Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ken Denman - Chief Executive Officer

Karen Willem - Chief Financial Officer

Anne Brennan - Vice President, Head of Finance

Michael Bishop - Investor Relations Manager

Analysts

Tom Roderick - Thomas Weisel Partners

Matt Hoffman - Cowen and Company

Scott Sutherland - Wedbush Morgan Securities

Scott Zeller - Needham & Co.

Brendan Austin - Access Intelligence

Openwave Systems Inc. (OPWV) F2Q09 (Qtr End 12/31/08) Earnings Call January 27, 2009 5:00 PM ET

Operator

Good day everyone and welcome to today’s Openwave second quarter conference. Just as a reminder today’s call is being recorded. Today’s recording will be available for reply starting at 5:00 pm Pacific today. At this time for opening remarks and introduction, I would like to turn the call over to Michael Bishop of Investor relations; please go ahead sir.

Michael Bishop

Thank you. Good afternoon everyone and thank you for joining us today to discuss the results of Openwave System’s second quarter of fiscal year 2009. Joining me today from Redwood City are Ken Denman, Chief Executive Officer and Karen Willem, Chief Financial Officer and Anne Brennan, our Vice President and Head of Finance.

Before we discuss the results for the quarter, I want to remind everyone that we are operating under the rules of Regulation FD. Our second quarter financial results press release was distributed at the close of market today and if you’ve not yet seen a copy, you can find it at our website at www.openwave.com. For your convenience, this call is being recorded and will be available for playback from our website for one year.

Before we begin, I would like to remind you that any remarks that may be made on this call or in our earnings press release about future expectations, plans or prospects for the company, may constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The actual results may differ materially from those indicated by the forward-looking statements as a result of various important factors. These factors include the specific risk factors discussed in the company’s press release that was distributed today and in the company’s filings with the SEC, including but not limited to Openwave’s fiscal 2008 financial results on Form 10-K and any other reports subsequently filed with the SEC.

We intend to make several forward-looking statements during this call that are based on management’s current outlook as of today. We do not intend to update these business outlook statements until the release of Openwave’s next quarterly earnings announcement and disclaim any obligation to do so prior to that time. However, we reserve the right to update the outlook for any reason during the quarter.

With that, I’d like to turn the call to Ken.

Ken Denman

Thanks and welcome to everyone on the call. Let me start up by saying how excited I am to be at Openwave. Having been on the Board since 2004, I’m well aware of the great potential of the company. It has an enviable customer list, best of breed products and a talented employee base. What’s more, I’ve watched this company make substantial improvements in the past 12 months.

Since I joined as CEO, I found that steps taken to improve our cost structure are already having a good impact and we tightened that focus to further make sure we sustain the push. The company has loaded its operating expenses to a sustainable level. In fact, we have achieved our non-GAAP profitability goal a quarter sooner than anticipated as a result of the effective cost controls.

Openwave has maintained the high level of reliability our customers have come to expect from us. We’ve also had world class products and further, the market is increasingly moving towards us, to our product philosophy and vision. We’re seeing capacity constraints hitting our customers and the market. The trend is unabated even in this economy.

Video and smartphones are driving more sessions and more usage per user. Carriers are requiring robust analytics and optimization. These trends play into our strength. As the environment becomes friendlier and carriers are forced to be more strategic in their purchases, we have taken action to be in a position to capitalize on those changes.

Meanwhile, smaller competitors are struggling as they don’t have the scale and the largest solution providers may have scale, but lack the necessary focus to adequately address the market needs. To be sure, there is a lot of work to be done before declaring success. We think there is an opportunity to drive efficiency in our engineering and R&D team and we need to refine the product offering overtime. However, I believe we are well on our way to achieving our near term goals.

Turning to the quarter, we saw revenue of $48.1 million, which is inline with our expectations. Bookings increased $10 million sequentially to $39.3 million. It is good to see the bookings increase on a quarter-on-quarter basis, but we clearly, our focus is on getting a better book-to-bill ratio going forward. Karen will detail the numbers in a moment.

Looking into our products, the first area, the service management group includes our Mobile Access Gateway, MAG for short, which continues in its solid, stability and reliability for carriers across the globe. Our next generation Integra service management platform delivers a powerful Mobile Access Gateway, in addition to our platform produced services that are assisting mobile operators and delivering a superior mobile internet experience that should help to minimize churn and drive new resources of revenue.

Thrusts with high amounts of data; driven by smartphones, laptops and other capable devices, operators are searching for a cost effective way to handle the many challenges and opportunities that are being generated by the increasing number of mobile internet users. Integra addresses this need. It facilitates managing and serving the needs of this increasing volume of mobile internet users with a lower cost of hardware footprint.

