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Executives

James Orsini – President & Chief Executive Officer

John Quinn – Chief Financial Officer

Jerry Hug – Executive Vice President, Corporate Development

Analysts

Marc Robins – Catalyst Research

Single Touch Systems (OTCQB:SITO) F2Q 2013 Earnings Call May 16, 2013 8:30 AM ET

Operator

Greetings, and welcome to the Single Touch Systems F2Q 2013 Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jerry Hug, Executive Vice President Corporate Development for Single Touch Systems. Thank you; you may begin.

Jerry Hug

Good morning everyone. My name is Jerry Hug and I would like to welcome all of you to Single Touch’s F2Q 2013 earnings conference call. With us today are Single Touch’s President and CEO, James Orsini; and CFO John Quinn. Anthony Macaluso, our Chairman and Chief Innovation Officer unfortunately is under the weather and unable to join us this morning.

Before I turn the call over to James I would like to remind our listeners that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties; and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for Forward-Looking Statements that is contained in the Private Securities Litigation Reform Act of 1995. These statements may include those regarding strategy, growth, and future operations.

Actual events or results may differ from Single Touch’s expectations. The risks and uncertainties include reliance on brand owners and wireless carriers, the possible need for additional capital as well as other risks identified in Single Touch’s most recent filings with the SEC. In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 16, 2013. Single Touch Systems assumes no obligation to update these projections in the future as market conditions change.

And now it’s my pleasure to turn the call over to Single Touch Systems’ President and CEO, James Orsini, who will give an overview of our business activities and developments in F2Q. James will then turn the call over to John Quinn, our CFO, for a detailed account of the company’s financial performance and I will then touch upon the key IP developments and open the call to questions from participants.

Yesterday we issued a press release announcing our results and filed our 10(q) so listeners who have not already done so may wish to look at those documents as we provide a summary of the results on this call. Over to you, James.

James Orsini

Thanks, Jerry. I’d like to thank everyone for joining our call today. I’m happy to report that we continue to see year-over-year double digit revenue growth. In F2Q 2013 ended March 31, 2013, our revenue exceeded $1.8 million, a 16% increase over the same period of the prior year and revenues for the six months ended March 31, 2013 grew by 20% from the prior year period to $3.8 million.

Our gross margin improved to 57% in the quarter and 56% for the six-month period. We had indicated last quarter that we anticipated continued gross margin improvement targeting 60% during F2013 and we believe our results in F2Q 2013 show that we’re on track to achieve this.

A key indicator of growth for us is messaging volume which for the quarter increased by 15% to 66 million messages sent, up from 56 million in F2Q 2012. This increase is consistent when factoring in the normal spike in our business around the holidays. In the fourth quarter of the calendar year, which is typically the busiest for retail-based mobile messaging we had sent over 77 million messages.

I’d like to share a few recent developments consistent with our goal of expanding our direct sales channel. Shoppers within the world’s largest retailer will continue to experience Single Touch services with our recent signing of a direct agreement with [Touch Rate], a company that has been installing touch screen kiosks for insurance quotes within these stores.

Single Touch will message Touch Rate’s insurance quotes real time while shoppers remain in the stores and we expect this new customer agreement will contribute reoccurring revenue streams for us. Our messaging volume and associated revenue will be directly predicated on the number of kiosks deployed by Touch Rate in these 4500 locations across the US.

We continue to steer client engagement towards recurring revenue rather than transactional fees and this provides us more predictability in our revenue streams. We recently moved an existing healthcare client to a monthly retainer relationship and now all of our new clients are required to sign guaranteed minimum monthly revenue commitments regardless of their messaging volume. Clients are then required to pay a per-message charge once the minimum has been exceeded.

We’re very excited about our expanded partnership with Canadian-based Cell1 Communications for the US nationwide launch of #Taxi. This abbreviated dial code has been successful in Canada with nearly 2 million calls per year. With 26 million mobile phones in Canada and more than ten times that number here in the US this represents an opportunity of 20 million calls per year in the US.

Our per-call economics are very favorable and we will have our first sponsored city launch here on the East Coast later this month. Stay tuned for a highly visible marketing rollout shortly. Out-of-home, print, online, and field marketing efforts will all be deployed in the coming weeks. We expect our first #Taxi city sponsorship to result in an ongoing local travel/tourism client initiative as well.

