iPass' (IPAS) CEO Gary Griffiths on Q2 2016 Results - Earnings Call Transcript

| About: iPass Inc. (IPAS)

iPass Inc. (NASDAQ:IPAS)

Q2 2016 Earnings Conference Call

August 03, 2016, 17:00 ET

Executives

Kirsten Chapman - IR , LHA

Gary Griffiths - President, CEO & Director

Darin Vickery - VP, CFO

Patricia Hume - Chief Commercial Officer

Mato Petrusic - VP, Sales EMEA and APAC

Analysts

Jim McIlree - Chardan Capital Markets

Mike Rindos - Aegis Capital Corp.

Josh Seide - Maxim Group

Marc Silk - Silk Investment Advisors

Kevin Hanrahan - KMH Capital Advisors

Operator

Welcome to the iPass Q2 2016 Financial Results. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kirsten Chapman. Please go ahead.

Kirsten Chapman

Thank you, Jessica. Good afternoon, everyone and welcome to iPass's second quarter 2016 financial results call. This is Kirsten Chapman from LHA, iPass's Investor Relation firm. I'm here today with President and CEO Gary Griffiths, Chief Commercial Officer Patricia Hume, Vice President and Chief Financial Officer Darin Vickery and Vice President of Sales of EMEA and APAC Mato Petrusic. We've distributed our Q1 release over the wire services and posted it on our website at Investor.ipass.com. Please note we have also posted our Q2 earnings presentation to 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 of or rebroadcasting without express prior written consent of iPass is prohibited. Before we get started, we want to emphasize that some of the information and statements you will be hearing 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 as of the date of the conference call and undertake no obligation to revise or publicly release the results or make any revisions to these forward-looking statements in light of any new information or future events. Please refer to our press 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 11th, 2016 and in our Form 10-Q filed in the future, for a detailed description of the risk factors that may affect our results.

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 press release and posted to our website at Investor.ipass.com.

Before I turn the call over to Gary, I would like to note that management intends to present at the annual Oppenheimer conference in Boston next week. If you would like a meeting or a call with management, please contact our IR team at LHA.

It's now my pleasure to turn the call over to Gary. Please go ahead, sir.

Gary Griffiths

Thank you, Kirsten. And just as an aside, let me say we picked a hell of a time for the air conditioning to go out in California for this call, like it wasn't hot enough. And I also wanted to take a moment to thank Mato for joining us. And let me just say, in the Q&A, if you have any questions specifically for our European or our Asia-Pacific regions, you've got the perfect opportunity, the perfect guy here to answer those.

So, with that behind us, for many of you on this call today, iPass has been a frustrating journey. In fact, the last time quarterly revenues grew year-over-year, George W. Bush was present, nearly a decade of annual revenue decline. And you'd have to go back to the days when iPass offered dialup as a primary service to find a profit. Well, I told you 15 months ago that we'd reverse that trend, that we would return iPass to growth and that while we were increasing revenue on the top line that we would reduce and control expenses to accelerate the path to profitability and cash generation.

I'm pleased to report today that return to growth and we move a big step closer to adjusted EBITDA profitability and positive cash flow. Darin will share the details, but you've seen the headline. Revenue this quarter increased to $16.5 million, beating second quarter of 2015 by nearly $1 million and almost $2 million better than last quarter. And while we haven't been giving quarterly guidance, I can assure you that our revenue in the current quarter will again beat last year's third quarter.

Our quarterly adjusted EBITDA loss narrowed to $300,000, less than half a penny per share. That's pretty close to breaking even, especially considering that over $100,000 of that loss was foreign exchange adjustment. As Darin will discuss in a few minutes, we used about $1 million of cash in the quarter, but he will also tell you that there were some anomalies in that usage. More significantly, we expect that our cash has bottomed here and that we'll start growing from here on out.

So, this is all good news, but this is not a victory lap, far from it. Much, much work remains to be done. Our ACV this quarter, for example, was $2.3 million. Well, as you remember, we were pretty happy about our near-record $2.1 million bookings last quarter. And $2.3 million this quarter was nearly double the ACV in the second quarter of last year, but frankly we were hoping to do better. And the low point of our quarter was churn which Darin will address. But as you know, churn is driven by a number of factors and it can be lumpy. We do expect churn to level and return to our plan expectations this quarter.

So, no, no victory laps today, but this is hardly a pit stop either. The team has made great progress over the past year in this radical transformation of iPass. The Wi-Fi we deliver is unlimited and so are our opportunities unlimited. The market has responded well to our simple strategy, that Wi-Fi and iPass will be unlimited, everywhere and invisible. We believe our prospects looking forward have never been brighter. We've expanded the world's largest Wi-Fi network to nearly 60 million hotspots, growth of nearly 300% compared to where we were on this call one year ago. This growth has come from a number of sources.

We enjoy growth as our current suppliers continue to add new hotspots. And we grew thanks to our SmartConnect technology which allows our footprint to expand organically from the inside out. And it also comes, very importantly, from new suppliers in new venues. As you may have seen in today's announcement, we've completed a pivotal partnership with United Airlines. This extends iPass connectivity to United's entire fleet, over 700 aircraft flying 4,500 daily domestic and international flights. That's about 1.5 million flights per year serving 140 million customers. We're proud and frankly humbled to include United Airlines as a partner.

