iPass' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: iPass Inc. (IPAS)

iPass Inc. (NASDAQ:IPAS)

Q4 2013 Results Earnings Conference Call

February 12, 2014 05:00 PM ET

Executives

Lauren Stevens - Investor Relations

Evan Kaplan - President and CEO

Karen Willem - Senior Vice President and CFO

Analysts

Fred Ziegel - Topeka Capital Management

James McIlree - Chardan Capital

Kevin Hanrahan - KMH Capital Advisors

Greg Hillman - First Wilshire Securities Management

Marc Silk - Silk Investment Advisors

Matt Reiner - Adirondack Funds

Operator

Good day and welcome to the iPass Fourth Quarter 2013 Financial Results Conference Call. Today’s conference is being recorded. We will have a question-and-answer session at the end of the call. (Operator Instructions). At this time, I would like to turn the conference over to Ms. Lauren Stevens. Please go ahead ma’am.

Lauren Stevens

Thank you. Good afternoon, everyone, and welcome to iPass’ fourth quarter and year-end 2013 earnings conference call. This is Lauren Stevens from iPass’ Investor Relations. I am here today with Evan Kaplan, President and CEO of iPass; and Karen Willem, Senior Vice President and CFO of iPass.

We have distributed our Q4 earnings release over the Wire services and posted it on our website at investor.ipass.com. We would like to highlight that we have also posted our Q4 earnings presentation on the site along with an updated company presentation. This call is also being broadcast at investor.ipass.com and a replay will be available on our website until the next earnings call.

Please note that this webcast is property of iPass and any copying or rebroadcast without expressed prior written consent of iPass is prohibited.

Before we get started, we want to emphasize that some of the information and statements you will hear during our discussions today will include forward-looking statements, including without limitations, those regarding our expected performance of the business, financial outlook, and revenue and profitability targets. These statements generally maybe identified by the use of words expect, intend, believe, anticipate and other similar words denoting future events or results. These statements may involve risks and uncertainties that could cause actual results to differ materially.

These forward-looking statements reflect our opinion only as of date of this presentation, and we undertake no obligation to revise or publicly release the results or make any revisions to these forward-looking statements in light of new information or future events. Please refer to our earnings release posted on our website and to our SEC filings including under the caption Risk Factors and our Annual Report, 10-K filed with the SEC on March 15, 2013. For a more detailed description of the risk factors that may affect our results.

In addition, investors and others should note that iPass announces material information and material financial information to its investors using its Investor Relations website, SEC filings, press releases, public conference calls, and webcasts. iPass also uses social media to communicate with customers and to the public about iPass, its products, services, and other materials matters relating to its business and markets. It is possible that the information iPass posts on social media could be deemed to be material information. Therefore, iPass encourages investors, the media and others interested in iPass to review the information of posts on U.S. social media channels, including iPass Twitter feed, iPass LinkedIn feed, iPass Google Plus feed, the iPass Facebook pages, and the iPass Blogs. These social media channels may be updated from time-to-time.

On this call, we also provide and talk about our results using non-GAAP financial measures. Our GAAP results and reconciliation of non-GAAP to GAAP measures can be found in our earnings press release, which has been posted on our website at www.ipass.com.

Before I turn the call over to Evan, we would like to note that management will be meeting with investors and analysts in the Mid Atlantic region on the West Coast in the following week.

With that, I would like to turn the call to Evan.

Evan Kaplan

Thanks Lauren. Good afternoon everyone and thanks for participating on today’s call. We have a lot of ground to cover so let’s jump right in. Open Mobile continues to drive iPass and with each quarter we have bolded by its performance OM grew 77% in 2013 to over $48 million in just three short years since its launch. In the fourth quarter OM grew 43% over the fourth quarter of last year and 3% over Q3 marking 11 consecutive quarters of growth.

The number of WiFi sessions grew at 12% and WiFi hours grew 9% over the fourth quarter of the last year, driven largely by the continuing penetration into smartphones and tablets. Our OM revenue grow slow quarter-on-quarter due to couple of one time issues, the outlook is positive and we expect OM growth to pickup nicely in Q1.

Perhaps most importantly for those of you following our business closely Q4 marks the first time in five years that we have had total WiFi users year-over-year. As we have said before adding WiFi users is a single biggest growth driver for our business. Overall iPass revenue and adjusted EBITDA were within guidance and were $26 million and negative $2.6 million respectively.

On the new customer front we have been continuing to build on the new customer acquisition momentum. This quarter adding a record of 19 new logos including Zurich Insurance, Microsoft, Ashurst, Bonduelle, Linktel and (inaudible). We are also pleased that Telefonica announced its universal WiFi service based on the iPass open mobile platform.

What is perhaps the most encouraging in the new contract value of the agreements we signed. It is the largest in OM history even better than what we achieved in the previous reported strong Q3. We expect this momentum to be reflected in our OM growth rate in Q1 and beyond. Externally we see a number of positive trends in the market. First and foremost according to the global business travel associations, business travel is projected to grow nicely in 2014, and improvement further declined in 2013.

