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iPass Inc. (NASDAQ:IPAS)

Q1 2011 Earnings Call

May 9, 2011 5:00 pm ET

Executives

Steven Gatoff – CFO

Evan Kaplan – President and CEO

Analysts

Frederick Ziegel – Blue Water Capital Markets

Justin Orlando – Dolphin Management

Kevin Hanrahan – KMH Capital Advisors

Bernie Sandford – Winslow, Evans & Crocker

Daniel Weissman – WeissCo

Operator

Good day and welcome to the iPass first quarter 2011 earnings conference call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to iPass Inc. Please go ahead.

Steven Gatoff

Thank you. Good afternoon, everyone. Thank you for joining us to discuss our financial and operating results for the first quarter of 2011. I’m Steven Gatoff, Chief Financial Officer of iPass, and I’m here today with Evan Kaplan, President and CEO.

Before I turn the call over to Evan, I’d like to bring the following to your attention. The date of this call is May 9, 2011.

Our discussion today contains forward-looking statements about events and circumstances that have not yet occurred. Statements regarding our projected financial results for the second quarter of 2011 and the full-year 2011, statements containing words such as, will, expect, anticipate, believe, plan, intend and should, and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including those set forth in today’s press release, our quarterly reports on Form 10-Q and our annual report on Form 10-K that are filed with the Securities and Exchange Commission. These reports are available on our website and at www.sec.gov. Please note that iPass undertakes no responsibility to update the information in this conference call.

On this call, we will also provide a talk about our results using non-GAAP financial measures. The press release and our website include text and tables that explain how we define and calculate the various non-GAAP metrics and a reconciliation of non-GAAP results to GAAP results.

The press release and Form 8-K announcing our financial results are available on our website at www.ipass.com. This earnings call is being recorded for replay. It is being webcast and will also be available on our website for one quarter until the next earnings call. Please note that this webcast is the property of iPass and any copyright or rebroadcast without the express prior written consent of iPass is prohibited.

With that, I’d like to turn the call over to Evan.

Evan Kaplan

Thanks, Steven. Good afternoon, everyone. Thanks for joining us. Let me jump right into it. On today’s call, I would like to accomplish three things. First, I want to give you an update on the progress we are making in our enterprise business with our Open Mobile Platform. Second, I want to lay out some of the specifics of the important announcement we made today regarding our new partnerships with Deutsche Telekom and the parent company T-Mobile. And third, I want to continue to outline for you the important role that Wi-Fi networks in general, and iPad specifically are poised to play in the clearly capacity constrained wireless world.

Let us start with our enterprise business. I’m pleased with the progress we’re making with our Open Mobile Platform. As a reminder, Open Mobile is our technology platform that includes our Cloud-based mobility management portal, our various client agents for Mac, Windows, iPhone, iPad, android and other devices. It also includes our worldwide transaction infrastructure that securely authenticates bills, and clears Wi-Fi transactions for enterprise customers and carrier partners.

With respect to our enterprise business, it is now clear that our enterprise customers are committing to the new platform. This past quarter we almost doubled the total number of Open Mobile customers under contract, and we now have more than 90 customers committed to the new platform, including the recent additions of Boeing, Honeywell, Dow Jones, Cable & Wireless, Baxter Healthcare, Fujitsu, and Newell Rubbermaid among others.

And while deployments are still slower than I would have liked, I’m happy to say that we now have more than 14,000 enterprise users paying us each month for our open mobile service. I believe we are poised for some significant large-scale deployment in the latter half of this year, particularly as our larger carrier partners finish their productization efforts, and bring their versions of Open Mobile to market over the next few quarters.

As a reminder, today we have in average of 610,000 paying users per month, and approximately 1.8 million unique users over the course of the year. The vast majority of those are on our Legacy IPC platform, and our top goal is to migrate those users over the course of the next few years.

From a broader perspective, the really good news is that while the sample size is still relatively small, those early Open Mobile customers are using the Open Mobile product more actively than the users of the Legacy IPC platform. That is the result we were targeting, and speaks to the early success of the value proposition and our goal to increase the effective revenue generated by each end-user. To be even more specific, with each new deployment of Open Mobile, we expected to see increased migration of existing users, we expected to add more unique users, and of course we expected to see more usage from all users. While it is still a small data set, we are pleased to be seeing exactly what we expected.

