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

Executives

Ken Denman - Chief Executive Officer

Anne Brennan - Chief Financial Officer

Mike Bishop – Investor Relations

Analysts

Chris Cohen - Stifel Nicolaus

Scott Sutherland - Wedbush Securities

Charlie Anderson - Doughtery and Company

Paul Treiber - RBC Capital Markets

Openwave Systems, Inc. (OPWV) F1Q2010 Earnings Call October 28, 2010 ET

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Openwave's First Quarter Fiscal Year 2011 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. (Operator Instructions) This conference is being recorded today, Thursday, October 28, 2010. I would now like to turn this conference over to Mike Bishop. Please go ahead, sir.

Mike Bishop

Thank you. Good afternoon everyone and thank you for joining us today to discuss the results of Openwave's Systems first quarter of fiscal year 2011. Joining me today from Redwood City are Ken Denman, Chief Executive Officer and Anne Brennan, Chief Financial Officer.

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

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

The actual results may differ materially from those indicated by the forward-looking statements as the result of various important factors. These factors include the specific risk factors discussed on the Company's press release that was distributed today, and in the Company's filings with the SEC including, but not limited to, the fiscal 2010 financial results on Form 10-K, and any other reports subsequently filed with the SEC.

We intend to make forward-looking statements based on management's outlook as of today. We do not intend to update these statements until the release of Openwave's next quarterly earnings report and disclaim any obligation to do so prior to that time. We reserve the right to update the outlook for any reason during the quarter.

I would like to note that during the discussion of the financial results, unless otherwise indicated, gross margin expense and earnings related items are reported on a non-GAAP basis, which excludes stock-based compensation, impairment on investments, amortization of intangibles, restructuring expense, and amounts related to unusual events.

Please access our financial metrics summary, which is available on the Investor section of openwave.com to review Openwave's historical financial performance and reconciliation of the non-GAAP measures we report to the corresponding GAAP measures. And with that I'd like to turn the call over to Ken.

Ken Denman

Thanks, Mike, and good afternoon everyone. Thanks for joining us to discuss our first quarter results. First a quick overview, revenue for the first quarter was $41.5 million and we recorded bookings of $42.4 million. Non-GAAP EPS was effectively breakeven.

I'd like to begin by discussing our plans for delivering shareholder value. As a technology company it is critically important we attain the number one leadership position in the markets we are targeting, specifically mobile data software’s infrastructure for traffic/data management and ecosystem monetization. This leadership is critical, and we continue to invest in our R&D efforts to best position Openwave as the obvious choice for customers and partners. This is most readily evident in the validation of our Integra platform as the foundation for key valued services.

The initial traction in our trial program with operators who are investing their own resources to test our products, and also just this week by Sprint announcement to build a browser-based ecosystem powered by Openwave, which has the potential to be a new standard for open application development across carriers.

I'd like to spend the time on the call today addressing four key areas. First, our media optimization trial program. Second, our plans to grow our reach to an enhanced partner strategy. Third, an update on our plan to monetize our intellectual property, and lastly, new product and customer momentum.

First, I'd like to provide an update on our trial program for media optimizing. As of today, we have 34 service providers who have completed or are committed to a trial. More than 50% of these carriers are new prospects to Openwave. These trials are allowing our current and prospective customers to witness firsthand that they can maximize bandwidth and reduce costs with our video optimization solution without degradating the user experience.

We’ve completed a total of 14 trials, eight of which were completed during the first quarter of fiscal 2011. One trial that we are currently conducting is a live production trial, meaning the product is being tested in a live environment with over 80,000 subscribers assessing Web and Media sites and receiving data optimized by Openwave. This real world trial positions us well for a rapid deployment should the customer decide to move forward.

As of the launch of our trial program, few buying decisions have been made one of which we won, which was DU in Dubai whom we mentioned in our last quarter's call, and was secured in the fourth quarter of fiscal 2010 as a direct result of our trial program. The other was a deal in APAC last quarter that we lost due to a very late entry into the process. We are aware of a couple of other optimization decisions that have been made outside our trial program with Tier 2 and Tier 3 level operators. Obviously, our aim with the trial program is to be as all encompassing as we can.

We are, however, very focused on ensuring we are under consideration for several large deals we see percolating at the group or parent company level. But these decisions will likely extend beyond this current quarter. That said, we expect at least two to three additional operators who are in the trial program will make buying decisions in the second quarter of fiscal 2011.

Overall, while we had initially hoped to see customers make accelerated buying decisions related to media optimization, we are finding that the process is reflective of the longer 12 to 18 month procurement cycles that we typically encounter with new products and with new customers. As in many cases, the operators we are trialing our product with our new to Openwave's business. In some cases, we have also seen deals at the local level get pushed back up to the group level for approval. Not necessarily bad news that in fact the operator has multiple mobile operations around the world.

We are working hard to shape customer demand highlighting the strengths of our platform's industry leading performance and its ability to intelligently optimize video without compromising quality. We believe this positioning will be key to spurring operators to decision and are the core differentiators of our platform driven approach versus the point product offerings of our competition. We are committed to expanding our partner strategy to enable us to scale much more effectively to reach more operators at a lower customer acquisition cost. We're deepening our relationship with a key partner F5 to sell a combined value proposition that incorporates Openwave's Integra platform and service orchestration capabilities at the application and service level with their expertise in delivering policy control and deep packet inspection capabilities via their big IP solution.

