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

Executives

Mike Bishop – Investor Relations

Ken Denman – Chief Executive Officer

Anne Brennan – Chief Financial Officer

Analysts

Matthew Hoffman – Cowen and Company

Scott Sutherland – Wedbush Securities

Charlie Anderson – Dougherty & Company

Chris Growe – Stifel Nicolaus

Scott Zeller – Needham & Company

Paul Treiber – RBC Capital Markets

Openwave Systems Inc. (OPWV) F2Q2011 Earnings Call Transcript February 3, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Openwave's earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, February 3, 2011. I would now like to turn this conference over to Mike Bishop of Investor Relations. Please go ahead.

Mike Bishop

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss the results of Openwave Systems second 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 everybody that we are operating under the rules of Regulation FD. The second 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 that may be 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 a result of various important factors. These factors include the specific risk factors discussed in 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, realized losses and 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 second quarter results. Let’s jump right in. Revenue for the second quarter was $39.9 million, and we recorded bookings of $40.2 million. Non-GAAP EPS was a loss of $0.03.

I’d like to give you an update on our trials program and couple it with a broader view of the market activity. Since its inception, we’ve had 43 total customers in the trial process, with 23 of those trials still in progress. Out of 20 trials completed, 14 targets have entered the RFP process or are still in negotiations and six targets have made decisions that resulted in two deals awarded. We won an additional deal after the close of the second quarter, which makes three wins out of seven decisions thus far.

When we include a deal signed outside the trials process, we have won four media optimization deals in total. Carriers are moving forward with strategies to maximize their network resources and relate their hardware investments to solve the network traffic congestion problems of today. This is leading to increased pipeline volume, and we’re expecting the market to push carriers in mask closer to a purchase decision.

During our second quarter, one of the trials turned into a booking for us as the deal was awarded. We mentioned this win on last quarter’s call. It’s a small operator based in Europe. The last trials have been successful in both validating the value of the solution category as well as generating specific customer interest in our product. We have sales initiatives with dozens of customers, new and old, some of whom we have not had active contact with in many years.

The trials have also taught us that customers are reluctant to invest based only on a lab trial, which is why we had pivoted towards in-production trials and let in select carriers to demonstrate real world return on investment. We are being selective about the customers we move to production trials because they are more intensive and require more investments. Qualification is critical. As we gather real-world data, we are in a position to leverage this data for future deployments, which may bypass the trial process altogether.

Production trials are exciting, and we are learning a tremendous amount from them to rapidly evolve our solutions. Most importantly, we learned that video optimization is as complicated and complex as carriers fear, requiring deep domain expertise, experience in network, and a high performance platform. For example, our top-three Android handset behaves differently in Southeast Asia than it does in the US because of different network conditions, content, and standards. All of these factors could necessitate unique configurations for each video deployment.

Balancing the profiles of traffic as the market evolves is also important. We believe that platforms must handle both web and video traffic in parallel and deliver great total cost of ownership as the mix evolves. With our latest version of media optimization and integrated platform released available today, we are first in the industry to announce a truly congestion-aware optimization solution. It is designed to continuously monitor traffic flow, compressing a video only when the network conditions dictate. This technique requires a much smaller hardware footprint than the other brute force solutions.

Another observation from trials that turned into a market-first feature was support for HTTP adapter streaming. Netflix uses HTTP adapter streaming and so will all the Netflix-like services that we expect to come online this year. Operators must have a solution that can handle this bandwidth-hungry protocol because it leaves little room for other applications during peak periods.

The Media Optimizer is one of the few products that allow operators to gain control of the network resources without manipulating the stream of content itself. At some point, we believe carriers must be forced or might be forced to prioritize protected content versus all other traffic. They will need a solution to help solve this challenge. We are making every effort to convince carriers that have completed their trial to move forward and sign implementation deals.

Many of the completed trials have moved to RFP, and we’ve been included on the shortlist. We like our odds of conversion, because in several instances, we have leveraged our participation in lab trials to implement and define the carrier RFP. To date, we are seeing consistent video optimization and bandwidth savings across formats and devices in a production environment. It can be a slow iterative process, but one that is ultimately affirming our strategy of a platform approach to optimization.

Point transcoder solutions simply can’t handle the growing complexity of mobile networks. As I’ve said earlier, different carriers have different problems. A platform-based approach delivers a more complete solution. It’s true that the platform sales can be potentially protracted in the buying cycle. But we are working with operators and partners to show them the long-term return on investment of a solution that ensures efficient network utilization now and right on through the transition to future network radio technologies.

It also gives them a platform to move beyond traffic management to start monetizing the demand that’s causing the traffic. A highly encouraging development is the pipeline momentum behind new products from outside the trial process, namely for our Passport product. This is due in part to a shift in our sales engagement strategy toward the Chief Marketing Officer, consistent with what we said last quarter.

