Steven Gatoff – Chief Financial Officer
Evan Kaplan – President and CEO
iPass Inc. (IPAS) Q1 2010 Earnings Call May 6, 2010 5:00 PM ET
Good day, ladies and gentlemen. And welcome to the Q1 2010 iPass Incorporated Earnings Conference Call. My name is Katrina, and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later we’ll conduct a question-and-answer session. (Operator Instructions).
I would now like to turn the conference over to your host for today, Steven Gatoff. Please proceed, sir.
Thank you, Operator. Good afternoon. Thank you for joining us to discuss our financial and operating results for the first quarter of 2010. I’m Steven Gatoff, Chief Financial Officer of iPass and I’m here today with Evan Kaplan, President and CEO.
Before I turn the call over to Evan, I’d like to bring the following to your attention. The date of this call is May 6, 2010, and our presentation today contains forward-looking statements about events and circumstances that have not yet occurred, statements regarding our projected financial results for the first quarter of 2010 and the second quarter of 2010, statements regarding achieving growth and profitability, statements containing words such as will, expect, believe, plan, intend, and should and other statements in the future tense are forward-looking statements.
Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. The risks and uncertainties that could cause these statements not to come true are set forth in today’s press release as well as in our most recent quarterly report on Form 10-Q and annual report on Form 10-K under the section Risk Factors that are filed with the SEC. These reports are available on our website and at www.sec.gov.
Please note that iPass undertakes no responsibility to update the information on this conference call under any circumstances. On the call, we’ll provide and talk about our results using non-GAAP financial measures. The press release on our website includes texts and tables that explain how we define and calculate non-GAAP metrics and the reconciliation of non-GAAP results to GAAP results.
The press release and Form 8-K announcing our financial results is available on our website at www.ipass.com. This earnings call is being recorded for replay. It is being webcast and will also be available on our website for one quarter until the next quarter’s earnings call. Please note that this webcast is the property of iPass and any copying or rebroadcast of this webcast without the expressed prior written consent of iPass is strictly prohibited.
With that, I’d like to turn the call over to Evan.
Thanks, Steven. Good afternoon, everyone. Thanks for joining us on today’s call. I have three things I want to cover in my opening comments. First, I want to give you a clear picture of the state of our business today. Second, I’d like to update you on the progress that we’re making with our Open Mobile Platform that we announced in January. And third, I want through the changes we made to how we’ll be reporting our revenue model and our iPass user metrics going forward.
So let’s start with the state of the business. I’m excited to share with you the progress that we made in the first quarter across several important fronts, specifically, team, technology and product.
As you know, we executed on a major milestone delivery of our Open Mobile Platform in January. And while we’re still in the early stages, we saw strong progress in the platform throughout the quarter. I’ll go into more detail on that in a few minutes.
From a financial perspective, as projected, we came in squarely on guidance with our revenue and profitability targets. We continue to run the business responsibly while investing in our expanded offer portfolio and our growth initiatives.
This was evident in the dynamic where Q1 revenue declined apples-to-apples from Q4, primarily on the back of lower dial-up and minimum commitment revenues. But I’m pleased to say that we managed our operations to accommodate this and maintain our commitment.
Taking a look at the team. Over the course of the quarter we also continued to build our bench strength by adding new entrepreneurial talent in key leadership positions throughout the company with a special emphasis on sales and marketing.
On the network front, in partnership with Aircell we launched the new inflight Wi-Fi service as part of the iPass Global Network. Our customers can now sign up to have the inflight service added to their iPass contract and their employees can seamlessly access inflight internet on Aircell’s Gogo service throughout North America.
So far, we’re very pleased with the usage we’re seeing and the general acceptance among our customer base of that service. We’re also excited to be the first roaming partner to get to market with this new capability and we’re looking forward to expanding our coverage to flights in Europe in the coming months.
On the terrestrial side, we’ve broadened our overall network footprint with some nice expansion in Europe in the quarter and now cover more than 143,000 venues in 93 countries.
We also broadened the range of devices that we support with the addition of Apple’s new iPad as well as adding support for a new embedded 3G platform. So, solid progress.
Finally, while it’s early, perhaps most promising is that we started to see initial signs that the global Wi-Fi business is getting better, with modest improvement in both hotel and air travel traffic. One clear indicator is that our Q1 Wi-Fi usage grew on a year-over-year basis and was above the levels that we saw in 2009.