But just in case United Airlines isn't enough, we've also extended our partnership with Deutsche Telekom Inflight services for another three years. This marks more evidence of our significant and growing relationship with Deutsche Telekom. Continuing our alliance with DT allows us three more years of service on flights of Lufthansa, Air France, KLM, Singapore Air, Japan Airlines, British Air and more. United Airlines and DT Inflight, combined with our existing partnership with Gogo and Panasonic, reaffirm iPass prowess in the air, while back on the ground we've struck a deal in China that opens up iPass access in eight additional Chinese airports.

To further enhance connectivity in Asia, we've reached a new deal with SoftBank which will expand iPass access in Japan and other Asian regions. Combined, these extensions and expansions will add iPass in key venues, including more than 1,000 hotels in the United States with important network suppliers like Single Digits.

Finally, I have two new and exciting partnerships to announce today. Recall that a couple quarters ago I mentioned that we'd contracted new deals with two new consumer loyalty programs. Well, last week Elo, the largest credit card company in Brazil held a press conference in Chicago and announced that the Elo premium credit card customers will enjoy the unlimited benefits of iPass Wi-Fi.

Also in Brazil -- this is cool -- Uber and iPass are teaming up to offer iPass Wi-Fi to those visiting Rio to watch the 2016 Summer Olympic Games. Uber is expecting hundreds of thousands of customers for the games. As the leader in global connectivity, we view transportation, whether it is an airplane, a train or an Uber car as just another connectivity medium. Whether you are accessing a Netflix movie or an Excel spreadsheet through Wi-Fi or getting from Point A to Point B in an Uber car or a United flight, it's all about being connected. And that's what we do, connectivity, so you can expect us to continue our efforts in this sector.

To summarize, iPass everywhere is alive and well. Our global network is growing and all the places our customers want to be, building the attraction of iPass for enterprises as well as for our expansion to broader markets through strategic partnerships. These partnerships include Tata Communications, Teleena, Angie Communications, AlwaysOn, WorldSIM and others. Many of these partners are taking advantage of our recently released software development kit. As these partners extend iPass access to their customers across the world, we're planting the seeds today for revenue growth that is expected to ramp this year and accelerate in 2017.

Shifting gears to the product, we've continued down our path to improve our usability and connection success rates, efforts to help make iPass truly invisible. In April, we announced iPass Veri-Fi, our big data analytics capability which will help us improve connectivity success and our quality of service. But we also expect that Veri-Fi will provide a supplemental revenue stream next year. In order to start putting some meat on the Veri-Fi bones, we've teamed up with Fast Forward Labs, a New York City based startup that specializes in demystifying analytics, helping companies glean value from the sometimes obscurity of big data.

And speaking of revenue streams, I believe that we have wisely invested our development dollars in building a platform that provides multiple revenue opportunities. We offer our client application to enterprises looking to improve the productivity in today's mobile world, delivering secure, predictable and simple access through our ever-growing global network. We now also leverage the power of the development community by allowing them to take advantage of our patented technology through our SDK.

And finally, as I mentioned, we intend to market our big data analytics, thereby providing our customers insight and intelligence into the wide world of Wi-Fi. In short, a single investment with multiple returns. So, while this was hardly a perfect quarter, there is a lot to like. And as I mentioned on our last call, change was last year. This year, 2016, is execution.

And with successful execution comes momentum, momentum with our customers, momentum with our partners, momentum that excites our employees and gives them reason to believe in the strategy that we're executing and to see that there are reasons behind the sacrifices this team has made and momentum with the investment community, as evident by the addition of some important new shareholders, while several existing shareholders have increased their positions, some significantly so.

As we climb the steep mountain to success, we've reached an important plateau, the plateau of growth. This first plateau may be the most difficult for us, as reaching it has required the management of so many moving parts, the strategy, the team, our partners, our investors, activists and more, all of which required attention. And we didn't have a lot of time to make it all come together. But the momentum behind reaching this first plateau gives us a tailwind for reaching the next.

Finally, momentum gives us a seat at many more tables, earning the trust of some of the world's most respected companies. And these seats are important, for in this global game of mobile musical chairs, teams will be formed, constellations, as Patricia calls them. In this market that is hot but fragmented, it is important to have a voice and the power that comes with momentum. Momentum breeds partnerships with some of the most powerful brands in the world, Microsoft, AT&T, DT, British Telecom, HP, Tata, Huawei and others that you know well. Today we've talked about new alliances with United Airlines and Uber and you can bet that there are still plenty more to come.

Before I turn this over to Darin for a deep dive in the numbers, I wanted to end where I started, with our investors. I thank you for your patience and support. Much work remains, but I hope you join us today in the satisfaction we feel in achieving this major growth milestone. Darin?

Darin Vickery

Thanks, Gary. Total revenue for the second quarter was $16.5 million, up 12% from $14.7 million in the first quarter. And as Gary mentioned, for the first time in a very long time our year-over-year revenue increased too, by 6% from $15.6 million in the second quarter of 2015. At the heart of the increase, we had more users using more network thanks to our commitment over the last year to sell new logos, to grow our footprint and to improve the product.

Specifically over the first quarter, we saw Wi-Fi network users increase 24%. Total throughput hours consumed increased 30%. And enterprise unlimited seats added increased 100,000. The seat additions include upsell to existing customers to roll out iPass to all corporate employees, not just the heavy business travelers within our customers. While we continue to report active platform users which declined 2% to 794,000 compared to the prior quarter, that metric is primarily reflective of our non-unlimited customers and does not include the majority of 160,000 enterprise seats we have added since launching unlimited in Q2 of last year, unless those seats also show up at network users during the same period which reflects a fairly small percentage.

