Smith Micro's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: Smith Micro (SMSI)

Smith Micro Software, Inc. (NASDAQ:SMSI)

Q3 2012 Results Earnings Call

November 1, 2012 04:30 PM ET

Executives

Charles Messman - MKR Group, IR

Bill Smith - Chairman, President and CEO

Andy Schmidt - Vice President and CFO

Carla Fitzgerald - VP, Marketing

Analysts

Scott Sutherland - Wedbush Securities

Howard Smith - First Analysis

Brian Swift - Security Research Associates

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro Software’s Third Quarter 2012 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is also being recorded today, Thursday, November 1, 2012. I would now like to turn the conference over to our host for today, Mr. Charles Messman of the MKR Group. Please go ahead, sir.

Charles Messman

Good afternoon, and thank you for joining us today to discuss Smith Micro Software’s third quarter 2012 financial results. By now, you should have received a copy of the press release discussing our financial results. If you don’t have a copy and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will immediately e-mail one to you.

With me on today’s call are Bill Smith, Chairman, President and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Vice President of Marketing.

Before we begin the call, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitations, forward-looking statements related to the company’s financial prospects and other projections of its performance, the existing and new market opportunities, and interest in the company’s products and solutions, and the company’s ability to increase its revenue and regain profitability by capitalizing on these new market opportunities and interest in introducing new products and solutions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s products from its customers and their end users, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continued adverse economic conditions, and the company’s ability to compete effectively with other software companies.

These and other factors discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Form 10-K, 10-Q, and 8-K could cause actual results to differ materially from those expressed or implied in any forward-looking statements.

The forward-looking statements contained in this press release and call are made on the basis of views and assumptions of management regarding future events and business performance as of the date of this release and the company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this release and call.

Before I turn the call over to Bill Smith, Chairman, President, and CEO of Smith Micro, I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated early today for reconciliation of the non-GAAP financial measures. Bill?

Bill Smith

Thanks, Charlie. Good afternoon everyone and thank you for joining our conference call to discuss earnings for the third quarter of 2012. Total revenues for the quarter were $11 million, up from $10.2 million in Q2, with approximately $9.6 million coming from our Wireless products and $1.4 million generated from our Productivity & Graphics product line.

Non-GAAP gross profit was $8.9 million for the quarter with gross profit as a percentage of revenues of approximately 80.8%. Our non-GAAP operating expense for the quarter was $13.9 million down slightly versus the previous quarter and down 37% versus the same quarter last year. We believe the increase in our third quarter revenues reflects the beginning of the important turnaround for the company.

Our Wireless portfolio once focused entirely on connection management for laptops is now strongly leveraged in network control solutions and premium applications for smartphones and hot spots as well, allowing wireless operators to generate new revenue streams and allowing public and private sector organizations to capitalize on the influx of mobile devices among their workforces.

Our revenues and relationship with Sprint and T-Mobile continue to grow, and we are helping both companies prepare for the launch of Windows 8 devices with our QuickLink solution for Windows 8. Further we are establishing new relationships with operators, original equipment manufacturers and enterprises around the world that are driving us to refine our business model and develop new go-to-market strategies.

I’ll talk more about the expected impacts of these developments after Andy Schmidt our CFO walks through the details of the Q3 financial results. Andy?

Andy Schmidt

Thank you, Bill. First let me go through our customary introductory items. As we have in past quarters, we have provided non-GAAP results, and a reconciliation of non-GAAP and GAAP results. Non-GAAP results discussed in this call net out stock compensation related expenses, non-cash tax expense or benefit, amortization of intangibles associated with acquisitions provide comparable operating results.

Our non-GAAP results for the third quarter last year net out the goodwill among them to asset impairment charge that we took and the reserve allowance established for net deferred tax assets, both of which were non-cash items. Accordingly, all results that I refer to in my prepared remarks for both 2012 and 2011 are non-GAAP amounts.