From a technology perspective, our product development teams are executing strongly evidenced by the quality new releases of our mobility manager portal, Mac, Windows and android clients this past quarter. In addition, we are poised for a whole new set of smart phone and pad product releases over the next two quarters. As we have said before, our strategy on the enterprise side of our business is to continue to expand the value of the platform with increased focus on our smart phones, tablets and pad offerings, as well as making continued improvements to our reporting and policy management capabilities.

In summary, on the enterprise side we are making good progress and our efforts to return the enterprise business to growth are bearing fruit. In that light I want to reaffirm what I shared with you on the last call, specifically I believe that we should finish out the year in the neighborhood of 150,000 monetized paying users on our new Open Mobile platform.

And now let us turn to our announcement today of our partnerships with Deutsche Telekom. This is a unique partnership, one that we have been working on for some time now. If you remember on our last call, when I began discussing the opportunity around the second wave of Wi-Fi, I indicated we were working on some important opportunities in these areas.

The partnership with Deutsche Telekom is the first, and it is based on the simple idea that carriers around the world will want to have access to a worldwide Wi-Fi network, much the way they have access to a worldwide cellular network for their subscribers. As Michael Wilkens from Deutsche Telekom said today, Wi-Fi has reemerged as an essential service for network access that all mobile operators will need to include in the mix.

Mobile operators need Wi-Fi for three reasons. First, they need to offload expensive data traffic if they are going to keep pace with the radical increasing demand for wireless bandwidth and provide their end-users a great user experience. This demand is driven by way more devices using way more interactive applications that demand connectivity, and Wi-Fi is simply the best most available option.

Second, they need to offer their international travelers a cost effective way to use their devices when they are traveling. With $20 a megabit Inter Standard Cellular Roaming fee is just way too scary for most travelers. Many just simply turn off their cell signal and use Wi-Fi to prevent bill shock when they return home.

And third, they need an effective way to monetize their own Wi-Fi network investments by letting other carrier subscribers use their growing Wi-Fi networks. Specifically, DT is introducing a product for carriers called Wi-Fi Mobilize. Great name. They bring to the table one of the most powerful wholesale sales capabilities in the telecom industry selling to 200 carriers around the world. They also have one of the world’s largest Wi-Fi network footprints, and one of the world’s largest cellular footprints.

IPass brings to the table our 320 plus relationships representing approximately 518,000 commercial hotspots globally, a carrier class transaction network and roaming hub to authenticate and clear transactions across all of these networks, and of course our Open Mobile platform and technology to create a seamless end user experience and management platform for the carriers.

To quote DT, the combination is a powerful one and is intended to enable a marketplace in the carrier world for the global exchange of Wi-Fi traffic and Inter Standard roaming. To summarize, we believe while still early this is a very exciting high-growth opportunity, and a clear way to further leverage our new Open Mobile platform, and our 10 years worth of experience building a carrier class, worldwide Wi-Fi roaming network.

Now as many of you know there has been a lot of activity in the Wi-Fi space lately. In light of the recent IPO, one of our network partners Boingo let me talk a little bit more about some of the broader trends in the market. Hopefully I can shine some light on some of the assets we have developed, and some of the investments we have made and are making here at iPass.

As I discussed on our previous earnings call, I think it is now clear that we are in the middle of a second wave of Wi-Fi, driven largely by the increasing demand for bandwidth and the increasing need for people to be connected. At iPass, we have traditionally focused all of our attention on the enterprise customers and their unique requirements. We did this for good reason. They are low churn, there are good payers, and most importantly in the early market, they were the most active users of Wi-Fi.

Further, they had a set of specific demands that are secure, high availability service was designed for. As the mobile market explodes and Wi-Fi professionalizes, we believe the timing is right to use our asset to serve the much broader mass market. We believe the way to that mass-market is through the mobile operators. We foresee that over time Wi-Fi will be an integrated service that is part of your monthly cellular bill.