We have talked a lot about our trials today, but more importantly, we are seeing a significant amount of activity outside the trials process. In fact, next quarter we expect to see as many deals won outside the trials process as we win from it. Of course, we will continue to report on all wins, be they from trials or not.

I’m pleased to report some impressive wins in the quarter. In addition to the Media Optimizer deal, we signed a deal with SoftBank for Email Mx Stateless Edition. We also signed our first messaging deal in Southeast Asia with a Tier 2 carrier. Additionally, customer loyalty remains high. Our large Tier 1 customers returned from multi-year engagements on products across our portfolio.

As I mentioned previously, we won another media optimization deal just after the quarter closed. This is a key win for Openwave, as the customer is part of a multi-operator investment group with 55 million subscribers across their entities, the equivalent of a Tier 1 operator. Since the deal has been approved at the group level, we are actively engaging with other entities in this group.

We continue to look for partnering opportunities that allow us to scale much more efficiently to reach more operators around the world at a lower customer acquisition cost. Additionally, by partnering, we can leverage their position in carrier networks, effectively inserting our platform in areas where we did not previously have footprint. With the right partner, we can steer the traffic off their position in the network to deliver a lower TCO value proposition as well as greater investment leverage in the 4G architecture.

Last quarter, we spoke about F5, and we are making progress on additional opportunities. We believe this team selling approach will multiply our reach. Openwave and F5 offer a compelling solution for operators to consider as they look at ways to get ahead of traffic they are announcing and hit their networks. Stay tuned for more news at Mobile World Congress.

Last quarter we announced that Sprint and Openwave are working together to deploy a new ecosystem of enhanced services within the browser. What Sprint is calling their Browser-VAS ecosystem is powered by our technology, an open application development layer that sits on Openwave’s Integra platform.

The Sprint-Openwave partnership demonstrates a revolutionary opportunity for developers to create apps that execute in the browser and function across operating systems, devices, and ultimately across carriers. Of course, this final piece requires additional customers. Last week, we unveiled Openwave Amplicity as the official name of this carrier-centric developer platform. We have taken steps to secure trademark protection, as we look to bring operators and developer partners together.

GetJar, the world’s largest open app store, is the first of what we hope will be many strategic partners in the app space. Openwave Amplicity will be integrated with GetJar’s app catalog so the developers can write apps ones and distribute them in a single step across five platforms; Android, Apple iOS, RIM, Symbian, and Windows, all through the GetJar store.

Openwave Amplicity is an operator-supported open development platform that lets app developers transcend individual operating systems to reach a much larger, but still very targeted audience. For our operator customers, that means providing valuable user services, better device, and OS-independent. This allows for rapid deployment of leading applications on a uniform client experience across an entire subscriber base.

I’d like to provide an update on the IP monetization process we announced last quarter. As you know, 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 is a significant asset that we aim to convert it into an ongoing revenue stream.

Last quarter we announced the first patent license agreement. We are actively advancing the program and have made progress in the quarter. We have put a number of potential licensees on notice, and we are in discussions toward arrangements. We hope to avoid litigation, but there are no guarantees. As with this type of endeavor, we can’t be certain of the timing or the type of these IP agreements. However, with a broader focus on mobile data, we believe we have a substantial portfolio from which to execute this program.

I would like to note that Senior Vice President Martin McKendry is departing Openwave. He was hired in the turnaround phase to simply the architecture of the product portfolio into a more comprehensive or a more cohesive platform-based set of solutions. With that phase now complete, we are turning to Sean MacNeill to lead the development of all products. Sean will lead the engineering team in addition to his role as Head of Global Services. You may recall that Sean previously managed our Service Mediation business unit, which included engineering.

Since arriving at Openwave, the management team and I have been disciplined in our approach to operations, continuously refining our cost structure. We recently took action to reduce the expense level associated with our legacy product set. We know that our new products, Passport, Media Optimization, Amplicity, and Analytic, will drive future growth. And we will continue to focus our investment on those products, including the Integra platform in which they operate. Anne will cover the details. But in short, we’ve reduced the R&D spend associated with our older set of products.

Openwave is actively moving forward, and we are highly encouraged by the progress we’ve made in developing the pipeline for a new product set. Yes, the sales process is frustratingly long. However, I’m committing to deliver four new product deals in Q3. These will come from a combination of sales pipeline, the RFP process, and the trials activity.

The calendar first quarter is generally an exciting one, as we have Mobile World Congress, our biggest tradeshow where we showcase our newest technology. We invite you to attend our Annual Investor Briefing at the show if you’re going to be in Barcelona.

And I’ll now 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 second fiscal quarter. Overall for the quarter ended December 31, 2010, Openwave posted a GAAP loss of $0.05 per share and a non-GAAP net loss of $0.03 per share. Reconciliations from GAAP to non-GAAP profit or loss can be found in our press release and on our website.