Coupled that with accelerating movement of enterprise productivity in business applications to the cloud and the traveler’s requirements to an excess speed services on the variety of devices forms and on higher speed networks. And you have a strong setup of all the work we have been doing developing open mobile and expanding our network over the last three years.

With that I would like to highlight our expanded network footprint, which now stands roughly $2.2 million Hotspots approximately three times our closest competitor. With simply the more Hotspot more valuable our network interconnect becomes. Bear in mind additional footprint is a very important metric for our customers as it provides them with a greater number of places to use our service, but it is not necessarily a direct proxy for revenue.

Turning to the investments side. As we indicated a couple of quarters ago we are investing to few of the OM movement, specifically accelerating our sales and marketing initiatives. In December we have appointed experience Silicon Valley marketing and Executive June Bower as our Chief Marketing Officer. A positioned we waited to fill as we restructure the company hence it serves. To influence the depth of strategic market experience and creating next generation offerings with a strong consumer focus and industry headwinds including Cisco, (inaudible), financial engines, Alcatel and Tobi, (inaudible).

One of June’s first initiatives is rolling out a new version of the platform targeted departmental buyers. Because OM does not require complex IT deployments, but offering a new way for companies to buy and roll out our service in line with SaaS as practices. Corporate department to travel frequently such sales and marketing, will now be able to order Open Mobile services online and be up and running without IT support.

With consistent performance and dedicated focus on OM, the next step for us is to intensify our efforts to engineer growth with new customer acquisition and improved penetration and utilization in the already strong customer phase.

In light of that, in 2014 and beyond our sole mission is to scale OM. As you know we've funded we'll enter this point by harvesting the cash flow from our legacy businesses and we believe we are well position to reach sales and sales efficiency with an attractive growth profile. However as we have articulated it will require judicious targeted investment. Consistent with our comment last quarter, we have been served with cash and deferred investment and infrastructure, systems as well as in sales and marketing.

The investments we made in Q3 and Q4 are already delivering early returns in the form of an improved pipeline and growing contract value. We believe this is a very exciting opportunity for investors who look for growth. As we look to 2014, expect us to use cash to capture the OM opportunity. As a public company, we realize we must be improving with the cash but a (inaudible) return on usage. The necessary additional capital come from a combination to cash flows from our legacy business and cash we have on the balance-sheet.

We believe OM is a growth opportunity and with continued business focus we can accelerate its adoption and use. In the context of narrowing our focus to mobility and in response to the receipt of unsolicited indication of interest, we have announced a public process to sell our unity business. Over the last several years iPass has increasingly transitioned to away from our legacy business and towards open mould.

During the transition iPass Unity has continued to deliver significant financial performance for the company. And we continue to believe there are significant growth opportunities for the Unity business in a growing managed network service market. We are committed to seeing the business achieve its full potential, either as part of iPass or under new ownership. We will of course update you, all of you when it’s appropriate to do so.

Assumingly successfully the best Unity business, we were transport iPass to be a pure SAS infrastructure business with a narrow focus on revenue growth and ideally with the attended virtues of that appealing model.

Going into 2014, we have focused on square that (inaudible) the OM opportunity over the past few years we've provided a large number of metrics in an effort to be transparent in our transition from a legacy business to OM. Now that we have made the transition stating in Q1, we will simplify the narrative and concentrate on the few metrics one of the most relevant to OM.

Lastly, I want to share their Open Mob business growing and exciting. We've done a great job creating that gross solely from our internally generated resources from our legacy businesses. OM had become big enough, fast enough to now demand we really lean into it, so that it can grow further and faster, we will do that.

With that let me turn the call over to Karen for more details on the quarter.

Karen Willem

Thanks Evan and hello everyone. Now let’s take a look at the financial results for the fourth quarter and full year of 2013. Total revenues for Q4 of 2013 was $26 million which was a $900,000 decline from $26.9 million in Q3 of 2013. Total revenue for full year 2013 was $111.1 million compared to $126.1 million in 2012. These results are in line with our expectations as Open Mobile revenue has grown but been offset by the anticipated decline in our legacy revenue. Unity revenue was largely flat year-over-year.

Open Mobile continued to grow for the 11th consecutive quarter to a total of $13 million in Q4 of 2013 which represents a 3% sequential increase from Q3, a 43% increase over Q4 of 2012 and a 77% increase for full year 2013 over full year 2012. Open Mobile revenue represented approximately 72% of total mobility service revenue in Q4 of 2013 compared to 68% in Q3 of 2013 and 43% in Q4 of 2012.

Open Mobile Enterprise Wi-Fi network revenue grew to $7.1 million in Q4 of 2013 from $6.7 million in Q3 of 2013, a robust 6% and a good indicator of our continuing OM trajectory. In fact OME Wi-Fi revenue grew to $25.2 million in 2013 from $11.2 million in 2012, which represents over a 100% increase year-over-year. Open Mobile platform revenue declined in Q4 of 2013 to $3.6 million from $3.9 million in Q3 of 2013. Open Mobile Platform revenue increased year-over-year to $15 million in 2013 from $11.6 million in 2012. Open Mobile Exchange in Q4 of 2013 grew a healthy $200,000 over Q3 of 2013.