In quarter one, we introduced Passport; a revenue generating service enabler that plugs into Integra. Passport helps the mobile operators tap into new revenue streams by enabling them to offer pay-as-you-go access and targeted promotions for their subscribers. Passport enables operators to offer a range of time-based internet access options; for example, day, hour and week passes to the casual mobile internet users and gives carriers flexibility to drive revenue.

This past quarter, we signed our first Passport customer, a major North American carrier. As implemented, Passport will create a variety of on-demand services for the carrier's subscribers. So for example, if a customer attempts to access a service on the mobile device for which they don’t have a current subscription; Passport will prompt the user to try it for free for a few days or for a nominal fee for a time predetermined by the carrier.

Moving on to the messaging line of business; this quarter, SoftBank Mobile, one of Japan’s largest telecommunications companies selected our Edge GX Anti-Abuse product; a comprehensive carrier grade solution that provides real-time protection against all types of attacks, including directory and denial-of-service attacks, as well as spam, virus and phishing attacks.

Also last quarter, we announced a mobile analytic service that allows an operator to manage and monitor all of their data traffic, including traffic from iPhones and other smartphone subscribers. The service leverages the powerful data collection and reporting capabilities of Openwave’s mobile analytics product, delivering the business intelligence needed to characterize mobile internet traffic including subscriber access to URLs, the duration of website visits and how frequently subscribers are accessing specific sites.

This service enables an operator to develop a 360 degree view of their subscribers that can be used to understand subscriber behaviors and allows the operator to market and develop targeted promotions. This gives the operator a powerful vehicle that can be used to monetize the value of their unique and priceless position in serving subscriber needs.

As we mentioned last quarter, we completed a strategic alliance with Alcatel-Lucent and realized the beginning of success of this partnership through a joint deal we closed in quarter two, with a carrier in Qatar that includes Openwave and another Openwave service enabler. We have several other deals with Alcatel-Lucent in the pipeline and expect the deal we closed this past quarter to be the first of many.

As we look forward, I’m focused on some important near-term goals. First, stabilizing the management team is the top priority. Our legitimate activation of the company is, in the recent past we’ve had too much turnover at the top. My goal is to stabilize the team and drive progress throughout the company. Secondly, as we said last quarter, achieving sustained breakeven cash flow from operations is essential. We believe this is the next milestone for the company.

Finally, we will continue to focus and scrub the product line. This means we will focus on creating sustainable advantage, including integrating technologies we own that have been previously delivered on a standalone basis. I’ve observed that our R&D work has generally been spread too thinly around the world, to achieve critical mass, thought leadership and execution. We will fix this quickly.

The result should be more focused and effective product development. Our quality efforts will bear more fruit on this model as well. Despite the recent turbulence, we continue to have talented and dedicated people and as we finalize our leadership and strategies, this resilient team of professionals will have the support they deeserve.

Now, I will turn the call to Karen for the financial review.

Karen Willem

Thank you Ken, good afternoon everyone. Before I begin discussing the numbers I would like to note that unless otherwise indicated, gross margin expense and earnings related items are reported on a non-GAAP basis, which exclude stock-based compensation, impairments on investments and goodwill, amortization of intangibles and other acquisition related costs, restructuring expenses and certain professional expenses.

In addition, all comparisons with previous periods exclude Musiwave and the client business, which we sold in the fourth calendar quarter of 2007 and the second calendar quarter of 2008 respectively. Please access our financial metrics summary, which is available on the Investors Section of www.openwave.com to review Openwave’s historical financial performance excluding discontinued operations.

This quarter the Openwave engine ran well. We achieved our non-GAAP profitability goal a little early and we have a full fighting chance of maintaining that profitability though the end of the year. We maintained tight controls on operating expenses and we are in a position to achieve our goal of turning cash flow positive from operations in the back half of the year. All of this was done in a more difficult, economic environment than we anticipated when we issued our goals.

Our responds to the environment has been to tightly manage the expenses to successfully achieve the stated objective. Alan Park, our head of worldwide sales is doing a good job of burying the pipeline in this challenging environment. Also we’ve added high quality sales people to the team as we indicated we would do in our last call. We are prepared for the economy to turn and when it does, we will be ready to execute deals and grow bookings and revenue.

Overall for the quarter ended December 31, 2008, Openwave posted a GAAP loss of $0.74 per share. A non-cash goodwill impairment charge of approximately $57 million was recorded in the quarter. It is primarily driven by adverse equity marketing positions that caused a decrease in current market multiples and the company stock price as of December 31, 2008.

The charge is attributable to goodwill and was initially recorded in connection with acquisitions over the last several years. This non-cash charge does not impact the company’s normal business operations, liquidity or cash flow. On a non-GAAP basis, net profit was $0.02 per share. Reconciliation from GAAP to non-GAAP income for a loss can be found in our press release.

I will now turn your attention to the detailed results for the December quarter. Revenue for the quarter was $48.1 million, a decrease of $3 million or 5.8% quarter-over-quarter and an increase of $600,000 or 1.3% year-over-year. The decrease was primarily attributable to lower than forecast year-to-date bookings.