Revenue for the quarter was $39.9 million, a decrease of $1.6 million or 3.9% quarter-over-quarter. License revenue was $10.1 million, a decrease of $2.3 million or 18% sequentially and comprised 25% of total revenue. The quarter-over-quarter decrease was primarily due to lower than usual license fees in the current quarter.

Maintenance and support revenue was $13.9 million, in line with the prior quarter and comprised 35% of total revenue in the current quarter compared to 34% of revenue in the prior quarter. Services revenue was $15.9 million, an increase of $4.7 million or 42% sequentially. This increase was primarily due to revenue recognized in connection with progress on larger projects in the Americas region. Services revenue comprised 40% of total revenue.

The regional breakdown of revenue in December September quarter shows that 58% of our revenue originated from customers based in the Americas, 14% from EMEA, and 28% from Asia. This is equivalent to last quarter’s breakdown. For the second fiscal quarter of 2011, Sprint represented 27% of revenue. No other customer represented greater than 10% of our revenue for the quarter. Actual bookings in Q2 increased 5% over the first quarter of 2011. In Q1, we recognized $4 million in patent revenues. In Q2, we received minimal patent revenues.

Turning now to our gross margins. We achieved a 61% blended gross margin for the quarter, a decline of 7.8 points sequentially. The gross margin decline was primarily attributable to the occurrence of high margin patent revenues in the first quarter. Gross margin on license of 99.2% decreased slightly from 99.8% in the prior quarter or 0.6 points.

The maintenance and support gross margin of 71.7% increased by 1.0 point from 70.7% last quarter, primarily due to a reduction in overall labor costs. Services margin of 27.5% increased 6.3 points from 21.2% last quarter. The sequential increase was primarily due to the contribution of higher margin projects, which have minimal third-party products.

As for operating expenses in fiscal quarter-two, research and development expenses were $10.3 million, a $1.0 million decrease or 8.6% sequentially. The quarter-over-quarter decrease is primarily attributable to lower overall labor costs, which include reductions in bonus amputation expense.

Fiscal quarter-two sales and marketing expenses of $11.2 million were $500,000 higher or 5% compared to the prior quarter primarily due to our continued investments in our sales force and marketing group. General and administrative expenses of $5.2 million decreased $1.1 million or 18% from $6.3 million in the prior quarter. This quarter-over-quarter decrease is primarily the result of reduced bonus expense and the timing of audit fees.

Our headcount increased by one from the prior quarter to 585. Please see our metrics sheet posted on the website for a breakdown of headcount 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 December quarter, interest and other income was $200,000, which is an increase from breakeven in the prior quarter. The increase from the prior quarter was primarily due to exchange rate gains.

Now turning to the balance sheet. Accounts receivable decreased to $22.6 million at the end of December from $33.8 million at the end of September, primarily the result of lower billings during the quarter due to the nature of the bookings mix with the material portion being billable quarterly over three years. This in turn decreased our DSO to 61 days for fiscal quarter-two, down from 73 days in the prior quarter. We continue to maintain our overall DSO target of 80 days.

Deferred revenue decreased to $40.7 million as of December 31, 2010, as compared to $49.6 million at the end of September. The quarter-over-quarter decrease was primarily attributable to recognition of previously deferred services revenue and due to the results of our bookings mix, as discussed earlier.

We ended the quarter with $113.4 million in cash and investments, which represent a decline of $4.1 million or 3.5% from $117.5 million at the end of the previous quarter. This is the result of $3.0 million cash used in operations as well as $1.6 million in fixed asset purchases. As a management team, we are acutely aware of our cost structure and our business dynamics.

As discussed in the 8-K we filed earlier today along with our quarterly results, we have taken action to reduce our operating expense level, specifically R&D associated legacy products. We expect to see the benefits of this action in the fourth fiscal quarter and in subsequent quarters. Our expectations for non-GAAP quarterly operating expenses are now in the mid $20 million.

Through operations alone, we have a goal of generating a non-GAAP operating profit by fiscal quarter-one of 2012. We will use cash in the current quarter, quarter-three, after which we expect to be within the technical patterns we have set over the past two years. There is possible upside to this scenario should we execute on patent licensing agreements, as those are high-margin and cash-rich. We continue to expect fluctuations quarter-to-quarter as major events occur.

Operator, we’d now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question is from the line of Matthew Hoffman with Cowen and Company. Please go ahead.

Matthew Hoffman – Cowen and Company

Hey, good afternoon, and thanks, Ken and Anne. Let’s talk first about the bookings. It looks like it’s a little bit over – book-to-bill over 1 in the quarter. But you signed two deals for the Media Optimizer for the new technologies there. What impact did that have on the booking then? Did that – is that a material part of the bookings number? And as you sign additional deals and you talk about maybe some turns business in the quarter, what impact do you think that that will have on the bookings notwithstanding the other guidance you just gave?