Our plan is to see the first city sponsorship launch successfully and then replicate and redeploy the campaign in other cities throughout the country. This #Taxi partnership with Cell1 is a great example of how our patent portfolio is monetized into high-margin revenues through marketing partnerships.

Earlier this week we signed a Master Services Agreement with the world’s largest eTailer and have completed connectivity and integration to our messaging platform through a custom applications programming interface, also known as API. We’ll have more to report on this in the coming weeks.

The mobile message marketing and advertising market is rapidly evolving and presents opportunities to companies that have the expertise and IP to deliver solutions generating high ROI. I’d like to share some industry statistics to help prove this out.

According to Flurry, an analytics firm, Americans now spend an average of 158 minutes every day on smartphones and tablets. Market research firm Gardner Group reports 1 billion smartphones will ship globally this year and mobile now accounts for 12% of American’s media consumption time according to eMarketer – triple what it was in 2009.

Advertisers are clearly aware of these trends and they are increasing their ad spend on mobile platforms. The world’s marketers spent $8.4 billion on mobile campaigns in 2012 and this figure could reach $37.0 billion by 2017 according to eMarketer. And Mobi reports 59% of mobile users are now as comfortable with mobile advertising as they are with TV or online ads, and according to Google Research 66% of promotion views are via mobile and 67% of customers are more likely to buy from a brand with a good mobile experience.

For marketers there is the realization that consumers don’t use desktops and mobiles in the same way when they’re searching to shop. Here is a vital and compelling statistic: 90% of the people conducting a mobile search act within one day and 70% act within one hour according to Sparksheet.com.

We believe Single Touch is well positioned to capitalize on this seismic shift from a mobile-migrant society to a mobile-native society. Baby Boomers migrated to use mobile phones while Millennials grew up using mobile devices. Single Touch now houses nearly 50 million unique phone numbers in our database across all of our retail clients. This represents an increase of more than 70% for the same time last year.

We believe the value we are building in our company is reflected in the stature of the directors that have joined our Board. On April 2nd we announced that Peter Holden joined our Board. He is widely recognized as a pioneer in leveraging IP as a financial asset class. In 2011 he was named by the Intellectual Asset Management Journal as one of the “Top 50 People, Companies, and Other Things that Have Helped to Shape Today’s IP Market.”

Peter has a tremendous track record in the IP space and his decision to join our team is a terrific validation of the strength of our assets and our ability to realize our company’s potential value. He will play a key role in helping our company to craft, guide, and execute on our IP monetization strategies.

On May 3rd we announced that James Nelson joined our Board. James is a prominent business leader with significant experience as a Director and Chairman of the Audit Committee of numerous private and public companies and he has served as the Director of Icahn Enterprises since 2001 and is a member of its Audit Committee. His vast experience in unlocking shareholder value and building companies is an asset to Single Touch.

Now I’d like to turn it over to John Quinn, our Chief Financial Officer, who will take us through a deeper dive into the numbers we reported in our 10(q) filings.

John Quinn

Thank you, James. We are pleased with our revenue growth during F2Q 2013. Because a majority of our revenues are currently derived from mobile messaging for retailers our business typically peaks around the holidays and the underlying growth becomes apparent again in April. This year is no different.

During the three months ended March 31, 2013, revenues increased approximately 16% over F2Q 2012 from $1.6 million to $1.8 million. This growth, all of which is organic, is attributable to continued mobile adoption and new programs for existing and new client relationships.

Royalties and application costs which represent the direct out-of-pocket costs associated with revenue vary substantially in line with revenue. They totaled $770,000 in F2Q 2013 compared to $654,000 in F2Q 2012, an increase of 19%. Royalties and application costs as a percentage of revenue increased by 1% from 42% to 43% from the quarter ended March 31, 2012, to that of 2013 attributable to the composition of message types.

Our gross margin was $1 million or 57% for F2Q 2013 compared to $900,000 or 58% in the same period of the prior year. Adjusted general and administrative expenses in F2Q 2013 increased 50% to $816,000 from $509,000 in F2Q 2012. Adjusted professional fees, the largest component of general and administrative expenses, rose 164% to $440,000 in F2Q 2013 from $167,000 in F2Q 2012. This increase was caused by additional legal fees both for our IP monetization efforts and for compliance with SEC filing requirements.