Unfortunately, an update on the state of the business wouldn’t be complete without addressing some of the headwinds that we articulated on our last call and that we’re still encountering.
We continue to see lower minimum commits from our customers on contract renewals. This is based primarily on their relatively low utilization over the last six quarters, driven by the recessionary effects.
And also to this point, we are not yet seeing significant job growth in our customer base. This is a contributing factor to our guidance for the second quarter, which Steven will outline in a few minutes.
Having said that, net-net I’m pleased with how my team is managing the existing business and I remain confident in the long-term opportunity we have here.
Now let’s talk more specific on our progress with the Open Mobile Platform, as that represents our most important investment in the future. In late January we announced a new platform. As a short recap, this was a culmination of 10 months of heads-down work by our new development team to build and deliver a technology platform that would fundamentally change the economics of enterprise mobility and empower enterprises to build their own mobility service and address the fragmentation, spiraling costs and consumerization issues that these organizations face every day.
We now have another three months under our belt and a few more point releases and I’m pleased to say that feedback from our customers and carrier partners has been very positive.
But more important than positive feedback, we have seen significant uptake in our test program with 175 companies, many of them household brand names enrolled in the testing and we’re seeing more than 4,000 sessions a week.
But we still have much work to do, the response from our carrier partners and our enterprise customers has been better than expected. And importantly, most of the discussion with our test program enterprise – most of the discussion with our test program enterprises is not about if they want to deploy Open Mobile, but rather when. In that light, we expect to see sales and testing cycles conclude with select customers and move into live production environments in the coming months.
Going forward, we have a very aggressive product development schedule to deliver on and some exciting customer opportunities on the horizon. I’ve said it before, but it’s important to reiterate it.
I believe our new Open Mobile Platform is the key to the company’s future. I believe that the broader the adoption and use of our platform by our customers and our carrier partners not only will drive greater platform and network revenue but will also position us for additional opportunities to grow our business.
With that, I’d like to talk a little bit about the significant changes to our reporting. So, in order to provide you with more visibility and transparency to how we manage the business, we’ve introduced changes in how we report our business and some of the key metrics that drive it.
We want you to see the business in the same way we see it and provide the clarity for you to effectively model it going forward, something we suspect has been difficult to do in the past. To that end, let me briefly walk you through the impact of this, I will leave it to Steven to cover some of the important details in metrics.
At the top level, the company’s overall revenue is now divided into two broad offerings, our Enterprise Mobility Services, which represent the bulk of our revenue and our Managed Network Services.
Managed Network Services or MNS, is our profitable fixed broadband offering that was acquired as part of the GoRemote acquisition in 2006.
Enterprise Mobility Services or EMS, consists of our platform, network and other mobility related revenues that together constitute our mobility offering for enterprise customers. This is the first time we’re breaking out these two businesses and this should help our stockholders quickly develop a view on each business and each opportunity.
Within our Enterprise Mobility Service, we are breaking out our revenue to show our platform and network revenue line items. Platform revenue is generally our high margin SAS-related revenue that includes our monthly client and platform usage fees that are built independently of their use of our paid network services.
We are breaking this out because we believe that over time the Open Mobile Platform will be a strong business and will offer significant opportunities for growth with deeper penetration and expansion of our installed base.
We view the penetration of Open Mobile much like a cable company might view homes past. Once accepted by the IT director, our client platform is generally deployed to all relevant devices. But the important metric is how many of those endpoints actually activate or in our case use the service. In the past, this has been a relatively small subset of the available base.
Open Mobile is specifically designed to drive that increased usage by dramatically improving the end user experience and significantly expanding the number of use cases, on campus, at home, on public free networks, on any 3G or 4G network and even in the air. If executed well, this should allow us to achieve our goal of being the always on enterprise connection service of choice.
From a business model point of view, the more the people use Open Mobile the more we expect to see the high margin platform revenues grow and the greater opportunity for us to add additional, profitable, value-added services for those customers. Said simply, on the platform side we had the opportunity to grow through increased usage and through additional services.
Moving on to the network side of the equation, the network revenue line under our Enterprise Mobility Services has been created to simply include all of our mobility network services revenue including Wi-Fi, (inaudible), 3G and hopefully soon 4G and of course, dial-up. This is by nature a lower margin revenue than the platform offering but it’s very important strategically.
As I said earlier, we believe the new Open Mobile Platform will generate more usage of the platform. More general usage of the platform will translate into more network usage and more network usage in general and more paid network usage specifically.