Normally we would expect a higher growth rate from Q3 to Q4 in total Open Mobile revenue however we had several one-time adjustments in both quarters, which caused the lower quarter-to-quarter total OM growth rate of 3%. The OM momentum is good and we are optimistic about Q1 and beyond.

Now let’s look at usage. Active monetized users at period end on the Open Mobile platform grew by 6% from Q3 of 2013 and a 64% from Q4 of 2012. Additionally, the percentage of active monetized users on the Open Mobile platform represents 85% of total platform users in Q4 of 2013 compared to 80% in Q3 of 2013 and 59% in Q4 of 2012. OM is now the predominant driver of our mobility business.

As expected, revenues for iPass Unity were $8 million, down from $8.3 million in the third quarter of 2013. This was due exclusively to the customer terminations that we highlighted in the last two quarters. Unity had some recent wins and a very strong pipeline, both of which give us confident that we can expect improving results in the back half of 2014.

Network gross margin for Q4 of 2013 was 40.4%, a decrease of 2.6% from Q3 of 2013. The margin decline in Q4 was mainly due to a decline in revenue on higher margin legacy products and the unfavorable margin impact of the customer terminations in the Unity business.

As we previously communicated, our margins are sensitive to customer usage patterns and are adversely impacted when customers on fixed rate price trends use them heavily. Also, erosion of legacy stream revenues such as dial-up and customer renewals at lower monthly commitments put downward pressure on margins. Operating expenses increased from Q3 of 2013 by $570,000 to $17.7 million in Q4 of 2013.

As Evan mentioned, we made incremental investments in sales and marketing to drive OM revenue and as a result, our Q4 2013 sales and marketing expense was $4.7 million, an increase of $300,000 from Q3 of 2013. Operating expenses for the full year of 2013 were $72.8 million compared to $75.9 million in 2012.

As we discussed in the past, we continue to effectively manage our expenses and will spend judiciously as we drive OM growth. For Q4 of 2013, adjusted EBITDA was a loss of $2.6 million compared to a loss of $1 million in the previous quarter, which was primarily driven by the decline in revenue and network gross margins.

Adjusted EBITDA for the full year 2013 was a loss of $5.1 million compared to adjusted EBITDA income of $1 million for 2012. Our cash balance increased to $24 million at the end of Q4 of 2013 from $25.2 million at the end of Q3 primarily due to the investments in sales and marketing and capital expenditures for IT infrastructure. Cash balance at the end of 2013 was $24 million compared to $26.8 million at the end of 2012. We continue to have such solid working capital and strong financial profile.

Moving onto the outlook, we are pleased with the continued progress in Open Mobile revenue growth and we expect OM to continue to grow nicely in Q1 and the rest of 2014. These increases will be partially offset by the expected continued decline in legacy revenue. Also, as I said last quarter, Unity revenue will decline in the first half of 2014 due to previously mentioned customer terminations, but will be offset in the second half of 2014 by new customers and channel sales, which are expected to ramp up steadily.

Consistent with what we stated the last two quarters, we strongly believe it's time to invest in sales and marketing to capitalize on the growing Wi-Fi market dynamic and continue to make OM a must have application for the business traveler. Also, Q1 is a large expense quarter for us due to an increase in payroll taxes, annual order fees and our annual sales keep up activities.

As a result, Q1 is normally our seasonally lowest adjusted EBITDA quarter. We anticipate total revenue to be approximately $24 million to $28 million for Q1 of 2014 and we anticipate adjusted EBITDA for the quarter to be in the range of a loss of $5.5 million to a loss of $3.5 million.

Investments in sales and marketing will begin to result in improvements to the bottom-line in the second half of 2014, but we will need this cash to fund these investments. Also we plan on spending several million dollars in capital expenditures throughout 2014 to expand and refresh our network operations infrastructure to deport our accelerated OM growth. We expect to use approximately $3 million of cash in Q1 of 2014.

We're working with Blackstone to divest our Unity business and now are focused on our high growth OM business. As a result, look for us to increasingly concentrate on handful of metrics that are more relevant to our Open Mobile business.

Starting next quarter, outside of the standard financial metrics, we will focus on a number of Wi-Fi users and their usage. These are the numbers we will be watching most closely and they better catch the dynamics of the OM business. In conclusion we are very excited about our path forward and we will continue to seek ways to maximize shareholder value in the near future.

I want to thank you for your time today. And we will turn it over to the operator for any questions.

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions). And we’ll take our first question from Fred Ziegel of Topeka Capital Management. Please go ahead sir.

Fred Ziegel - Topeka Capital Management

Hi guys couple of questions.

Karen Willem

Hi Fred.

Fred Ziegel - Topeka Capital Management

Is the M&A business that slow that Blackstone looking and going $30 million or $40 million transactions, I’m curious on that?

Evan Kaplan

Fred, I can’t comment on Blackstone’s business (inaudible) we’re pleased to have them as bankers, they are an excellent bank.