Q2 is traditionally our strongest seasonal quarter. However, with consumers through our B2B2C channels becoming a larger component of our user base, we're starting to see the impacts of seasonality diminished. For example, with early data in for July, we actually saw usage hours consumed increase 3% over June. Compare that to 2015 when July usage hours declined 4% over June. While summer vacations do result in enterprise users using less connectivity, vacationers are also consumers and are staying connected while traveling for leisure.

Breaking down the quarter-over-quarter growth of $1.8 million in revenue, we had four key drivers. First, installed base growth contributed $1.4 million of favorability based on the fundamentals we discussed earlier. Two ramping strategic partner accounts drove roughly half of that incremental growth. Second, recently signed ACV drove about $400,000 of the incremental increase. Third, we did have nonrecurring shortfall revenue which contributed about $300,000 to our quarterly growth. And fourth, the above was offset by $300,000 of realized churn quarter-over-quarter. I'll provide more detail on churn in a moment.

Looking at it by revenue stream, enterprise grew $700,000 or 6% sequentially and declined $400,000 or 3%, over last year. As you'll remember, in 2015 we were hit with some significant platform fee churn on write-downs to renew existing channel partners. Strategic partner revenue increased $1.1 million or 58% sequentially and $1.8 million or 94%, over last year. Legacy revenue, referring to 3G, dial and legacy iPC, was down 6% sequentially and $500,000 or 48%, over last year.

On to our remaining key metrics for the second quarter, we booked $2.3 million of ACV, representing a 10% increase over the first quarter. As a reminder, we define annual contract value or ACV, as the committed annual revenue of any new logo or significant upsell to existing customers that was signed or started the upsell billing in the reported quarter.

Roughly one-third of Q2 ACV was booked on enterprise business and two-thirds related to strategic partnership arrangements. This is a complete reversal from Q1, when two-thirds of ACV was enterprise verse one-third strategic partnerships. The change in mix should not be inferred as a trend, just the lumpiness of closing and signing deals. Churn was higher than expected at $2.9 million compared to $600,000 in Q1 and $3.3 million in Q2 last year. As a reminder, we define churn as the inverse of ACV, meaning for any customer that terminates or has write-down of commitment in the reported quarter we calculate the last full quarter of run rate revenue and annualize to determine the adverse impact on revenue over the next 12 months.

Churn in Q1 was low. But as I mentioned last quarter, there was no guarantee that it would stay that low. Doing some simple math, we had an expectation of 6% churn in our 2016 plan. In other words, 6% of our 2015 revenue of $62.6 million is $3.8 million which was what we had expected to turn out in 2016. With the first half churn we've reported this year, we will have roughly a $2.3 million adverse impact on revenue from churn in our full 2016 numbers. That translates to about 60% of the planned churn occurring through half of the year. While we aren't happy about the Q2 2016 churn, it is not significantly impacting our overall expectations for 2016.

To add a little more color around the churn, 34% in Q2 was pure customer terminations. 42% of that churn number was customer suspensions, meaning we continue to work with the customer to renew the service but they have currently suspended usage. And 24% was write-down, meaning we extended the customer but at a lower commitment than their prior run rate revenue. The biggest driver of requested suspensions was corporate budgetary issues, particularly with our customers in the energy and manufacturing industries.

Deferred revenue was essentially flat at $2.3 million sequentially, as we have yet to roll out the rest-of-world arrangement with our previously discussed OEM partner. As I mentioned earlier, our Wi-Fi network users increased 24% sequentially and 32% over Q2 2015. Drilling into those increases, enterprise Wi-Fi network users increased 8% and strategic partner Wi-Fi network users increased 75%. Gross margin increased from 35.2% in the first quarter to 37.9% in the current quarter. Network contribution was essentially flat and the improvement in overall gross margin was driven by lower network operations' operating expenses of $300,000.

While it might seem trivial that our network contribution to margin was flat, given that we increased Wi-Fi network users by 24% and usage hours consumed by 30%, much of it on our unlimited strategic partnership arrangements, the maintaining of a flat network contribution is actually a telling sign our continued strategy to buy excess Wi-Fi capacity is working. But instead of taking the benefit to margin as our usage and revenue increases, we're actively reinvesting those revenues into buying additional capacity. As reported last quarter, we had 44% of the non in-flight Q1 2016 network access costs or NAC, covered by excess capacity deals.

We exited Q2 of 2016 with 51% of our NAC spend on excess capacity deals and grew our total terabytes of available purchased capacity by 54% over the prior quarter. All of this was achieved with only a 14% increase in our NAC expense, from $7.4 million in Q1 to $8.5 million in Q2. We continue to position our buying strategy thoughtfully as we work to commoditize the cost of Wi-Fi connectivity without adversely impacting our gross margin.

Moving on to our OpEx, total GAAP operating expense decreased to $9.2 million from $10.8 million in the first quarter and from $14.6 million in the same quarter last year. Q1 included $700,000 of restructuring expense related to the reduction in force we announced on February 17th. Q2 2015 included $3.2 million of restructuring expense related to the event we announced on May 7th of 2015. We expect operating expense to remain relative flat quarterly for the remainder of 2016. Headcount costs have been the largest single driver in the reductions in operating expense quarter-over-quarter and year-over-year. Other drivers sequentially were the higher seasonal operating expenses that typically occur in Q1 such as annual payroll tax resets, less vacation taken and fiscal year-end audit fees.

