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iPass, Inc. (NASDAQ:IPAS)

Q2 2014 Earnings Conference Call

August 11, 2014 5:00 ET

Executives

Lauren Stevens – IR

Evan Kaplan – President & CEO

Karen Willem – SVP & CFO

Analysts

Stan Berenshteyn – Sidoti & Company

Kevin Hanrahan – KMH Capital Advisors

Marc Silk – Silk Investment Advisors

Operator

Welcome to the iPass Incorporated Q2, 2014 Financial Results Conference Call. (Operator Instructions). At this time, I’d like to turn the call over to Lauren Stevens. Please go ahead.

Lauren Stevens

Thank you. Good afternoon, everyone, and welcome to iPass’ second quarter 2014 earnings conference call. This is Lauren Stevens from iPass’ Investor Relations. I’m here today with Evan Kaplan, President and CEO of iPass; and Karen Willem, Senior Vice President and CFO of iPass.

We have distributed our Q2 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 Q2 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 web cast is property of iPass and any copying or rebroadcast without express 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 may be identified by the use of words, expect, intend, believe, anticipate, and other similar words denoting future events or results. These statements involve risks and uncertainties that could cause actual results to differ materially.

These forward-looking statements reflect our opinion only as of the 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 in our annual report on Form 10-K filed with the SEC on March 11, 2014 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 release, public conference calls and webcasts. iPass also uses social media to communicate with customers and the public about iPass, its products, services and other material matters relating to its business and markets. It is possible that 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 it posts on U.S. social media channels including iPass Twitter feeds, iPass LinkedIn feed, the iPass Google+ feeds, iPass Facebook pages, and iPass blogs. These social media channels may be updated from time-to-time.

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

Before I turn the call over to Evan, we’d like to note that management will be attending Oppenheimer Conference this week in Boston and meeting with investors and analysts in Chicago next week. With that, I’d like to turn the call over to Evan.

Evan Kaplan

Thanks Lauren. I would like to welcome everyone to our second quarter call. This is a really exciting time for the company and much I believe to be an important milestone mainly sequential growth in total revenue. With regard to today’s call I want to talk about three items, first the divesture of our Unity business, second the strong financial results of the second quarter and finally the core trends in our business.

Turning our attention to Unity, on February 12, we announced that we were exploring options for our Unity Managed Service business. With Open Mobile driving consistent growth and given the limited synergies between Unity and our core OM business we believed it was time to devote all of our energy to mobility and therefore pursue the sale of the Unity business unit. For some context when I joined iPass five years ago our Unity business then known as M&S was a money losing no growth business struggling with the rapidly declining telecommuter connectivity service. Thanks to (indiscernible) work from a strong entrepreneurial management team the business was transformed to focus on retail and Wi-Fi managed service deployments driving healthy growth and meaningful profitability in the process.

As you all know on June 30th, after a thorough competitive process we announced the sale of Unity to Tolt Solutions for $28.2 million. We’re confident that strategically and financially we delivered a strong result for our shareholders. With that in mind I would like to thank the Unity management team, Karen and the finance and the HR team for all their support and hard work in the process.

iPass is now a pure play focused on a very large addressable market global Wi-Fi roaming. In that light iPass possess some unique competitive advantages including the largest global network by a factor of at least 3x. Interconnectivity and commercial relationships was nearly a 180 Wi-Fi suppliers around the globe. A global authentication fabric that ties all these together in a rapidly evolving Open Mobile SaaS platform to deliver a seamless connectivity experience for the increasingly connected business travelers.

Turning to this quarter’s results. We believe the aforementioned strengths are increasingly apparent in our financial statements, in addition to achieving milestone in the sale of Unity, we have reached another significant milestone one that has been long incoming. We increase quarterly revenue on a sequential basis driven by an 8% sequential increase from our Open Mobile enterprise customers and users. Whether you look at it with or without Unity we increased revenue over Q1.

The growth was a modest increment but we will take it after a very long sustained period weathering legacy declines. The really good news is that almost every metric we track was going in a good direction in Q2 from new logo acquisition to OM revenue, to adjusted EBITDA and EPS but the results most gratifying to me are the ones that indicated sustained traction. Specifically strong quarter-over-quarter and year-over-year increase in total platform users, total Wi-Fi users and importantly Wi-Fi hours. With regard to OM platform users we grew average monthly monetize users on the platform 11% quarter-over-quarter with 753,000 active users in Q2. OM Wi-Fi users grew at a nice rate of 13% over Q1 to 80,000 users. Wi-Fi usage was also very strong in Q2 and grew 10% over Q1. These are the kind of results we were targeting when we started down the road to develop the Open Mobile platform and return iPass to growth.