License revenue was $13.8 million, down $500,000 or 3.3% sequentially, which comprised 28.8% of total revenue. Maintenance and support revenue was $15.9 million, down $500,000 or 2.8% sequentially and comprised 33.1% of total revenue. Services revenue was $18.3 million, down $2 million or 10% sequentially, which comprised 38.1% of total revenue. This decrease is primarily attributable to customer shutdowns during the holiday period.

The regional breakdown of revenue in the December quarter show the decrease related to the Americas regions, primarily due to the reduction in services revenue noted above. 59% of our revenue originated from customers based in the Americas, 17% from EMEA and 24% from Asia. This compares to last quarter’s breakdown of 63%, 13% and 24% for the Americas, EMEA and Asia respectively and last year’s December quarter breakdown of 59%, 20% and 21%. For the second fiscal quarter of 2009, Sprint represented 26% and AT&T 14% of revenue. No other customer represented greater than 10% of our revenue for the quarter.

Turning now to our gross margins, we achieved 62.1% blended gross margin for the quarter, an improvement of 0.5 point over the last quarter and 6.7 points over the same period last year. Gross margin on license revenue increased 4.6 points to 96.6%, compared to 91.9% for the September quarter and 6.2 points compared to 90.4% for the same period last year.

The maintenance and support gross margins of 71.9% decreased 2.6 points from 74.5% last quarter and increased two points compared to 69.9% for last year’s December quarter. These decreases quarter-over-quarter are primarily attributable to reduction in revenue identified above and the increase year-over-year is due to cost reductions, which we achieved as part of our restructuring.

Service margin of 27.5% decreased 2.3 points from 29.8% last year, and increased 3.9 points from 23.6% last year. As for operating expenses for the second fiscal quarter, research and development of $11.6 million decreased $300,000 or 3% from $11.9 million in the prior quarter and looks flat compared with the year ago period. This decrease is primarily attributable to labor cost savings and the benefit of favorable exchange rates.

For the second fiscal quarter, sales and marketing expenses of $9.9 million decreased $700,000 or 7% from $10.6 million in the prior quarters and decreased by $7.2 million or 42% from $17.1 million in the second quarter last year. This decrease from the prior quarter was primarily attributable to lower professional fees associated with our activities overseas.

Second quarter general and administrative expenses of $6.9 million decreased $1.4 million or 16.6%, from $8.3 million in the prior quarter and decreased year-over-year by $1.9 million or 21.4% from $8.8 million. This decrease was primarily attributable to labor cost savings and a reduction in facilities cost.

Our headcount increased by nine employees from 618 at the end of September to 627 at the end of December. We added 10 people to sales and marketing as planned. On a GAAP basis, stock based compensation expense for the second fiscal quarter of 2009 was $900,000 compared to $1 million in the prior quarter and $3.6 million in the same period prior year. The year-over-year decrease was due to the decline in the fair value of options granted and a reduction in the number of options vesting.

On a GAAP basis in the December quarter, interest and other income was a charge of $1.4 million, which compares to a charge of $6.5 million in the September quarter and an income of $2.5 million in the December quarter last year. As we previously disclosed, the cost of our auction rate securities was $22.7 million, which now compares to a written down value of $12.2 million of which 90% is covered by insurance.

Also on a GAAP basis, income tax has increased to $1 million in the December quarter compared to $500,000 last quarter and $500,000 in the December quarter last year. The increase is primarily related to overseas withholding tax.

In the December quarter, Openwave’s bookings were $39.3 million. Our current backlog is $217 million compared to $228 million last quarter and $237 million in the second quarter of last year. Deferred revenue increased to $62.6 million as of December 31, 2006 as compared to $61 million in the September quarter and $53.4 million second quarter last year. This quarter-over-quarter increase is primarily due to cash received on several large contracts prior to revenue being recognized.

Accounts receivable decreased to $54.6 million in December from $57.4 million at the end of September and increased from $51 million at the end of the second quarter last year. Our overall DSO increased by one day sequentially, from 101 days at the end of September and 29 days at the end of December last year to 102 days at the end of December this year. The increase year-over-year is primarily attributable to unbilled accounts receivable, which reflects current customer billings that have been included in revenue.

Now turning to our cash and investment balances, we ended the quarter with $119 million in cash, cash equivalents and short-and-long-term investments. This balance includes $17.6 million of restricted cash. Our cash used in operations was $7.5 million, which was $4.6 million less than last quarter. However, of the $7.5 million used, approximately $5 million was for the settlement of a securities law suite and approximately $3 million was for associated legal fees.

As of December 31, we have approximately $12.2 million currently in auction rate securities recorded in long-term investments due to their current illiquid status. Approximately 90% of the investments are covered by insurance.