On a GAAP basis, net loss was $1.4 million compared to $3.7 million in Q1 and $6.4 million in Q2 last year. This translated to adjusted EBITDA loss of $300,000 in the current quarter compared to a $2 million loss in Q1 and a $2 million loss in Q2 of last year. The significant reconciling items between current quarter net loss and adjusted EBITDA included depreciation of $700,000 and stock-based compensation expense of $300,000. Please refer to our earnings press release for a table reconciling GAAP net loss to the non-GAAP reported adjusted EBITDA.

On a side note, you'll notice we're giving greater prominence in our earnings press release to GAAP measures such as net loss compared to non-GAAP measures such as adjusted EBITDA. This is consistent with new guidance issued by the SEC in May regarding non-GAAP financial matters -- measures.

With regards to cash, our balance at June 30th was $16.1 million, a burn of $1.1 million from March 31st. Drivers included the $300,000 of adjusted EBITDA loss, our next to last payment on vendor financed capital acquired in 2013 of $300,000 and final payments on the 2015 and 2016 reductions in force of approximately $400,000.

We did benefit on cash from option exercises of roughly $1 million in the quarter, but that was offset by an adverse $1 million in working capital as two large monthly receivables due by June 30th were not received until early July. We expect to generate positive cash flow in the third quarter.

Finally, we reaffirm our 2016 annual guidance provided back in February, total revenue in the range of $63 million to $68 million and adjusted EBITDA in the range of a loss of $1 million to a gain of $1 million.

That concludes our prepared remarks. Operator, let's open the line for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions]. And we will go first to Jim McIlree with Chardan Capital.

Jim McIlree

I wanted to ask a little bit about the churn. Did this happen at the beginning of the quarter, at the end of the quarter or is it kind of evenly distributed? And what I'm really trying to get at is how much that's going to impact the Q3 results.

Darin Vickery

Yes, that's fair. It's fairly evenly distributed. We probably had -- in the quarter, Jim, about $200,000 of that already hit.

Jim McIlree

Okay. And was that a lot of customers or was it concentrated with one or two large customers?

Darin Vickery

It was a handful of customers, probably in the range of 12 to 15, if I remember off the top of my head. But there were two or three fairly significant customers in that that made up about 50% of it.

Gary Griffiths

And those significant ones kind of covered the three bases that Darin talked about, Jim, ones that were true cancellations, others that were write-downs and then the discontinuation.

Darin Vickery

In fact, the largest one of those is one of them in a suspension bucket who were already having ongoing dialogue about reactivating their service.

Jim McIlree

And so, if we ignore -- or if we try to segment out those companies that cancelled because of let's call it the deterioration in their financial or operational situation, the ones -- the remaining that cancelled, is that more a function of they're not really willing to go to unlimited or they don't like the direction that the Company is going and so it's just not as useful to them anymore? Or might there be something else going on?

Patricia Hume

Jim, it's Pat. For the most part, it's typically a budgetary concern, okay? When we go in and speak with the customers that are requesting a churn, typically it's a reallocation of dollars and/or budget cuts on their side.

Gary Griffiths

Jim, it's Gary. What we face in a lot of these instances is a recognition on the part of the customer that the dollars are going to be spent. But if, for example, to Patricia's point, it's in a IT budget and IT gets squeezed, they say, look, we're going to terminate the service and it's just not my nickel. So, it may be shortsighted in some cases, but it is what it is. And one of our remedies for that is trying to go and get more deals done with people who really do understand the overall impact, like the CFOs office.

Gary Griffiths

Right. Thanks.

Mato Petrusic

So, Gary, if I may --.

Gary Griffiths

Yes.

Mato Petrusic

A few comments from EMEA/APAC perspective. So, my observation is -- if I take a look at the second quarter is a few of the key drivers have been really larger customers who have been spinning off, right, so organizational changes. We also have seen a lot of M&A activities which in fact are -- the customers are shifting from one to the other, more favoring contract terms.

Jim McIlree

And can you give me an indication of how much of revenue is coming from unlimited plans versus the legacy plans?

Darin Vickery

Yes. Currently on the enterprise side of the house it's about 15% of total revenue at this point, 15% of enterprise total revenue at this point.

Jim McIlree

Right, right. I got it. Okay. Oh and the last one. So, there was a big increase in the number of strategic partnership users. Is that one specific account or is that, again, a number of smaller accounts that have just aggregated into a pretty big increase?

Darin Vickery

Yes, it's a combination. There is one strategic account that has really taken off through 2016 that represents about half of that increase. And then a couple of our other smaller strategic have started to ramp and there's been some installed base across those as well. So, about half of it was from one and the rest fairly evenly distributed.

Gary Griffiths

Let me make a comment on that, Jim. I would say that the strategic partnership growth, as Darin said, there was one pretty big player in there. It's probably not who you're thinking. And what I would say about that is that as we do more and more of these strategic partners, as we have more and more of these partners like Tata and Teleena and WorldSIM and all the other ones I mentioned in addition to the ones that you know about like HP and Microsoft and so on, as we get more and more of those in the basket we just are building such a hedge.