We believe this team selling approach will multiply our reach and is a highly compelling offering for operators to consider as they look at ways to get ahead of the traffic they’ll now be hitting their networks and to prepare for the unprecedented traffic levels predicted over the next several years.

In addition, as part of our customer's migration to support all IT traffic they are looking for pre-integrated solutions that span the entire technology stack from the application layer down to the connectivity or access layer. To address these requirements we are actively pursuing partnerships with leading network equipment providers to deliver joint solutions that can be rapidly deployed and managed more effectively at a lower total cost of ownership.

The most notable aspects embedded in the numbers we reported today is the emergence of our program to monetize our intellectual property portfolio. Openwave has always been a leader in the mobile data sector. Since its inception it has developed a valuable IP library containing some significant foundational methods for connecting mobile devices to the Internet.

This IP portfolio has been a hidden asset, but we are aiming to convert it to an income stream. Earlier this month we announced the first patent license agreement. The structure of the agreement was a license fee plus a royalty for any new implementation or installation of their products that contain our IP. This was an important first step in the program. We have segmented the market and are approaching each segment with a unique strategy. As with this type of endeavor we can't be certain of the timing or the size of these IP agreements. However, with a broader focus on mobile data, we believe we have a substantial program to execute and we anticipate the patent program will deliver additional license bookings and cash for us in fiscal 2011.

Now onto product and customer momentum. We continue to believe our approach to optimizing video is unique in the market and that Openwave is leading the market in technical innovations, rapidly evolving our solution to adapt to what we see as a highly dynamic market, our solution is designed to be context aware taking into account the device, the type of content, subscriber attributes as well as real-time network conditions.

Earlier this month we introduced a new version of Media Optimizer that automatically triggers optimization when the network reaches pre-determined thresholds. This in-network intelligence can significantly lower an operator's total cost of ownership by reducing transmission requirements up to 40%.

Since our optimization techniques maintain a higher quality video viewing experience, we believe that operators should expect higher average revenues per user than with competing solutions. We believe that this product will be a core element in our customer's ability to manage growing traffic volumes.

But traffic management is only one-half the story. Equally important is demand management and the ability to generate new revenue streams. Demand-based pricing is becoming one of the hot topics within the marketing organizations of our customers. They see a largely untapped market for customized data plans that align a user's bill with their online behavior, not just the amount of megabytes consumed.

We are in the process of repositioning our policy solution to better articulate its value to the Chief Marketing Officer and the senior marketing executives within the operator community, and we continue to view the offering as core through our contacts to where traffic mediation value proposition. By combining policy management with our analytics and optimization tools, Openwave is able to offer a unique and differentiated value to our customers.

This value extends beyond a pure total cost of ownership into something more meaningful for our customers, the ability to create new revenue streams from the monetization of premium service levels, delivery of more targeted and focused tiered pricing and service bundles, and the creation of new offer insertion.

Okay, now onto customer wins. Building upon our initial successes last year with Bouygues Telecom, a leading French mobile operator, we signed a new agreement for our next generation IP traffic mediation solution, which combines our powerful work flow engine with a flexible policy management system.

The solution gives Bouygues the ability to enrich the user experience and manage their network more efficiently by enabling them to potentially offer a variety of tiered subscriber data plans that reflect actual usage. We continue to witness solid traction for the Integra platform. This quarter a Tier 1 customer in Japan signed a deal with us to route all their IP traffic through Integra. We view Japan and this operator in particular as a bellwether for the operator community. Their decision to flow all IP traffic through Integra clearly shows that they understand the value of mediating directly in the data path.

Integra acts as the single control point for total traffic management and can enable operators to more efficiently control their networks and better leverage subscriber data to create new monetization opportunities.

As Sprint's CEO, Dan Hesse, noted in his keynote address at the Sprint Developer's Conference last night, Sprint and Openwave are working together to deploy a new ecosystem of enhanced services within the browser, making Sprint the first operator globally to announce a browser-based value-added ecosystem. The Openwave Integra technology powering the Sprint solution includes an open application development layer that is designed to enable third parties to rapidly develop and distribute apps directly in the browser, which promotes better end user discovery of new services. Until now, no ecosystem has been available to deploy enhanced services through the browser, but Sprint's partnership with Openwave is changing that and delivering a revolutionary opportunity for developers to create apps that will execute in the browser and therefore will work across platforms, form factors and multiple carriers.

Our solution leverages Sprint's network infrastructure and Openwave's open APIs through Integra to make contextual data such as location information, analytics data, content adaption and security features available to a broader developer community. This relationship with Sprint is a strategic win for Openwave and directly validates our strategy for Integra and its ability to mediate all IP traffic directly within data path.

We are seeing the realization of the initial promise of Integra. The Integra platform underpins all of our value added services, optimization, analytics, policy management, and now the open application development layer, and we believe it will continue to be a strategic platform for carrier's next generation networks and their ability to manage traffic more efficiently and create new revenue opportunities.

While 2010 was a challengingly year for nearly all telecom software vendors, we were able to increase bookings from the prior year, and looking ahead 2011 we believe we will achieve that goal again. To achieve these goals we expect the new generation of products to be the future growth of the business, and we are moving forward aggressively with our IP monetization and trial program. As we indicated last quarter, we are demonstrating to our customers how our solutions will help them solve their network issues. This market is still nascent, and carriers are now deciding on their strategy for handling the data volume, and we hope to be part of these decisions. Competition is a factor, but we believe we have the right products, strategy and customer relationships to succeed.