Current cash flow projections indicate that we will generate sufficient funds from ongoing operations without the requirement to draw on funds externally. However, we’ve taken the opportunity to secure a line of credit with Silicon Valley Bank; revolving credit facility has a maximum value of approximately $40 million and it will allow us to free up some of our restricted cash as well as allow for better management of our working capital.

Depreciation and amortization, including amortization of goodwill and intangibles for the quarter totaled $2.9 million, of which $1.6 million was depreciation. We are generally satisfied with our results, especially given the extremely challenging economy we are facing. We’ve cut our expense run rate and are below our targeted range on expenses. We’ve turned a profit from operations this quarter and we’ve continued to build up our pipeline of sales opportunities.

Given our current forecast of bookings and revenues, we believe we can still attain our goal of turning cash flow positive before the end of our fiscal year. We expect operating expenses to return to our target range in the low $30 million and except to see fluctuations quarter-to-quarter, as major events occur.

The economy still makes predicting the top line challenging and as a result in the near term, our revenue profile looks similar to Q2. Bear in mind however, our revenue is contingent on large deals and we have seen significant swings quarter-to-quarter in the past and expect this to continue in the future.

Operator, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Tom Roderick.

Tom Roderick - Thomas Weisel Partners

Hi. Thanks and good afternoon. So first off, congratulations on achieving non-GAAP profitability again. Nice job getting the expenses down. I guess as we look at the longer term future of the company, a lot sort of rests upon the adoption of new products by your customers and it sounds like you had a couple of nice wins there.

Can you go into a little bit more detail in terms of what you’re doing to get carriers to adopt and use some of these newer products, the next-gen products? How you’re incentivizing your sales force to focus on selling those new products and then perhaps the bigger challenge right now is carriers tightening up on their wallets? How do you cite the environment that we’re in to get them to adopt new services and focus on your next generation of products rather than maintenance and upgrades to existing capacity? Thanks.

Ken Denman

Tom thanks a lot for your question and your comments on the front end of that. Fundamentally, we are fortunate and that there are some dynamics that are going on in the marketplace that are going to really force our customers, operators to continue to look at new and interesting ways to solve the problems that they are facing.

Capacity constrains are significant driven by increases in mobile data, which are in turn driven by video, video as kind of a symptom of things that we’re going to continue to see hitting the marketplace in the near term. So, there’s a real capacity there, an issue that’s driving a need for better visibility by our customers in terms of what’s happening to them.

So, from an analytic standpoint, from an optimization standpoint and then a lot of interesting sort of service enablers that are natural outgrowths of those things, are all the kinds of things that we’re finding operators are very interested in talking about. Not only because it helps them address from a network operation standpoint, how do they manage a smart, intelligent network, but also from a sales and marketing standpoint, if they don’t have the access to the data and information about what’s happening to end users, they really cannot market to their customers in the way that they need to.

So, we are spending a lot of time, talking about the drivers of the issues that are causing them grief and the things that they have to solve for in order to maintain market share.

So capacity, the share battle, those are the things that are helping us have a dialogue with customers and we’re really spending our time getting in front of not just the operators within our business, who are our typical champions, but spending a lot more time with the line of business leaders; in particular marketing leaders and chief marketing officers, product managers. So, those are some of the things our sale teams are focusing on and some of the drivers underneath why our new products are taking, making or getting traction in the business.

Tom Roderick - Thomas Weisel Partners

That’s real helpful detail and I guess I heard you talking a little bit more about a heavier focus on analytics. It sounds like products with a shorter payback period. Is this really the focus in terms of higher, immediate ROI sort of payback period versus some revenue generating opportunities for your carrier customers, particularly advertising supported revenue streams for them. That was at what point of focus of the company? Where does that stand now?

Ken Denman

Well, I think that Passport is an example of sort of a more near term revenue, impacting opportunity for our customers and I just suppose the advertising which I think it still has a bright future. It really hasn’t taken off to the extent that anybody thought it would by now. So, advertising continues to be an opportunity waiting to be grasped across the market.

Some of the things that we are seeing and learning are the relationship to search, the relationship to location, those things have to be figured out. I think candidly our initial approaches have not borne fruit and we're reloading, we think there’s still an opportunity in front of us; no ones cracked the code. We have the enabling capability and we need to work very closely with our customers and our partners to find the right solution, because ultimately that market will crack, but for now I would say basically we are not there yet.

Tom Roderick - Thomas Weisel Partners

Okay, Karen just – I’ve got a brief set of questions for you. You’ve got two customers that combined accounts for 40% of your revenues. To the extent that Sprint and AT&T continue to show deteriorating outlook for their CapEx and their spend in the marketplace, can you cut this OpEx line down below $30 million and what’s the absolute bottom you think you could get it to?

Then just the last quick question; in terms of your auction rate securities exposure, could you go over that one more time and in terms of the insurance, if there was some sort of insurance settlement necessary for liquidity? How long it would take to get out those funds? Thanks.

