iPass Inc. (NASDAQ:IPAS)
Q4 2015 Results Earnings Conference Call
February 17, 2016 05:00 PM ET
Kirsten Chapman - IR, LHA
Gary Griffiths - President and CEO
Patricia Hume - Chief Commercial Officer
Darin Vickery - Vice President and CFO
Marc Silk - Silk Investment Advisors
Kevin Hanrahan - KMH Capital
Jim McIlree - Chardan Capital
Mike Rindos - Aegis Capital
Fred Ziegel - Topeka Capital Markets
Good day, and welcome to the iPass Year-end 2015 Financial Results Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Kirsten Chapman. Please go ahead.
Thank you, Leanne. Good afternoon, everyone and welcome to iPass’ fourth quarter and year-end 2015 earnings call. This is Kirsten Chapman from LHA, iPass’ Investor Relations firm. I am here today with Gary Griffiths, President and CEO of iPass; Patricia Hume, Chief Commercial Officer; and Darin Vickery, Vice President and CFO.
We have distributed our Q4 earnings release over the Wire services and posted it on our website at investor.ipass.com. We would like to highlight that we have also posted our Q4 earnings presentation on the site, along with an updated company presentation. This call is also being broadcast at investor.ipass.com, and a replay will be available on our website until the next earnings call. Please note this webcast is the property of iPass and any copying or rebroadcasting without expressed prior written consent of iPass is prohibited.
Before we get started, we want to emphasize that some of the information and statements you will hear during our discussions today will include forward-looking statements, including, without limitation, those regarding our projected performance of the business, financial outlook, and revenue and profitability targets. These statements generally may be identified by the use of words expect, intend, believe, anticipate, and other similar words denoting future events or results. These statements involve risks and uncertainties that could cause actual results to differ materially. These forward-looking statements reflect our opinion only as of the date of this presentation, and undertake no obligation to revise or publicly release the results or make any revisions to these forward-looking statements in light of new any information or future events.
Please refer to our earnings release posted on our website and to our SEC filings, including under the caption Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 13, 2015, and in our Form 10-Q filed in the future for a detailed description of the risk factors that may affect our results. In addition, investors and others should note that iPass announces material information and material financial information to its investors, using its Investor Relations website, SEC filings, press releases, public conference calls, and webcasts. iPass uses social media to communicate with customers and the public about iPass, its products, services and other material matters relating to its business and markets.
It is possible the information iPass posts on social media could be deemed free and material information. Therefore, iPass encourages investors, the media and others interested parties in iPass to review the information it posts on U.S. social media channels, including the iPass Twitter Feeds, the iPass LinkedIn Feeds, the iPass Facebook Page and the iPass blogs and the iPass Instagram account. These social media channels may be updated from time to time.
On this call, we will provide non-GAAP financial measures. Our GAAP results and a reconciliation of our non-GAAP to GAAP measures can be found in our earnings press release and posted to our website at investor.ipass.com.
Before I turn the call to Gary, I would like to note that management intends to present at the Sidoti 2016 Emerging Growth Convention in March. If you would like a meeting or a call at management, please contact our IR team at LHA.
It’s now my pleasure to turn the call over to Gary.
Thank you, Kirsten, and thanks to all of you for joining our earnings call today. As Kirsten noted, Darin Vickery, our CFO will follow with a financial review. We will then open the call for questions with Patricia Hume, our Chief Commercial Officer, Darin and me.
4Q marks my third full quarter at iPass and only the second for our new leadership team. In this short time, our new team conceived and delivered on a promise of Wi-Fi that is UNLIMITED, EVERYWHERE and INVISIBLE. This includes the introduction of a new go-to-market plan, broader distribution, and enhanced technology setting the stage for 2016. In fact, we believe 2016 will see our first year-over-year revenue growth since 2007. Moreover, we expect to be adjusted EBITDA profitable in 2016, which we believe would be the first time in the Company’s history.
There are five key takeaways for the call today.
First, we very recently entered into an agreement with an important OEM for a material and significant partnership. While I am not able to name the company today, they will be announcing our deal in the very near future.
Second, we have closed two important deals with large companies that will be including iPass as part of their loyalty rewards program. Both of these partnerships are outside the U.S. and these companies intend to announce to their customers shortly. Also, we added a total of 18 new unlimited contracts including new accounts and continued conversions of our existing base.
Third, iPass SmartConnect, which we announced at our last earnings call, is now available on Android and Apple devices and will be ready for Windows platform shortly. Recall that one of the important aspects of SmartConnect is the discovery, categorization and creation of Wi-Fi hotspots globally. We are collecting data now, lots of it, and I’ll be discussing the implications of this in a few minutes.
Fourth, as you may read in our press release today, we are initiating a reduction in force and of lowering annual operating expenses by an additional $4 million. Combined with the actions we took last year, our quarterly OpEx is now about 40% less than similar periods in 2014. This puts us at around 155 employees, about a 100 less than a year ago. I am comfortable that this is about the right step for a company of our size and complexities to sustain growth and profitability.
And finally, after having had three quarters to gain a feel for the business, I am comfortable now with having enough visibility to share our view of the year ahead.
Darin will be delivering our annual guidance in a few minutes, which is something that Company has not done for a very long time, if ever. We are excited to forecast a return to growth combined with profitability and cash generation.
So, let’s talk about some of the highlights for the quarter.
As I mentioned, we have entered into a significant agreement with an important partner. This is a deal we’ve been working on for several months, one that will continue to fulfill our promise of iPass EVERYWHERE. In addition to having the largest global Wi-Fi network, it is also important to have iPass embedded as a fundamental feature on any and all devices that are designed to be connected to the internet. While I wish I could tell you more about this relationship today, our partner asked that we wait because they will be announcing the specifics very soon. And note that since this is considered an unannounced and financially material event, it did impact our ability to execute the stock buyback we announced last November, Darin will elaborate in his remarks.