To summarize, this quarter we have witnessed the launch of the intellectual property licensing program, made strides to bolster our partnership program, saw additional traction in media optimization trials, and seeing recent success with Sprint on our new open application development layer, which builds on the inherent value of our Integra platform. It's been an active quarter.

And now I will turn the call over to Anne.

Anne Brennan

Thank you, Ken, and good afternoon, everyone. I will now provide a detailed summary of the financials for the first fiscal quarter. Overall for the quarter ended September 30, 2010, Openwave posted GAAP and non-GAAP of breakeven EPS. Reconciliations from GAAP to non-GAAP profit or loss can be found in our press release and on our website. As Ken mentioned, we launched our IP monetization program, which has some benefits in our financial statements.

Revenue for the quarter was $41.5 million, a decrease of $2.1 million or 4.8% quarter-over-quarter. License revenue was $12.3 million, a decrease of $3.4 million or 21% sequentially and comprised 30% of total revenue. The quarter-over-quarter license decrease was primarily due to a significant and nonrecurring deal that was recognized in the prior quarter. Maintenance and Support revenue was $14 million, a decrease of $1 million or 6.7% sequentially and comprised 34% of total revenue. The quarter-over-quarter decrease is attributable to reduced platform requirements in two of our North American customers.

Services revenue was $11.2 million, a decrease of $1.7 million or 13% sequentially. This decrease was due to customer driven changes which delayed revenues during the quarter. Services revenue comprised 27% of total revenues. Patent revenue of $4 million for the quarter represents our first earnings to come from our new program to monetize our intellectual property.

The regional breakdown of revenue in the September quarter shows that 58% of our revenue originated from customers based in the Americas, 14% from EMEA, and 28% from Asia. This compares to last quarter's breakdown of 61%, 20% and 29% for the Americas, EMEA and Asia respectively. For the first fiscal quarter of 2011, Sprint represented 21% of revenue. No other customer represented greater than 10% of our revenue for the quarter. Actual bookings in Q1 increased 18% over the fourth fiscal quarter of 2010. This enabled us to add to our backlog.

Turning now to gross margins. We achieved a 68.8% blended gross margin for the quarter, an improvement of 1.3 points sequentially. The gross margin improvement was primarily attributable to the contribution of patent revenues. Gross margin on license of 99.8% increased slightly from 99.2% prior quarter, or 0.6 points.

The maintenance and support gross margin of 70.7% increased by 1.4 points from 69.3% last quarter due to a reduction in contingent worker expense. Services margin of 21.2% decreased 5.6 points from 26.8% last quarter. This sequential decrease was due to lower services revenue as well as an increase in employee-related expenses, most expected to recur.

Actual operating expenses in fiscal quarter one, research and development expenses were $11.3 million or a 600,000 increase or 5.2% sequentially. The quarter-over-quarter increase is attributable to higher labor costs.

Fiscal quarter one sales and marketing expenses of $10.7 million were $500,000 higher or 4.7% as compared to the prior quarter due primarily to our annual global sales event held in the first quarter. General and administrative expenses of $6.3 million increased to $800,000 or 11.4% from $7.2 million in the prior quarter.

This quarter-over-quarter decrease is a primarily a result of lower cost associated with professional fees as well as the recovery of FASB expense resulting from an improvement in the accounts receivable aging.

Our headcount remained unchanged from the prior quarter at 584. Please see our metrics sheet posted on the Web site for a brief annotate by function. As a reminder, the gross margins, cost of revenues, and operating expenses I just discussed were all on a non-GAAP basis. On a GAAP basis in the September quarter interest and non-interest income was break even, which compares to a charge of $100,000 in the prior quarter. The increase from the prior quarter was primarily due to lower interest expense.

Now turning to the balance sheet. Accounts receivable increased to $33.8 million at the end of September from $31.2 million at the end of June primarily the result of the timing for two large billings. The increase is DSO is a result of an increase in the most current categories of the accounts receivable balance and does not reflect a slowdown of collections. We continue to maintain our overall DSO target of 80 days.

Deferred revenue increased to $49.6 million as of September 30, 2010, as compared to $46.9 million at the end of June. The quarter-over-quarter increase was primarily attributable to increased bookings in the September quarter and the timing difference between billings and revenue recognized.

We ended the quarter with $117.5 million in cash and investments, which represent a decrease of $1.9 million or 1.6% from $119.4 million at the end of fiscal 2010. This is the result of $2.9 million cash used in operations and $1.1 million for the purchase of fixed assets. These uses of cash were partially offset by $2.2 million of proceeds received from the escrow settlement related to the sale of our client business in fiscal 2008.

Consistent with what we've said in the past, our revenue outlook is guided by past bookings. Generally our rolling average backlog is realized in earnings over a 4 to 6 quarter period. As we gain traction with our new products and licensing deals we expect to build a backlog that will begin to benefit revenue later in the fiscal year.

I will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Tom Roderick with Stifel Nicholas. Please go ahead.

Chris Cohen - Stifel Nicolaus

Hi guys, this is Chris Cohen for Tom, good afternoon.

Ken Denman

Hi, Chris.

Anne Brennan

Hi, Chris.

Chris Cohen - Stifel Nicolaus

Hi guys. So again thanks for the breaking out the detail on the media optimization segment, I know that that was probably a pretty hot topic last quarter. So just wanted some clarification, so I think you mentioned that you’ve completed eight trials, did I hear that correctly? And typically from the time of completion, how long has it been or I guess you only have two data points, but how long do you kind of expect those eight completed trials to make a decision? Are those like within the next six months do you think?