Fred Ziegel - Topeka Capital Management

So I’m not sure you can answer this either, but I’ll ask it anyway. What does iPass look like ex-Unity?

Evan Kaplan

I think it’s pretty broad question, I think the numbers sort of speak for themselves. You can sort of do what we said segment report on Unity, it’s a SaaS business, it’s growth-oriented, it looks like from our point of view a very compelling SaaS growth story.

Fred Ziegel - Topeka Capital Management

Are you more or less unprofitable than (inaudible)?

Evan Kaplan

There will be necessary adjustments as we go through process I prefer to give that guidance as we get closer to that transaction Fred.

Fred Ziegel - Topeka Capital Management

Okay. And in the guidance, how do we get to $24 million on the OM, had we not win our cards on the legacy business because it seems to me what we get in guidance as we take whatever you just reported then you take on $2 million on the top side and $2 million on the bottom side. I don’t know how you get to $25 million?

Karen Willem

Well, that guidance is for our total revenue and is apples-to-apples with that we just reported this quarter. Clearly, as we go forward and we move to this process there will be accounting changes such that we may have to show the Unity business as a separate line of either assets for sale or discontinued operations. And we’ll give you a lot more insight into that next quarter. At the moment that is the same kind of guidance as we’ve done in the past, fairly wide range.

Fred Ziegel - Topeka Capital Management

It’s the same guidance you give every quarter, which is plus or minus $2 million the guidance for Q1 is inclusive of Unity, correct?

Karen Willem

Yes.

Fred Ziegel - Topeka Capital Management

Okay. And presuming it is sold to somebody whoever the unsolicited buyer is for use of proceeds?

Evan Kaplan

We’re not discussing the use of proceeds at this time. What you can assume is we’re going to do everything we can to maximize shareholder value.

Fred Ziegel - Topeka Capital Management

Okay. That would suggest buybacks and dividends, so we’ll leave it at that. Okay, thanks.

Evan Kaplan

I don’t think it suggests anything at this point, Fred.

Fred Ziegel - Topeka Capital Management

Okay. Thanks very much.

Karen Willem

Thanks Fred.

Operator

Thank you. And we’ll take our next question from James McIlree with Chardan Capital. Please go ahead.

James McIlree - Chardan Capital

Yes, thanks and good evening. So Evan both you and Karen talked about one time issues or special issues that affected OM growth but you didn’t sort of discuss what those issues were, could you elaborate on that please?

Karen Willem

Well, I will touch on revenue. I mean one of the things I mentioned, first of all OM WiFi revenue growth was 6% which is healthy and we are very happy with that. What I mentioned was a little bit of platform, we had a few accounting issues, adjustments in both Q3 and Q4 which caused the total rate to be a little bit lower than I’d like in platform. But overall, Open Mobile grew healthily and we were happy with the results.

Evan Kaplan

And just so James again on the same thing is our view is we look at the WiFi revenue but we also look at the user growth that happens on that platform and the dynamics around it. I don’t think the final revenue number because of the one-time accounting adjustments had a good effects to real growth that happened in the quarter which was pretty strong for fourth quarter.

James McIlree - Chardan Capital

Well, what were the one-time accounting adjustments?

Karen Willem

It’s a multiple things, usually it’s timing adjustments where you have to just -- based on collections and so forth. We have DSOs of 61 days, so we don’t have collections issues but sometimes I have to book reserves and so forth and then release them. And that timing can sort of mess with these small numbers. So it’s nothing significant or worrisome.

James McIlree - Chardan Capital

Okay. So both of you called it out, and so it’s something, I’m assuming it’s something otherwise you didn’t called out.

Evan Kaplan

Well, I think what you want….

James McIlree - Chardan Capital

I have asked a couple of times and then you just seem to not want to answer either the scale or the specificity of what the adjustments were and now you are saying, well really it doesn’t matter. Okay, what did I go on? So the bigger EBITDA loss in Q1 versus Q4, it looks like it’s solely due to the increased expenses that you have underway for the audit payroll et cetera, is that fair?

Karen Willem

For Q4 to Q1 you are saying?

James McIlree - Chardan Capital

Yes.

Karen Willem

Yes, it’s the same kind of thing we ran into last quarter, if you look, Q1 is typically our lowest EBITDA quarter because of the typical things that we certainly have with the audits, all the different things around being a public company, so that’s the general just of it.

James McIlree - Chardan Capital

And what’s this vendor financed plant of equipment?

Karen Willem

Last quarter in our Q4, we indicated that we brought some equipment. We bought several million dollars of equipment with some extended terms on it. And so this is reflecting the proper accounting of buy a equipment that you take in several tranches as you roll it out in our centers and therefore pay for it thereafter. So they gave us some very nice terms on that, so that’s the way we have to account for it.

James McIlree - Chardan Capital

So over the course of 2014 that vendor financed fee turns to what, turns, just becomes you pay for with your cash and so it goes away and your cash counts goes down, is that it?