Consequently, we are convinced that mobile operators will dominate as they increasingly view Wi-Fi as an important cost effective network service that simply must be part of their portfolio. We believe that iPass is uniquely positioned to help these mobile operators realize that opportunity. This announcement today from Deutsche Telekom is just the beginning. Look for more as we continue to build out strong relationships with the global mobile operators.

While I don’t want to get too far ahead of the story, iPass with a common set of well-developed assets is now able to serve both enterprises and carriers, and positioned to take advantage of what I view is extremely favorable macro trends in our business. As I have said before, I’m very bullish about our enterprise opportunity, and our enthusiasm for our enterprise business is very high. We are also optimistic about this emerging carrier mass-market Wi-Fi opportunity.

In summary, we are well positioned in front of two large complementary opportunities in the mobility space. We feel comfortable with the strategy we have adopted, the assets we have developed, and resources we have allocated, and most importantly the way our team has executed, and I’m confident we’re doing the right things to drive shareholder value.

Thanks for our time, and let me turn it back over to Steven for a drill down on the quarterly results. I look forward to taking your questions at the end of the call. Steven.

Steven Gatoff

Thanks Evan. I like to start with the key financial takeaways from the first quarter, talk a bit about what the framework and model for the new Wi-Fi off-load opportunity is evolving to look like, and a wrap up with some color on Q2 and our guidance.

Overall, we were pleased to see our financial results for Q1 come in ahead of expectations on both top line revenue and bottom-line guidance. As Evan talked a bit about earlier, we are pleased with the enterprise customer contract signing traction that we have had with our Open Mobile platform wins. The direct result of this is that while deployments take long, the important outcome is that we are continuing to make progress monetizing the new Open Mobile platform for paying users.

Platform revenue increased by $200,000 in Q1, or 4%. The modest but continued growth in platform revenue in Q1 is important. We believe it is a key driver of long-term value from this high margin, high growth revenue and it is something we are focused on continuing to deliver as a key component of our goal of continuing to drive value for our stockholders.

Underlying this, we feel we have had early successes in monetizing Open Mobile platform users in two key channels, through direct sales relationships with enterprise customers, for which they are signing Open Mobile agreements and committing to platform usage, and through our carrier OEM or white label channel, with their commitments on the Open Mobile platform.

The financial effect of the enterprise customer commitments to the new platform was seen in a relatively small but directionally and inaugurally important $125,000 in OM platform revenue in the first quarter. Looking forward, as these Fortune 1000 enterprises work through their various hardware and operating system refreshes and IT road maps, we would anticipate increasing platform revenue from enterprise Open Mobile customers.

On the carrier channel side of Open Mobile enterprise deployments, while we don’t anticipate seeing material growth in OM users from our signed carrier partners for several quarters, as their deployments are large scale and typically involve multi-quarter time frames as we have discussed. The financial impact of the carrier Open Mobile revenue commitments however, has also started to show modestly in the financials.

In Q1, we had a few hundred thousand dollars of incremental platform revenue from these carrier partners as their baseline Open Mobile contracts went into effect. As these carriers add users through subsequent quarters and drive usage, we of course would look for this too to drive platform revenue growth over time.

On the Mobile network side of enterprise mobility revenue, while total network revenue was down on an anticipated lower minimum network commitment and 3G network revenue in Q1, the results came in a bit better than we anticipated as Wi-Fi usage showed good signs in Europe in Q1.

Turning to expenses for a moment, as you know from our two year track record, we watch our expenses very closely and have a lot of vigor around engineering the company for efficiency and driving costs out of the business. As a result, we managed Q1 to a lower operating expense in the aggregate, and even more so on an apples-to-apples basis, as you will recall there was a one-time sales tax benefit in Q4 of about $2 million. And we accomplished this despite the decline in network revenue, despite our continued investment in our platform initiatives and new Wi-Fi off-load business.

Looking at the bottom line, adjusted EBITDA for Q1 came in at about $900,000 loss. The increase in the loss from Q4 was primarily driven by the lower revenue results for the quarter, and about $400,000 in FX losses in Q1. This was offset by the favorable OpEx results, as well as some favorable network access costs in the first quarter.