Ken Denman

Chris, absolutely I think within the next six months is reasonable. We certainly hope it’s faster than that, but I think that’s clearly the window. I would expect that, there’s typically sort of a three-month window on average, and it really depends on how the operators going through, are they going from the trials right into sort of a contracting process where they might do a best in final, they sort of identify two that they want to play off against each other and then that sort of navigate a process to a final decision and then or do they take that trial information and then do an RPs, the benefit of being in the trial and typically of being a winner is you get to have a good-sized impact on the RPs.

That can take a little longer, I mean the first case you’re probably looking at kind of, 60 to 90 days, in the second case you’re probably looking at 90 to 120 days so that’s sort of how they break out broadly.

Chris Cohen - Stifel Nicolaus

Got it. Great and then as far as you mentioned you do have one that’s kind of a trial, but also pseudo-live. Do you anticipate a lot of trials to go that way where they tested in a lab environment or do you believe that’s more of an exception?

Ken Denman

Actually, while I gave one example in my prepared comments, we’ve had four in that and yet go that route, and in fact one of the trials that was in the network trial or that was in network, has since the end of the quarter, has become a customer.

I think that the importance of these in network trials cannot be underwhelmed. For us, it’s so important to be in production, touching live traffic. First of all, it says the customer saw enough value either in our overall pitch or from our references to actually put us in the data path and allow us to test their customers.

I’m sure you all understand how extremely rare that is. So they saw enough value that they wanted to give it that shot and of course we have to execute our executing, and we get valuable credibility from being in that environment.

I think that in network we’ll become, it really depends on operators. I think you’ll probably see it some percentage of the time I can’t say that it would be the majority. And by the way as we have more evidence as we have more data and more references, I think you’ll see customers be willing to move. Sometimes that is just a migration path, but for the most part I think you’ll see this as a tactic with smaller tier threes, tier twos. I don’t think you’ll see it as much or as often with tier ones. If that helped.

Chris Cohen - Stifel Nicolaus

That definitely helped and then just one more on this and then I’ll move to everyone’s favourite topic, Sprint. But as far as I think you said 34 service providers? And I think last quarter the number was 20. So can we deduce from that that you’ve increased the backlog so to speak by 14 during the quarter?

Ken Denman

That’s correct.

Chris Cohen - Stifel Nicolaus

Okay great. And then so if we move on to Sprint, so you mentioned that browser announcement that browser-based development platform that they rolled out or that you guys announced I think it was last week. How it is their kind of tone been going, because I know that you had a couple of North American carriers that had kind of delayed projects. What you think, what’s the sense you’re getting from Sprint as far as maybe recovering some of the potentially lost revenue over the last few quarters?

Ken Denman

So first of all the tone with Sprint has never changed or gone bad or did come back, that’s sort of the underlying implication. Frankly at the back end of last year, we saw some weakness, we didn’t speak to a particular carrier. We saw some weakness at one of our largest carriers. But I don’t – if you look at some of the more recent announcements, at least one of our operators is looking at migrating off of one of their networks, so that’s not a function of softening of the relationship, softening of the resolve, and interest in our innovation or our products, never was. And we were trying to signal to everybody, it’s just a decision in terms of how they manage their platforms, and sometimes when you have high customer concentration you get implicated by that.

Having said that, we have continually, over this period of time, been working on the next generation of solutions and products, and this is certainly one that Sprint’s been excited about for some time, and we’ve been working under the covers to continue to share with them what we got, show them the vision of where we could go.

The reason I’m very excited about this one is, it also represents Sprint’s buy-in, and it’s a buy-in that we’re seeing with other operators, that them working together on a common standard is one of the best ways to make sure that they get some of the value chain associated with the ecosystem.

So for me, Sprint’s a really important customer obviously, and we continue to work very closely with them. But the implication of Openwave and Sprint and other operators that we’re talking to embracing this model is pretty powerful, and we’re working hard on it. And again, it’s nice to have one of our large customers in there swinging with us as we work with other providers, and importantly, other ecosystem players around the world.

Chris Cohen - Stifel Nicolaus

Great. Thanks. And then I’ll ask one more and then turn it over. As far as the, I think you mentioned, Ken, on the repositioning of the policy management offering, and I think you guys, I assume that’s your Smart Policy product that you’re talking about as far as the new products?

Ken Denman

Yes. It’s the Smart Policy and Passport offering, yes.

Chris Cohen - Stifel Nicolaus

Okay. And I was just wondering because I think Media Optimizer and policy management, they kind of came out together, if I remember correctly, so can you maybe talk a little about the pipeline, what’s causing you to have to reposition that? Has demand not been as good as you thought it might be? Is it because people are just kind of uncertain as to whether they’ll be able to move to a model where they kind of manage the network hogs, so to speak, where they just use it too much, they just don’t think they’ll be able to shift the revenue model from these all-you-can-eat plans?

Ken Denman

Well, no, I actually think there’s an intensity in this area that’s sort of building. The market is, my words, I would say that net neutrality, it’s sort of, in the U.S., it’s kind of become less of an issue or a non-issue. Operators are moving to tiered pricing, and they’re looking for more than something than just a classic sort of gold, silver, bronze. They’re looking for dynamic, the ability to do dynamic pricing plans and move more dexterously, identify segments.