Karen Willem

Exactly because you use up your cash as pay it off over time and that is reflected in some of the capital numbers that I mentioned that we’d be spending. So it’s a total of -- it's a combination of -- there will be about a $1 million of cash in 2014 coming from that and then the rest of that is 2015. So, it was about a three year total financing of a bunch of equipment for our data centers. And it will take us a year to roll it out to the various data centers.

James McIlree - Chardan Capital

Okay. And you talked about Unity being down in the first half of this year and that's down versus the first half of 2013 or that's down versus the Q4 and Q3 run rate?

Evan Kaplan

For the first half of 2013 and the second half of 2013. So, we message it would be down in the first couple of quarters this year and we messaged that on the last earnings call too.

James McIlree - Chardan Capital

I'm sorry, Evan I didn't hear you, you said it would be down versus the second half of 2013?

Evan Kaplan

I said both be down, both.

Karen Willem

Yes, as we indicated last time Jim, we have this one termination in Unity, it impacts us the first couple of quarter of ‘14 and then the increases in ongoing business and new business takes over and it starts growing again nicely.

James McIlree - Chardan Capital

Got you. Okay, great. Thank you.

Karen Willem

Thank you.

Evan Kaplan

Thanks Jim.

Operator

Thank you. And our next question comes from [Stan Berenstain] with Sidoti and Company.

Unidentified Analyst

Hi, good afternoon. Thanks for taking my call. I wanted to ask you, since past couple of quarters, the gross profit measures have been flat and you guys announced that you signed 18 new enterprise customers. I was wondering if that going to be reflecting growth in the gross platform users at all?

Evan Kaplan

This is Evan. Hey Stan. Growth that you'll likely see will probably reflecting growth in the gross, but the growth that you'll likely see in the number of active, which is really the metric that makes a difference. I think when you are seeing growth is flat, is that number of customers who have renewed, who had chosen not to do what we call an enterprise license, but chosen to do a select group of business traveler.

So an enterprise license could cover 10,000 or 12,000 users and select group of traveler could cover 6,000 or 7,000 and so it’s held flat. It’s not the number that we monitor closely as I’ve shared before. The number we’re looking for is growth in the active OM users which was I think in the quarter about 8% quarter-on-quarter.

Karen Willem

Yes. And we grew to 622,000 users from 574,000 in the previous quarter.

Evan Kaplan

And Stan, what that means is essentially active is the number of people who use us to connect any network at all, gross is a number of people who are in theory available to get to have the cost software to play and install, because they are permitted.

Unidentified Analyst

Yes, I just assume that since you are adding new enterprise customers, the growth would increase in and out itself. I did see that active users were up. Now seasonally Q4 is -- tends to be I guess weaker. Is the growth that you saw on a sequentially due to new clients or is this all kinds or any color you can add to what's driving growth there in active users?

Evan Kaplan

I can give you a little bit of color. It’s primarily due to older clients. We haven’t really started the customer acquisition thing at any kind of scale until probably mid first, early second quarter last year, and the first quarter we saw really good results was third quarter. It can take anywhere from a month to six months of these guys to get active, those who have been following the story for a while have seen.

I think we saw really nice growth, surprised me on the last time side as well as this time and it tends to be from existing customers.

Unidentified Analyst

Okay. Just last question in terms of the growth in the global footprint specifically in your [in play] growth is this from existing I guess clients or rather providers or just say new acquisitions?

Evan Kaplan

Yes. It’s the way it’s set up is there are two or three primary providers, the ones you’d know our Google obviously and Panasonic and if they add capabilities, we get permission from the airlines to basically open those capabilities. As you look at….

Unidentified Analyst

So, does that scale automatically or….

Evan Kaplan

It scales almost automatically, yes almost. You still want permission from the airlines but generally they’re supportive, and so yes. The answer is you build relationships with the providers, you service this to airlines. In the case of most of U.S. airlines the larger provider is Google, in the case of the international, it’s Panasonic in-flight through Deutsche Telecom. So we have the Lufthansa, Etihad, Aer Lingus, American Airlines and others in the pipeline.

Unidentified Analyst

Okay, great. Thank you.

Evan Kaplan

And by the way just as a comment, that is a pretty nice sector of growth in our business. In-flight business has been growing steadily, we don’t break that out separately, but it probably is important as most business trips start with some sort of airplane trip.

Operator

Thank you. And our next question comes from Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

Hello Evan, I had a few questions. So, first question was on the Unity business where you announced you may -- well you announced you retained the banker and you may sell it. I recall last quarter you announced a partnership with the very large telecom company which you couldn’t see what was. My first question would be has that partnership begun already or not?

Evan Kaplan

The partnership has begun and we’re very pleased with both the pipeline and a couple of early views. So, yes…

Kevin Hanrahan - KMH Capital Advisors

Okay that’s good. So would the banker who is soliciting the interest, would they know who that telecom company is or will the buyer eventually know who it is if the public does not?

Evan Kaplan

So Kevin, I am not -- I can’t comment on the process but you can assume a good banker would know everything they need to know to do their jobs.