And staying with the EVERYWHERE theme, I mentioned that we also closed two significant partnerships in the quarter that will include iPass as a benefit in member rewards or loyalty programs. Again, I am not at liberty to mention the details today, as announcements like these are far better suited to the companies that are offering these benefits to their customers.
In addition to loyalty deals, we continued progress with UNLIMITED, closing 18 new deals in the quarter including a significant renewal from a men’s luxury apparel producer, a significant expansion with a major transportation corporation, and a new deal with a global financial institution. All of these deals are very important in our goal to be ubiquitous, to connect our customers wherever they are easily on any device they choose.
As we expand on network and increase the number of devices on which it is available, we believe it is possible that iPass could be embedded on 1 billion devices by the end of next year. Now, this may seem to be an enormous stretch from the 5 million devices on which we are embedded today, but when you consider our existing partnerships with global industry leaders like Microsoft, HP and others, added to the new deals I’ve discussed today, the prospect of having iPass available on 1 billion devices in the couple of years is not just an aspirational battle cry. It marks the logical extension of our continued journey down the path of UNLIMITED, EVERYWHERE and INVISIBLE.
In fact, as we engage with our network supply partners for new contracts, it is evident that we need network costs that are significantly less than what the Company had previously negotiated. And in an order to secure aggressively lower costs, we need to increase the volume of traffic on our network and that is what we’re doing.
As you know, since April 21st of last year, we’ve been offering unlimited Wi-Fi to our customers. We are now securing deals with our network supply partners that effectively give us unlimited network capacity. And our goal is to expand on as many devices as possible to consume this capacity.
Moving on to technology, recall that on November 4th, we announced iPass SmartConnect, our technology platform that delivers four important features, which are: One, last-mile VPN security; two, capabilities that will allow managing connections on Wi-Fi but cellular and others as well; three, a software developers kit or SDK that will allow a wide range of partners to embed the benefits of iPass in their own devices, platforms, applications or operating systems; and fourth, I mentioned that SmartConnect includes the ability to detect, categorize and carry hotspots everywhere across the globe. We made SmartConnect available in various app stores a few days before the holiday season last December. Our customers immediately started downloading our new app with SmartConnect and we started collecting data, lots of data. In fact, in the first few weeks, we’d already collected tens of millions of records that have identified so far nearly 40 million unique hotspots. iPass will be the first in the world to have an accurate map of global Wi-Fi hotspots, and not simply the geo location of these hotspots, which by the way does not exist today but also showing relative signal strength and eventually global Wi-Fi data traffic patterns.
Now, as you would expect, many of these hotspots are part of our global network, but many are not. So, seeing where the ones are and using crowd-sourcing to monitor the relative traffic, we can determine what additional networks we need to add to make sure that iPass is always where our customers need to be. But, when iPass SmartConnect detects a new hotspot that is free, that is available without password information; our technology allows these hotspots to be automatically added to our footprint. So, as our user base grows, our network will grow proportionally. In addition, SmartConnect will also help us manage our network cost by routing traffic to the lowest cost hotspot when multiple choices are available.
We know there is a lot of value associated relative to data we are collecting but candidly we haven’t begun to understand and plumb the depth of this yet. But in a world that needs to be connected everywhere and all the time, in a world in which we believe iPass could be embedded on 1 billion devices, we suspect we were sitting on a gold mine with iPass SmartConnect. And by the way, we patented this technology. Intellectual property we believe will be pivotal as there’s increasingly broad interest in global data traffic and performance patterns.
Now, I won’t go over the financials, as Darin will be reviewing the numbers in detail, but I did want to mention our continued assessment of and adjustment to our operating expenses. Recall that last year our reduction in force was aimed at senior management. We are a small company but we have far too many executives and senior managers. And this made iPass sluggish and non-responsive. There were simply too many people involved in too many processes and decisions. So, by drastically reducing that number, we not only reduced operating expenses, we also made our business more agile and responsive, something that has been confirmed repeatedly by our customers and partners.
Now, our new leadership team has had a couple of quarters to assess their own operations. For example, instead of running four data centers around the world, we are shrinking that to one. The servers needed to run our new business has dropped from over 300 to less than 50, thanks to our implementation of virtualization. This of course has lowered operating expenses but also dramatically reduced our capital expenses. Today, we have announced further steps to streamline our business. With this new structure, our breakeven revenue run rate will be well less than $70 million; also the new quarterly OpEx will be about $9 million compared to over $14 million in 2014. We believe that this new expense structure combined with the Company’s outlook for growth, results in profitability this year.
Now with that, I’ll turn it over to Darin for a deep dive in the numbers. Darin?
In addition to our financial performance for the quarter and year, I also want to spend some time discussing our revised metrics as we enter 2016.
Our total revenue for the fourth quarter of 2015 was $15.4 million up from $15 million in the third quarter and compared to $17.2 million in the fourth quarter of last year. For full year 2015, revenue was $62.6 million compared to $69.8 million in 2014, a 10% decline and unfortunately marking our 8th straight year of total revenue decline. The major driver of the year-over-year revenue decline was an $8.3 million churn of our legacy revenue.
For Enterprise revenue, formerly referred to as open mobile enterprise or OME, increased $200,000 over the third quarter, as growth in revenue from UNLIMITED customers of $300,000 outpaced net churn and our other pricing plan customers of $100,000. Note that we have dropped the acronyms OME and OMX when talking about our two ongoing strategic revenue streams. We sell connectivity to enterprises in a classic B2B go to market strategy and to strategic partners in our B2B to C type offering.
Year-to-date UNLIMITED, which we first announced in the second quarter, generated $700,000 of Enterprise revenue whereas net churn and other pricing plans reduced revenue by $2.7 million. As discussed on prior calls, the biggest driver of our net churn was renegotiated deals with our large carrier partners for committed platform fees that drove $4.4 million decline year-over-year. These large commitments have all been effectively renegotiated and don’t pose a significant write-down risk for 2016.