So a long story short, we had been working with our network peers, network influencers, network decision makers, and as we were doing the work we were bumping more, bumping into the marketing teams more and more who we found, frankly, were incredibly excited about our product offering. And so we sort of re-oriented our messaging more around the use cases, the specific use cases that we can deliver value around.

And so because it’s a difference, it’s less of a technical sale and more of a marketing user experience and what we can do to reduce the cost of customer support, so it’s a different messaging purely. It’s not about acceptance so much. It’s about making sure that we are selling to the influencers who frankly had been run over the network organization and say, I’ve got to have this. So we’re just working on arming our people with the right information packaging and use cases to have a more compelling and a more comprehensive discussion with customers across the right groups.

Chris Cohen - Stifel Nicolaus

Okay. So when you say reposition, it’s not so much an issue with the product, it’s just kind of selling it to the right people, so to speak?

Ken Denman

Yes, we are actually trying to accelerate even by making sure that we touch other bases who have a huge -- who are a huge constituency in this process and frankly we found in a couple of cases can move the ball faster if they’re engaged.

Chris Cohen - Stifel Nicolaus

Interesting. Okay great. Thanks guys.

Anne Brennan

Thank you.

Operator

Thank you. Our next question comes from the line of Charlie Anderson with Doughtery and Company. Please go ahead.

Charlie Anderson - Doughtery and Company

Good afternoon, everyone. Thanks for taking my questions.

Ken Denman

Hi, Charlie.

Anne Brennan

Hi, Charlie.

Charlie Anderson - Doughtery and Company

Wanted to ask just about sort of the live trial data that you’re getting back. Can you give us sort of some data points on how much bandwidth savings you’re able to wring out? What type of scenario is there? And then also, if you could turn to the decisions that were made in the quarter where you didn’t get it, if you could maybe talk to were there technical reasons, was it partnership issues?

Ken Denman

Sure.

Charlie Anderson - Doughtery and Company

Because you didn’t have staff, that sort of thing?

Ken Denman

Yes, so, sure. On the first – as regard to your first question on the trial data, what we’re seeing is the validation of the things that we said that we could do in terms of the 30% to 70% reduction or the 30% to 70% optimization without degradating the user experience. That was really where we wanted to go. It’s been good to understand that live traffic kind of, what customers say to you about what they think their percentage of, for instance, video traffic is as a percentage of the total.

What we’re consistently seeing is customers are underestimating the percentage that video traffic represents of the total. We’re trying to understand does that mean there’s pent up demand or unmet demand in some way, shape or form? We’ve got lots of work going on through our analytics solutions, which we have an analytics express package tied to video optimization. But we also have a broader analytics package, which becomes very relevant for our customers once they figure out that they really don’t have good clarity in terms of the content, the actual content mix that’s going across the network.

So for instance, one of the things we saw with one of these trial customers was they represented to us that they thought video traffic was sort of 20% to 25% of their traffic, best case. We saw particularly during certain periods and certain windows, video traffic was more than 50% of the total data traffic, so when you calibrate that and you look at cache-hit ratios, you look at a number of sort of things that we pay attention to, it really shows the necessity to manage the network differently, to be able to configure the network elements differently to get actually more throughput.

Probably the biggest finding that what we have here, Charlie, and that we’re demonstrating with data is that by using our video optimizer solution and the other value-added services as part of a suite, operators can delay significantly the amount of incremental network investment that’s required going forward. So heretofore, a lot of operators have just been meeting the data demand by just growing the element to their network, whether it’s radio or other, and backhaul and other because they weren’t sure. They just tried to meet the peak so they just tried to blow up each part of the infrastructure to sort of to have a big enough pipe. And with our capability combined with the data that’s available from our analytic suite, it gives them much more dexterity.

The new capability that we added, which is congestion management, also pays attention to what the state of the network is and therefore how we can tweak how customers are treated, how data is treated and still deliver a great user experience. But be very cognizant of what the network capacity and capability is. So what we’re adding is a dynamism to their network management that gives them comfort and also allows them to be more certain around their network, their next dollar of network CapEx spend, and that’s a huge selling point that we’re going to leverage and we’re going to leverage with data. We’ll anonymize the data and then, of course, we’re asking these folks to be reference customers for us as well, so a lot of really good and tangible and powerful findings.

The most important thing for Openwave is that we are validating that we can do what we said we could do, and it’s not just about bit crunching, hard core compression. It really is very, what we’re doing is very cognizant of the user experience, and we’re delivering multiples of improved user experience compared to our competition, and we can prove it with data.

Charlie Anderson - Doughtery and Company

Okay. And then turning to the losses?

Ken Denman

Yes. I’m not, well there was only one loss that we talked about and this was an Asian player who we, and this speaks more to our ability to reach around the world and be every place that we would like to be. We found out about this, we got engaged with this particular customer very late in the trial process. I mean they were basically done with their trials. And we kind of tried to force our way in there the last minute and I think more than anything we were just too worried and too late. Now I will say this, we’re not giving up on that one.

They had a formal process with firm dates and everything, but we know they have not made a decision here a month and a half later, they haven’t sort of awarded that, and we’re still in there swinging because we got, as I just said a moment ago, we got data now, hard data. So we’re going to keep knocking on the door. But I wanted to report as transparently as I could, so because we went into that trial process, even though we forced our way in at the very last minute, we reported that as a loss. We’re not giving up on it. And then there were too other instances that I mentioned, Charlie that were outside of our trial process.