Closing out with a look at our balance sheet and financial position, we ended the quarter with more than $27 million in cash, and continue to have zero debt. Quarter-over-quarter, a large part of the cash decrease was from the favorable settlement with a state taxing authority, with a previously recognized sales tax liability, for which we paid $1.1 million in cash in Q1. Overall, working capital continues to be strong and well managed.

Turning to my second overall topic, we thought it would be helpful to provide some early insights and a framework for what the economic model for the new Wi-Fi off-load business is evolving to look like for iPass. From a financial standpoint, this whole business opportunity is a nice win for us, as it leverages our core competencies, our Open Mobile platform technology, and our global Wi-Fi authentication and settlements infrastructure.

As you heard us talk about and today’s announcement with Deutsche Telekom illustrates, we believe there are some very big infrastructure needs and market opportunities with our carrier partners, as they look to solve in country 3G off-load, international roaming and the required rating and settlements backbone of all this, we feel our assets are uniquely positioning us to drive new revenue streams, and growth opportunities for iPass.

To give you a sense of how the overall economics of these arrangements are evolving, the nature of these Wi-Fi offload and roaming services falls into three primary revenue streams. One, platform revenue, where carriers pay some monthly service fee to iPass for the functionality associated with the off-load and roaming offerings. Two, transaction or settlement revenue where the carriers would pay some rate per offloaded traffic, and three, mobile network usage revenue, where carriers would pay us in the scenario where our global Wi-Fi network is used as the offloaded network.

As we formalize our go to market offerings with the broader carrier market, we look forward to providing more color on these elements, and how and where they are anticipated to flow through the financials.

With that I would like to move to Q2 guidance. As both Evan and I have discussed, we feel good about where we are with the progress we’ve made on Open Mobile contract signing, the monetization of our Open Mobile platform, and the compelling opportunities in front of us with our global Wi-Fi authentication and settlement assets.

We continue to watch Open Mobile deployments, and are actively engaged to drive those forward to the best extent we can with our large enterprise customers and carrier partners. Given these dynamics, and the nature of the anticipated continued decline in 3G network and minimum commitment network revenue, for Q2 2011 we anticipate total revenue to be in the range of approximately $34 million to $36 million, and we anticipate adjusted EBITDA for Q1 to be a loss in the range of $3 million to $1.5 million.

I’d like to wrap up by circling back to the important themes that we’ve discussed over the past several months, and from a financial perspective, leave you with three brief but important messages. First, we continue to manage the company responsibly and with discipline, managing spending and the risks in the business, while balancing that with making the right investments.

Second, we feel good about our financial position with more than $27 million in cash and zero debt, and we believe this further strengthens our position, as we focused on creating asset value for our stockholders, and establishing a strong foundation for growth. And third, we believe we are poised to drive growth on the heels of successfully scaling our Open Mobile enterprise business, and the compelling opportunities that are already starting to take hold around our Wi-Fi assets and expertise.

We believe our enterprise customers, carrier partners, and end-users are recognizing the strong intrinsic value of the iPass assets, and they are beginning to act, whether on the form of increased enterprise deals or new carrier arrangements around Wi-Fi infrastructure opportunities, we believe this in turn is creating meaningful strategic value for iPass, and that that will translate to meaningful value for our stockholders.

With that, we appreciate your time and support, and we’ll be glad to open the call for any questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And we will go first to Frederick Ziegel from Blue Water Capital Markets.

Frederick Ziegel - Blue Water Capital Markets

Hi, guys.

Evan Kaplan

Hi, Fred.

Frederick Ziegel - Blue Water Capital Markets

Hey. Let me ask you two questions. First, on the heels of the Boingo IPO, could you just spend a minute or two comparing and contrasting, and I guess as part of that, given their consumer orientation, what – have you crystallized any further thoughts around the consumer market? And then the second question, maybe to Steven, is, where do you think the bottom may be in terms of 3G and minimum commitments, in terms of revenue declines?

Evan Kaplan

Okay. Good Fred, let me start. So to put the Boingo IPO in perspective, I think they did a very competent job of gaining IPO out there. I think our view of the Boingo business goes something like this, is for us they have been an important partner for quite some time. They have run a network, obviously a network of airports and other facilities around the world, primarily in the US.