Strategic Partnership revenue increased $300,000 over the third quarter, as devices with iPass embedded continue to ship at a strong rate and we recognized some previously deferred revenue as our commitment to deliver against future obligations expired. Year-over-year Strategic Partner revenue increased $3.1 million. Net-net, deferred revenue increased slightly in the fourth quarter by $100,000 and by $2 million over December 31st of the prior year. As a reminder, our Strategic Partnership revenue previously referred to as OMX is derived from business development deals with the likes of OEMs, premium brand providers like credit card companies, telecommunication carries and software products and service providers. Significant customers contributing to this revenue stream include Hewlett-Packard, Microsoft, Huawei, and AT&T to name a few.
Legacy revenue defined as 3G, dial and usage on our old iPC platform declined by $100,000 in the fourth quarter, exiting 2015 at an annualized run rate of $2.8 million. We expect this legacy revenue to continue to churn in 2016, probably at a rate of approximately 50% year-over-year.
On our other key margin metrics for the fourth quarter, given our Legacy business now accounts for less than 5% of total revenue exiting the fourth quarter, we will no longer provide user metrics for our OM or Open Mobile business, rather we will combine all iPass users into our user account metrics. For all prior periods reported, we have included total users in our accounts.
For the fourth quarter, we had 79,000 average monthly enterprise users and 21,000 average monthly strategic partner users of our Wi-Fi network, numbers that were essentially flat in total with our Wi-Fi network users in the same quarter and in the prior year.
Average monthly active platform users declined 1% from the third quarter and 4% from the same quarter in 2014. Embedded devices, representing potential iPass users that have essentially licensed the platform gained access to iPass services, have grown significantly in 2015 from 2 million at December 31, 2014 to 5.1 million as of year-end; our OEM distribution channel has been the largest driver of this increase.
This quarter, we are changing how we report margins. Historically, we presented our networks margin that was meaningful when we were buying and selling Wi-Fi and other connectivity on a variable per usage basis. With our focus on UNLIMITED and strategic partnership deals, we are transitioning our Wi-Fi acquisition strategy to mirror our go to market strategies, buying excess or unlimited capacity from key suppliers and beginning to curate hotspots organically through our iPass SmartConnect technology and key supplier relationships.
Our new gross margin metric is very simple. We take total revenue less network access cost, less our network operations expenses divided by total revenue to calculate gross margin. In addition to making this metric easier to calculate directly from the face of our financial statements, it also becomes a better metric to track our progress against optimizing our Wi-Fi acquisition goals including the cost of maintaining and supporting our network infrastructure.
Year-over-year, our gross margin was relatively flat at 38.8%, as benefits from reducing our network operations expense and efforts to lower Wi-Fi buying rates were offset by lower platform revenues. Since platform revenues were essentially variable cost free, productions in platform revenue directly impact margins adversely. We were successful in reducing our megabyte effective buying rates for Wi-Fi by approximately 30% full year-over-year 2015 versus 2014.
And just as a point of reference on our old network margins, that metric improved from 40.9% in 2014 to 42.4% in 2015. Annual contract value of ACV declined from 1.6 million in Q3 to 700,000 in Q4. We define ACV as the committed annual revenue of any new logo or significant upsell to existing customers that were signed or started that the upsell billing in the reported quarter.
Now, we had commented last quarter we believe ACV would again double in Q4; we did not close a planned significant OEM deal until early 2016, as Gary mentioned earlier. Ultimately that OEM deal agreement was reached without a related commitment and will result in no reported ACV in the current year. Absent that one deal, our ACV for Q4 was actually slightly better than we had forecast.
Total ACV for 2015 was 3.9 million, more than 50% higher than 2014 with twice as many new deals signed this year versus last. From a booking to billing perspective, we recognized benefit to revenue in 2015 of $700,000 on Enterprise and $700,000 on Strategic Partnerships, as a result of 2015 reported ACV.
Moving on to our OpEx, year-over-year we drove $14.2 million or 24% from operating expenses, excluding the cost of restructuring primarily from active cost cutting initiatives. Total operating expenses excluding restructuring cost was $9.9 million in the fourth quarter, down from $10.2 million in the third quarter and $14.0 million in the fourth quarter of last year. We exited the fourth quarter of 2015 with a global headcount of 205, down from 250 at last year-end.
Going into the 2016 planning cycle, we again revisited our global headcount, in connection with our revised go-to-market strategy and product roadmap, intense on preserving cash and reducing our breakeven point.
Today, we announced the reduction in force that we’ll reduce an additional 60 employees worldwide or approximately 30% of our workforce. We expect a charge of approximately $1 million in the first quarter and an annualized net savings of approximately $4 million as a result of this plan. As a result of the reduction in force, we believe our adjusted EBITDA breakeven level is around $67 million to $68 million of annualized revenue, and we are positioned to generate positive adjusted EBITDA in the back half of 2016 and overall adjusted EBITDA breakeven for the year. Speaking of adjusted EBITDA, loss for the fourth quarter improved to $1.4 million down from $1.6 million for the third quarter and a sequential improvement every quarter this year. Year-over-year, adjusted EBITDA loss improved $6.4 million from $13.7 million in 2014 to $7.3 million this year.
Our cash balance at December 31, 2015 was $20.3 million, a decrease of $3.9 million from the prior quarter. The primarily uses of the cash for the quarter included final payments on our May 15th, restructuring; annual prepayments of business insurance and data base maintenance and operating cash flow.
Last November, we announced the share buyback program of up to $3 million through the end of 2016. Due to blackout rules, we were unable to initiate the buybacks in the fourth quarter but expect to start repurchasing our shares this month. We expect primary uses of cash in the first quarter will be operating cash flow, payments on the reduction in force announced today and initiation of the share buyback, all of which should result in approximately $3 million of cash burn for the first quarter.