With the growth in OM as part of our fabric now the clear focus is accelerating that growth on both the enterprise and the service provider side of the business.

Let’s start by taking a look at what’s working for us. Last quarter we announced our Business Traveler 2.0 roll out and the program is already delivering strong results. As a reminder Business Traveler 2.0 is relaunch of our core global Wi-Fi mobility service targeted at the unique needs of the enterprise business traveler. The program began in January and was publically launched in May. The service was redesigned to focus on the end user as the customer with IT only acting as the facilitator. It takes the advantage of our investment in big data to track an individual user success and communicate with them within the app or a near real time via email.

It also helps them quickly and easily see nearby places they can connect and work. What’s new for us is that with Business Traveler 2.0 we’re cultivating an audience of end users directly instead of relying on our customers IT department to provide support and information on our service.

To do this we’re increasingly automating and building intelligence in the system to drive a much improved user experience. The initial effort to BT 2.0 were targeted 50 or so large enterprise accounts and the primary objective was to increase penetration and utilization as well as to reduce churn in those accounts. Today I’m excited to report the results have been very strong with virtually all of those accounts seeing very healthy growth rates.

The level of end user engagement that Business Traveler 2.0 enables is another reason we’re seeing a steady growth in users and usage on the enterprise side. We’re now working to expand the program to as many enterprise accounts as possible.

What’s also working for us ahead of even our own expectations is our Supplier 2.0 initiative, with the consistent growth of OM we have been able to start generating increasing traffic for our global suppliers and with that increasing traffic and better visibility we have been able to improve our commercial agreement significantly and begin an aggressive program to lower our cost of Wi-Fi supply. But most of our suppliers we’re their largest roamers and incremental commits are buying us disproportionate reductions in price. It's a win-win for both parties.

In turn we’re able to approach our OMX service providers with a new set of assumptions and allow us to keep peak for business that previously would have been out of reach. In addition overtime we should see the added benefit of being able to incrementally improve our offerings and margins on the enterprise side of our business. In many ways over the past few years as revenue has declined we suffered a negative cycle which is now appears to be shifting as we return to growth and see some of the benefits of the network effect as we drive more traffic.

From a new logo perspective in Q2 we added 12 new customers on the enterprise side including Air Canada, Credit Agricole, Gemalto, Landis & Gyr -- the Swiss multinational energy management company with 5300 employees, and since the quarter ended we have been awarded an important contract with a new multinational customer, one of the Fortune 10 that we have been working on for a better part of the year. Stay tuned for more information on that front as we move forward.

Turning to OMX, consistent with my commentary last quarter, OMX revenue declined by $200,000 in Q2 driven primarily by the performance of our Middle-East carrier partners. But we see significant changes ahead that we expect to be positive catalyst for the business. As we noted last quarter many of our carrier customers are not getting the traction we expected and to garner more growth we’re increasingly turning our attention to device manufactures and fixed line operators who have complimentary services that would benefit by adding a Wi-Fi roaming offer.

We’re making very good progress on that front and we find a responsive cadre of hardware providers who are looking to add connectivity to their hardware offerings as that capability is becoming an increasingly important feature in consumer purchase decisions. It's important to note that it would have been difficult for us to win these kinds of deals prior to our Supplier 2.0 initiatives. Look for us to make steady progress on the OMX front going forward.

In addition to traditional hardware players we’re seeing more companies use iPass as a way to build brand interest. High-end phone maker Vertu started with us a few quarters ago as an option on their handsets and we recently completed an agreement to be included as a standard part of their devices. They own see that our Wi-Fi offering is a compelling capability for their handset customers. Now other companies are looking us iPass as a way to differentiate their mobile products and build value to enhance their brands. We’re eve seeing interest from luxury brands not in the traditional telecom or device segment that want to give loyal customers a high value service as a loyalty reward. One example of this is the fashion house Xenia, who recently completed an agreement with iPass to offer global Wi-Fi to their high end customers called Xenia World Pass.