And the generative part of their business is really around stuff that happens around that network. They look a lot like an access or traditional access provider. So they have relatively low customer acquisition cost, or customers they acquire on that network, and 55% of their traffic goes on that network. You know, so people who are just at airports. So it is a very targeted consumer offering, with a particularly high churn rate, and I think it is a pretty reasonable business. It has got some nice growth and doing well, but it is very different than what we are trying to do here.

And I want to be clear about that is when Boingo tries to sell a subscription or an aggregated network subscription there are really selling an aggregated network, right to the consumer. Our belief is that over time, that consumer will be the providence of the mobile operators. Again, as I said on the script I think that what will happen over time and probably fairly shortly is that you will see Wi-Fi added in many cases to the standard mobility bill. In which case the carriers have, as we have seen this with AT&T here in the US, the carriers had a really good event.

Our view on that is to use our infrastructure, which is very different, as an exchange so that they can very quickly get worldwide footprint. If they want to run traffic across our network, that is great, but if they want to create bilateral wholesale relationships for themselves, we are completely in support of that and in some ways we would prefer it. That leads to high margin authentication business for us.

And so in summary, the Boingo business is turning out to be pretty different. I will be blind to say that the consumer business doesn’t look interesting when you look at it from this perspective, but it is really the competitive advantage they bring to the table is owning all those assets, and we do not deploy any capital to buy networks or things like that, all of ours is virtualized.

So it ends up being very different businesses, and I think in the long term with different income statements and different models.

Frederick Ziegel - Blue Water Capital Markets

Okay.

Evan Kaplan

Steven, do you want to comment on the second half of the question. Fred did that answer your question?

Frederick Ziegel - Blue Water Capital Markets

Yes, thank you, Evan.

Steven Gatoff

So, Fred, on the 3G and min commit revenue network line items. So the headline is, there has been no changes here in so for what we are seeing versus what we expected, and how that kind of works into our view going forward. And the nature, probably the good news in the story is that it has a very long tail on it.

The nature of what is going on is that our customer contracts around these two items have anywhere from a 19 to 24 month life, and so with our larger customers we have worked through to right size our agreements, where you had large customers who were paying large min commits. So that was tied to that quid pro quo of hey, will go midterm, reduce your min commit in exchange for more favorable incremental pricing, a new lock up longer-term, or commitment to pilot and try Open Mobile.

And a lot of that has worked through. So now what we are watching is as contracts come up for renewal, customers that are paying much lower dollar min commits will start to renew and kind of get right-sized. And that is kind of what we want. It is probably not a horrible time to mention also that this relates directly to the whole network min commit topic. You and I have talked in the past about MOV as a metric and driving that forward, as folks have done in the past.

And that is really centered around trying to get large dollar network min commits from customers. And our view and our focus here is really on migrating customers to a platform for the increased value add and all of the good stuff it does around compliance, control and visibility. And so the focus and the emphasis is not on securing upfront, large dollar commits, it is on getting people to use the platform, and as Evan said in the prepared remarks, we are seeing better usage and better economics, and that is kind of what we play too.

So we will continue to see this kind of legacy resale of 3G and the legacy approach of trying to drive high min commits continue to work its way out probably over a long tail horizon.

Frederick Ziegel - Blue Water Capital Markets

Okay. One last quick question, is the arrangement with Deutsche Telekom and Wi-Fi mobilize, is that an exclusive deal?

Evan Kaplan

No, not exclusive. The way to think about it is Deutsche Telekom is effectively a very, very strong distribution partner. But this is not an exclusive relationship. We can sell and will sell to other carriers directly if that is where the preference is.

Frederick Ziegel - Blue Water Capital Markets

Okay. Thanks.

Operator

The next question comes from Justin Orlando from Dolphin Management.

Justin Orlando - Dolphin Management

Hi there, gentlemen.

Evan Kaplan

Hi, Justin.