Kevin Hanrahan - KMH Capital Advisors

Right. Do you think that you will be able to disclose the partner this year?

Evan Kaplan

I am hoping -- yes, we will do it this year. Yes.

Kevin Hanrahan - KMH Capital Advisors

Okay, that would be good.

Evan Kaplan

Sooner than the time frame of this year.

Kevin Hanrahan - KMH Capital Advisors

Okay, that’s helpful. Thanks. I had a question about you said you had one OMX carrier win in Q4 and I did read the Telefonica press release that they put out that not the one that iPass put out, because I didn’t think you put one out, I read that to mean that they were an OMX customer but it’s kind of confusing. So…

Evan Kaplan

Let me clarify for you. Telefonica is and this is where the lines of OMX blur a little bit it. It’s technically an OFE customer not an OMX customer. And the reason that is because they are selling to global enterprises through their Telefonica global services arm. We did not have permission to announce that and we are surprised to see it publicly announced. And so, if it works out, we will more formally announce it with Telefonica sometime in the not too distant future. But what is out there, we feel comfortable.

Kevin Hanrahan - KMH Capital Advisors

So it would be somewhat similar to what you were already doing with Orange and with Deutsche Tel or is that a little bit different as well?

Evan Kaplan

No, it’s very similar what we do with Telstra, Orange, Deutsche Telekom and SingTel.

Kevin Hanrahan - KMH Capital Advisors

So, the same idea with the Telefónica?

Evan Kaplan

Yes, it’s another way for us to capture these large goal enterprises where we can’t afford to fund that kind of ourselves.

Kevin Hanrahan - KMH Capital Advisors

Okay. And my next question is about OMX customer base, which I guess your question which I think you’ve announced about 20, but I thought Telefónica was the only mix, so maybe I’m only at 19, it’s hard to keep track. So I think there is about 10 could be 9, could be 11 that you’ve not been able to announce yet. Do you think I am in the ballpark there?

Evan Kaplan

That sounds about right. Right now as I see they don’t have to act the numbers in front of me and what’s been announced and what’s not about right. And consistent with what happened with Telefónica they are very concerned about any public announcement of their services before rolled them out.

Kevin Hanrahan - KMH Capital Advisors

Before rolling out, right.

Evan Kaplan

Could be somewhat constrained on that front.

Kevin Hanrahan - KMH Capital Advisors

Yes. So, just about six months ago, I asked if you thought a view from then in order words August of 2014, we would know the names of the other OMX wins that you’ve already had, but haven’t been able to announce yet and you said, yes you’d know the names?

Evan Kaplan

Yes, quite consistent with that, I hope that’s true.

Kevin Hanrahan - KMH Capital Advisors

Six months from now we’ll know the names?

Evan Kaplan

Yes. We don’t control them, but yet, I’d expect that to be true.

Kevin Hanrahan - KMH Capital Advisors

Yes, I know the carrier what they are doing is they want to be out in market before they announce it, is that for competitive reasons is that base case of it?

Evan Kaplan

In almost all cases that’s the case, but in some cases they let us announce when we sign the deal, we’ve done two of those.

Kevin Hanrahan - KMH Capital Advisors

And then I just had a question of -- I saw your hotspots grew a lot especially domestically, was it due to some new partners that came in domestically and internationally or can you comment about that?

Evan Kaplan

Internationally, it's due to some new partners who came in, but domestically it's Comcast really being aggressive about their build out. The large part of that is Comcast other people have expanded their footprint, but the large part of that is Comcast.

Kevin Hanrahan - KMH Capital Advisors

So assuming just Comcast rolling out new hotspots?

Evan Kaplan

Right. That's why when we sign these partnerships it is very important because the ones that are investing a lot in this Wi-Fi are -- and that being important revenue generators for us.

Kevin Hanrahan - KMH Capital Advisors

Okay. Thanks a lot Evan. Best of luck to iPass.

Evan Kaplan

Thanks Kevin. Thanks for the questions.

Operator

Thank you. Our next question comes from Greg Hillman at First Wilshire Securities Management.

Greg Hillman - First Wilshire Securities Management

Yes, good afternoon. Evan, kind of there is a story that maybe you could help me with couple of questions. Number one, for your target market for your OM market for the business users, what percentage of the Wi-Fi spots are free versus what percentage we have to pay for in the moment particularly around the world?

Evan Kaplan

Yes, it's a good question, an important question to our story. So, what we've typically said and the hard data is -- the hard data for some of this is between there is some study that have been done in the public by [JiWire] and others. But in Europe the number tends to be 80% of the hotspot that business travelers use are in fact paid and 20% are in fact free. And in the U.S. we tend to see a reversal of that.

And so our primary place is to monetize our users with paid footprint. It's on obviously airplane, often airports, hotels even public venues. The other dynamic that happens is hotspots are free, but they are free under certain conditions. They are free like Comcast’s hotspots are free in the U.S. in most cases if you are Comcast subscriber. O2’s hotspots and BT’s hotspots are free in the UK if you an O2 or BT subscriber or if you want to give them your cell phone number.