In addition, on the carrier side, we are seeing expanded traffic from Skype, AT&T, Oi in Brazil. And it's important to note that for a core group of forward thinkers in the carrier space we do see further expansion ahead. The outlook on OMX is particularly encouraging because it shows iPass is able to quickly respond to the challenge in our carrier customers. We were creative and diligent in pursuing other sets of customers for our unique product and the business is responding well. We believe we can turn OMX to grow -- return OMX to grow in short order.

On the network side of our business our total global hotspot footprint is now approaching 13 million across 120 countries. It's important to note that we now think it makes sense to include our community and residential footprint in the total, this is because some major providers around the world like Comcast and Orange in France are investing aggressively in these networks. Over 2/3rds of our traffic still comes from our hospitality airport and in-flight footprint. The growth of the smartphone business and the emergence of new alternative challenges makes us believe that the additional community and residential footprint will continue to increase in value for us.

We have a longer term vision of a global alternative network approaching a 100 million hotspots worldwide in which these community and residential hotspots play an increasingly important role for consumers and business travelers. Looking forward it's clear that our legacy business has become less meaningful. We intend to be more aggressive in terminating or transitioning those legacy customers in the next few quarters.

Also we expect OM to continue its consistent growth rate, it's early in the quarter but to till our users and usage metrics have exceeded our nominal seasonal expectations and we’re excited to see strong performance in what is traditionally one of our worst months. Finally on the back of the Unity sale, strong OM growth and a thoughtful restructuring we expect to steadily reduce our operating cash burn.

In summary taking a step back and looking at iPass we’re now streamlined and focused on Wi-Fi mobility. We successfully executed a process to divest the sale of a business unit with limited synergies resulting in a sale price at the high end of expectations. As a management team we continue to build financial value driven by strong OM growth. But we’re also very excited by the strategic and competitive value that we are creating with our technology investments, our supplier initiatives and our dramatic increase in network and interconnect. We believe this value will become more apparent to our stakeholders overtime.

Looking forward I’m energized by the progress we have made and the opportunities that lie ahead. Of course we have work to do to enable our business to grow like I know it can but we have the foundation to make it possible. And with that I would like to turn the call to Karen to take you through the numbers.

Karen Willem

Thanks Evan and hello everyone. As you know we have completed the all-cash [ph] sale of our Unity Managed Network Services business unit for $28.2 million which we announced on July 1, 2014. We signed and closed the transaction on June 30th, and we will continue to provide support to Unity through a transition services agreement for up to six months. I will first focus on the results of our continuing operations and then I will move back to review our results including Unity in order to compare to the second quarter guidance I gave back in May. Total mobility revenue for Q2 of 2014 were $17.8 million compared to $17.6 million last quarter and $20.3 million in Q2 of last year. This represents quarter-on-quarter growth of 1% and it is the first quarter of mobility revenue growth since Q4 of 2010.

In our core business Open Mobile, revenue grew for the 13th consecutive quarter to $14.4 million in Q2 of 2014 from $13.6 million in Q1 of 2014 and from $12 million in Q2 of 2013. This represents growth rates of 6% and 20% respectively. Open Mobile revenue represented 81% of total mobility revenue in Q2 of 2014 compared to 77% in the prior quarter and compared to 59% in Q2 of last year.

As we discussed on our last conference call we will continue to report on two key user metrics that we believe best capture the dynamics of the Open Mobile enterprise business. These metrics include Open Mobile Wi-Fi users and active Open Mobile platform users. As a refreshers, Open Mobile Wi-Fi users are the number of unique users that use the paid Wi-Fi network from iPass in a given period. Active both in mobile platform users are the number of unique users that have paid for Open Mobile platform services and used the platform in a given period. We generally provide the metrics calculated as the average number of users per month during a given quarter. This quarter we saw strong user growth Open Mobile Wi-Fi on the iPass network through to 80,000 in Q2 of 2014, a 13% increase over Q1 of 2014 and 43% year-on-year growth.

Smartphone and tablet Wi-Fi users grew 19% in Q2 of 2014 over the prior quarter. As a result of the increased number of users and the increase in their overall usage of the product Open Mobile Enterprise Network revenue grew nicely to $9.7 million in Q2 of 2014 up from $8.8 million in Q1 of 2014. Active platform users in Q2 of 2014 grew to 753,000 representing an 11% increase over the prior quarter. The continued growth in active platform users serves as a strong base to grow Wi-Fi revenues in the future.