Karen Willem

On the OpEx, I’ve talked in the past that our target is in the low 30s and in fact we came in even lower than that this quarter, in the $28 million range. That’s a little bit due to -- quarters vary in this next quarter we have for example, our biggest tradeshow. So, there’ll be a blip in expenses for that. They’ll go up and down. We’re working hard to keep lowering them as low as we possibly can, especially given the uncertainty in the economy. So, I’d like to still target that 30, but we hope to beat our target; so we’ll work hard on that, and with Ken here we will be doing that.

On the ARSS, always one of my favorite topics. What I mentioned is we recently had $22.7 million of ARSS and overtime we’ve had to mark them to market every quarter. What we do is we hired an outside firm to make sure we have a third party unbiased opinion. They give us guidance and then we mark-to-market on that.

However, of the $22.7 million, $17 million is insured. What that means is, in the event that they default, we can collect the insurance over 30 years which is when they actually expire; whichever comes sooner. Right now they are paying interest, they are not defaulting; it’s just that they’re highly illiquid. You can’t go out and sell them on the open market to anybody. So, we have to look at them in a not marketable fashion. So, that’s the reason for the mark-to-market, but they still are delivering into it at this time.

Tom Roderick - Thomas Weisel Partners

Okay, very helpful. Thank you guys both.

Ken Denman

Thank you.

Operator

We’ll move next to Matt Hoffman.

Matt Hoffman - Cowen and Company

Hi Karen and Ken. Nice to see a wave break back in the non-GAAP profit. Karen, I know you called up the legal heads that caused the cash flow to lag behind it this quarter, but normally should we expect your OCF to match that non-GAAP profits number a bit better; but if not, what are the puts and takes there?

Karen Willem

Yes, typically going forward, I think we had a bunch of unusual things over the past. This was pretty much the end of the cash outlays from the legal costs related to the securities settlement and also the cash out for our piece that we had to pay out of pocket. So, the majority of the big unusual things are over, that’s not to say you don’t have the occasional one here and there, but the ones that have been -- sort of we’ve been covering for a while now are pretty much washed through the system. So yes, we should start looking more like a typical software company, where those two numbers sort of travel together, both the profitability and the cash flow.

Matt Hoffman - Cowen and Company

Right, that sounds good. So, if I understood you correctly, I think you said that your goal is for OCS breakeven by the end of the fiscal year and if so, tracking to your previous comment, it sounds like maybe your EPS number should look with a steady profit moving forward. Is that a fair way to look at your comments?

Karen Willem

Yes, let me just talk about that. We still expect to turn cash flow positive on a prospective basis by the end of the fiscal year. If you do the math, the operating cash flow this quarter was actually slightly positive; if you took out the couple of auditees that I mentioned. So I think we are getting there. So, I haven’t changed my outlook at this point and this is all given that our bookings and revenue forecast that we have right now still hold true.

Likewise on the profitability side, we have turned profitable a little bit ahead of schedule and again if bookings and revenue continue, and in this economy, granted there’s a lot of variability there, but given our current forecast, we believe we can pretty much maintain that. We think we can do that.

Matt Hoffman - Cowen and Company

Alright, I'll shift over to Ken real quick; in terms of the sales of the new products like Integra and Passport and I think I heard -- I got most of your answers in the last question, but in terms of what is going on with the MAG. If the customer already has a MAG Gateway, can you go through the incremental costs they incur by buying the Integra platform and then can you take us through -- I don’t know; if that’s the only Passport deal you’ve done and you don’t want to call it out, but can we talk typically about Passport. Is it going to be a buyer subscriber or hosted model or it will be more of a flat fee that the operator pays on those new products? Thanks.

Ken Denman

Well, I know you’re going to give me dispensation here on my first call, but I mean going to go into a description of the evolution of Integra. Integra was intended to be backward compatible with MAG and that’s the way we built it. It was basically a bridge such that customers could buy incremental licenses and be assured that they would have a bridge for MAG to Integra.

So, you can almost think of Integra really as a sort of; in terms of our incumbent fees with customers, that sort of a plug-in that takes them from the old to the new and then walks forward. Of course that new customers we could deploy Integra in the way they go.

So, it really is an incremental license, but in a manner that plugs into their existing platform and takes advantage of some of scale that they’ve already bought. But again this is a chance to grow forward with them. And on the Passport side, it’s really flexible. We can do it on per sub basis, on a pay-per-use basis or on rev share. So we have a number of different ways to monetize that particular product thought and we’re really trying to be flexible with the market, while making sure we get our returns.

Matt Hoffman - Cowen and Company

Great. Nice job on the profit guys. Thanks.

Operator

We’ll move next to Scott Sutherland.

Scott Sutherland - Wedbush Morgan Securities

Great, thank you and also a good a job on the profit.