Our earnings release, which will be furnished to the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between each non-GAAP financial measure provided in the press release, and most directly comparable GAAP financial measure. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In a detailed manner, for the financial modelers let me provide the difference GAAP and non-GAAP P&L metrics. In terms of the stock compensation, stock comp totaled $1.0 million for the current period broken out as follows. $3,000 assigned to cost of sales, $231,000 to selling and marketing, $202,000 to R&D, and $544,000 to D&A. While we should showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we’re showing a 1.5 million pro-forma or non-GAAP cash based tax benefit which is our estimate of the tax benefit carry forward that maybe implied against future profitability.

Moving on, for the third quarter we posted revenue of $11.0 million and a loss of $0.13 per share GAAP and $0.07 per share non-GAAP. Revenue for the quarter compares $12.6 million for the same period last year. International revenue was approximately $1.3 million this quarter across all business groups. Our wireless segment reported revenues for the quarter of $9.6 million as compared to $10.2 million last year.

Our Productivity & Graphics segment posted revenues of $1.4 million as compared to $2.4 million. Total deferred revenue at September 30, 2012, was $1.9 million. Switching to gross profit, non-GAAP gross margin of $8.9 million compares with $10.2 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 80.8% for Q3 2012, compared to 80.7% for Q3 of 2011. Non-GAAP gross margins by segment were as follows. Wireless 83%, Productivity & Graphics 72%.

Switching to operating expenses. Non-GAAP operating expenses for the third quarter of 2012, were $13.9 million which includes a $19,000 return to profit from our restructuring reserve. Q3 2012 operating expense was $0.2 million lower than Q2 of 2012, driven primarily by further cost reductions. From a year-on-year perspective, engineering expenses decreased 46%, selling and marketing expenses decreased 29% and administrative expenses has decreased 13%.

Total non-GAAP operating expense has decreased $8 million or 37% year-over-year. Non-GAAP operating loss for Q3 was $5.0 million as compared to a loss of $5.7 million in Q3 of 2011. Non-GAAP net loss for the third quarter was $2.4 million or $0.07 per share, as compared to a loss of $9.7 million or $0.27 per share last year.

Cash decreased $4.2 million for the quarter closing at $27.0 million at September 30, 2012. However, in October, we received a federal tax refund related to our 2009 and 2010 re-filings of approximately $7.5 million which has increased our cash balance to approximately $34 million. Regard to other matters that company did not repurchased any shares during this fiscal quarter.

In terms of housekeeping we expect to file our quarter (Inaudible) 10-Q by the end of this week which will represent our final financial statements for the period. At this point I’ll the call back to Bill.

Bill Smith

Thanks, Andy. We’re very encouraged by the increase in revenues we saw in Q3. Not only, in the sales execution it represents but in the execution of the technology strategy we’ve been working for several years, that is now beginning to produce meaningful results. As most of you know, broadband connectivity has been the lynchpin of our portfolio for the past decade, with a rapidly changing landscape of mobile platforms to support our strategy for connectivity solutions has been to simply integration through development enhancement of industry standards.

This allows us to focus our expertise and resources on improving the user experience and developing advanced features that help operators differentiate their offerings. The strategies fits perfectly with Microsoft Windows 8 platform where basic connectivity is a available out of the box, but operators must develop their own tile applications to have a brand presence on the device and promote new services.

This is the value of our latest connectivity solution, called QuickLink MiTile, which is being deployed by T-Mobile USA, for devices running Windows 8. As Microsoft builds momentum and market share for windows 8 devices we expect demand for our QuickLink MiTile solution to grow, opening the door for us to extend our footprint across new windows phones as well.

Another exciting development at T-Mobile is the technical acceptance of our first QuickLink Zero installation on our mobile broadband device. You may recall that we announced this project with T-Mobile in August and in less than three months we have integrated our software, completed multiple rounds of testing and are now ready for commercial launch. The new device is scheduled to hit stores shelves for the 2012 holiday season and we are already working on the next hot-spot device.

Shifting now to Sprint. Our revenues from this key account continue to grow. In addition to broadband connectivity, on Windows 8 devices we are making good progress on the rollout of NetWise Director across their existing Android smartphones, as well as on new LTE smartphones.

Our NetWise platform is an important component of Sprint’s unlimited data strategy and we are honored to have been invited to speak about WiFi offloads at the recent Sprint Open Solutions Conference. Further we are working closely with Sprint to significantly expand the use of our visual voice mail application among the subscribers and across their MVNO partners.