And so with large corporation they’re starting to meet increasing awareness about the security and privacy that are given up by virtue of using some of the free hotspots. But if somebody was thinking about our story broadly it have to factor in the impact of free hotspots in their different forms. So I hope that answers the question at least to start?

Greg Hillman - First Wilshire Securities Management

Okay. And then when your business travels go around sometimes they get SIM cards even they go in a country and pop it into their new smartphone, how does that effect to your business?

Evan Kaplan

That's still relatively small market, although increasingly we saw T-Mobile in the USA offer a much better global plan for roaming and that sort of stuff. Pretend to be the large corporate tend to not leak day buy those kinds of services. What I was telling you that the broader theme is global roaming, the cost of global roaming is in fact declining. But at the same time, the amount of Wi-Fi is increasing and the requirement for faster and faster networks is increasing. It’s very hard to do that on a lot of a cellular your infrastructure, which in Europe and Asia still primarily 3G infrastructure and ends being expensive in a roaming or non-roaming situation.

I mean you look at the corporate application step, which is things like unified communications, communicating with your family home is a bunch of different stuff that requires high bandwidth. People are supersensitive about doing on mobile or cellular. So they remain a pretty healthy ecosystem for Wi-Fi.

Greg Hillman - First Wilshire Securities Management

Okay. And just a question of just positioning yourself, I think of the company I think it’s called [Acuro] I should get an appearance maybe dealing with company. But how do you position yourself relative to them? Are they more sort of massive or specialized application for Wi-Fi?

Evan Kaplan

We don’t, Acuro is actually partner of ours and we worked with them I think that was announced about a year ago and they provided same chip that allows you to connect to Wi-Fi. And so our client work with the Acuro’s infrastructure.

Greg Hillman - First Wilshire Securities Management

Okay, okay. Fine, I’ll get back in queue. Thank you.

Evan Kaplan

Yes.

Operator

Thank you. Our next question comes from Marc Silk with Silk Investment Advisors.

Marc Silk - Silk Investment Advisors

Hi, Evan and Karen. Thanks for taking my questions. I guess the first one is on the potential Unity sales should we look to see that deal be done in the first half of the year or second half of the year if you have to guess?

Evan Kaplan

Now that we’ve announced in my prepared, preference would be in the first half of the year, but the processes.

Marc Silk - Silk Investment Advisors

Exactly. Since most of my iPass specific questions have been answered. I have a few questions about the industry. So I’ve been reading that on TV stations in Los Angeles are going to share channels for your spectrum. You have a government’s plans to eventually queue up an auction off more airways for using wireless broadband. So how is that going to affect the Wi-Fi industry if you could project that?

Evan Kaplan

Marc, it’s kind of long conversion, but which I am happy have with you or others. But to give you the highlight is anything that increases the spectrum for Wi-Fi 5 gigahertz or in other places it’s capable of using Wi-Fi chipsets that is nothing, but good for us. That’s a good iPass dynamic.

Our view is there are two primary networks, cellular and Wi-Fi they both have their places and roles. And increasingly cellular is a pay as you go experience and Wi-Fi starts to look at folks like a preferred experience in many cases. And so we are looking for as much bandwidth can be made available not a lot of lobby of interest to make Wi-Fi bandwidth available.

Marc Silk - Silk Investment Advisors

That’s helpful going forward. And so my last question is, I was sitting down with the CEO last month who has generally gain regards to LTE. And so I started discussing Wi-Fi because of my interest obviously in iPass and what his -- let’s just say criticism of Wi-Fi was less capacity and safety/security. So if you were sitting next to me to [embark] the CEO, what would you basically say?

Evan Kaplan

I would say this is a very classic story of an organic unregulated slightly messy ecosystem, but supported by everything from real estate owners to large platform players to equipment manufacturers that is emerging and by nature it’s a messy ecosystem. So, in fact it’s not as secured as LTE today. You can easily make it that secure, easily right not everybody does. And so it’s the nature of these organic sort of ecosystem that they are going to grow like wild fire and I think that’s the benefit, but it’s going to be LTE. LTE is meant for very specific purpose and it tends to be very expensive certainly on a per megabyte basis. And so Wi-Fi direct competitor is not necessarily LTE, it’s not communicating at all.

Marc Silk - Silk Investment Advisors

And then as far as capacity, what -- it sounds like there are some issues, not issues but there are things being done to that -- maybe this I would say more speedier than capacity?

Evan Kaplan

Yes. LTE increases speed, many of us who probably on this phone are already on LTE network, right. But they become saturated like all other cellular networks. And it’s a really simple dynamics, it’s physics problem. The closer you are out to the ground and therefore the fiber the faster you are going to go. But further you are, the further single stands right is slower, right the slower capacity you are going to have in general without spending a lot of CapEx to do it.