Karen Willem

Thanks Scott.

Scott Sutherland - Wedbush Morgan Securities

Kind of want to drill a little bit more on the financial side in getting to the cash flow breakeven point. Obviously the big comp is not this quarter. As you look out to your last fiscal quarter here, coming in June, do you see it being a combination of getting some of that top line growth going and is that going to depend on getting a better bookings quarter this quarter? What do you think after the big comp ends this quarter, you can bring the cost back down and on top of that question, do you see any more types of professional services cost or one time cost that you squeezed out in Q2 that you can still squeeze out going forward?

Karen Willem

Well, I think three different questions are there and I may make you repeat some. but generally speaking, as I indicated in the call, we see the near term quarter as looking very similar to this quarter. It’s variations up and down depending on the actual deals that we deliver in those quarters, but relatively flat revenues.

On the other hand, we’re going to continue to work on the OpEx, but again we had some unusual things that happened in this quarter for example that makes it a little bit hard and we are looking at some things in other parts of the OpEx to try to keep making it more efficient. As Ken indicated, we’re looking at our offshore R&D and some of the (Inaudible) and so we’ll keep pressing on that, but at this point we’re not ready to commit to really the bottom line getting much more above turning profitable and getting out of the red, which we’ve now achieved.

Ken Denman

I will add that it’s only prudent for us to think about being able to deliver in the long run an OpEx result that’s lower than where we are, given what’s going on in the environment and what’s going on in the economy. Now we’ll be figuring that out this quarter and deciding what we can do. We are not yet ready to come out and say, “Here’s where we’re going to go” or “Here’s what’s possible;” it’s frankly too early, but we’re working real hard and from my perspective we understand that we need to find ourselves a buffer or a cushion of work to do.

Scott Sutherland - Wedbush Morgan Securities

Okay. Following Howard’s question earlier, you had talked a lot about wireless data growth. I mean clearly looking at carrier reports, things like text messaging, connecting NoteBook computers and the iPhone phenomena when you look at AT&T data results having the drivers, can you talk about tie up leverage to those types of data usage. I know historically when we’ve had more exposure to the mass market data phone, maybe how can you benefit from the exposure to these areas that seem to be growing the best?

Ken Denman

I’m sorry. We missed the back end of your question.

Karen Willem

We got cut off.

Scott Sutherland - Wedbush Morgan Securities

Okay, I’ll ask it again. You talked in your comments on the strong growth in wireless data driving capacity needs. Historically you had a lot of exposure to the mass market data phones and I think we’re seeing from carrier reports these days that its text messaging, note book connectivity and things like the iPhone that are driving the daily usage. So, can you talk about maybe how Openwave has shifted to benefit from these types of end devices and date applications versus the…

Ken Denman

Okay I got it. Okay, thanks for that. So, you’re right. Historically we’ve been focused on the feature phone space in terms of transcoding and encoding and a very good question is where do we go from here and frankly I’ve relied heavily in my earlier comments on analytics and optimization and some of the sort of ancillary enablers that will come from that space, because that’s really where the pain is felt from our customers.

It’s really the ability to support all the traffic comes in a way where they can contract the traffic, analyze it and then do something with that. So they need to be able to withstand this enormous load of volume that’s coming at them and they need to be able to actually tear it apart and understand it.

So, fundamentally we see our role as being a very intelligent gateway that helps with this analytics and with the optimization and ultimately there are some other opportunities for other capability, where you basically end up helping our customers with bandwidth management at some level and that embraces and encompasses a lot of different things, but we’re finding a lot of appetite with the customers that I’ve spoken to. They love the fact that we can sit in front of their business and we can force traffic through our transparent proxy and really help them by delivering a dashboard to what users are doing and where they are doing.

So that is the fundamental crux of our positioning going forward; data usage and the need for data management which is fundamentally where our customers are moving to. They are moving from phone companies to basically being data management businesses and we’re going to deliver the tools to help them do that very well.

Scott Sutherland - Wedbush Morgan Securities

Okay and my last question for now is Openwave historically had 50 to 60 carries installed with the old gateway. How many customers now do you have for Integra and how many more do you think are right to penetrate with the Integra gateway?

Ken Denman

We’re not publicly disclosing those numbers. It’s an intensely competitive space. We’re right at the precipice of a pretty good time for this business and I think it wouldn’t be the right thing for us and I’d be very surprised if other competitors are going to share those numbers right now.

Scott Sutherland - Wedbush Morgan Securities

Okay. Thank you.

Karen Willem

Thanks Scott.

Operator

(Operator Instructions) Scott Zeller has our next question.

Scott Zeller – Needham & Co.

Hi. For the bookings, I wonder if you could give us anecdotal color around which product areas the bookings would be spread among?

Ken Denman

We haven’t shared our bookings by product area. We had bookings obviously across the spectrum. Every major product group there were bookings, but we’re not breaking those out.