On our guidance for 2016, with this call, we will be initiating annual guidance, a first for iPass. For Q1 ‘16, we will provide quarterly guidance in addition to our overall guidance for the fiscal year but we will no longer provide quarterly guidance moving forward. We expect Q1 ‘16 total revenue in the range of $14.7 million to $15.5 million and adjusted EBITDA for the quarter in a range of a loss of $2.5 million to a loss of $1.5 million. As a remainder, the first quarter is historically our highest operating expense quarter, the payroll tax ceiling starting over, annual allotted fees ramping up and incentive compensation plans getting reset.
For full year 2016, we expect revenue in the range of $63 million to $68 million and adjusted EBITDA in the range of $1 million loss to $1 million profit. As necessary, we will update our annual guidance quarterly going forward. While there is risk in any annual plan, we believe the strategy that new management team has made over the last three quarters combined with continued fiscal responsibility will allow us to make 2016 a year of true financial transformation for iPass.
With that, back over to you, Gary.
Thanks Darin. So before opening the line for questions, let me just take a moment to reflect on 2015. While not without our challenges, I am very pleased with the progress we have made over the past three quarters and then our position as we enter 2016.
We’re a new company in virtual all respects from our leadership to our go-to-market plans, our network, our partnerships, our products and our technology. Very importantly, we are now nimble and lean. iPass is truly a startup again. We have a vision for the future and a leadership with the experience to deliver this vision. In this world approaching ubiquitous connectivity, iPass will be a leader in the exciting changes ahead. 2015 was a year of learning quickly and initiating change at a very rapid pace. And with 2015 behind us, we can now turn our energy to focus execution.
In closing, I wanted to thank our shareholders, the majority of whom I have had the pleasure of meeting in the past year. I appreciate your trust and support. We will continue doing everything we can to return to you the value you deserve.
With that I’ll turn over to the operator for questions.
[Operator Instruction] We’ll take our first question from Marc Silk with Silk Investment Advisors.
So, in regards to the restructuring, I am a big fan of reducing overhead. Are you confident these cuts are not too deep? And is this restructuring an ongoing process or is this more of a factor as in 2015 you were able to cut upper and middle management costs and now under the eyes of the new management team, you are able to see how the Company can presently be run more efficiently? Any color you can share with us would be helpful.
Thanks, Marc and thanks for joining the call today. Yes, it’s pretty much as you’ve outlined it. I would say as a preface to this Marc that in my experience, many, many more companies suffer from having too much staff and than being understaffed. When you do make cuts, it’s often very helpful in identifying where the bottlenecks are in and where you really need to improve the processes. And I don’t think that’s need to be an exception for us. But as you pointed out, last year the restructuring was focused at senior and middle level management. We took out at least one layer; some places more than a layer of management. And that certainly allowed us to see more clearly what the operations look like and where we need to be as well as -- as I mentioned, making us much more nimble and decisive. So now with that behind us and with the new team on board, the new team has had a couple of quarters to see how their own organizations worked and were able to find ways to make the operations more efficient while of course getting us much closer profitability, which we expect we will achieve on an adjusted EBITDA basis this year.
Okay, great. So, let’s say hypothetically, if Hewlett-Packard expands their relationship with iPass beyond Asia, how many more devices would this cover?
Well, that is the hypothetical for sure. I’d say that the first part -- if we were to expand the relationship with HP, the first element of that would be continuation of the business we’re doing with them in Asia Pacific, which of course is very important. Of course that would open up the rest of the world, which is certainly a lot larger than the Asia Pacific operations. So, we would certainly expect to see upside in that. But again there’s nothing we’re announcing about that today.
Okay, two part question. To manage the risk of unlimited usage, there’s still an element of variable cost, how can I pass manage these risks and with network cost going down, what does that mean to your pricing model?
Hey, Marc. It’s Pat. How are you?
Good, Pat. How are you?
Good, thanks. Gary, okay if I take that one?
Yes, please Patricia.
Great. So, Marc, as you heard on the call today, our business is all about trying to drive volume. And then of course that volume allows us to have more usage on our footprint. We look at ourselves currently as the largest global provider of Wi-Fi. And in this role, we have an opportunity and I’d almost say an obligation to drive the price for Wi-Fi to a penny, a meg or less, right? So, this opportunity then helped us drive volume usage and really allows us to help move people into a Wi-Fi first world, right? We’ve been working over the last nine months certainly with a tremendous amount of focus in last six months with our top suppliers to negotiate new contracts, which align to our go-to market model as well as our network acquisition costs. So, we’re trying to align, as Darin said.
So by example, one of our largest suppliers went in and started the discussion in I would say the fall of last year and the result of that is we’ve been able to increase our capacity to 10X of what we’ve had in prior contracts, which is I’d say virtually unlimited. We’ve been able to lower our effective per megabyte cost by coincidental 10X. And all this was accomplished with only a 30% increase in our cost. Now, you might say well, how come? And I’m going to say when you sit down, you talk to the suppliers, they understand economies of scale. They say look, if you can drive more volumes through our invested infrastructure, through the capital investment we’ve already made, we’re certainly in a position to drive the lower per megabyte cost. So, this results in a win-win-win. We achieve the lower cost per megabyte, the supplier drives the needed economies of scale and in turn more revenues from us, and our customers and our prospects are then have the ability to achieve global Wi-Fi at commodity prices through iPass.
So, we’re executing on that as Darin and Gary both said, and I’m giving you one of many examples of new contracts that are being negotiated or have successfully been negotiated.
And Pat, if I could just add a quick statistic to that, so in our press release today we noted what our percentage of total network Wi-Fi acquisition is of buying unlimited or excess capacity versus not. And in 2014, we were buying 18% of our Wi-Fi with unlimited or excess capacity. We exited 2015 at 35% for the year and exited at a run rate of roughly about 45% of the Wi-Fi we buy at unlimited or excess capacity. So, in stair step with how we’re moving to sell on an unlimited basis, we’re clearly managing our cost along those same lines.
Understanding that your immediate goal is to sign up as many customers as possible, but looking at the offerings of SmartConnect, is management thinking that this has a potential to be a separate business in itself, generating additional revenue streams in security or tracking access points, or in other terms, could SmartConnect be marketed as or sold as a separate product?