Turning to network gross margin, we saw a slight decrease in Q2 of 2014 to 40% compared with 41.7% in the prior quarter. The lower margin in this quarter was mainly due to the higher usage from our flat rate customers, consistent with our previous commentary on margins we expect that network gross margins will be in the low 40% range in the upcoming quarters as we start seeing the benefits of our supplier renegotiation efforts as well as lower usage during the summer months.

Operating expenses decreased to $14.6 million in Q2 of 2014 from $16.5 million in Q1 of 2014. The first quarter of the year is historically our highest expense quarter due to higher payroll taxes, year-end audit fees and the cost of our annual sales kick off in January. In addition during the last quarter we have been actively preparing for the potential sale of Unity, and so have been reducing hiring and spending as we resize the company for our new financial profile.

Adjusted EBITDA for Q2 of 2014 was a loss of $3.4 million compared to a loss of $4.8 million in Q1 of 2014. Next let me provide the details of our results including Unity in order to give you a better comparison to the guidance we have provided in May. Total revenue with Unity came in at $25.5 million in the middle of our guidance range, adjusted EBITDA with Unity would have been a $2.5 million loss which is at the top end of the guidance.

Our cash balance increased by $21.6 million to $41.7 million at the end of Q2 of 2014 from $20.1 million at the end of Q1 of 2014. This increase was mainly due to the proceeds from the sale of the Unity business for $26.8 million excluding the ESCROW amount of $1.4 million. Excluding the proceed from the Unity sale our cash burn was $5.2 million in Q2 of 2014 which was higher than our previous guidance of approximately $4 million. The higher cash burn was due to a timing issue where a large customer payment of $1 million came in on July 1st. Given this we expect cash usage to continually decline in the coming quarters. We expect our total cash burn for Q3 of 2014 to be about $5 million of which we expect $2.3 million will be for transaction expenses related to the sale of Unity including bankers fees, audit and legal expenses and incentive compensation relating to the Unity employees and approximately $600,000 will be for restructuring charges that I will describe in a moment. Continuing operations will use approximately $2 million of cash in Q3.

Now that the divesture of Unity is complete we announced today that we have put in place a restructuring plan to increase efficiency and drive profitability that we believe will better align our cost structure with the increased focus on our core mobility business. As part of the restructuring plans we plan to reduce a number of existing positions worldwide, reduce planned replacement positions, consolidate our facilities footprint at corporate as well as some remote locations and reduce other planned spending throughout the company.

We expect to record in the aggregate approximately $900,000 of restructuring charges and expect to complete the majority of activities related to the realignment plan by the end of the second quarter of 2015. As a result of the restructuring and our ongoing prudent expense management we expect to continue to improve our bottom-line and push towards profitability.

Moving onto the outlook, we’re pleased with the continued progress in Open Mobile revenue growth and we’re positive about OM growth moving forward. These increases will be partially offset by the expected continued decline in legacy revenue driven in part by our decision to aggressively convert customers from legacy to Open Mobile and as Evan said continue to terminate 3G and dial-up customers.

Legacy revenue in Q2 of 2014 was $3.4 million down from $4 million in Q1 of 2014. We expect legacy revenue to be less than $2 million per quarter by the end of 2014. With the sale of the Unity business it should be noted that our forward-looking guidance will focus only on the continuing mobility business. Given the dynamics of the summer seasonality in the enterprise business we anticipate total revenue to be approximately $16.2 million to $18.2 million for Q3.

We anticipate adjusted EBITDA for the quarter to be in the range of a loss of $2 million to a loss of $3.5 million. To reiterate we expect our cash burn to be slightly more than $2 million for continuing operations and approximately $3 million for transaction fees and restructuring.

We’re currently redrafting our strategic and operating plans for the remainder of 2014 and for 2015 including uses of cash and intend to update you with our plans on the next earnings call.

In conclusion, we’re very excited about the iPass opportunity as we can now focus fully on Open Mobile growth and while prudently managing our cash, continue to enhance shareholder value. 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

(Operator Instructions). We will take our first question from Stan Berenshteyn from Sidoti & Company.

Stan Berenshteyn – Sidoti & Company

Have you observed any increase in user engagement following the Business Traveler 2.0 initiative?