Scott Zeller – Needham & Co.

Okay, thank you.

Operator

We go next to Brendan Austin.

Brendan Austin – Access Intelligence

Hi guys. I just want to ask you about the balance sheet. I’m a relatively recent Investor here and I think I called during the (Inaudible) but you couldn’t answer anything at that time. If I’m looking as the cash on the balance sheet, the accrued restructuring charges, those are all expected to be cash coming out going forward?

Karen Willem

The restructuring charges that were already reserved for -- when you say, you’re looking at the cash are you asking are there any more cash expenditures for restructuring?

Brendan Austin – Access Intelligence

Is that roughly $50 million in a accrued restructuring cost? All those costs, those are going to be cash coming out I’m guessing and what’s the timing on that $50 million coming out of the accrued restructuring?

Karen Willem

The biggest piece of that overwhelmingly is facilities. We have a number of facilities like our former headquarters here in Redwood City that we have to be paying for overtime and that’s the majority of that. So, that comes out over the next several years and that’s the biggest piece of it. Most of the other kinds of restructuring expenses; like for people the labor cost, they pretty much run their course. There’s just a little bit going out, but the majority is for facilities and that $50 million will run out, but it will be over several years.

Brendan Austin – Access Intelligence

Okay and the facilities charges, are those properties been sublet as yet or there is still the potential to sublet anything else?

Karen Willem

The biggest hitters have already been sublet out, like the former headquarters in Redwood City has been sublet, but there are a couple of smaller ones mostly out in EMEA that I’m still trying to sublet, that could have a little bit of cash upside going forward, but they are large properties. The vast majority of the $50 million is towards the Redwood City site.

Brendan Austin – Access Intelligence

Okay. Now the long-term investments in restricted cash and investment, what’s that in?

Karen Willem

The cash is mixed. We are very carefully -- most of our cash is in short term as you can probably imagine. Some of the ARSS are out there because they’re not liquid. So, they get classified as long-term, that’s $13 million, and then we have $17 million of restricted cash. Again, this is for a deposit on the building in Redwood City, the one that I just mentioned that was our former headquarters. In fact, the good news is that, with this new bank line from Silicon Valley Bank, I’ll be able to un-restrict that cash as I put in a letter of credit in the next few months and free up some of that $17 million. So, that’s the good news about that and then there’s another $5 million of other long term investments.

Brendan Austin – Access Intelligence

What’s the deposit into other assets, what’s that?

Karen Willem

Those tend to be -- there’s a lot of things in deposits. Some of them are short term things like tradeshows and stuff like that. They have to put the deposit for and that’s primarily the piece of it. There are little bit of facilities in there that aren’t secured by other restricted cash components, so for some other smaller facilities that have some deposits required, and I can go into a bit more detail if you’d like to call me offline, I can go into even more detail, because I think I can tell you a lot of that.

Brendan Austin – Access Intelligence

No, I’m just trying to figure what your real cash is and what the cash is net of obligations that you guys have in place right now. Did you guys say what your backlog was earlier on the call? I must have missed it, if you did.

Karen Willem

Yes, I did. I gave the points of that and we ended with $217 million in backlog.

Brendan Austin – Access Intelligence

Okay, so that was roughly just slightly lower than what it was last quarter. Is this still the case that 80% of that backlog is expected to be recognized in the next 12 months?

Karen Willem

No, the way that we look at it is historically. That comes out anywhere on average four to six quarters after it’s booked. That’s how it tends to rollout, because of the way that our services have to install it and so forth. So that’s more the way we look at it rather than saying it will come out in the next quarter.

Brendan Austin – Access Intelligence

When you guys say -- when you’re looking-forward at your numbers for the rest of the year, you’re talking about -- you’re saying like, we're a big deal company, we sign big deals, a lot of it appears to be already in the backlog. Is the backlog usually scheduled by you guys or can your customers say “yes, the backlogs committed, but we’re going to put-off this project for like six months, but we’re still going to do it right.” Do you have that situation where the backlogs is scheduled by you or can the timing of that backlog be recognized for the new ground on it?

Karen Willem

We do schedule it actually. It’s scheduled out, because we have to identify the resources to put on these all over the world. So in fact, we have a certain amount of it that’s absolutely fixed in our backlog. We basically roll out the whole backlog when we do our forecasting. Some of it's fixed, things like maintenance and so forth is fixed and they come out overtime and then some things that require services professionals to go out and install, we do an estimate of when that’s going to happen.

Today, we haven’t had historically things fall out. Typically we did have a bit of a slowdown as I mentioned in the call around December, because of holidays, some people [inaudible], but generally it’s fairly forecastable and we’ve gotten awfully good at it over the years.

Brendan Austin – Access Intelligence

Okay, that’s great and I guess the last thing I wanted to ask you about, I think you have over $2 billion in NOLs. Is there anyway for you guys to monetize that other than going out and earning $2 billion, god willing?