By continuing to enhance the user experience and streamline the trial process we have increased adoption of the visual voicemail, voice to text premium service by 62% in Q3 versus the same period last year. We are exploring many more initiatives with Sprint and are excited at the opportunity to participate in their growth as a result of the announced investment by Softbank.

Our highly successful revenue-share model for visual voice mail is a great example of several ways we were evolving our business models, along with our technology, to capitalize on market trends. Video mail and video casting are new enhancements to our visual voice mail platform that not only provide an up-sell opportunity to mobile subscribers they also extend to other vertical industries, such as public safety with video surveillance to field agents. And manufacturing with video streaming operational procedure to remote workers.

As discussed during our last quarterly call, the ability to integrate several technologies, and apply them to new use cases will be one of the primary drivers of our recovery, we have been proving out these capabilities in Q3 and we’ll continue to engage in commercial activities along these lines in Q4.

Likewise we are pursuing broader channel strategies and go-to-market initiatives with new hardware and software partners that could dramatically accelerate our entry into new markets and reduce our sales cycles. To support these efforts we are reallocating headcount to invest in season sales and business development executives that have experience in launching new products into new channels and growing sustainable revenue streams.

One area in which we have - are already seeing results from these investments is our Productivity & Graphics business unit. In the third quarter, the team focused on reinforcing and enhancing major sales channels. The increased attention to our retail partners, is laying a strong foundation for revenue performance in 2013. We are also working to add new distributors and new markets that will expand our retail exposure in North America and abroad.

In the direct channel for P&G we launched major website redesigns for two of our core brands, and enhanced our online shopping experience, resulting in significantly increased web-traffic and a 96% increase in our average close ratio. New cross-promotion features have also helped to increase our average online order value, to culminate the quarter productivity and graphics group released a new version of our popular animation software Anime Studio 9. The market response has been excellent, and sales from the launch period eclipsed our last [week release] by more than a 175%.

With these third quarter investments in marketing and business development of technology enhancement we believe that the (Inaudible) is well positioned to end the year with solid performance.

We continue to work with operators around the world on trials for our NetWise family of solutions. While Data Offloads has been very popular in the media for past year, it is still largely remedial in practice. The ability to support complex use cases, such as secured tunneling with seamless transitions between 3G, 4G and WiFi requires extensive interoperability testing with existing networks servers and we have demonstrated robust test results with several leading network providers.

We are not able to comment on specific results until commercial negotiations are complete, but we hope to have news to share before the end of the year. Of course, commercial agreements are only half the battle, we expect device integration and commercial deployments of our NetWise solutions to be moderate but successful just as you’ve seen at Sprint.

Finally, as we approach the company’s 30th anniversary at the end of November we are optimistic about our ability to successfully rebound from a down cycle on our business as we have done more than once in the past three decades. Virtually every industry has suffered under the current economic conditions, but we have proven time and time again that we can adapt and recover through the peaks and troughs of each economic and technology cycle.

We remain prudent about managing costs, while at the same time recognizing the need to think and act creatively which requires investments in new areas. Our current pipeline of opportunities, if successful should allow us to grow revenues at an even pace over the coming quarters and return to profitability in 2013.

We look for continued growth in revenue and stable expenses in the fourth quarter of 2012 as we manage the company towards a cash flow positive business case.

With that, I’ll turn the call over to the operator to start the questions.

Question-and-Answer session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Scott Sutherland with Wedbush Securities. Please go ahead.

Scott Sutherland - Wedbush Securities

Good afternoon. Hey, so a couple of questions here for you. First of all maybe some housekeeping questions, were there any 10% customers? And secondly how much legacies Connection Manager revenues did you have in the model?

Andy Schmidt

Hey Scott, this is Andy, okay, we had Sprint at about 46% for Q3 and Verizon at 19%, those were two 10% plus customers. And when we look at product mix, our base connectivity business that you’re familiar with from prior years that had a uptick, we’re about $3.8 million in that in Q2, sequentially that went up to $4.4 million. So as we’ve spoken too in the past that business is not going down to zero that business is going to find a spot where you base line for a bit and then expect some modest increases, Bill talked to some in to business that we’ve kind of coming forward with the new launches. So we expect that to do as we said in the past stabilize and increase modestly.