And if executed well, we think more network usage will allow us to take advantage of the increased fragmentation in the industry and develop less expensive and well targeted network offerings for our enterprise customer base.
If we do our job and the market evolves as we expect, the platform and network components of our business should be self reinforcing. As one improves, so should the other and vice versa.
In summary on the new reporting, this is how we as a management team and board view the business. We think this is a clear view how the business actually operates and what has been previously presented. And perhaps most importantly, this provides a directional view of how we intend to create value for our stockholders going forward.
I hope this is helpful. And now for a deeper dive on this reporting and the metrics and some more color on our Q1 results. I’ll turn it over to Steven.
Thanks, Evan. There are three things I’d like to cover. First, the important introduction of our new revenue model and monetized user metric reporting that Evan overviewed, second, talk through our Q1 results and third, provide guidance on Q2.
Jumping right into our new reporting, we believe that there are essentially a handful of metrics that really matter in so far as understanding this company, tracking its transformation and providing visibility into the drivers of growth and value creation.
At the heart of it, we see iPass as having two distinct offerings, our Enterprise Mobility Services and our Managed Network Services. Our goal is to bring clarity to our reporting and focus on the few core metrics that model our business and are the key indicators of future growth.
As Evan overviewed, these metrics are simply network revenue and the number of paying users of the iPass network, platform revenue and the number of paying users of our platform services and our network profitability or network gross margin as we now refer to it.
It’s important that we have a way to evaluate and clearly communicate what the two product lines are generating and how they are performing, both in terms of growth and the underlying drivers.
Accordingly, with our Q1 financial results, we’re changing the way in which we report and analyze revenue and we’re changing the user metric that we follow and report on as a means of showing the use and growth of our services.
Looking at our revenue reporting first, our MNS revenues are now broken out separately so as to provide visibility into this offering. And for our Enterprise Mobility Services, we believe it’s informative to look at three primary revenue streams. One, network revenue, two, platform revenue and three, other EMS fees and revenue. We believe this is a good approach.
Rather than have more than 25% of revenue reported under the caption of services and other fees, we’re separating out the revenue streams into clear, logical and transparent reporting lines as follows.
Network revenue is a new reporting category under Enterprise Mobility Services that is comprised of our revenues from our Wi-Fi, mobile broadband revenues such as 3G and dial-up revenues. This line item also includes minimum commitment revenues as they are directly attributable to customer network agreements and the network offering.
Platform revenue has been created to now report one distinct line item under Enterprise Mobility that encompasses all of our client and platform-oriented offerings and speaks to the heart of the platform model in what we believe to be the catalyst for future growth.
And finally, other EMS fees and revenue now takes on the feel of what you’d expect in another category, making up less than 5% of revenue. It is comprised of various mobility, professional services and other mobility related fees and revenues that contribute to EMS, but are ancillary to the core network and platform offerings.
Equally important in our view, we are also providing new metrics on user accounts. Historically, we’ve reported the number of unique users of our mobility services across a full quarter. This metric included both paying and non-paying users of our platform and network services and was presented as one aggregate number.
While directionally helpful, this metric doesn’t track to revenue on the P&L or value creation and it doesn’t provide a means with which you can model the business. We believe it’s helpful and provides good alignment with the drivers of the business to look at a monetized user metric, that is, the number of paying users that we have using our network and platform services in a given month.
Beginning with Q1, we have added the key operating metric of average monthly monetized users that we use to track and report on our Enterprise Mobility Services. For example, rather than reporting an aggregate quarterly number of users saying we had 1.1 million unique users in Q1, we look at the average number of monthly paying users across the quarter and report that we had an average of 683,000 total monetized users per month in Q1, 211,000 of whom paid for our network services each month and 612,000 of whom paid for our platform services each month in the quarter.
As you saw on the earnings press release and will see in our 10-Q, we’re providing this metric in total for both our EMS – and -- platform and EMS network offering.
From a quantitative standpoint, you may note that the platform and network user metrics do not foot to the total monetized user count. The reason is a good one. It is because there is a natural synergy where approximately 23% of our platform users also pay for our network services in a given month.
To aid you in transitioning to the new revenue reporting and monetized user metric, we have provided our revenue reporting and the legacy user metric for Q1 based on the historic methodology. We will provide this legacy info for our Q2 results as well. From that point on, however, we will not provide the legacy revenue reporting or our total quarterly users.