Karen Willem

Well, I’d like to focus on your latter suggestion. At this point, I wish that NOLs were my biggest problem. I think right now, heads down we’re going to do our business, we’re going to make this business a successful one and try to grow our bookings and our revenues and our profits and overtime I think the NOLs will just come out overtime; but now I’m not looking at any -- I mean a natural act to do with them at this point.

Ken Denman

Absolutely, I want to support that. I think our focus has got to be driving and growing a great business. Opportunities like the ones that you are asking about will become obvious if they’re are out there, but other than that now I think that’s heads down, drive this business forward and in the sort of top three priorities that we have and we’re going to stay very, very focused on that.

Brendan Austin – Access Intelligence

So, it’s nice to know when you start earning money, then you don’t have to pay taxes and if you find that profitable acquisition to do at some point and you can also shield taxes?

Ken Denman

Absolutely, absolutely. Thanks a lot.

Karen Willem

Thanks Brendan.

Brendan Austin – Access Intelligence

Thanks a lot guys.

Operator

We’ll go to Scott Suther with a follow-up question.

Scott Suther - Wedbush Morgan Securities

Yes guys, a couple of follow-up questions here. First on your CapEx, obviously very little in the last couple of quarters. What kind of guidance should we be getting going forward on your CapEx spending?

Karen Willem

Our capitalization level is $3000, and so in this world of Morris Law, a lot of the equipment that we buy like laptops and things, which is typical for a company like ours gets expensed. So, the vast majority gets expensed. At this point our target is about $500,000 a quarter going forward and I think on a more reasonable level that $500,000 would make sense overtime and that’s really to provide for servers and things like that in our lab.

In the past, we’ve just been very careful, very conservative with cash and we’re just managing it. Also with the addition of the new line of credit, I’ll be able to take advantage of equipment financing lines that will help spread it out a little bit overtime.

Scott Suther - Wedbush Morgan Securities

The other question I had is maybe to get an update. The last time we spoke, you guys have already gone through your North American customer base and started to target the Asia and EMEA customers and get back in front of them. Can you talk about how progress is going in the International sales channels and customer relationships?

Ken Denman

Yes, thanks for that question. It’s really a very good point and appropriate one to touch on. So, we are absolutely focused on making sure that we can get to some of those emerging markets where a bunch of the growth is going to come from around the world over the next five years. We’re going to do this working with partners. At our side, a $200 million public company, we cannot be everywhere. So, we really need to focus on being effective and efficient in terms of our go to market strategy.

Our relationship with Alcatel-Lucent, I think is a good example of how we can have a broader reach and be in more deals than we would be in otherwise on a direct-only basis. You’re going to see more of that; we’re very excited about the relationship that we have with Alcatel-Lucent and what we are seeing forming in terms of a pipeline and we need to extend our reach around the world by working with more partners.

So, that is one of the priorities that we have in the business on the sales side, on the go to business side, as to extend our reach and make sure that we are in more deals with our best of breed technology and capability that we have and the good news is, there are a lot of people that want to talk to us, so more to say in the further.

Scott Suther - Wedbush Morgan Securities

Okay. Thank you.

Karen Willem

Thanks Scott.

Operator

And it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Denman for closing remarks.

Ken Denman

Great. Thanks everyone for joining us this afternoon. We are really excited as I said before about the opportunity that we have here and it’s an interesting time in our space. I’ve been in the wireless space on and off for a number of years and this is one of those times where that happens kind of every three or four, five years as an inflection point. We are on another inflection point in this industry that, I think I’m not sure how long this one goes on, but it looks big.

It’s about the Tsunami that’s coming at the industry as our mobile data has began to really lift off and then take wings and it’s changing the issues, the opportunities and the players overtime in the space that we enjoy the opportunity to play on. Openwave has an opportunity to carve out a very, very interesting role; it’s not a critical role along with the other competitors that we have in this space. We are really, really well positioned; we need to execute.

So, we have sort of a few focuses in the business in the near term. We are focused on driving the cash flow, sustainable cash flow positive ASAP; we’re trading as toward going out on business levels and one of the things we are going to do going forward here is strive to make sure that market understands if that’s not happening.

Secondarily, getting our product line split and improved to focus on this burgeoning opportunity associated with the real huge spurt of mobile data driven by things like video; we have role to play there. Finally, solidifying the leadership team so that our customers and our employees know that this is a going concern with the right leadership people, that have their hands on the steering wheel, taking the business in the right direction.

Our shareholders have been patient and we understand that and we’re thankful for it and we intend to make sure that they have reasons to want to continue to be Openwave shareholders in the future. Thanks a lot for your time and we’ll see you next quarter.

Operator

That concludes today’s conference. We thank you all for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Openwave Systems Inc F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
This Transcript
All Transcripts