Justin Orlando - Dolphin Management

Just two quick topics. First is a little bit around the guidance. Given the revenue and EBITDA this quarter, the guidance seems light for next. Are there some additional spending that we're going to be doing in Q2 that makes you say that, with the same revenue line, you'll have a different EBITDA loss?

Steven Gatoff

Good question Justin. It is actually a combination of two things. There was a little bit of that. So we do have some initiatives that we have kicked into gear around smart phones that we are spending to, a few hundred thousand dollars, not multiple millions, but a few hundred thousand to really move that along. We are seeing it come along nicely. There are also some one-time favorable items in Q1 around NAC and around OpEx.

So apples to apples Q1 was a good quarter that we are not anticipating that we have favorable outside in Q2, for example, sales tax collections of several hundred thousand dollars was favorable in Q1. If we get that again in Q2 that is great, but we’re not planning on it.

Justin Orlando - Dolphin Management

Okay. Fair enough. And then I'm trying to get a handle on this DT arrangement, and then how – what it implies for the business, just with DT, and then what it implies for the business with other potential carriers. If you can help me with that, I would appreciate that. Kind of piggybacking, I know, on Fred's question.

Evan Kaplan

Sure. So the way to look at that business as Steven described is there are maturities as we expected to. There are three sources of revenue. There is a platform fee every time we enable a mobile operator, and that is a monthly platform fee that comes in every month for running our infrastructure in support of their mobilization of Wi-Fi.

Two there is a transaction fee much like – the comparable business is to look at on the GSM world and the CDMA world are a mock or a synergy is global roaming exchanges, right. So there is a transaction fee either on a per megabyte basis, or other basis for every time we authenticate a user to a network. And so what we fully expect, and obviously that is a high margin business when you get it. What we fully expect on that side is that for many carriers we engage with, they will have partners they want to deal with directly, they will create bilateral roaming relationships.

And so they will negotiate their own economics for the traffic, and we will just collect an authentication fee. We think that is pretty valuable. And we actually encourage that. And then the third source of the revenue is to actually with the mobile operator, in the case of a long tail, as you get out to the end of our network as you get to suppliers you have 200, 300 commercial hotspots in Brazil, or in Russia or whatever who a carrier may want to have access to for their travelers, right.

They may not want to do those deals directly, and so in that case basically we will carry that traffic for them, and collect a normal fees around that, and potentially so we call that our long tail traffic. And so all three together come together with a revenue model, and what we liked in this situation is we will get a critical mass over time of carriers, who join basically this exchange, and use us. Because there is a bunch of benefits to them by doing that, one is, they can very quickly turn on Wi-Fi – turn on Wi-Fi fast. Two is they can get access to DT, or Deutsche Telekom’s footprint very quickly, one of the largest. And three is, it makes them part of a global roaming exchange, which makes it easier to monetize their own networks.

And so that is sort of the – I took this advantage Justin of your question to describe the business, how big the opportunity is. From this position here it seems very big. I would be hesitant to try to quantify it at this point. What it does represent is I think a very strategic and creative way to leverage the assets that we had when we got here, and the new development we have done around Open Mobile. So, I just think of it as a very wise thing to do in response to where we see the market going. Sorry for the long winded answer, but I wanted to get a lot on the table.

Justin Orlando - Dolphin Management

No, I think that helps. In essence, in English, you're kind of – sorry about that, I didn't mean to be obnoxious, at least not on this call – you are, basically, redoing the network just for Wi-Fi that you already have created. And you're not redoing it as much as you're signing people up to use it differently. And the more carriers you get, the more chances you'll have to hit one of these three bits of revenue on a network you already have.

Evan Kaplan

Yes, and I wouldn’t ever say it is redoing, right. The beauty of this intervention and why we continue to maintain the guidance we gave earlier is that it is using all of the assets we already have deployed today in service for a whole market that we never served before, which was the mast market. All of our attention was on the enterprise business. We are using the same assets to service. So there is really not any redo.

Where the new stuff comes in is the stuff we did on Open Mobile, the technology, the platform, the smart zone stuff which is critical to the carriers now.

Justin Orlando - Dolphin Management

Fair enough.

Evan Kaplan

Is that clear?