We measure the underlying business via adjusted EBITDA. That underlying loss was $443,000 for the quarter ended March 31, 2013, compared to a loss of $305,000 for the quarter ended March 31, 2012. On a GAAP basis, net loss attributable to common shareholders for F2Q 2013 increased to $1 million or $0.01 per basic and diluted share compared to a net loss attributable to common shareholders of approximately $665,000 or $0.01 per basic and diluted share for F2Q 2012.

As of March 31, 2013, we had cash on hand of $924,000 and total assets of $5.7 million. Stockholders’ equity totaled $200,000. For further information and details on our six-month results you can review our earnings release as well as our 10(q) which was filed with the Securities and Exchange Commission yesterday.

Now I’d like to turn the call back over to Jerry Hug who will cover the key IP activities and then open the call to questions.

Jerry Hug

Thanks, John. In F2Q 2013 we continued our efforts to monetize our IP portfolio and we’ve been granted another patent. More recently on April 23rd we announced that our common stock has been added to IP CloseUp 30 which is a stock index comprised of 30 publicly traded companies that are all focused on intellectual property.

The United States Patent and Trademark Office granted a patent to our subsidiary Single Touch Interactive for a key invention titled “Searching for Mobile Content.” The patent addresses methods and apparatus for searching mobile content and the transfer of data from and between mobile devices and through the cloud. This is a significant addition to our patent portfolio and addresses mobile data transfer functions that happen nearly every time a new mobile device is purchased here in the US.

Each time a user purchases a new mobile device and moves information from an old device to a new device a transfer of data occurs. Now that most mobile device users are in the replacement cycle, changing and upgrading phones on a regular basis inventions that improve the methods and efficiencies with which data is transferred between mobile devices via the cloud become critical and foundational to information technology infrastructure.

This most recently issued patent builds upon our family of patents which addresses mobile data transfer and mobile content search, strengthening the Single Touch IP position in the mobile ecosystem. We now have 49 patents issued and pending which address the mobile space.

In F2Q 2013 we had a development in our complaint against Zoove which was filed with the courts in February of 2012. A claim construction hearing was held before the court in February of 2013. We are awaiting a decision by the court on a Markman ruling; however there is no specific date set by the court by which the decision is to be rendered. The parties continue to communicate through a mediator regarding a possible settlement.

As part of our ongoing initiatives to monetize our IP, in F2Q 2013 we had taken three steps towards setting our strategy with regards to our patent portfolio. First, we’ve engaged both technical and market experts to begin the process of mapping the single touch IP portfolio to third-party products and services related to video streaming and dynamic ad insertion. Second, we have started to interview experienced licensing teams with specific domain expertise in these related fields of use and lastly, we have engaged outside council Reed Smith to support and advise on our licensing strategy and execution moving forward.

We will now be conducting a Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Our first question is from the line of Marc Robins of Catalyst Research. Please proceed with your questions.

Marc Robins – Catalyst Research

Hey, good morning gentlemen. It sounds like you made some good progress this last period. James, I apologize – I’m going to ask you to do something for me because I guess I don’t write as fast as I used to, particularly at this hour. You had a comment in your formal discussion about the world’s largest eTailer and I’d really appreciate it if you’d just read that paragraph again.

James Orsini

Yes, Marc. We were saying how earlier this week we signed a Master Services Agreement with the world’s largest eTailer and have completed connectivity and integration into our messaging platform through a custom application programming interface, which you guys know as an API. And we’ll have more to report on this within the coming weeks.

Marc Robins – Catalyst Research

Yeah, I heard that “more to report” – that’s what got my attention. Okay, let me get back into the queue and I’ll let somebody else go ahead and ask a question but I’ll be back. Thank you.

James Orsini

Thank you.

Operator

(Operator instructions.) We have a follow-up question from the line of Marc Robins with Catalyst Research. Please proceed with your question.

Marc Robins – Catalyst Research

Thank you. Let’s talk a little bit if you will, or bring us up to date if you please on Hibbett Sports. Is there anything there that you can kind of add to what we know?

James Orsini

Yeah, we’re having a lot of success with Hibbett. In a recent leadership meeting they’ve actually targeted doubling the unique user database before year-end. As you know, in this particular retailer we’ve seen great success in measurable ROI through mobile, whether it is an increase in coupon redemptions exceeding better than 14%, whether it’s click-through rates when we embed a URL into an SMS message – we’re seeing better than 6% click-through rates; or whether it’s basket-sized increases where we’re seeing better than 10% increases in the basket size post coupon redemption. They have some stores that are signing up hundreds of mobile folks per month and they plan to open up 64 new stores this year. They currently have about 875.