Again, we weren’t aware of them until we heard about a potential award. So we also wanted to make everyone aware of those as well. Now what we’ve done about that in the near term is that we have launched a broader marketing program around the world to another 150 operators, a very broad lead generation program to make sure that as many customers, prospects as possible know about our product and our initiative and our trial program. We just missed or they missed us or we missed them. So that’s our response to sort of having a couple get by us. But again in terms of loss, I only recall one.

Charlie Anderson - Doughtery and Company

Got it. Good. And then turning to the IP monetization there, that was interesting. Obviously you had the lawsuit settlement, you talked about bringing some more in this fiscal year. I’m trying to figure out where your visibility is there because obviously we knew about this lawsuit, it was in process. Are you doing things outside of the court? Is there a lawsuit for the company?

Ken Denman

Yes, obviously we would prefer to not be in litigation. That’s obviously the preferred path, which isn’t to say that when you have an IP program, you have to be prepared to do what you need to do. But in general, our program is about licensing. And this was a program that I started when we got here. It’s been in the works for some 18, 20 months. We felt that we were not taking advantage of the core assets in this business.

We brought the people on board. We added the focus. We repaired what was kind of a waning program here, not just backward looking but forward looking. And then we began, as we said, we segmented the market. We have a multifaceted program. We began having discussions with folks. So we are down the road. This one was a little earlier in the process, but we have multiple oars to the water and we’re going to continue to drive forward in a very methodical way. It’s great to have a proof point that validates our going-in assumption that we had important IP and we intend to protect that IP.

Charlie Anderson - Doughtery and Company

The 4 million, what did it represent? Was it for patent infringement, was it license? And then I’m also curious if it impacted the bookings number, is that 4 million included in that? And then have you been paid for it yet?

Anne Brennan

Can I?

Ken Denman

Go ahead, Anne.

Anne Brennan

I’ll answer your second question, first the asset was in bookings. It was in revenue and in revenue really because it was a go-forward license agreement rather than a settlement on litigation, which encompasses both 724 and Mobixell.

Charlie Anderson - Doughtery and Company

And have you been paid for it yet, Anne?

Anne Brennan

We were paid a tranche up until the end of September and received the balance 10 days ago. So we’ve been paid in full, some in the quarter and some in our fiscal quarter 2.

Charlie Anderson - Doughtery and Company

There’s a little bit in that A/R balance, maybe a couple million?

Anne Brennan

Yes, there’s a more significant tranche in the A/R balance at the end of the quarter and that’s really what’s driving up the A/R figure.

Charlie Anderson - Doughtery and Company

Got it. Good. Thanks so much.

Anne Brennan

Thank you.

Operator

Thank you. Our next question comes from the line of Scott Sutherland with Wedbush Securities. Please go ahead.

Scott Sutherland - Wedbush Securities

Great. Thank you. Good afternoon.

Ken Denman

Hi, good afternoon.

Anne Brennan

Hi.

Scott Sutherland - Wedbush Securities

Maybe let’s stick on this IP, I mean how should we think about modeling, is there some existing residual revenue from this recent win? Are you pursuing the same technology patent at other vendors at the gateway space? You know the other products or the patents in other areas that you’re pursuing as well?

Ken Denman

So we are pursuing similar licenses across the same and even more expansive group of patents. So the answer is yes and yes. And we will see what happens on the royalty side, but right now we’re focused on the next set of what we have – we continue to be focused on the next set of prospects/partners, if you will, in terms of building on the next opportunities.

So I shouldn’t go into specifics on the strategy, I rather not go into specifics on the strategy because of ongoing discussions. But we do think there’s solid opportunity here and we would expect to see some continued progress in this year.

Scott Sutherland - Wedbush Securities

With 724 Mobixell based on more products, based on this patent, you expect to get additional royalty then this year? Is that the way to think about it, but it’s hard to model?

Anne Brennan

Yes. So the deal that we struck with Mobixell 724 had two components, the first of which was the license which we’ve referred to, and the second is the royalty piece. So over the course of time and the life of the patent, we should see incremental royalties coming off of that deal.

Scott Sutherland - Wedbush Securities

Okay. When it goes to, beat on the trials here a little bit more. Ken, I thought I heard you earlier in the first line of questioning that you did four live trials in network and one since the end of the quarter became a customer. Did I hear you right on that?

Ken Denman

Yes. That’s right. Of all the trials we did, I was speaking to the fact that in addition to the one I mentioned in my comments there, there’s actually three others where it should have been in network or we are in network. And to be clear, since the end of the quarter we’ve had one of those become a customer.

Scott Sutherland - Wedbush Securities

Is that for media optimization?

Ken Denman

Yes, correct.

Scott Sutherland - Wedbush Securities

Okay. So that is a--?

Ken Denman

It actually happened to be broader. It’s also Integra, but yes, media optimization and Integra.

Scott Sutherland - Wedbush Securities

So that’s a second win but that was more a fiscal Q2 win?

Ken Denman

That’s right.

Scott Sutherland - Wedbush Securities

Okay. That’s good. This other one, the two that made decisions, were you in a live trial with the other one or is it only the one that you were in a live trial with?