Evan Kaplan

Definitely, yes. On those targeted accounts we have seen reduced churn, we have seen increased penetration, we have been able to resurrect people who hadn’t been using in a while. I think one of the things that buoys our confidence so much in the consistent growth is we are just seeing very good results from user engagement.

Stan Berenshteyn – Sidoti & Company

So you said from targeted accounts, is this going to be a -- a program it's going to be expanded? And can you give us an idea of how many of those accounts in total -- of how many accounts the Business Traveler 2.0 initiative is being implemented on?

Evan Kaplan

As I alluded to in the script it's roughly 50 at this point. Obviously we would love to expand it to every account of size. We’re in the process of trying to expand it to another 200. The expansion of end user engagement of the whole end user engagement process and the Business Traveler 2.0 the customer has to be willing to be cooperative, IT has to be able to let us take over the reins a little bit. And we're seeing increasing receptive of that but it's not true in all accounts. So, that’s the only gating factor. We would be happy to do it for every customer out there.

Stan Berenshteyn – Sidoti & Company

Okay. And what kind of impact can we expect from the supplier initiative? Will any of the benefits be passed along to the clients as a consequence or everything going to be retained by iPass?

Evan Kaplan

I think we view this Supplier 2.0 initiative as strategic because we have some flexibility, we think we still serve a very narrow market in just the largest of enterprises and as you know from following us for some time we have been trying to crack the nut with carriers, with now hardware providers and other folks and we feel like we’re starting to get there. In order to do deals with some of those bigger channel partners we really have to change our pricing models and the dynamic around it. So the first the most important reason we engage in Supplier 2.0 was to open up that total available market increasingly to consumers into those channel partners. I think on the enterprise side as you look at that business we typically sign two year contracts that have some auto-renewal capabilities in some cases and so we tend to lock in our pricing for a couple of years. I would not be surprised if overtime enterprises would try to put some more pressure on us as consumer pricing changes but I think that whole exchange is positive for us because of the timing dynamics. So I would like to see us increase our enterprise margins also.

Stan Berenshteyn – Sidoti & Company

Okay, so just to get a better understanding of what the Supplier initiative entails, would it be something on the lines of as a user scales up their data usage that the amount that is passed along to iPass to compensate the Wi-Fi provider would scale down?

Evan Kaplan

We don’t break it out like that and I’m hesitant to take you through all the dynamics suffice to say that for incremental commits in usage that we can predict which we can increasingly predict more and more, we’re getting a significant multiples of increases in capacity. That’s the dynamic at play.

Stan Berenshteyn – Sidoti & Company

Okay and is it safe to say that most of the sales and marketing expenses that you’ve incurred have really being part of Open Mobile exchange and not really just the Open Mobile platform and not really Unity?

Evan Kaplan

Yes, I think it's very specific you can see if you carve it back from the last report, you can see we didn’t have a huge sales and marketing expense on the Unity. Most of our sales and marketing has been on Open Mobile but you can carve it back from the numbers we can help.

Stan Berenshteyn – Sidoti & Company

Sure. And the income tax benefit incurred for this current quarter, will we see any residual income tax benefits in those subsequent quarters, or does everything hit in Q2?

Karen Willem

It's pretty much hitting now. I mean we reserve it and put it in a provision, the net-net is we were able to use the NOLs to write-off the vast majority of the gain. It is about a $150,000 plus or minus sort of basically AMT and some state taxes but the Federal and major state taxes were covered by it. So we will be doing a 382 [ph] to recast what our remaining NOLs are going forward. But yes they all hit now.

Stan Berenshteyn – Sidoti & Company

Okay and just one more question, I don’t know if you have a number for this but what’s the overall size of the planned reduction in your operating expenses? Is there kind of a target?

Karen Willem

Yes, it's quite a cut our expenses annually by about $3.5 million as a result of the cuts we made.

Operator

We will take our next question from Kevin Hanrahan from KMH Capital Advisors.

Kevin Hanrahan – KMH Capital Advisors

I had a question to begin, on Open Mobile Exchange. It sounds like you are re-excited about that, maybe because of lower costs, which you can capture some new business going forward?

Evan Kaplan

That’s exactly right. It's not just from lower cost but we’re engaged in a series of agreements or deals that we’re pretty excited about and feel like we’re in a good position. So that’s what I’m so encouraged about.