Carriers are faced with a fundamental issue and squeeze our profits, which is each of these new iterations of 3Gs and 4G is expensive and that amount of data is shooting through the roof. If you look at this new generation of users coming into the workforce, they’re not WiFi first generation, they look for WiFi and unless they’re absolutely mobile, they do not use cellular right away. If you look at the penetration of iPad, it’s a 90% WiFi phenomena. So, there is a bunch of things that makes this WiFi ecosystem super resilient and an effective means for getting connected, phones, work, public places, airplane, (inaudible) both ecosystems will exist nicely together.

Marc Silk - Silk Investment Advisors

And my last question is I know you were talking about down along maybe seeing WiFi on a phone bill, I don’t say it’s very early with mobile experience, are you having discussions with that or is that just way too early?

Evan Kaplan

No, we are seeing that. Some of the people who are already live with OMX, OMX grew nicely this last quarter. And you are seeing that in some, there is actually a bill that appears on a phone bill that you get charged for one time. So we are seeing that, it’s early and it tends not to be in huge carriers at this point, but certainly and that’s what we are excited about.

Marc Silk - Silk Investment Advisors

All right, good luck, Evan. Thanks for taking my questions.

Evan Kaplan

Marc, I appreciate it.

Karen Willem

Thank you.

Operator

Thank you. And our next question comes from Matt Reiner with Adirondack Funds.

Matt Reiner - Adirondack Funds

Hi Evan.

Evan Kaplan

Hi Matt.

Matt Reiner - Adirondack Funds

I had a quick question on the gross margin line again. And I think maybe one of the other caller's or questioner has asked about some items you called out, whether the items you called out have direct impacts on gross margin?

Evan Kaplan

You mean the one-time items associated with OM growth…

Matt Reiner - Adirondack Funds

Yes.

Evan Kaplan

That we talked about earlier?

Matt Reiner - Adirondack Funds

Yes.

Evan Kaplan

No, those weren't necessarily gross margin items. The gross margin, I'll let Karen talk to it more sensibly and more to do with stuff on Unity side. But these are just so -- people understand, these are probably the range to gross margins are going to be in a couple of points plus or minus. We feel pretty comfortable with these numbers.

Matt Reiner - Adirondack Funds

When you say these -- the current quarter is in that low 30s or…

Evan Kaplan

No.

Karen Willem

No, it was 40.4%. And with the guidance we've given is in the low 40s is where we expect to be in the near term and that guidance hasn't changed.

Matt Reiner - Adirondack Funds

I think I'm adding another, the way you break it out on the…

Karen Willem

No. To add to what Evan said, yes we had some downward pressure primarily from Unity on. And again it's also to do with these the three quarters with this large customer that the climbed matched more rapidly than they usually do. And so we still set into all our models and we still expect margins to stay down in the very low 40%.

Matt Reiner - Adirondack Funds

Okay, good. That was my only question. Thanks.

Karen Willem

Great. Thank you.

Operator

Thank you. We have one more question from James McIlree of Chardan Capital.

James McIlree - Chardan Capital

Yes, thanks again. At least the way I’m calculating it, it looked like ARPU on Open Mobile network was down insignificantly versus the previous quarter and year ago quarter. Is my math right, and if so why was it down?

Karen Willem

We’re looking around at ARPU.

Evan Kaplan

On Open Mobile, it looks like it’s down about 150, so near as I can tell 37.21 to 35.75.

Karen Willem

Yes.

Evan Kaplan

Without having everything in hand Jim, what my expectation is, is that we are seeing increasing penetration from the EFR customers who are using the product, we've done a good job on usage and utilization. So the EFR customers who are using it more and more represent a larger and the usage once maybe represent a little bit lower. So higher usage on the fixed rate customers.

James McIlree - Chardan Capital

Okay.

Karen Willem

And just looking at historically some of the data though, it does have a simple dollar per range over time as those go up and down, it was 36 comes in Q1 and Q2, so yes.

James McIlree - Chardan Capital

Yes, I see that. And then the legacy business, I don’t want to say that the decline stopped, but the decline certainly moderated this quarter versus prior quarters. I know that (inaudible) you approach zero, but are we kind of at that band do you think where the declines are just a little bit less than they have been?

Evan Kaplan

Yes, I mean we went from 6 million last quarter to 5 million this quarter. And it just continues to wind down, it probably doesn’t really get to zero any time soon, but it just keeps winding down. So, we’re going to get to the small number fixed.

Evan Kaplan

It’s foolish enough to think that I could guess what the legacy decline would be before Jim, so I’m sensitive to that number. So yes those numbers appear to be true but there are no guarantee of future results.

James McIlree - Chardan Capital

Right, okay. So in terms of Karen you said anytime soon it won’t go to zero, anytime soon is 12 months, 24 months 36 months, when you think that?

Evan Kaplan

It won’t go to zero in 12 months.

Karen Willem

Yes. It won’t go to zero in 12 months; of 24 I can’t see quite that far, but definitely not within 12 months, it will go down a couple more million over time.

James McIlree - Chardan Capital

Right. Okay, great. Thank you.

Karen Willem

Thank you.

Evan Kaplan

Thanks Jim. Thanks everybody for joining us today. I appreciate it. With that, operator?

Operator

And that does conclude today’s conference. We thank everyone for their participation.

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