They're not all going to grow. They're not all going to grow at the same rate. But we have so many more eggs in that basket now that it gets pretty exciting. And candidly, the one that drove the growth this quarter was not one that we were really expecting. I mean, it's a good, solid customer, but it's not something that we were expecting to see that kind of growth.

Jim McIlree

And I think that that's one of the items that many have -- including myself have expected, to have this hockey stick type growth. Is it -- and in the past, we've always been too optimistic about when we would hit the knee in that curve. Are we kind of there? Is it -- should that optimism return or let's give it a few more quarters to really see it take off?

Gary Griffiths

I'm not going to call the hockey stick, but I'm certainly optimistic and I certainly feel good about where we're right now. I feel great about the team. I feel great about the strategy that we're executing. When I look back -- as you know, Jim, over the past year, we've taken a lot of risks. I mean, we've made decisions pretty quickly that we were really just betting on an unknown.

But as I look back, I don't think there is anything I would have or that we as a team would have not done or would have said, gee, I wish we had a chance to do that one again. I mean, we're on course. And candidly, we feel pretty damn good about where we're.

Jim McIlree

Right. I should have directed that question to Patricia so I could get the unalloyed optimism.

Gary Griffiths

Yes, that's right, throw it over to sales for any--.

Operator

We will now take your question from Mike Rindos with Aegis Capital.

Mike Rindos

Excellent quarter, excellent quarter. I wanted to talk a little bit about the United Airlines partnership. Can you talk a little bit about how that will be marketed when that rollout will occur? I mean, I guess you talked about the rollout occurring later this year. But how will the marketing plan come about and how will that be co-branded, if at all? Can you talk about that?

Patricia Hume

Yes, sure. Mike, hi, it's Pat. So, as you saw, we announced it today, United's actually in our offices today talking just about what you're asking.

Gary Griffiths

And that's amazing. I mean, we literally just signed this deal and they're --.

Patricia Hume

And they're here.

Gary Griffiths

Already here working on the implementation.

Patricia Hume

Yes. So, here's the scoop. We're going to of course aggressively work on the integration of the fleet. And as you may or may not know, they have multiple Wi-Fi providers. So, we work with the Wi-Fi providers, two of whom we already have relationships with. So, we've already integrated some of the footprint from those Wi-Fi providers to allow us to provide in-flight as we have prior to the United relationship.

Now, United is excited because of the fact that they now can, if you would, differentiate themselves in the large corporate enterprise businesses by having the iPass value proposition, the productivity, the security for mobile workers. Now, from a standpoint of them marketing to their accounts, they do intend to have their sales teams around the world educated on how to position the value proposition for the iPass solution worldwide.

Early days, Mike. As I said, they're in the office today. We're finalizing the joint go-to-market. And the only thing that -- we're hopeful this is just the beginning of a very expansive partnership with United Airlines.

Mike Rindos

Okay, fantastic. What can you tell us about your further push into the travel industry at the carriers, hotel companies that would I guess really focus on U.S.-based business travelers?

Patricia Hume

I need -- can you ask it a different way? I don't mean to be obtuse.

Mike Rindos

Okay. Well, I love this marketing arrangement, this partnership that you have here. Anything similar coming or to what extent are you more focused on this sector than other sectors? How --?

Patricia Hume

Fair enough.

Mike Rindos

Can you follow this up?

Patricia Hume

Yes. So, let me step back for a moment and let you know that when we entered into the fiscal year 2016, our network acquisition strategy was very much venue-based, knowing that our customers want to connect in places like hotels, like airports, train stations, right, cafes, restaurants, etc. So, we've had an all out effort to continue to increase the footprint across hospitality, transportation and community cafe kind of Wi-Fi.

One of the interesting phenomena that has happened this year, with our ability to close enterprise deals with some of the largest brands in the world, those brands help us. They help us get into deals like United Airlines. Those brands have buying power, not only across the airline industry but also the hospitality industry. So, you watch this space as we continue to provide announcements on major brand partnerships that will enable us to continue to provide Wi-Fi where our users need it around the world.

Operator

We will now take your question from Brian Kinstlinger with Maxim Group.

Josh Seide

This is actually Josh Seide in for Brian. Last quarter I think you mentioned demand in the Americas beginning to pick up and rebound. Could you just comment on whether or not that might have sustained into June and whether or not you think that's sustainable going forward? Thanks.

Patricia Hume

Yes. Sure, Josh. It's Patricia again. The answer is yes, we continue to see the demand in the United States market increase. The pipeline is growing and we're aggressively pursuing pipeline acceleration to close.

Gary Griffiths

Mato had to come to the U.S. to protect his turf here. So, that's why he's here today

Josh Seide

And then how about in Europe? Do you think Brexit might lengthen sale cycles temporarily out of Europe?

Mato Petrusic

Can you repeat it again? Sorry. It's Mato.

Josh Seide

Do you think that Brexit might impact sales cycles, potentially lengthening them temporarily?

Mato Petrusic

Yes. So, we don't believe that Brexit will have any impact on -- either on our strategy or execution. In fact, if you take a look at what's going on, nobody really knows whether Great Britain will in fact exit the European Union or not. So, from our perspective, we're keeping the current strategy and expect no impact.

Darin Vickery

And I'll have to -- this is Darin. I'll have to add that's the optimistic sales guy talking. We're adding actually a new risk factor into our 10-Q this quarter around Brexit and just the unknown that's there. So, to your question, it is a bit of an unknown at this point. It does create risk, but we're going full forward on the sales cycle.