Ken Denman

Okay. Hi, Matt. Thanks for the question. First, let me just be clear. We had one Media Optimizer win in the quarter and one that just fell over in the quarter. So I just want to clarify that first of all. And the impact to the bookings of the media optimization deal was minimal. So that’s the basic answer. Anne, do you have anything to add there?

Anne Brennan

No, I think you’ve covered it.

Matthew Hoffman – Cowen and Company

Okay. And what level of wins do the new products like Media Optimizer have an impact on the bookings?

Ken Denman

Well, in general, when we say new products, and I would say Media Optimizer as one example to that, but also, as I’ve pointed out in the past, we have to pay attention to Smart Policy because Smart Policy actually had a much bigger impact in this too, as an example, than Media Optimizer. Some of our newer products are actually dialing in at a solid price and solid margin. Candidly, they are just little less competitive. It’s an innovative product. We’re sort of in the lead. We’re delivering some really good value. There is a little more sort of system integration customization associated with those solutions. So we’re getting good value on those plays, and I hope everyone doesn’t forget about the fact that we have other new products.

The Media Optimizer is definitely a core opportunity for us and it’s a very competitive space, as you all well know. We have seen pricing pressure in that market and we’re going to continue to see it. And we’re aggressively going after those wins ourselves. So I do expect that we see multiple wins in the Media Optimizer category, and we expect that to happen over time here. It will have a solid impact. It also depends also on what’s the overall size of bookings. I’ll stop there and see if I really addressed your question and give you a chance to come back at me.

Matthew Hoffman – Cowen and Company

Yes. No, it’s – the open question is whether the Media Optimizer or Smart Policy, you have a whole group of new products where you’ve been making the investment in R&D and you’re actually trimming costs back out of legacy R&D side to moving the company in this direction to try to get an impact of a percentage, some sort of qualitative feel for what percentage of the $40 million in bookings are coming from the new products.

Ken Denman

Through the end of the second quarter, it’s relatively small. So that’s clear. It’s relatively small. However, as we go forward, I’m really confident in the strategy. That is clear. We are also seeing the beginning of what we hope and believe is a bulge in our new product opportunity to deliver. We need to see a step function pop in bookings, quite frankly. That’s the bottom line. I’m looking for that. And as we get more of the new products done, that’s one of the ways we’re going to get there. It’s one of the ways you go for 20% plus kind of pop over the levels that we’ve been at, that’s where we need to go. We will likely not get there without several new products closing in a quarter, and that’s why I mentioned my target of doing minimally kind of forward in the quarter. So we need to see that kind of magnitude of a pop.

Matthew Hoffman – Cowen and Company

Got it. So one more for you and then one quick one for Anne. You mentioned an app platform product. How does that differ from something like Nokia’s QT, let’s say, cross platform app development engine that lets out apps for multiple operating systems, and specifically which operating systems is your platform working for right now?

Ken Denman

Yes. The fundamental difference is that our platform is browser-based on the primary browser that sits in most of the smart devices that are out there we look at, and it really is fundamentally the tool, we think, that many developers will be developing to as we move on to HTML 5. So the fundamental difference is our thought is browser-based, and I think that’s going to be a much easier platform for folks to build towards.

Matthew Hoffman – Cowen and Company

Okay. And Anne, a question for you. Just drilling down on the DSOs, I noticed that you had commentary about what happened there and they came down pretty substantially. My calculation I guess during the – maybe within 20 days or so. And you gave us some visibility on the move to sort of quarterly billings. So, talking about a quarterly mix, more of a quarterly mix, help me understand what the dynamics are there and what you think the trend are for DSOs moving forward. Thanks.

Anne Brennan

Let me answer the first part of the question, which is the DSOs came down from 73 to 81. So 22 days there. We expect given that we would – we are planning to expand internationally that we still hold that target slightly higher than the 50 range. That was the driver this time around that was driven by the absolute dollars and AR at the end of December if you compare that to the absolute dollars at the end of September. So $11 million reduction from $33 million to $22 million. And the driver really for that was the bookings mix in the quarter in Q2, which was primarily M&S. We signed a large multi-year M&S deal. The reference in my earlier comment around that being over a three-year period is just that that’s significantly over a three-year period rather than something which we are able to bill upfront. So it’s the significance of that in the quarter as well as the period of the contract.

Matthew Hoffman – Cowen and Company

All right. Thanks, guys.

Anne Brennan

No problem.

Operator

The next question is from the line of Scott Sutherland with Wedbush Securities. Please go ahead.

Scott Sutherland – Wedbush Securities

Hey, guys, good afternoon.