Scott Sutherland - Wedbush Securities

Looking at the road back to profitability, I think we’ve talked about getting to the mid high teens level to get back to profitability. Are we going to be seeing this step-up function every quarter, are we going to see some more inflection point of maybe Sprint or T-Mobiles in this new deals ramping up and how should we expect that because I think we are hoping to get there it by the end of this year?

Bill Smith

That’s true, Scott. I think the way you’re going to see it from a conservative standpoint, you’ll see a step up function every quarter. I think what will happen at some point in the next three or four quarters whatever it takes, as you’ll see a larger step up, so that - at some point it will just take off a little bit more. But I think to be conservative and reasonable in the approach, we’re looking for a step-up and every quarter in the forecast rate going forward.

Scott Sutherland - Wedbush Securities

Okay. And last can you discuss a little more about the Windows 8 opportunities are you the only vendor addressing this or have you already one the Windows 8 devices at some of your carrier customers?

Andy Schmidt

I haven’t heard of any of the other competitors really focusing on Windows 8, Bill tell him, but nonetheless we have won a few, we’ve talked about one here that is ready to deploy. And that we expect it there will be others. The key point here is with Windows 8 operating system with the tile system or the carriers could have their own tile but they have to have an app then to make it work, to bring it to life, to give them [ability] to give access to the certain life of the feature and that’s where QuickLink MiTile comes in.

Scott Sutherland - Wedbush Securities

Okay, great. Thanks guys.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Howard Smith with First Analysis. Please go ahead.

Howard Smith - First Analysis

Yes, two questions. One on housekeeping, the other income I think picked up a little bit and I was wondering if there’s is a little explanation behind that. And then on a fundamental basis, you planted a lot of seeds internationally, it jumps around a little bit but maybe you could about what you’re seeing and what some of the rollout schedules from some of the wins you’ve had in the past it look like as we I did this year, and going to next?

Andy Schmidt

All right, hey Howard, this is Andy. And in terms of your housekeeping, there was a other income item that was related to our Core Mobility acquisition sometime back, there was earn out that the Core Mobility folks missed that had to do with the timing of certain revenues. And they took us to court on it and we prevailed. So we had that set up as a contingent liability that we were now able to take off the balance sheet and it shows then as a other income item.

Bill Smith

Okay and then talking about overseas opportunities, we have been quite active in Europe and LATAM and in the Japanese market we do expect to win some business, in one or all of these deals over time. And we do expect to be able to talk about it. They are more challenging when you’re doing trials and some of them are in far corners of the world because that’s where they operating it, that they choose to do the trial ad exist. And we work through that we’ve had people in lots of different places and but the I guess best news is that our product has performed extremely well and we’re moving forward.

Howard Smith - First Analysis

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Brian Swift with Security Research Associates. Please go ahead.

Brian Swift - Security Research Associates

Thank you. Bill in the past you’ve given us some color on the some of the trials that are being going on with the NetWise and some of the other new products, could you - I know you mentioned but can you give us a little bit more color on that in terms of how these are going and people - anybody has dropped out or any new ones that have come in or anything along those lines?

Bill Smith

Sure, I guess, before I start let me first say (Inaudible) that I apologize for not making to the SRA Conference earlier this week, I had an family member who was sick, somebody’s got to mute their phone because we have a lot of cross talk. Okay let’s try that. Brian as far as the other question, - the real question you asked, yes we’ve had a number of trials we are still in trials in a number of locations, they have all by and large going very well, we have proven our software and now we’re going through the excruciating process of trying to negotiate a deal and put a contract in place, so that’s really all I can say at this moment. I look forward to be able to say more to you as soon as we have deals done.

Brian Swift - Security Research Associates

Okay. Thanks.

Operator

Thank you. And, there are no further questions in the queue at this time. Please continue.

Charles Messman

Might just want to thank everyone for joining us today, should you have any further questions please feel free to give us call in the office and we look forward to talking to you on our year-end conference call. Thank you.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you again for your participation. And you may now disconnect.

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