Gary Griffiths

And it frankly is -- that's a great question and I was not knowing the answer. But it's good to hear from the ground level that you're not seeing any immediate impact.

Mato Petrusic

Yes, certainly not this year.

Gary Griffiths

That's good.

Josh Seide

And then could you just talk a bit about the pipeline of opportunities, maybe share some metrics on whether the pipeline has grown in terms of volume of bids currently awaiting adjudication or maybe the value, the average value of the pipeline year-over-year or Q-on-Q? Thank you.

Patricia Hume

Certainly. So, yes, the pipeline is growing. We had our Board meeting this week. I showed a trend analysis on pipe over the last year and in fact it is growing in value, okay, but it is also growing in number of conversations in which we're engaged. The numbers are up fairly significantly year-over-year, of course, as you would expect, but even quarter-over-quarter. And as I said earlier, we're working feverishly to accelerate the pipeline and get as many deals closed as we can. We've done -- we've closed deals already in July. So, momentum continues, as Gary indicated in his opening comments.

Operator

And we will take our next question from Marc Silk with Silk Investment Advisors.

Marc Silk

All right. To kind of follow up to clarify one of the questions I think Jim asked you earlier, so is it safe to assume that the growth of the revenues this quarter were not because of the Microsoft and HP relationships? Maybe you can comment on that a little bit.

Gary Griffiths

I would say, Marc, that -- Darin referred to one major strategic partner which was neither one of those two. It was not Microsoft or HP that had the big impact in the quarter. Now, the good news on that is that, as you know, we fully expect them to be significant, so they're still sitting in that basket. They're significant today, as you know. I mean, they're certainly top five, top 10 customers for us, but there's a lot more potential in them. We just haven't realized it yet.

Darin Vickery

And in actuality, Microsoft did contribute slightly more this quarter than they did last quarter. They have now, for every month in Q2, exceeded the commitment that they have with us. So, there is a slow growth going on in the Microsoft account at this point.

Marc Silk

Okay. My next question is for Patricia and Gary. It's more of a macro in the Company. So, you guys have been here in your present capacity for about -- a little under 18 months. So, can you describe to us some of the things that are better than you originally thought? And what are some of the aspects that are turning out to be worse than you thought or more challenging than you originally thought and what are you doing about it?

Patricia Hume

Let me start with the good stuff, okay? So, someone asked me this probably about two weeks ago, what was surprising me from a standpoint of delightfully surprising me. When we announced unlimited, certainly and then built our new sales force, we were not sure what would really happen on the strategic partnership side of our business. And I will say that we're extremely excited about what we're seeing in the MVNO market and what we're seeing with our strategic partners who are our channel partners as it relates to their mobile business. So, exciting, very positive opportunities presenting themselves there.

What is challenging? Look, as you bring in a new sales force and you reposition your business and you deliver a new promise of value, it's just constant march, right? It's that constant commitment to excellence in operations, operational excellence. So, it's not that it's hard. It's just we have to every day wake up with our passion and our glass half full to go win in the market. And I said to somebody yesterday I love what I do. We work hard here but I love what I'm doing and we especially love winning. So, it's just the -- right, Gary?

Gary Griffiths

Yes.

Patricia Hume

It's kind of like day after day just going in and keeping that focus on operational excellence.

Gary Griffiths

Well, I think -- yes, that's well said, Patricia.

Patricia Hume

Talk about the moving parts, right?

Gary Griffiths

Yes. Well, the thing -- I mean, how do I say this without sounding like we're boasting? Because, as I said, there's a lot of work to be done. There was a lot of stuff going on in the past. I referred to it in the -- in my comments. But when you think about it, this is a brand new team. We have 155 people. But as I think I've told you in the past, Marc, 100 of those have joined since I joined, 100 of the 150. So, we went from 260 people when we joined to 150, but 100 of them are new. So, we had a new team. We had a new strategy.

As you know, we had some hostile investors that we had to deal with. We had activism. There were a lot of things to have to balance over this year. So, I couldn't be happier that we're can sit here today and talk about growth and talk about looking to positive cash flow. That's pretty gratifying. Now, the other side of that coin, we still have the vestiges of a company that was a $200 million company and have processes in place and a different product and a different product strategy that is no longer there, but the complexities remain. So, we have a lot of process work.

When you think about it this way, I can talk rather glibly about going from a million international business travelers to a billion devices. It's easy to say that. There's a lot of process work and a lot of tooling and a lot of just hard work that needs to be done to make that transformation. Now, we've made a good start at it, but there's a lot more work to do. And that's going to take a lot of sweat as we go through the next quarter to several quarters.

Marc Silk

So, you haven't -- I want to hear what you say, Gary, about maybe what's better than you thought, because it sounds like to me the intellectual property is something that just wasn't tapped into and now it's definitely making a major change with SmartConnect, etc.

Gary Griffiths

Well, for sure. I mean, I guess, again, that it's easy for me to say invisible. It's hard for an engineering team to step up and take that challenge and actually deliver it. So, I'm certainly -- yes, it was a very pleasant surprise to find the IP that we had. It was also gratifying to see us get to SmartConnect so quickly. That said, there's still a lot of work to be done on the product. We're not where we want to be. We're miles ahead of where we were. We still have a ways to go to get this product exactly where it needs to be, to be the kind potential -- to realize the kind of potential that we have.