Ken Denman

Hi, Scott.

Scott Sutherland – Wedbush Securities

So, Ken, you’re talking pretty positive about four new deals this quarter. Obviously you’ve already got one deal. So I guess you’re talking three more. How are you coming to look confident, or do you think you’re down the pipeline with a few customers pretty far or do you think there’s a broad number of customers and you have a good chance to closing a few of those? And maybe just talk about the pipeline outlook going forward.

Ken Denman

Well, Scott, I think the punch line here is that at this point in the process we’ve got, the work that we’ve been doing in our trial process, work that we’ve been doing outside the trial process, work that we are doing on other pipelines with on other products. And so the combination of those, you get to a point where you go through a trial, maybe you get to a decision, maybe you don’t, more often than not we’re not getting a decision. The customers are going to RFP, but we think that we are influencing those RFPs. We have several deals that we’re now in best and final on. There are other deals that we are expecting – that we’ve been notified that we’re in the shortlist on.

And so when you sort of look at where you are in the process across the product line and then deal-by-deal where they are in the selling process, we are seeing more deals in the customers’ decisions than we have seen to this date across all of our new products. So I think it was actually you, Scott, you’re quoted as saying, the knee in the curve feels like it’s the June quarter based on everything that’s going on in the market. And I think it’s what I would say is based on what we’re seeing in our pipeline that can validate that. But there is a critical mass of decisions that need the Optimizer plus we have other decisions in other products on the cost that lead us to believe that this quarter and next quarter are knee in the curve for these new products.

Scott Sutherland – Wedbush Securities

How many in-production trials are you currently in or have finished, they haven’t decided on the vendor yet?

Ken Denman

That would be – we're currently in two and we’re just starting a third.

Scott Sutherland – Wedbush Securities

Okay. So basically three, okay.

Ken Denman

Yes, it’s basically three.

Scott Sutherland – Wedbush Securities

Moving to a different direction, you’re cutting the R&D on the legacy products, but looked like you are increasing the sales headcount. Are you going to be making more investments in sales and that $25 million OpEx line or is there again a whole new sales line, or can you invest in sales from this point forward if the pipelines are good?

Ken Denman

My answer is that if the opportunity is there, the pipeline is good. We’re going to go after it. We believe in these two products. We think our strategy is spot on. We do think we have a structure and we have headcount authorized within that $25 million that Anne – that mid-20s number that Anne gave out. So that’s encompassing what we think we need to do go win in the marketplace. I’d point out that we’re also investing pretty heavily and working with partners, both existing partners and other partners, to make sure that we have to reach around the world. So the answer is, yes, we have invested in the sales force because we have the products. We’ve got the products. We’ve made the investment in to get to this point to be a domain leader in several of these areas. We want to make sure that we don’t underwhelm the presence of the marketplace. We also need to extend our reach through partners which are working on very aggressively. And again, Scott, all those thoughts are encompassed within the range that we talked about in terms of a mid-20s operating expense.

Scott Sutherland – Wedbush Securities

Great. Last question, you had a pop in the services offsetting from the license gains. How should we think about the services pop this quarter that – of course, not some projects are leading into future licensing revenue in the projects?

Anne Brennan

I think the best way to look at is we had, as I mentioned in my script earlier, we saw an increase in services so that the number in excess of 15 is probably at the high end of the range that we would expect. As we move forward, based on the pipeline license opportunities that we see within the pipeline and obviously there’s a services component to that. So we would expect to be back in a more regular range, kind of in the 12 to 15 rather than being in excess of that going forward.

Scott Sutherland – Wedbush Securities

Great. Thank you.

Ken Denman

Thanks, Scott.

Operator

The next question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty & Company

Good afternoon. Thanks for taking my questions. I’m wondering if you could just kind of talk about the four deals in the current quarter, just sort of order of magnitude of the size of carrier? There’s probably a pretty big delta between a Tier 1 and a Tier 3, if you could help me there?

Ken Denman

Well, in general, it’s going to be a little bit difficult to give you the specific side because obviously I’m working off of pipeline in multiple deals and multiple players. And there is, as you pointed out, a wide range in that pipeline of possible deals that could cause – I think you should think that most of those deals as Tier 2 and Tier 3 players in general. That’s the way I would think about them. I tend to think about specific players within that realm in terms of the overall signal that they will send to us. For instance, the deal that we closed earlier this quarter, as I mentioned, while it was a Tier 3 player, it was part of a larger group, an investment group that owns multiple operators around the world.

That’s an example of where we would have loved to close that deal last quarter. Faster is always better in our view. That deal got slowed down as the group headquarters got involved. Ultimately you go (inaudible), but then the fact that we went to the headquarters had the full betting, got their blessing, is hopefully going to speed process as we talk to other entities. So that’s an example of a Tier 3 deal that as we mine that, it’s going to easily turn into a Tier 2/Tier 1 deal. In general, the fundamental answer to your question is we have all sizes, but primarily think of those four deals as Tier 2 and Tier 3.