Additionally, to further aid you with the evolution of how we are viewing our business and the transition, we’re also providing our 2009 revenue results using the new revenue presentation and the new monetized user metric for the full year 2009 and by quarter on the same basis that we used for Q1 2010.
We trust this will help people get plugged into the numbers, build out their models and have some insights into the results. These are the metrics around which the management team and board have oriented and accordingly, they are the metrics about which we’re communicating with our stockholders. We’re focusing on what we believe matters and we’re communicating that to you.
With that, I’d like to move on and provide some insight into our Q1 financial results and performance.
Overall, while we’re excited about the feedback on Open Mobile and are confident that we are driving meaningful changes in the Enterprise Mobility space, we also do not realistically expect to see any meaningful impact on our revenues for several quarters. We’re bullish on the compelling nature of our offering but also realize that it’s a release 1.0 and the roadmap ahead of us is an important one.
Moving to the P&L and starting off with revenue, Q1 revenue came in well within guidance. Total revenue for Q1 was $40.4 million, essentially flat in comparison to Q4 but that quarter you’ll recall, included a $1.2 million revenue reduction to correct for historical billing errors.
Excluding the Q4 revenue adjustment, EMS network revenue declined by about $1 million or 3% quarter-over-quarter, primarily driven by the anticipated decline in dial-up revenue, as well as lower minimum commitment shortfall revenue.
In so far as the new operating metric, average monthly monetized network users, it decreased by about 11,000 users in Q1 to approximately 211,000 average monthly monetized users in the quarter.
Again, this means that we had on average 211,000 users each month paying us for network services in Q1. This decline is consistent with the revenue trend and is primarily attributable to the noted dial-up decline.
While becoming increasingly immaterial at about 6% of revenue in Q1, the dial-up decline nonetheless presents a persistent headwind that otherwise masks the importance of our network product.
On the surface, the implied EMS network ARPU looks to have increased quite a bit in Q1 from Q4 when you do the math. But in adjusting for Q4 is $1 million revenue reduction to the network line item, we see the implied network ARPU increase modestly to the mid $40.00 range in Q1.
This was primarily attributable to the impact of the quarter-over-quarter dial decline, as this product has much lower price points, in the low 20s versus the newer high value broadband technology such as Wi-Fi and 3G.
Offsetting this ARPU increase were some moderate pricing declines in the 3G offering as high prices in this previously new technology have begun to moderate in the market, particularly with 4G and other new broadband technologies percolating.
Moving on to our new EMS platform revenue line item. This revenue was slightly higher in Q1 over Q4, mainly due to a modest increase in ARPU. Average monthly monetized platform users were flat quarter-over-quarter at approximately 612,000 per month.
Similar to the dynamic with monetized network users, this platform user metric says that we had on average 612,000 users paying us each month in Q1 for our platform services. We are pleased to have this visibility and feel it’s driving some great awareness.
Closing out the third element of EMS revenues, other EMS fees and revenue had no significant change in Q1 over Q4 and represented less than 5% of the EMS revenues.
In our Managed Network Services areas, revenue declined modestly quarter-over-quarter by about $200,000, primarily due to some customer terminations and store consolidations in our retail customer base.
Further, our home office business continues to move through its headwinds of a declining value proposition of this legacy offering.
Overall, the MNS business is being well run now from both a profitability and growth potential standpoint, as the team has done a nice job focusing the pipeline on the higher value proposition offerings. So stay tuned for more color on this area over time.
Looking at our revenue from a geographic perspective, iPass continues to maintain a strong global brand and presence. In the first quarter, our international revenues accounted for approximately 39% of total revenues and Europe continues to be our largest area of focus and growth outside the United States.
Moving on to network access costs or NAC. This expense declined by $1.3 million in Q1 due a combination of several factors as follows.
Decreases to NAC were driven by, one, $300,000 decline from reduced dial-up usage in Q1, two, a weakened euro and pound against the dollar that benefited us by about $300,000 in the quarter, three, a favorable provider NAC adjustment in Q1 of approximately $200,000 and four, one-time costs of approximately $600,000 in Q4 that we discussed on a prior call that did not occur in Q1.
These favorable variances in Q1 were partly offset by higher NAC in the quarter from increased Wi-Fi use and the higher cost to European regions.
Looking at margin. Network gross margin is the term we’re using as a refinement to what’s been presented historically as we believe it hones in on what really matters in the cost structure and provides a meaningful indicator of the profitability of our network offerings. It’s defined using total network revenues, EMS network revenue plus MNS total revenue less our network access costs.