Marc Silk

Okay. I'm glad that you're on the call so we can get a little different perspective here. So, what is really happening with international roaming? And this is for you, Mato, of course. And what impact is it having on your business?

Mato Petrusic

So, Marc, let me first give you -- say a few words about the EC, the European Commission, the regulation itself and then I will talk to you about what impact we're seeing on our business in Europe. So, in its endeavor establishing an EU digital single market, the European Commission has, last year in October, decided to remove roaming charges across the 28 countries that are forming the European Union. So, this is really happening in two milestones.

Milestone number one has happened already in April 2016, so this year, where the EC regulation has enforced dramatic reduction in roaming charges. Just a few data points, so a one minute voice call can't be charged more to a consumer than EUR0.05 or one megabyte data consumption can't be charged more than EUR0.05 today. Now, the next and the last milestone is June 2017 where the roaming charges altogether will be removed, right? So, when that happens, any voice or data consumption will simply count against consumers' subscriber plan which they have at their homes.

Now, what we're seeing today already, although we're one year before that, most operators across European Union have already dropped the charges, right? So, you could say roaming charges within the EU to a great extent has already -- have already been lifted today. Now, to answer your question, how is this impacting our business in Europe, short said, it does not really impact us, at least no negative impact and let me tell you why. As we heard Gary saying before, we have moved away from selling to the classic business traveler. And instead today we're addressing the needs of a broader mobile workforce.

So, we're, if you will, selling the full capability of our connectivity solution which is centered around user experience. You mentioned the power of our SmartConnect technology, productivity, security with our last mile VPN, analytics and so on. So, this is really a value-add to any enterprise mobility strategy across the region. And this is evident in the progress that we have made, that Patricia and Gary have covered and spoken about. So, this approach is resonating well with our customers not only in the European Union, but also across Eastern Europe, Middle East, Africa, as well as Asia-Pacific.

Marc Silk

No, that's a great perspective and I appreciate you explaining that. I got one more question for you. Because we all -- most of the investors in iPass are U.S. centric and we talk a lot to Gary and Patricia. So, this is for you. Can you discuss, in your opinion, what you think the international growth drivers are for iPass and why?

Mato Petrusic

Sure, Marc. So, from my perspective, if I take a look at EMEA and one year ago the majority of our business was coming from EMEA. Now we're seeing also good expansion -- good growth of pipeline also across Asia-Pacific. So, to me, it's really the two segments where we're realizing revenues and seeing progress today. And one is enterprise which is no surprise. This is our sweet spot. This is where the Company is coming from. And the second one, as Patricia has mentioned before, is the B2B2C market segment.

So, as part of our pipeline growth, so the MVNOs, the MVNO-E, so the enablers of the MVNOs, the MNOs, the mobile network operators, do represent for us I believe a significant growth potential. So, this is -- if I take a look at what are the segments, right, where I am expecting not only pipeline but also business growth. The second element is really our geographical expansion, right? So, if you take a look at where we have been before, majority of our business, as I mentioned, has really been coming out of the western part of the European Union, not even from the eastern EU additions. If you look at where -- how the GDP growth was coming from the European Union, it was driven significantly also from the new emerging markets which have joined the Union.

Now, what we're doing right now is we're looking into regions like Russia and CIS. And just a few data points, I mean, Russia alone has more than 150 million mobile subscribers, right? I mentioned to you we're seeing good uptake on the MNO and MVNO side. So, it's these new geos where we're expecting to accelerate -- to see acceleration in our growth moving forward.

Marc Silk

Well done. You passed in flying colors. So, Gary, back to you and Patricia, you can -- so, there was an article a few weeks ago in Tech Insider and I thought this was -- I thought of you guys immediately. So, security researchers with Avast Software set up a number of fake Wi-Fi networks around Republication National Convention sites and not surprisingly, thousands of attendees exposed themselves to the risk of being hacked. So, if I was there and I had my iPass -- the iPass app which I do use and I love it, how would this protect me? Because I think this is a very interesting point that you want to get across as far as what you can offer.

Gary Griffiths

Well, that's a great question. I hadn't seen that article. But the nice thing about iPass is the security. And I would say that, in the example you cite, that security really comes in two ways, the first one being that the way we curate free amenity hot spots would prevent this from happening in the first place. In other words, if you tried to connect or if we detected this spurious or frivolous or dangerous access point, it wouldn't pass the security or reliability standards that we have built into SmartConnect. So, that would be, if you will, pretty much immediately a connection point that would be blacklisted.

Now, the second part of that and I would say the second layer of security, of course, is even if you managed somehow to get into that, maybe you got into it without going through iPass, then our last mile VPN would protect the user both in terms of their privacy and their data security and having any of that compromised. So, it's a good example. I thought maybe you were going to make a political comment there, Marc, that the RNC was protected where the DNC got hacked, but I guess you weren't going there.

Marc Silk

No, this is all about the dollars and no politics. So, on that note, when you read this article and Patricia, I know you're working with a limited budget with a small company, but maybe one day this article comes out and then all of a sudden they mention iPass, how this stuff can be -- basically end for the people who are iPass users. So, I just thought it could have -- down the line it could be a marketing opportunity type of thing.

Patricia Hume

It absolutely is and I agree 100%. And as Gary said, the more seats we get at the table the more likely that will happen.

Marc Silk

Gary, a quick one. Would you like to clarify your relationship with Uber? I mean, that's very exciting as far as that you're on their radar.