Marc Robins – Catalyst Research

Is there any kind of guesstimate or measurement as to the kind of sales that are attributable to the joint venture between Hibbett and Single Touch and how it’s affected Hibbett’s overall sales? I guess what I’m asking is do we know if Single Touch has added to the organic growth by a percent or something of that nature?

James Orsini

Yeah, they’re looking at an excess of $15 million per year. They’re certainly seeing that in year-on-year comparisons, just the coupon sales through the SMS are north of $8.5 million now – that’s like a 3000% increase year-on-year.

Marc Robins – Catalyst Research

Okay very good, thank you. Let’s turn to the #Taxi. You’re pretty careful about what you say on that. Is there any kind of an indication… I’ve never used the service so forgive me, I’ve never used it. Is there any kind of indication as to how the fee charged is going to be split or shared amongst the participants?

James Orsini

Yeah, I think this one we’re really excited about because you know, if I could just kind of frame this space so that you understand the magnitude first.

Marc Robins – Catalyst Research

I’d appreciate that. Go right ahead, please.

James Orsini

Yeah, the taxi and limo industry is about $11 billion in North America and they’re actively defending their space against ride share competition like you’ve been hearing about recently – Uber, [Halo] and other dispatch solution providers like e-hail – all of these have been in the news recently. But what we see is just like brick and mortar of old, when ecommerce came out the retail landscape was really forced to change. So keep in mind, though, that said 15 years later online is still only 10% of all commerce and people still go to stores. So retail stores all now have ecommerce sites and the way they do business has changed.

So if you have that in mind so too will the taxi and limousine industry undergo change. #Taxi is their solution to this change. So ride share offerings will likely have new layers of regulation being imposed on them – so Uber has seen their right in Manhattan pulled as recent as last week; Baltimore’s calling for ride share solutions to be transparent, under third-party insurance coverage, same thing in San Francisco. And dispatch solutions are trying to sell call [solution] versus radio dispatch, so radio dispatch firms represent about 75% of all that.

#Taxi is part of this evolutionary solution for the taxi and limousine industry to defend their space. It works on all mobile phones in the US, accessing all cab companies, and it’s got the ability to sense a busy signal and dial until connected and working to another dispatcher. It works on any major carrier. It doesn’t require any additional storage space on the phone of a mobile user who may only use a taxi occasionally and doesn’t want to download an app.

So we think with more than 2 million calls made in Canada last year the time has really come for #Taxi to gain its rightful traction in the US market which is sort of 10x the Canadian market. We love the fact that… You’re used to sort of our economics around messaging solutions, and this call solution is dialed into an abbreviated dial code, is 15x to 20x our typical economics around a message – so very economically favorable for us the more people who dial this abbreviated dial code, which is why we made the effort to ask them “How can we help and can you leverage some of the marketing expertise that we have here?”

And we’re excited about a very public launch with out-of-home billboards, with field marketers delivering napkins, coasters, door clings; with magazine ads. This will be a very public and visible launch. Sponsorship by Mothers Against Drunk Driving – it’s big.

Marc Robins – Catalyst Research

Okay, thank you very much. And then one last question, something I thought that was very interesting – you said that you’re now charging a minimum from your accounts. I guess this really should be directed to John: is there any way that we can kind of detect how that might boost baseline revenue for Single Touch?

John Quinn

Sure, Marc. The easiest answer is very substantially by engagement. It tends to however around sort of $5000 per month; it can be less, it can be quite a bit more than that. But that tends to be kind of a break point where you know people are candid about actually using mobile. What it does is it causes us to streamline our new business efforts. Without a commitment of at least that amount it’s really not an interest to Single Touch.

Marc Robins – Catalyst Research

Got it, I’ll get back into queue. Thanks so much, gentlemen.

John Quinn

Thanks Marc.

Operator

Thank you. (Operator instructions.) Thank you. Mr. Hug, there are no further questions at this time. I’d like to turn the floor back over to you for closing comments.

Jerry Hug

So with that I would like to thank all of our listeners for their interest and participation on the call. This concludes Single Touch Systems’ F2Q 2013 Conference Call. Thanks everyone for joining and we’ll speak to you soon.

Operator

Thank you. You may now disconnect your lines at this time.

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