Charlie Anderson – Dougherty & Company

Great. And then I wanted to just kind of talk about the legacy business as you guys are cutting R&D associated with that. What do you see sort of the top line on that legacy product? Is that a flat business? Is that down 20%? Just give us some more color there, it would be helpful, you know, what you’re seeing.

Anne Brennan

We’re seeing I’d term as a flat to down business in certain elements, as we – specifically around M&S, as we knew some of those M&S contracts on longer terms. We’re seeing increasing pressure in terms of price. So the best I’d say is it’s flat to down.

Ken Denman

Yes – which is one of the reasons as we targeted our reductions, we’ve focused those reductions on the legacy assets of our business model to reduce our support costs for those legacy products.

Charlie Anderson – Dougherty & Company

Was there a change in the quarter just in the pipeline for that that maybe you make this decision? Maybe if you could just give us some color around your decision-making, that would be helpful.

Ken Denman

I would say, Charlie, this. It wasn’t a change in the makeup of the quarter as much as we are delayed – we've talked about the sales cycle for the new products that being longer than we’d like. We maybe arrogantly thought we could shorten that sales cycle through a number of techniques. And what we found is in the mobile industry, I’ll remind it again, mobile telecommunications industry, the sales cycle to sales cycle tends to be 18 to 24 months. Given that and that we are a bit delayed with the flat to slightly down in the legacy side and with the new products coming on a little bit slower, we wanted to be cognizant of our obligation to make sure that we’re prudent. And we want to make sure that we manage the business as tightly as we can.

We felt that we could address the cost of managing and supporting the legacy products and services in our business. And we wanted to take that action now because we also know that within the expense range that Anne has talked about, we need to sort of reinvest in some of the new aspects of our business or important aspects of our business, whether that’s the Amplicity products or some of our – standing up some of our partner arrangements. So this is as much about going deep enough to keep our cost structure in line based on what we see and the potential variability, while at the same time taking enough out so that we can invest in those areas that we have to invest in, back to kind of Scott’s question. So this was really somewhat overarching. How do we manage the business to make sure that we can deliver an acceptable result while we push to deliver on the broader strategy, which we think ultimately drive value for shareholders.

Charlie Anderson – Dougherty & Company

And then quick one for you, Anne, before I go. So the $12 million of annualized savings identified in the 8-K, are we just pulling $3 million a quarter starting in, like you said, Q1 next year out of R&D and is there sort of an offset in terms of arrays in some of the areas to get sort of that 25 level?

Anne Brennan

Yes. We will be – the areas that we – as Ken mentioned, the areas that we’ll investing in are to bolster our sales coverage worldwide as the new products get traction the areas in R&D with regards to specifically our new product set. We’ll start to see the benefit of that in the announcements where in the last week or so. We will see the full benefit of that in Q4 into Q1. So we’d be running in and around $27 million on average for OpEx. It takes it down to the $24 million and – $24 million to $25 million range. One thing, which I would point out, is that there will still be a variability in any given quarter. But over a period of time, it will be within that range with a specific focus on those two areas, being sales and on development.

Charlie Anderson – Dougherty & Company

Great. Thanks so much.

Anne Brennan

Okay.

Operator

The next question is from the line of Tom Roderick with Stifel Nicolaus. Please go ahead.

Chris Growe – Stifel Nicolaus

Hey, guys, this is Chris Growe for Tom Roderick.

Ken Denman

Hi, Chris.

Chris Growe – Stifel Nicolaus

Hey. So, just kind of clarifying what you said earlier about the four kind of new product deals that you are hoping to sign, would that get you to that kind of 20% increase in bookings type step function that you’re talking about if that were to happen?

Ken Denman

Not in and of itself. It could. Again, it depends on the mix of the deals and the size of the carriers. But I would also point out – I’m not including when I say new products, I’m not including, for instance, Email Mx Stateless Edition, which has been strong since its launch. We’ve already seen when and I actually expect more. We don’t talk a lot more as much as we should about the messaging business, which continues to be a solid underpinning in terms of customers’ expectations of us continuing to deliver. And in fact, their acceptance of a stateless version because of the relevance of geographic diversity and survivability or redundancy. So basically the answer is, it would be very helpful. It won’t get us there all the way in and of itself, but we have several messaging opportunities in the pipeline that any one of those would kind of help us there.

Chris Growe – Stifel Nicolaus

Okay, great. That’s actually helpful about messaging pipeline. So, as far as – kind of just a little bit more on your comment as well, I think, on the pricing pressure. So I just want to clarify – so are you seeing – is that kind of playing a role as far as Media Optimizer because it’s seeing pricing pressure in carriers delaying making decision, maybe trying to work vendors against each other? Do you think that’s occurring right now?