I am glad you asked that question Marc because I think maybe SmartConnect has been somewhat confusing. SmartConnect is not a product per se; SmartConnect is our platform upon which our application is based. And when we say that we’ve done a software development kit, we’re extending the benefits and the capabilities of SmartConnect to any broad range of customers that would be interested. Now that said, there are certainly elements of SmartConnect that may in the future become productized. And I would think specifically of the data that we’re collecting that I mentioned. And again, I would say that we’re early in this journey of data where we’re quite frankly delighted at the amount of data that we’re collecting and the way that it’s working, as we had hoped it to work. But we really haven’t been able to assess yet all the different capabilities that we have with that data. Although that I will say virtually every time we show a new customer, a new prospect, a new partner what we’re doing with this data, they have 10 questions about could we do this, could you do this, could we get this kind of data. So, there is clearly a lot of value in the data that we’re collecting and certainly a lot more data as we look ahead to what we could be doing once continue down the path of getting it made available to our customers, getting the SDK out where people are starting to use it and just collecting a lot more of the data that we’re getting. So it’s pretty exciting.
Maybe I missed, maybe it was more of a service, but I know that it just came out in November, so it should be interesting going forward. So next, with all your new offerings and strategy, can you share how you are dealing with churn in regards to your inherited client base and possibly share a few anecdotes in regards to some customer interactions?
So, churn is top of mind. I think the good news is, if you look at the numbers, churn has been decreasing over the last four quarters, so we’re headed in the right direction, critically important for us as company.
And this year, when I look about at what we’re up to, I am pretty excited about our ability to manage and mitigate our churn in 2016. So, you might ask, so, Pat, why are you confident about that. There is four things that I want to highlight. First of all, it’s hard to upsell to customers or mitigate churn, if you can’t offer them something new and different. And so, when you take a look at what we’ve done under the auspices of invisible -- I have a new product offering, I’ve new features, I have new capability to sell into the base that SmartConnect, that’s number one. It really is easy to go back and do your install base when you have incremental value because you have to value sale, number one.
Number two, the whole new change to our price methodology from a pay as you go, usage based unlimited gave us another opportunity to be able to go back into our install base. And anecdotally, we were really able to save a nice number of customers last year who had terminated. I mean we actually got termination letters and we went back and said hey, hold on a minute we’ve got something new to offer you and it’s unlimited. And we actually were able to bring terminated customers back to iPass. So, we have some proof points that the new price methodology is another way to go back and do the install base and allow us to save a customer but also increase the amount of business that customer does with us.
Number three, we’ve raised the bar on our CSMs that’s our customer success managers. These are the guys and gals that are responsible for our install base. But our sales kick off this year, the team worked really hard to pull together a new sales methodology for our CSMs. Because I think everybody knows that if you’re running the SaaS business, your CSMs need to be hunters, not armors. Any good SaaS company knows they got to hire hunters; they got to be enterprise hunters. So, now we have a team of hunters managing our install base.
And lastly with all due respect to sales people, I’m the one, commission strategies are motivators or de-motivators. So, we adjusted our commission plans this year to be consistent with motivating our CSMs to drive hard for a much lower churn rate and this includes aggressive approach to upselling our customers. So, as an example, we just saved a really big account, a really important customer who was actually considering termination. We went in and offered them unlimited. We did some real hunting; we did some real value selling. And not only did we save the account but we were actually able to increase the number of users and the monthly committed revenue. And the increase was at about 40% higher than what we had in the past.
So, we use these examples, and I have lots but due to the time and what not, those examples have been shared across the organization as best practices. So, takeaway, we are totally focused on our install base. Last week, our American sales kick off. Our head of Americas Christine Braelow made a comment to me, she said Pat, our install base is our treasure and we must treat them as such. So, you can expect that that’s the way we are all thinking. And we are all behind the mitigation of churn, delighting our customers and actually getting them to buy more of what we have because we believe we have a solid value proposition for them, going forward. So that’s kind of what we’re doing on the churn side.
I like that insight. So Gary, yesterday, I am sure you saw that Gogo and American Airlines, American Airlines basically is thinking to going to ViaSat because of their offerings might be better, yet I know Gogo has a chance to rectify that. Can you comment on that because I know Gogo is an important partner of iPass?
Yes Marc, Gogo is very good partner of ours. And we wish them nothing but the best. First of all, as you know, this is not a done deal; this is something that may happen. It also is not affecting -- even if it does happen, based on what we understand, it would affect about 200 aircrafts of the 900 aircrafts fleet. It would also of course -- if it happened, take a very long time, because the conversion of aircraft from terrestrial based Wi-Fi to satellite is not an easy feet. And that would happen over time. And quite frankly we -- again, I wish Gogo nothing but the best. But should that happen, I think we are well-positioned to pick up that same footprint with another partner. So, we are really not concerned with that. It’s certainly as we look at our financial forecasting for 2016, it really is not material.
Just two more and I’ll get back in queue. Last conference call, I asked you about how free Wi-Fi affects your business model, and I will probably bring this up in future calls. So, my question is how will future ubiquitous free Wi-Fi affect iPass?
Patricia alluded to the fact that we see ourselves as an agent of change. We see iPass as a force in driving Wi-Fi cost very close to being free rather than denying it or resisting it. And that’s really what SmartConnect is all about is. It’s all about the platform; it’s all about adding services to connectivity, not necessarily Wi-Fi connectivity but the management of connections between devices, maybe from Wi-Fi to cellular team, satellite as I talked about before. It’s about providing security, it’s about the SDK to allow others to take advantage of these features, and it’s certainly about the data and the data that we collect.