Ken Denman

No. This was a – we weren’t in live trial with the others. So, you know that, and the reason I mentioned, I just wanted to say, Scott, in addition to, I mentioned those other two that were outside of our trial process because I’m just trying to be, I’m trying to be as transparent as we can be so that you guys have a way to gauge our progress. And so I apologize if it sounds like I’m giving a lot of bits and bobs and it may be too much detail, but we’re trying to fill out landscapes here because we’re happy to be judged by kind of the progress we’re making. We stood up and said this was going to be a major topic for us in the market to demonstrate our ability to play in this space because we were; the perception was we were new to this space. So it’s a marketing technique. It’s a way we measure ourselves internally, but also we want you to be able to measure us as well.

Scott Sutherland - Wedbush Securities

You’re right. So we always want more, right Ken?

Ken Denman

As do I. Believe me, as do I.

Scott Sutherland - Wedbush Securities

When you go to a live trial, is this usually, are you usually the only vendor doing a live trial or do you see simultaneous live trials or would you be the only one and that’s a good indicator that you’re close to a win if you prove it out?

Ken Denman

Typically we’re the only one. We have not seen another situation where operators can do multiple or have done multiple live trials. And then, Scott, that brings up a really important point. These trials, whether it’s lab or live, take a lot of resources on the operator’s side. As we all know, operators have, they’ve really leaned out their staffs over the years and it’s an investment of time, lab or data center space. It’s an investment of resources. Everybody is sort of on edge when they’ve got something, new element in the network. So their staff and our staff are kind of on 7/24 call. It’s a big deal.

And so when people ask me about the relevance of these trials, I say customers are investing dollars to do these trials. So in order for that to happen, you have to have their attention. You have to convince them that there is value here from a total cost of ownership, from improving their overall network capability, a whole number of things have to happen before you get to this point. So I’m glad you’re giving me a chance to focus on these.

Scott Sutherland - Wedbush Securities

On the booking side, despite the patents bookings, it was a reasonably decent quarter and it’s typically a soft quarter. And yet you’re not really seeing traction yet with the new products, because possibility takes time. The process just takes time. So what is driving or what helped the bookings out this quarter beyond the patent?

Ken Denman

Well, we had a very successful quarter with our Integra solutions in Japan. So we had a major Tier 1 customer who made the decision to go to the next generation Integra solution, drive all of their IP traffic, so read that as smartphones, smart device traffic through. So this is a big deal. Like I said, this is a Tier 1 customer and that was a big deal in the quarter. We have continued – its validation quite frankly. It validates Integra as a workflow engine, is very credible. The reason it’s credible is that Integra is credible to a large Tier 1 player like this or like Sprint is they’re looking past it to the value-added services.

They’re looking at media optimization. They’re looking at Smart Policy. They’re looking at analytics. So we see it as a buying signal for those valued-added services because it’s all about the service layer for them. The other area that we had a couple of nice opportunities happen was on the messaging side of the business. So we had a couple of very good wins on the messaging side of the shop.

Scott Sutherland - Wedbush Securities

Okay. Last question on your operating expenses. The last few quarters started to trend back upwards after getting close to the mid 25 million range. Is there any goal to kind of keep that constrained, so you deliver breakeven numbers? Or where do you think OpEx goes from here?

Anne Brennan

Our range right now is still in the mid to high 20s. The area that where you see the increase over the last several quarters is R&D and that’s really a function of where we are in the development of the new product suite. So sales and marketing this quarter, as I mentioned earlier, has expenses that relate to the annual sales event. So that’s a one-off.

And you’ve seen a reduction in G&A. The G&A expense this quarter unlike other quarters actually includes the legal fees related to patents. So, we’ve previously been treating those differently. And given the fact that our patent program has kicked up and benefited the P&L, we have to take those expenses through our OpEx, so that’s another driver there. Even though you saw a reduction in G&A, there’s about 400 K of expenses in there that relate to patents.

Scott Sutherland - Wedbush Securities

Okay. Thank you.

Anne Brennan

Okay.

Operator

Thank you. Our next question comes from the line of Matthew Hoffman with Cowen & Company. Please go ahead.

Unidentified Analyst

Hey, Ken and Anne, this is Brian [ph] for Matt. A couple quick clean-up questions around Media Optimizer. So we saw the ramp of trials went from roughly 5 to 20 to 34 in the quarter just ended. Should we expect a similar rate of growth into F2?

Ken Denman

Where growth is continuing, let me tell you that at a similar rate. It’s hard to say. At this point of the quarter, we still are adding them. We’re above that number already, so whether we’ll add another absolute kind of whatever that was, 15 or so, I wouldn’t be surprised. I wouldn’t be surprised, but it’s kind of hard to call it, but we’re definitely going to see growth quarter-over-quarter again this quarter. Whether it’ll be the same absolute number of growth, let’s see, but we’re definitely already tracking good solid growth.

Unidentified Analyst

Okay, good. And then building on that, I think you said last quarter that you expected or were confident that Openwave could win about 50% roughly of those trials, of the 20 trials?

Ken Denman

No, I think I was talking more 25 to a third, was sort of the range that I talked about.

Unidentified Analyst

Okay. Fair enough. Did that number stay constant, 25 to a third as the number of trials increases? I guess what I’m getting at here is do you have the headcount in place to support trials in the 50 plus range simultaneously?

Ken Denman

Well, to be clear, we don’t have the headcount in place to support sort of 50 simultaneous trials, but I don’t think that’s what we’re talking about. I think again in time, we had talked about, it would be great if we get to support 20 simultaneous trials, and we’re not quite at that level yet, but what we are doing is we’ve grown our abilities to support trials since the what, fourth quarter of ‘10, and we’re sort of already done.