Ken Denman

Absolutely. Well, what I would say is there is a big fear in the carrier market as there often is in the last several cycles, maybe in the last three or four years. There is a fear that they were overpaid. Carriers think back to a couple of other technology inflections, and they remember moving boldly and largely down half and then subsequently feeling like they over-invested. So they are looking for more certainty that the investment that they make is actually going to generate savings, and they are not going to be caught out, they are not going to be embarrassed. And so we are having to be very creative and aggressive, and there’s a lot of other people out there that are also willing to be creative investment and aggressive.

And so that causes, I think, operators to think about how far can I go. And again, this is why trials are so important. This is why data is so important, because you also want to remind them that yet some of it you do get what you pay for. If one of the reasons we took great care to sort of get another version of our solution out as we dropped our most recent edition of Media Optimizer a couple of weeks ago and are trumpeting the benefits. It’s getting good returns. So the answer is yes, absolutely. That’s plain apart I think in carriers trying to make sure that they get the best deal they possibly can.

Chris Growe – Stifel Nicolaus

So kind of maybe looking a little more optimistically, is there anything out there that you see that would kind of force their hand where they will be forced to stop playing this game of chicken so to speak. Like, if there is a network overload in terms of volume, is there anything out there that you see that might kind of force the tipping point on their ends? Or is this a game that they might be able to play for a while longer do you think?

Ken Denman

I think at the risk of going here again and being too optimistic, I have to say I think we are building. I mean, most of you saw that Cisco report. Many of you know that there are more players getting access to things like the iPhone and the iPad and multiple other smart devices. We are seeing the impact of digital rights management content in the space, which is – these are bandwidth-greedy protocols that are tending to cost more and more problems, especially during peak periods. So – by the way, the problem is somewhat different. We tend to talk about congestion and bandwidth issues similarly in one vein. And around the world, different carriers think of this problem differently. Some carriers have deep, deep problems in hot spots or particular areas, not maybe across their whole network or not across their whole backbone.

So, building different use cases for people who are having to sort of try to solve different problems, we are finding it’s gaining some traction. The punch line is we’ve been wrong in a couple of points here in terms of how fast the market would move. So I certainly get it when people take it with a grain of salt. But I think the pressure is building rapidly. And again, I’m basically saying that I think that the knee in this curve is this June quarter. Based on what we see happening in our pipeline, we are seeing people starting to move to decisions. OEMs are starting to play in the game. By that I mean there are bigger players who are – they don’t have solutions, but they spend a lot of time trying to figure out how they play in this game in the 4G architecture. That tells me that they are getting pressure from carriers as well.

Chris Growe – Stifel Nicolaus

Okay, great. I’m sorry, one more. Just in terms of the patent pipeline, I know it’s probably pretty tough to sign odds, but as you look out in terms of potential revenue from that source, is it something you feel pretty good that you can get something within the next, say, four quarters out of or is that just like completely half hazard in terms of timing?

Ken Denman

In general, it’s lumpy. I feel good about the prospects to do something in the next four quarters, absolutely.

Chris Growe – Stifel Nicolaus

Okay. Thanks, guys.

Anne Brennan

Thank you.

Operator

The next question is from – I'm sorry, go ahead.

Ken Denman

Apologies. You can tee up the next question, go right ahead.

Operator

Okay. The next question is from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller – Needham & Company

Hi. Could you give us some color around the F5 partnership and what sort of impact that’s having on revenue and pipeline at this point? Thanks.

Ken Denman

So – yes. Thanks, Scott, for the question. The F5 partnership has been a really nice opportunity for us to have a conversation with customers that we wouldn’t necessarily have a chance to have a conversation with. It’s also been a very much education about how we can ride another player’s infrastructure, if you will, and not have to realize solely on our workflow engine. Then this has led to all kinds of other implications and opportunities. So fundamentally, we have seen more deals in our pipeline. I wouldn’t say that – I can think of several deals that we have closed with F5. We participated in F5’s global sales conference just in November. And so, as a result of that, we’re seeing more opportunities. And we are getting smarter about how to work with them.

What we are finding the key is to not refocus obviously on the technology, but the actual use cases and how that might impact the specific businesses that we’re talking to. And we’re doing our best to help the F5 team learn to think about it in that guise what are the use cases for the impacting applications as opposed to just kind of load balance or traditional selling discussion that they might have. That gives us a nice vertical approach to go down. We need a similar kind of partnering in other areas of the operator’s environment, and we are also working on that. But this has been a fruitful discussion. It’s not a partnership. It’s not a huge impact. It’s not 20% of our deals or anything like that. But the interest and the pipeline is building. The question for me, Scott, is can we extend this model to other players so that we can cover the waterfront in terms the different ways that we can land within an operator’s environment without just inserting our infrastructure in their environment?