Now, we don’t think and I agree with you that at some point in the future, Wi-Fi is going to be -- or let’s just say connectivity is going to be free. So, you don’t want to be in a business that is building the infrastructure because the infrastructure of connectivity is just going to have a decreasing return. We like our positioning and you’ve heard me say it before. We like to be like Uber where we don’t own a single hotspot but we are the largest Wi-Fi network in the world. That is the service economy we want to be in. You also heard me say that as we look at our vision where we are going, it’s not about a couple million international business travelers, it’s about 1 billion devices; it’s about having iPass embedded on any device that needs to be connected. So that is the vision. That’s a very different -- fundamentally different business model, but it’s a transformation that is taking place as we speak. And as we look forward to this year, as Darin mentioned, we are already growing the number of devices pretty significantly and we expect that growth to accelerate.
Which is a good segue, because my last question which is the most important, your 1 billion-device in two years; that’s quite a goal. And even if you do half of that, I can’t even fathom what the revenues could be. So can you give us a little more color on what makes you think that you can really show that type of growth because like I said, that could be a game changer?
Well, devices are already -- intelligent devices already outnumber human beings on the planet.
And so when we think of devices, they cover a wide range, everything Darin mentioned, everything from credit cards to of course PCs, smartphones, IoT devices, Amazon has a lot of devices that they’re making available today and probably an awful lot more that are in their queue. Everyone who is a mobile operator today, I’m sure would have some interest in offering all of their customers worldwide Wi-Fi, roaming at a very, very low price. Low prices on worldwide Wi-Fi roaming are actually a big advantage for us. They’re not a threat. And as I said, we are actually an agent to accelerate that change rather than resisting it.
We’ll go next to Kevin Hanrahan from KMH Capital.
Thanks for the annual guidance. I’ve been suggesting that for several years. So, nice to see it finally and you can refine that as the year goes on. That’s good.
We call this is the Kevin Hanrahan annual guidance.
Thank you. I appreciate that. Maybe it shows how long I’ve been around. My first question was about Google Project Fi which they talk about that and they talk a lot about Wi-Fi. And it seems as you just said global leader in Wi-Fi network, it seems like that would be a natural for iPass. So, can you talk about that a little bit and fill us in on that?
I would say this Kevin that when you have the largest global Wi-Fi footprint on the planet, anyone who is an MVNO, a mobile virtual network operator, and there’s about 1,200 of them, you almost can’t be an MVNO which Google is and not be looking at iPass and looking what iPass is doing. So, we certainly are aware of Google Fi. And we certainly are aware of getting to a 1 billion devices and I probably shouldn’t say more than that.
Well said, Gary.
You might be limited on what you can say. And I heard your answer to Marc’s first question as well you are limited on what you could say. As a follow-up on that, limited on what you can say, I wonder if you can give us any update about Microsoft; you announced some of the things about Microsoft last year. But I wonder if you can fill us in some more on what you are doing with Microsoft.
I can say this and I’m happy to let Darin and Patricia jump in, I can say that our relationship with Microsoft has never been stronger. We literally talk to Microsoft every day. We are very familiar with their plans. And I think it’s safe to safe to say that as we look in 2016, look forward, we’re fairly confident that we’re going to see that relationship continue to flourish.
Yes, I’d like to say that in the annual guidance we gave for revenue that there is a big uptick in there for Microsoft but at this point in time, we’re still in kind of a wait and see mode. So, to me that could be potential upside to the plan that we put forward as our annual guidance for this year.
Yes, it’s just difficult, I think Kevin is when we’re dancing with the bears like HP and Microsoft, it’s sometime difficult to be able to predict where their next dance step is going to be.
If I could, my feedback is, their working relationship, as Gary says on a daily basis and Jeff Mabe on my team is responsible for the relationship, there isn’t a day that doesn’t go by that Microsoft has enhanced -- extended their helping hand to us. And I’ve been doing alliances for a long time in my career and it’s just an extremely delightful relationship with Microsoft and more to come is all I can say today, but just delighted to work with them.
We’ll go next to Jim McIlree from Chardan Capital.
Can you talk a little bit about your expectations that are embedded in the guidance for user growth as well as the change in ARPU? And in that can you talk a little bit about what you think is going to grow faster the enterprise business or the partnership business?
Yes, let me try that one, Jim. In our plan, we’ve done both the bottoms up forecast and then we looked at the pipeline that Pat has as far as planned ACV for the year between our Enterprise sales and our Strategic Partnership deals. I’d love for a Strategic Partnership deal, we were just talking about Microsoft a second ago, to really take off because that could blow my plan out of the water. But from a conservative standpoint because we tend to be the tail being wagged by the dog in a lot of these large partnerships, there’s not a lot of our growth coming out of that in those forecast numbers for 2016. Probably about three quarters of our revenue upside is in Enterprise for the year and about a quarter of our revenue upside is in our Strategic Partnership and/or business development deals for the year. So that will translate into higher Wi-Fi network users; it will translate into significant numbers of subscriptions. And as that number becomes larger, we exited Q4 with Enterprise revenue under UNLIMITED being about 4% of our total revenue. As that number grows throughout the year probably to an expectation of between 15% and 25% exiting the year, you will start to see us report subscription numbers as opposed to some of those old platform user numbers. And so, I think that’s where you will see the growth in 2016.
Now beyond 2016, which we’re not giving any guidance on at this point, I’d like to see some of those 1 billion devices start to really impact our bottom line as well.
Let me just add at the risk of Darin kicking me out of the table. I mean the 1 billion device number is a very different kind of a business model. Because when you think about and this comes back to actually influencing the way this industry operates. If we had 1 billion devices and each one of those devices was paying us just $1 a year, we have $1 a year I am saying. We have more than enough capital to go out and buy all the network capacity that we could possibly need, making commitments to our suppliers.
So, we’re helping the industry. We’re making the providers of the network guarantees so that they can plan and they can grow and at the same time we’re making extremely affordable for both people and devices to be able to connect ubiquitously. So to Darin’s point, the older ways of looking at this business are rapidly changing, but we want to be the people who are changing it, not the ones who are standing around and watching it happen.