Kevin Hanrahan – KMH Capital Advisors

And you mentioned a couple of the carriers on that side -- Oi in Brazil and AT&T. Were you ever able to announce who the big partner, the telco partner that you announced in Q4 was for Unity?

Evan Kaplan

For Unity, I was not ever able to announce it, that’s a great question and now it's not my prerogative to announce it. That is their prerogative to announce it.

Kevin Hanrahan – KMH Capital Advisors

So Tolt and Blackstone know who it was?

Evan Kaplan

Yes everybody knows who it was.

Kevin Hanrahan – KMH Capital Advisors

Everybody but us.

Evan Kaplan

Everybody.

Kevin Hanrahan – KMH Capital Advisors

Well, to continue on with it, you just mentioned the Fortune 10 Company, which sounds like a large enterprise. Is that on the international side?

Evan Kaplan

By nature it's a multinational, yes. It's a Global 10 or whatever, not just a fortune.

Kevin Hanrahan – KMH Capital Advisors

Do you think we'll know the name of them in a year?

Evan Kaplan

Now you’re just bating me, yes I think you will know the name of them in shorter than a year.

Operator

(Operator Instructions). We will go next to Marc Silk from Silk Investment Advisors.

Marc Silk – Silk Investment Advisors

Most of my questions have been answered. But can you give us some anecdotes and feedback from the BT 2.0, as far as what the customers have been saying?

Evan Kaplan

So the anecdotes I shared with you aren’t necessarily what the customers are saying because our primary customer contact is traditionally being IT. What we’re hearing from the end users is a real fundamental appreciation, didn’t know you were there, thank you for helping us through these issues, thank you for getting me back on. This was a life saver, they like the automation. They like the fact they were helping them do what is basic stuff like recover username passwords that they couldn’t get from their IT department, they like the help desk. I think they just like feeling like they are somebody out there who is listening to them as opposed to their own internal IT departments who can often be a bit of a brick wall.

Marc Silk – Silk Investment Advisors

And you said this IT department are now letting you do this. What's their reasoning for that?

Evan Kaplan

I think there is some fear in the less progressive IT departments that this is ironic right, even though we save them money that here will be larger expenses in their budget by virtue of us telling people where they can use, giving them a better experience, helping them recover, there is a little bit of irony there. That happens in some of these cases, also happens in Europe a little bit, the more old line IT departments, more traditional industrial companies are a little reticent to allow us to have all of their employees emails and engage directly. But I feel like that’s a shifting tide. It's changing.

Marc Silk – Silk Investment Advisors

Can't you go above the head to the COO and let him know that this is something that, again, you could save money on?

Evan Kaplan

Well you know obviously we do our best to do that but in some cases it's a pretty dangerous when you go around the IT guys and you try to go to the CFO because you’re saving the money and we have been able to do that successfully in some cases but it's not like it's a single playbook for every customer. There is cultural dynamic to this. But you know the more people are going to the cloud the more they are kind of accepting these kind of SaaS services, the better off our position is.

Marc Silk – Silk Investment Advisors

So you tweeted out a bunch of helpful articles, and I appreciate that. There's some very interesting things that I just wanted you to comment on. One of them said that Wi-Fi offload will represent 52% of Mobile Internet traffic in 2018. It looks like smartphones will represent 51%, and tablets, 69%. Should we be excited about this in regards to the Open Mobile Exchange prospects?

Evan Kaplan

I think you should be excited about in regard to the broader iPass both on OMX and OME, because offload is a funny word Marc, offload is a carrier’s idea of what happened from your handset. What the truth is, is if we take a look at devices that are LTE enabled today so their device is enabled on the best network right? They are already 72% of the data that’s flowing over those already on Wi-Fi and they are not “offloaded” those are people going natively to Wi-Fi when they get home, they get at work, they sit down in a public place. What you’re seeing is you know obviously what we would like to promote, it's in our best interest but we’re clearly seeing out there is kind of the Wi-Fi first orientation and as you go down the sort of generational stack to kids who are younger and coming into the workplace, or even young employees, they're definitively a Wi-Fi first orientation. And so I think it's not so much of an offload as Wi-Fi being the lingua franca for all that communication, all the big data communication.