Scott Zeller – Needham & Company

Thanks.

Operator

(Operator instructions) And the next question is from the line of Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber – RBC Capital Markets

Hi. Thanks for taking my call. From the RFPs that you’re seeing, are carriers looking for a standalone optimization solution, or are they considering optimization in light of a broader strategy to manage bandwidth [ph], which may also include policy management and deep packet inspection of other solutions? And if so, is that what is leading to the longer sales cycle?

Ken Denman

Yes, you’re spot on. I think there is a growing hesitancy or fear about buying a point solution that doesn’t scale. They are watching the change in rich media and rich context. They are watching the number of different formats, the number of different protocols, and how rapidly they are changing. And they are saying, well, this is a big issue. And then when they think about – when the market organization is saying, hey, you know, I need an ability to very dynamically give propositions and monetize and do inline stuff with my subscribers. So the challenge for the engineering team has become broader over the period of time we’ve been talking to them. And I couldn’t agree with you more.

You’re actually – you are describing our strategy. We thought this would happen all along. We felt that a platform would be the way that people would want to go. There is one other thing that I think is important. We have to be able to answer the question. How do we address a 4G architecture? Where do we live in a 4G architecture? What’s the model? How does this walk from where we are today to the future? And that’s linking the conversation a bit. I think we have a compelling story, but you have to tell that story. And that is part of the process of the – or part of the story about having a longer sales cycle.

Paul Treiber – RBC Capital Markets

And then when you look at your current product portfolio versus what the carriers are envisioning, do you see gaps within it and those are the areas that you are either looking to invest or to partner?

Ken Denman

We’ve been pretty focused in terms of our portfolio and thinking about kind of what can we do really well, how can we make sure we do enough to be relevant, and what else do we need to add. One other thing that we just added from the last quarter was obviously the Amplicity thought, which was an innovative thought that we came up with the exception of some operators, they agreed and we deployed that. And at this point, I can’t point to another thing that I think we need to go invest in, in order to deliver the value that we talked about. I think we are in very good position relative to our current product platform. There are things that we have to invest in as it regards to interoperability, and we’ve been doing that by the way. We’ve done – we've invested in inter-op testing with PCRF players, for instance, people like Bridgewater and Openet and Camiant and those folks.

We’ve invested to make sure that we interoperate with those kinds of players. That’s an area that we’ve spent some money on. We had to do a little bit of capital investment in the area of performance and capacity testing because some of our core platforms that we are launching our new products in are frankly different. There is a lot less Solaris, a lot more x86, Linux, et cetera. And we just needed to make sure that we could do (inaudible) testing and we could demonstrate scalability and survivability. So in the last three quarters, we’ve invested in some of those things. But it regards sort of net new technology or targets. I can’t really point at anything per se at the moment. We’re sort of heads down very focused on deployment, execution. For me, right now, this is really sort of – I'm maybe a little bit boring, but we are sort of narrowing the aperture around going and sort of showing the things that we have in our pipeline.

Paul Treiber – RBC Capital Markets

Okay. And lastly, have you seen any impact to the positive or negative around the recent net neutrality debate on US carriers plans or buying intentions?

Ken Denman

What I would say to that is we haven’t directly seen an impact other than just the conversations that we have with the people in the industry. Building up to it, there was a lot of concern, a lot of dialog and debate. What I would point to is that it’s a very different issue for wireline versus wireless. And I talked about some of these greedy protocols and the importance of adaptive streaming. That is probably the biggest single issue and fear in the industry as there may not be a recognition that wireless is different and fundamentally differently challenged than wireline. So therefore, things like the ability to support adapter streaming, things like our congestion-aware capability, if I can do a little commercial, are exactly pointed at that fear and that problem. The ability to allocate some amount of bandwidth and limit some amount of bandwidth to particular types of contents or protocols, et cetera, it’s going to be critical because these bandwidth-hungry protocols will just take it all. And that will only exacerbate the problems in the peak periods.

Paul Treiber – RBC Capital Markets

Okay. Thanks very much.

Ken Denman

Thank you. Okay. Ladies and gentlemen, I’d like to thank you for joining us today. We are optimistic about our business, and we believe this quarter and the next represent the knee in the adoption curve of our new products. Again, if you are planning to go to Mobile World Congress in Barcelona this year, we invite you to our Annual Investor Briefing. We will also be attending the Stifel Nicolaus Conference and the Wedbush Morgan Conference this quarter. So I look forward to and hope I would see you there. Good evening.

Operator

Ladies and gentlemen, this concludes Openwave’s earnings conference call. You may now disconnect. Thank you for your participation.

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 F2Q2011 Results - Earnings Call Transcript
This Transcript
All Transcripts