There were eight trials done in Q1, completed in Q1. Again, I would love to be able to do 20 trials simultaneously. I think I’m somewhere between north of 10, maybe 15, and we don’t have the wherewithal right now with the subject matter experts who’ve been driving trials.

What we are doing to address that is we are training our broader group of sales engineers and our broader group of professional services personnel to support the trial and that’s how we’re going to get more capacity around the world, but this is a challenge for us because this is effectively sort of a marketing cost, if you will, to get these engineers in the right places around the world to drive these trials and we have to do them pristinely, obviously because we want to win. So it’s one of my challenges in the OpEx side, but we’re not going to be growing our work force to staff further trials at the moment. We’re going to live within our means and we’re going to do it by training more people and kind of having people overlap their roles.

Unidentified Analyst

Understood. Alright. Last question. real quick. Did this week Integra win at Sprint, does that open the door to Media Optimizer longer term?

Ken Denman

So just to be clear, we had previously won the Integra Placement at Sprint. That was a previous deal. I don’t know if we actually announced it publicly, but that was in place. What we, this announcement was the open application development capability. Think of it as a service enabler similar to, because we built this open house capability and are continuing to build it for, if you take the market based on Integra. So think of this as a module off of Integra similar to Media Optimization and Smart Policy and Analytics.

I believe that because we’ve shown the ability to innovate and because we have a great partnership and a great relationship with Sprint, we’re going to have every opportunity for that business. They know that we are innovative. They know that our products work. They know our products very well and so I’m hopeful and we have their ear. They’re a great partner. I’ll stop there. I think it’s in front of us. We’re working hard on that. I certainly want Sprint to have everything that we sell, so it’s in progress.

Unidentified Analyst

Great. Thanks for taking the questions and good luck.

Anne Brennan

Thank you.

Operator

Thank you. We have time for one more question and our last question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber - RBC Capital Markets

Hey, guys. Since you were just talking about it. On the Sprint deal, could you provide some more details on the revenue structure behind it? So is it typical service plus license or is there a longer term opportunity, meaning for like a rev share on apps, something like that?

Ken Denman

Interesting that you -- so first of all, this will be, there’s going to be, the reason I’m sort of chuckling is you sort of answered your own question. You were a bit prescient. There’s obviously a – there will be some kind of an initial deal that – the initial deal is always about getting us deployed in to the customer, getting the capability there. We’re looking to have that, something in place in the first quarter timeframe. We’d look for the next tranche of a capability and a solution, maybe by the June quarter. And I talked about this phenomena with Media Optimization. I said typically you get a portion of the deal in and in parallel, you’re continuing to work with the customer helping them understand and then there’s additional tranches of the deal. I think we’ll see that same opportunity.

There’s two monetization strategies here from our perspective. The first is by having us or Integra be more important to be in the data path to deliver this capability we’re going to drive a lot more traffic, and that ultimately could lead to a lot more license purchase from Sprint on our core business. That’s the first one.

The second piece is, there’s typically a right-to-use and a professional services component to get deployed. And then the third piece is as we work with Sprint and other operators to bring together an ecosystem of application providers, there’s going to be opportunities for us to participate, we believe, in a rev share model should we decide that that’s the right approach. So this is going to be multi-faceted. I don’t think you look at this just as a traditional sort of kind of one-off professional, perpetual license and M&S deal. I think this is going to have many more facets to it.

And again, I’m as excited, quite frankly, about the fact that when you add these value-added services capabilities, you basically are getting a commitment from the customer to drive all of their traffic through the Integra platform. And when that happens, at the end of the day, I really would love to see that additional license revenue associated with more traffic and volume going through that core infrastructure. So that’s how we think about it.

Paul Treiber - RBC Capital Markets

And on [Inaudible] it out to other operators, have you discussed this with any other operators yet or has there been any interest, preliminary interest from anybody else outside of Sprint?

Ken Denman

Absolutely, we’ve discussed it with other operators and there is a strong interest out there. We are in discussion as we speak with several other operators. I think actually our challenge is going to be to decide who we work with first because we want to do this well and there’s work to do in parallel. So we’re actually probably going to pick a short list of folks by geography that we focus on because that will help us. The spread of geography will help us with the ecosystem players. So this is one of those rare instances where we’re going to be challenged to run as fast as our customers would like us to run.

Paul Treiber - RBC Capital Markets

Great. That’s all I had. Thank you.

Ken Denman

Thank you.

Operator

Thank you. And at this time I’d like to turn the call back over to Ken Denman for any closing comments.

Ken Denman

Alright. Thanks, everybody, for joining us for our call this evening. I look forward to talking to you next quarter, and in the meantime we’ll be back at it driving our new suite of products into the marketplace as fast as possible. As Scott says, it’s never fast enough, but we’re definitely going to try to make it happen faster. Thanks very much.

Operator

Thank you. Ladies and gentlemen, this concludes the Openwave’s first quarter fiscal year 2011 earnings conference call. This conference will be available for replay today through November 11, 2010 at midnight Pacific Standard Time. You may access the replay system at any time by dialing 303-590-3030 or 1800-406-7325 and entering the access code of 4373937. Thank you for your participation. You may now disconnect.

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

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

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

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

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

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

Source: Openwave Systems CEO Discusses F1Q2011 Results – Earnings Call Transcript
This Transcript
All Transcripts