Marc Silk – Silk Investment Advisors

Okay. And then in Tech League Europe [ph] you quoted, you said in Europe in 2016 they expect there to be free roaming, the carriers are going to responders, that's a huge profit center for them. They have to change somewhere, you're going to use more Wi-Fi. And that's your thoughts. What makes you think that, by the way? And I appreciate that you're not putting your head in the sand regards to what happens to roaming. Because we all know that it could be fatal obviously down the road.

Evan Kaplan

When we build our forecast, when we build our assumptions right? We’re assuming that roaming continually comes down globally. I mean there will be places where it takes a long time but in Europe they are talking about the end of 2015 early 2016 where they are trying to eliminate intra-country roaming. So the carriers, that is a huge profit center for them and a huge margin allocation. They are under a lot of pressure at the European telcos and so when I have the conversations with the executives that are in-charge of that roaming business the kind of things I hear is, we’re likely to raise our base rates to encounter that, we’re likely to raise our ratable rates to that our base amount per megabyte even on a domestic plan changes. We’re likely to raise our rates when roaming outside of Europe. So roaming to the U.S. or other places and so they have to figure out a way to create profit pools but I think at the end of the day what you see with the cellular spectrum is there is only so much spectrum. They have to monetize that spectrum effectively in order to have profitable going concerns and the more they do that, the more consumers figure out how to go on Wi-Fi and the more Wi-Fi that gets built.

You know this vision of a 100 million hotspots two years ago everybody would have viewed as pipe dream and now I think there is a group in the industry that view it as almost an inevitability. I think the growth in Wi-Fi is so significant, I feel like we’re sitting in a pretty targeted area that now and we like to expand to a broader area. Hope that’s helpful Marc.

Marc Silk – Silk Investment Advisors

It is. And then, I know in regards to LTE, there was a study by Mobedia that the first four months of 2014 shows LTE subscribers using more data than their plain 3G counterparts. But also Wi-Fi usage is increasing as well. So should we feel better about that that LTE is not going to be the end of Wi-Fi?

Evan Kaplan

It not only makes me happy it makes me happy that you brought it up on the call. Yes there is no question that LTE is not the end of Wi-Fi, for every, these are rough numbers but for every device that ships that has an LTE chip set, there are 10 devices that ship that are Wi-Fi only. Wi-Fi really is the lingua franca whether at home or work, in the public spaces that’s where the build out is.

Marc Silk – Silk Investment Advisors

And the other thing that I found interesting in that article is, it says as users get used to data-heavy applications that will lead to more dependency on Wi-Fi. Why is that?

Evan Kaplan

Yes one of the things you see, one of the things I think is helping our OM businesses is, you know unified communication is a huge push by Microsoft, by Google, by Cisco and unified communications most people regard increasingly as a Wi-Fi experience. One is it's a lot of data, when you include video, and voice together or you include white boarding, other services that are available for conferencing and things like that and they are heavy data intensive applications, right? And most people are sensitive particularly when traveling to data intensive applications on the cellular network. They fear about bills, they fear about roaming, all the fears add up and so they automatically look for Wi-Fi to do that up in their hotels or airports things like that.

Marc Silk – Silk Investment Advisors

And then last, you made a comment -- it could have been a year ago that you felt that Open Mobile Exchange could be your biggest growth driver than even your Open Mobile, for the enterprise. Based on the setback last few quarters do you still have that belief? And if so, why?

Evan Kaplan

I still have that belief, my belief has been a little build by our experience in some of the carrier markets. But it's enervated again by our experience with some of the hardware guys and platform guys who want to see Wi-Fi be increasingly ubiquitous and people connected all the time. So I’m feeling very much more bullish and I certainly was on our last call about it.

Operator

With no further questions in the phone queue I would like to turn the call back over to Evan Kaplan for any additional or closing remarks.

Evan Kaplan

Thanks everyone for joining today’s call. At this point I feel like we have built a lot of strategic value while transitioning iPass to focus on growing the business through our mobility solutions. We feel like we have established that we’re the premier provider in this Wi-Fi mobility space and we will strive to continue that success that we saw in Q2. I’m excited about our business, I’m excited about our prospects going forward and I appreciate your support. Thank you.

Operator

This does conclude today’s conference. We thank you for your participation.

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Source: iPass' (IPAS) CEO Evan Kaplan on Q2 2014 Results - Earnings Call Transcript

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