Justin Orlando - Dolphin Management

Bad vocabulary on my part, but I think I got it. Thank you, I appreciate it.

Evan Kaplan

Thanks.

Operator

We will move next to Kevin Hanrahan from KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

Good evening, gentlemen, thanks for having the call. I had a few questions. First of all, I guess you mentioned carrier wins this quarter. Would it be fair to say Cable & Wireless is a carrier in the Hong Kong area? Is that a carrier win for you?

Evan Kaplan

You know, what is interesting is Cable & Wireless we already have as a carrier partner.

Kevin Hanrahan - KMH Capital Advisors

Okay.

Evan Kaplan

But the Cable & Wireless we won this quarter was as an enterprise user, and they are quickly rolling out Open Mobile to their employees all around the world.

Kevin Hanrahan - KMH Capital Advisors

For themselves? Okay.

Evan Kaplan

Yes.

Kevin Hanrahan - KMH Capital Advisors

Because you mentioned carrier wins, I didn't know if some of these other computers were carriers. I'm not that familiar with Fujitsu services, that's more of an IT company, wouldn't you say?

Evan Kaplan

Actually, the division of Fujitsu is kind of a network operator and carrier partner of ours.

Kevin Hanrahan - KMH Capital Advisors

Okay. So that is more of a telco application. Okay. All right. Then, Steven, you talked about the $1.1 million in tax payments, so that basically came out of cash but did not flow through the cash flow statement or the P&L?

Steven Gatoff

That was in the P&L in Q4.

Kevin Hanrahan - KMH Capital Advisors

That's what I thought. It was already in before, but this time, it just came out of the cash balance on the balance sheet.

Steven Gatoff

That is right.

Kevin Hanrahan - KMH Capital Advisors

Okay. And, Evan, can you give us an update on Gemalto, if there's anything new there that you announced on the last call, or at the time of the last call?

Evan Kaplan

Yes, there is no – we continue to work closely with them, and we have some opportunities in the pipeline. But there is nothing I can discuss on the call. So actively engaged.

Kevin Hanrahan - KMH Capital Advisors

You're working with them. I mean, it seems like that would almost be – you talked about three possible revenue streams now going forward, with your new service you announced today, but the Gemalto could almost be like a separate payment the company could get, right?

Evan Kaplan

You know, we view it as part of the same ecosystem around the exchange. Gemalto if the provider of the sim card technology. And so – but they also are a Distribution partner for these Wi-Fi services that we are offering too. So they sort of play in both levels of the equation.

Kevin Hanrahan - KMH Capital Advisors

Okay. Can you talk about, last call you were talking a little bit about long-term, like a three to five-year plan, the company could increase revenues a lot. Would you still say the same things or are you more bullish, less bullish, or same amount of bullishness?

Evan Kaplan

I got cornered into the 2015 on the last call, I am same bullish.

Kevin Hanrahan - KMH Capital Advisors

Okay. The same, okay. That sounds good. Will the T-Mobile acquisition that's going on in America, would that affect the Deutsche announcement you made today, or could they still buy those services from your new partnership?

Evan Kaplan

I think they can still buy those services, and I think it is probably positive overall.

Kevin Hanrahan - KMH Capital Advisors

Well. Okay. Thanks very much.

Evan Kaplan

Thanks Kevin.

Operator

And we will move next to Bernie Sandford from Winslow, Evans & Crocker.

Bernie Sandford - Winslow, Evans & Crocker

Hey, guys. Thanks for taking the question.

Evan Kaplan

Hi, Bernie.

Bernie Sandford - Winslow, Evans & Crocker

Just a question on the mobile hotspot modems, that I see different companies selling and how they might play into what you're doing there.

Evan Kaplan

Yes, good question Bernie. So it is related. So the mobile hotspot modems essentially are using the 3G network. And so while there are very handy, they don’t offload any capacity. They use the 3G network. That is true for the modems that on the android phones and the iPhones now that basically use the 3G network, and so they are just another way to use 3G.

So what it does make is it makes it a lot easier for our connection managers on laptops and Macs to integrate with those smart phone modems. But I don’t think it changes anything from a capacity, traffic, usability point of view.