Gary Griffiths

I'll let Patricia take that one. She's anxious to talk about Uber.

Patricia Hume

Yes. So, first and foremost, Uber is a customer of ours. So, Uber joined the iPass family a while back and has been using our product. And here's what's fascinating. Uber contacted us because they have used the product and they love the product. And they said, wow, here it is, the Olympic Games in Brazil. And wouldn't it be awesome if we had an opportunity to work side by side with you and keep our Uber customers Uber-ized by iPass Wi-Fi? And so, this is the beginning of what we hope to be a great partnership with Uber beyond the supplier/customer relationship, but into more of a strategic partnership type relationship.

Gary Griffiths

And as you know, Uber is the iPass of taxi companies.

Marc Silk

No doubt. No doubt. And lastly, the churn, I refer to the -- your usage based clients as kind of like now your new legacy, right? But it's got to be frustrating because I know an IT guys leaves because of budget. But then as you go to the CFO and you can lay out, listen, this is what you're paying on your cellular data and this is what we can save you, not to mention the security, I mean, you must bang your head against the wall when someone churns out and you can't get to that right person. I just thought you might want to comment on that.

Patricia Hume

Yes. So, Marc, you're spot on, but we're tenacious. We're not giving up. So, every single customer that has churned out, we have a focus on the top 100, as you would expect. And so, we've been rolling out something we call the Innovation Summit, where we go in and we actually spend a good amount of time with not just the IT organization but other stakeholders across the business, like the financial teams or the sales line of business, whatever. And we have found that when you take the time to sit down with the customer and discuss their strategy for mobility and remote users and the need for productivity and whatnot we turn them around.

Suffice it to say that some of the churn mitigation that we don't talk about, right -- Darin spoke about what we did lose. But what we didn't talk about is what we saved. And so, there was an awful lot of good news on customers that had said we're going to leave, but we went back in with this Innovation Summit approach and we actually saved them. And some even not only did we save them, but we got more. And so, suffice it to say that we will be back in front of these guys with the full intention of winning them back. It's just a matter of getting in front of them and getting the right people at the table. But we're not giving up.

Gary Griffiths

Yes, I would make a comment about the tenacity of this team. I think it would be fair to say, Marc, that any customer who has churned just becomes another lead. It's just an -- it's actually a better lead because we have some history there. Darin is one of the secret weapons of the sales team. They've been enlisting Darin to do calls with his counterparts at enterprises. So, Darin is starting to make CFO calls. And I'll tell you, when Darin gets an ear of a CFO, those people listen because they get the fact that it doesn't matter whose budget it's in. If the dollars are getting spent and there's a way to save it, that gets their attention.

Darin Vickery

It's a great point, Gary. And Marc, this is Darin. I've probably talked to a handful in the last quarter. And when you start to have the conversation with the financial people around whether it's ROI, whether it's around the security stuff, whether it's around the ease of use and the customer satisfaction, I almost never hang up with that call -- on those calls without him saying I'm going to talk to my procurement person, because this is very compelling. And so, when you start at that level, you can get rid of some of that frustration.

Operator

And our next question will come from Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan

I had a question for Mato which was about the Brexit. After the vote, I hear that travel to the UK has actually increased, maybe because the pound fell so it's cheaper to visit London and surrounding areas. Can you see that in your travel business that you have?

Mato Petrusic

So, I guess it is too short notice for us really to see any trend. Hopefully we can reflect on it maybe on the next earnings call when we have more data points. But the answer is at this point in time no.

Kevin Hanrahan

It's too quick. I see.

Darin Vickery

Well, it's actually interesting, because we follow the users from our network in looking at what suppliers they use, etc. And we have several large networks in the UK. I have noticed in the last month significantly increased usage on some of our excess capacity deals in the UK. So, this is one area where big data analytics can actually start to look at these kinds of things and see these kinds of trends.

Gary Griffiths

Yes, that's interesting. The one point, though, Kevin, that is relevant to this and Darin touched on this in his remarks and it's very important. It's this -- it's as we do more of the B2B2C deals, in other words, as we get iPass in the hands of more consumers through our partners, it really does mitigate our seasonality. And so, as Darin mentioned, as businesses start slowing down, well, they're slowing down because their employee who are consumers are the ones who are traveling. They're doing it on their own nickel, but then we pick up that travel through our partners. So, it's a pretty interesting phenomenon and we're -- we thought we might see it. As Darin said, the fact that our July usage was greater than June is probably unprecedented in our history; probably unprecedented in our history.

Kevin Hanrahan

Yes. It's usually a slowdown, right?

Gary Griffiths

Yes.

Kevin Hanrahan

Right. So, my client Matt and I were talking about that. We were talking about how, as you go to -- if you ramp to a half million devices or whatever that you've been talking about, then your travel impacts will be lower. So, you know that that's a--.

Gary Griffiths

That's right. Well, a combination of unlimited with more B2B2C deals, eventually we really don't see any more seasonality than any software as a service company and it's all just about unmitigated growth.

Operator

It appears there are no further questions at this time.

Gary Griffiths

Well, that's perfect it worked out that way, All right. Hey, listen, thanks again to all of you for joining in. Thanks again for your support. We're certainly excited. But, again, we've got a lot of work to do. And this is hardly time to pop the champagne corks, but I will have a beer tonight. Thanks, guys.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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