Network gross margin percentage for Q1 came in at 47.3%, about a 300 basis point increase from Q4. This was driven by some favorable NAC items in Q1 just mentioned, as well as the negative impact in Q4 from the $1.2 million revenue adjustment.
Moving on to operating expenses. OpEx came in ahead of expectations overall. The favorability in Q1 is a good example, we believe of how we are carefully managing our operations while we continue to invest in growth and roll out our Open Mobile platform.
The decline in OpEx quarter-over-quarter was on the surface due to a $3.8 million restructuring charge in Q4. But even after adjusting that out, however, R&D, sales and marketing and G&A expenses were all lower in Q1, mainly driven by cost savings from the Q4 restructuring, a decrease in bad debt expense and Q4 sales tax charges.
These savings were partly offset by incremental mobile data card costs in Q1 of about $300,000 from the true-up of prior period 3G card costs and a small Q1 inventory mark-to-market adjustment.
Stock compensation expense is included in the GAAP numbers and is broken out in the tables. Overall, stock comp was higher in Q1 from Q4 by about $200,000 as a result of Q1 stock option grants to employees, as well as a benefit from expirations associated with terminated employees.
Taking a brief look at currency. The other area in which favorable foreign exchange rates impacted our P&L was in other income. In Q1, we recorded approximately $375,000 in FX gains on non-functional currency exposures, which were primarily NAC accounts payable to network – to European network providers.
This all translated into adjusted EBITDA for Q1 of $0.9 million, an increase from $0.7 million in Q4, where lower Q1 revenue was more than offset by lower NAC in Q1, lower OpEx and some foreign currency gains, as I just mentioned.
Looking at the bottom line, we’re pleased that both GAAP and non-GAAP EPS came in slightly better than anticipated. Q1 GAAP EPS came in a penny ahead of guidance at a $1 loss and non-GAAP EPS came in at the high end of guidance at break-even.
Finally, in so far as new bookings in Q1, MOV came in at $404,000, a decrease of about $50,000 from a seasonally higher Q4.
Turning to some key balance sheet statistics. We ended Q1 with approximately $37 million in cash and investments and continue to have zero debt. Cash outflows during the quarter included $1.6 million to buy shares of iPass common stock under our stock repurchase program, the payment of approximately $2.5 million in costs from the Q4 restructuring and approximately $1 million in beginning of year pre-payments and payroll taxes.
On the stock buyback program, we have repurchased approximately 3.2 million shares since the program was launched in mid Q4 or approximately 5.2% of the common stock outstanding.
With that, I’d like to conclude with some color on what we’re seeing in Q2 and how we think about guidance for the quarter. Please note that the following statements are based on information available to iPass today. These statements are forward-looking and actual results may vary.
As Evan discussed a bit, while we are pleased to see early signs of network services growth that are consistent with hotel and travel industry trends, it’s early on in the process.
Similarly, while we are bullish on the progress being made around our Open Mobile Platform, we believe it will be several quarters before that offering has any meaningful impact on the P&L.
Further, we continue to see a challenging environment for topline revenue, particularly in light of the further erosion in dial-up revenue and pressure from declining minimum commitment revenue that we’ve discussed with you at length.
Given all these factors, we anticipate total revenues to be in the range of approximately $37 to $40 million for Q2. In so far as the bottom line for Q2, we anticipate non-GAAP EPS to be in the range of a loss of $0.02 per share to a loss of $0.06 per share and we anticipate GAAP EPS to be in the range of a loss of $0.03 per share to a loss of $0.07 per share. The difference between the projected GAAP and non-GAAP EPS numbers is our consistent approach of adjusting out stock-based comp and amortization of intangibles.
To wrap it up, as we have said throughout the call and throughout the past few months, we believe the company has a unique and strong set of assets and value creation drivers. We’re excited about the opportunity and believe that we’re doing the right work to capitalize on it.
Looking ahead from a business model standpoint, our focus is on the value of the platform and driving the number of monetized users. To that end, we’re pleased to provide you with additional information and insights on our new revenue reporting and key monetized user metrics.
With that, we appreciate your participation and support and are glad to open the call for any questions. Operator?
Thank you. (Operator Instructions). And there are no questions at this time.
If there are no questions, we would be happy to connect with people for follow-up. We are always available. Thanks everyone.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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: firstname.lastname@example.org. Thank you!