Bernie Sandford - Winslow, Evans & Crocker

Does that – correct me if I'm wrong – I thought I saw an article that actually might have said that those type of mobile modems actually increase the data that gets used.

Evan Kaplan

I think that is right. I think that is right. But I think every, Bernie, just to be more specific, I think the way the world is going is that every smart phone will be one of those modems. Today, if you take an android smart phone, or an iPhone, you can actually use it as a shared Wi-Fi hotspot.

So, essentially yes. So I think that captures the broader trend is we are using way more devices and we’re using way more traffic.

Bernie Sandford - Winslow, Evans & Crocker

And the bottom line is that's good for iPass.

Evan Kaplan

I think it is good for iPass.

Bernie Sandford - Winslow, Evans & Crocker

Okay. That' s great. Thank you too for the explanation of the three sources of revenue, and that was going to be one of my questions, but that helped. So, thank you.

Evan Kaplan

Thanks Bernie.

Operator

And we will go next to Daniel Weissman from WeissCo.

Daniel Weissman - WeissCo

Good afternoon, guys. How are you?

Evan Kaplan

Hi, Dan.

Steven Gatoff

Hi Dan.

Daniel Weissman - WeissCo

Excuse me, I missed some of the opening comments, so if you answered this already, just let me know.

Evan Kaplan

(inaudible)

Daniel Weissman - WeissCo

I can imagine. Just want to get an update just generally on timing with some of the carrier partnerships you've announced previously. So if you take something like – well I guess Deutsche Telekom or Telstra, where my understanding is they're paying for a lot of the overhead. You have iPass representatives that are in their offices helping them to tailor an offering for their subscribers. From the point that you guys sort of struck a deal, when would you expect sort of the end consumer or the end enterprises to see the finished offering, and then test the finished offering and then for us to start seeing that drop to the bottom line, just generally speaking.

Evan Kaplan

So, yes, so the benefits of dealing with carriers are the tremendous amount of scale, the difficulty in carriers is the time it takes. So we signed Deutsche Telekom in Q4 of ’10, and we expect them to be in market probably this summer is our expectation. Telstra is just starting in market, and we signed them before in Orange, I would expect in the latter half of this year.

So it takes a little bit time for them to create offerings, to productize, to do all of their productization around this.

Daniel Weissman - WeissCo

I see. And then are you guys getting feedback, I mean is there a testing process that takes place with their customers, as they're crafting the product, or is it just sort of…?

Evan Kaplan

Yes, there is definitely an acceptance process and a testing process that we’re doing with them and with their customers. So we don’t just go away. We are pretty actively engaged all along. And I’m glad you brought it up Dan because the 15,000 users that we currently have monetized, almost none of them are the carriers yet. So that is a little bit why we’re optimistic about the third and fourth quarters this year.

Daniel Weissman - WeissCo

Got you, great. And heading back to the 15,000 number, from I guess what you call your legacy enterprises or whatever, your legacy customers, you guys have historically discussed things like the Windows 7 migration, and just some key features that we're missing, depending on the type of enterprise. Can you just tell us, or give us a sort of an update as to where you see Win7 going, and just how those legacy relationships, they seem to be sort of the low-hanging fruit, if you will, and love to see you guys monetize those.

Evan Kaplan

Yes, I think that is right. So, on the backs of this latest release 141, we are feeling at least on the laptop side of the equation, we are feeling pretty flush with capability. As with every customer, there are things you can add and little things that would accelerate. I think at this point in the game, we’re largely tied for better or worse to the customer adoption of Win7 hardware refresh cycles, it feels to me that they take a long time. They are taking longer than I would have expected.

So having said that once they we programmed in, we’re starting to see this with a few customers. They are just rolling out every quarter. Exxon being one of those. We’re just seeing more and more rollouts all the time, and so once you get going on those things, they just kind of have their own life. But getting going on them seems to take time.

Daniel Weissman - WeissCo

All right. Well, congrats on the Wi-Fi announcement and keep up the good work, guys. Thanks.

Evan Kaplan

Thanks, Dan.

Operator

It appears there are no further questions at this time. That does conclude today’s presentation. Thank you for your participation.

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