From an ARPU perspective, what Gary just said is that $1 ARPU at 100 million or 500 million or 1 billion devices not a bad business.
And it’s not like we’re strangers to that. I mean we’re in those kind of deals and we understand the economics behind them and we’re starting to build models around those numbers.
But in 2016, you’re not expecting that to happen. So, I am trying to concentrate instead on what you have built into your guidance. And it seems like what you’ve done is that you’ve assumed that the non-unlimited business, let’s call it the limited business is flattish and the unlimited business is the real growth. And I think what I am trying to get confirmed from you is that the unlimited ARPU is substantially lower than what I’ve just coined, the limited ARPU?
Not substantially lower, it’s probably 25% to 30% lower. So, it’s not half; it’s not 75% lower; it’s somewhere in that ballpark. Now, those deals have strange pricing, again depending on the breakage model that’s created. So somebody who signs up for 25 users, if somebody -- it’s completely different characteristic set than a customer who signs up for 10,000 users or signs up 100,000 users.
And to that point, this is where ARPU -- there’ll always be an ARPU, it’s just a matter of what it’s going to be. But to you point Jim, if I’ve got -- let’s say I have a customer that has 150,000 employees and they’ve got 10,000 to 20,000 of them using iPass on a regular basis, I would much rather have that customer give iPass to all 150,000 of their employees, even if the total monthly billing from that customer is only up 10%, 15%, 20%, from what they’re paying us for 10,000 or 20,000 users. And that’s again because I want to base this business on volume I want to make commitments to our suppliers to dramatically increase the volume because I want to drive the cost lower and lower.
And again for me, this is the WebEx model. It’s unlimited meetings; it’s more and more people; it’s getting that flywheel going, driving cost down and making the commodity. I want to make connectivity at commodity because we’ve got a lot of services that we can add to that to make it a much better user experience in terms of privacy, security, reliability, flexibility and so on, that’s where our business is.
Let me just put two questions together and then I’ll give the line out. The first one is, Patricia talked about a penny per meg and I was wondering how far -- how close or how far away you are from that? And then the second question is why the guidance in Q1 that’s lower revenue than Q4, what’s the dynamics going on there? And thank you and I’ll give the lineup.
I’ll answer the question first on guidance for Q1. As a rule, Q1 is slightly a seasonally down quarter for us over Q4. We have really one bad month in Q4, which is December; we typically have two not great months in Q1 which is January and February. We still got some full effect of 2015 churn that we’re still slightly in the run rate and completely coming out in Q1. And then to the point we made earlier, we don’t expect any significant ramp in some of our strategic partner deals in Q1, those are built into the plan to occur later in 2016. So that’s the primary driver of where you are seeing our guidance for Q1. But that guidance is part of our overall plan. And we have full expectation and strategy to have that still meet, but we are putting out there as our annual guidance number. On, Jim’s first point?
Patricia, what -- did you catch that? It was you talking -- it was [multiple speakers] penny of megabyte. How close are we to it?
We are not there yet. We have several deals that with the capacity we are buying, if we fill the bucket, we will be at a penny or less than a penny. We have other deals that we are still paying as much as $0.05, $0.06, $0.07, $0.08 per megabyte and are currently in the process of renegotiating. I can tell you, it falls somewhere in between there as our average dollar per megabyte, but everything we are doing on every deal we sign is driving that cost down.
And also, I’ll again point out that as we do that SmartConnect out broadly, SmartConnect allows us to be able to switch networks to the least cost routing. So, if I have three networks of equal quality and two are free and one I am paying for, SmartConnect has the smarts to switch over to the free or a lower cost networks.
And also that gives us the to feel the bucket from some of those excess capacity deals we’ve signed. If we have excess capacity in a deal, drive that traffic at an excess capacity because it’s just bringing down our effective buy rates.
This is the beauty of doing the deal with Devicescape where we pick up 20 million hotspots that are free; this becomes our own little private Wi-Fi offload network, if you will. And that was all done in anticipation of having the capabilities that we are now starting realize with SmartConnect. So, it’s a lot of stuff that had to come together in a pretty short amount of time to get a set up for where we are today. But surprise, it’s actually working.
We will go next to Mike Rindos from Aegis Capital.
Really just a quick comment, I appreciate all the guidance that you are putting forth and the great data that came out in this call. But my questions have been answered at this point. Thanks.
Alright Mike, we will talk to you later.
We will go next to Fred Ziegel with Topeka Capital Markets.
So, first question is how many hotspots did you support at the end of 2014 versus 2015?
Fred, I want to say -- and Patricia feel free to correct me, but I want to say that at the end of 2014, it was around 15 million.
15 million to 18 million.
Yes, 15 million to 18 million is somewhere in that range, Fred. And were you saying how many today? I mean today the number with -- as we integrate Fon and Devicescape, it’s north of 50 million. I say north of 50 million because it’s not a -- it’s certainly not a stagnant number. Our large network partners, folks Comcast and Time Warner Cable and certainly the mobile operators who are doing as well, they are growing literally daily. And at the same time with SmartConnect, as I mentioned, it will be growing our network from the inside out, just as we detect new hotspots and are able to add them automatically to our footprint. But it’s point -- I mentioned this but I don’t think people understand how few of the hotspots around the world really are geo tag. So nobody really knows today how many hotspots there are and where they are. We are collecting that data and we are getting geo information on about 90% of the hotspots that we are detecting discovery.
So, give that -- if I am looking your press release, network users are absolutely unchanged year-over-year and platform users are actually down. So what’s that about?
On the platform side, a lot of that is driven by some of those large committed platform deals we had with some of the carrier companies that as we reduced and wrote down those platform commitments, we also wrote down the available user counts for those same platform providers -- platform customers. On the overall network users, it’s pretty much tracking with revenue on network. Network revenue is fairly flat year-over-year and network users are fairly flat year-over-year. We had some…
Yes, I understand that but why isn’t user growth increasing, because your hotspots – I don’t know what year-over-year you must be 10%, 20%, 30% yet according to the press release you are spot on flat at 100,000?
I think this is characteristic of why when we look at the dynamics of the business of the international business traveler, it’s what we’re seeing and why it’s so important for us to expand our user base much more broadly than international business travelers, it’s relatively I don’t want to say -- well, it’s relatively stagnant. I mean there is not that many more people; there’s only so many airplanes and there’s only so much traveler and that’s not a high growth number. So, it’s very important for us to drive cost down, increase the size of that user base, increase the traffic through other means than just going out there in international business traveler.
Fred, the other thing is just that -- I talked about having the ability to sell something new to our installed base. The access to the new footprint Fon and Devicescape in particular are in our new SmartConnect client. So, if you are trying to correlate, which is not unfair, but correlating the usage growth to the footprint, we have to get our customer base on the latest version of our client. So, they have to have our SmartConnect client. And as Gary said earlier, our SmartConnect client was made available on Android in December and in Apple in early January. So, it’s still fairly early for our customers to be aware and ready to use the SmartConnect client. Now, we’re remedying that with the appropriate install base marketing campaigns and the appropriate in app messaging and all the things that we do to build the awareness in our install base of the availability, not only of the features that are present in SmartConnect, which of course is our VPN capability and all of the data capture and what not, but for a customer in addition to all of that, they also now have the access because it’s fully integrated into the client to have the Fon and Devicescape networks which are the predominant drivers of the growth from 15 to 18 to 50 and more. Yes? [Multiple Speakers]
But to say it another way, Fred, you are absolutely right. It’s not exciting that our Wi-Fi network users are flat this year and that’s not something that we were looking forward to in 2016 to meet the numbers that we’ve put out there. We expect to see growth in Wi-Fi users again. We expect to see growth in the number of devices that have our client on them and we expect those numbers to go up as our revenue numbers grow. But 2015, not a great year and that churn pretty much offset all of our growth.
That’s the -- 2015, we -- the biggest factor, we never really talked about it to the extent that we probably maybe should have but the -- what mark 2015 was churned, we had massive churn. We talked about the platform fees going away and we talked about losing some big customers but Patricia mentioned the fact that’s been improving metric each quarter and we expect that it will continue to improve in the current quarter that we’re in today. And to Marc’s question, Patricia outline what we’re doing. It’s a very important focus for us because I tell you can have a great bookings quarter that just gets completely wiped out by churn that offsets it.
So, you talk about the most ubiquitous Wi-Fi network on the planet. So, why would somebody move?
Move from what, Fred?
Move from you to somebody else?
I think you’re asking why people would churn -- Patricia, do you want to talk about churn, Patricia if that [Multiple Speakers]
Given your ubiquity.
So Fred, if I’m hearing the question correctly, you’re asking why would a customer churn out based on our value proposition, is that correct?
Based on whatever but I was saying network coverage is the most important, right?
Yes, network coverage, the fact that you can always be on, the fact that you have a security, there’s a now with SmartConnect additional value that we bring to our customers. So, why would they churn? So, the customers that I had direct dealings with in 2015 that churned out under the last three quarters, the primary reason was budgetary. They had cost pressures in their company whereby their IT spend budgets were significantly reduced. So, the majority of the churn that I saw in 2015 had to do with the IT budgets being slashed and slashed fairly dramatically. Okay?
There isn’t quote on quote a direct competitor alternative to what we have. And what people will do is say I don’t have as money. And therefore we have to just deal with the ramifications of not having a global ubiquitous and secure Wi-Fi solution. The ramifications are productivity of employees declined, the ramifications are there are hidden expenses because employees will use corporate expense to get access to Wi-Fi in hotels, on air planes, the ramifications are they may use free Wi-Fi which then exposes the company to security breaches. Those decisions are taken. And I think that as we go into this year with higher focus on upselling the new value prop with SmartConnect, the realization of free Wi-Fi is free, this is why I said earlier to Marc, I was excited about our ability to mitigate and manage the churn because I think that if people get smarter about what it really means to go to free Wi-Fi, they say holy moly, this isn’t the good thing for my cloud based applications to be moving data down on non-secured type.
So, I think that the cost pressures were the objections. And I think that with SmartConnect and with UNLIMITED, we have now a way to position even more value than ever before to be able to demonstrate hey, don’t churn out, you need us because. The thing candidly we’ve been able to -- we don’t sell on cost savings because many companies don’t even really understand how much money they’re spending. But for those that do, we’ve had companies come back and say, you saved us 40% of our communications cost. We’re in a pilot right now with an undisclosed customer. We’ve been able to articulate that the customer could save upwards to $1 million on its current budget. They’re a large company because $1 million is a lot of money to talk about.
But when a company understands what they’re paying, not just paying in the sense of potential hacking and what not but paying in actual out of pocket expense, it’s an easy argument. But like I said, companies don’t always track this. So, we sell on productivity, on value, on security, on ubiquity, on always connected, ease of use, simple user journey, single click activation. We have a lot of things to talk to our customers about these days. So long winded answer to the question, but that’s what we saw in 2015 was basically budget.
Let me just say, Fred, if I may, just one related comment on that. The cost, the budget issue as Patricia says is real. The problem that we see, and again this is much more of a large company thing is that the people who control the budgets are typically not the users. And if it’s in the IT budget, they don’t really care if those expenses and more get transferred into individual department budgets. So, which is why as we’ve done UNLIMITED, we target line of business users, we certainly go in and target sales and marketing because they often are the ones who are bearing that cost via expense accounts, which is a very expensive way to go.
And at this time, I will turn the call back over to Gary Griffiths for any additional or closing remarks.
Well, I have no more remarks. I appreciate all of you who stayed on the call for some really great questions. And we look forward to meeting and hopefully exceeding our plan for this year. So thank you very much and we’ll talk to you all again certainly three months from now but many of you we’ll be seeing in the next days and weeks and months. So, thank you very much. Good evening.
This does conclude today’s conference. We thank you for your participation.
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