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Executives

Anitha Gopalan - Director, Finance & Investor Relations

Evan Kaplan - President & Chief Executive Officer

Steven Gatoff - SVP & Chief Financial Officer

Analysts

Marc Silk - Silk Investment Advisors

Fred Ziegel - Topeka Capital Markets

Kevin Henehan - KMH Capital Advisors

Scott Searle - Unterberg Capital

iPass Inc. (IPAS) Q3 2012 Earnings Call November 7, 2012 5:00 PM ET

Operator

Good day everyone and welcome to the iPass third quarter 2012 earnings call. Today’s call is being recorded. At this time, I would like to turn the conference over to the company. Please go ahead.

Anitha Gopalan

Thanks, operator. Good afternoon everyone and welcome to iPass’s third quarter 2012 earnings conference call. This is Anitha Gopalan, Director of Finance and Investor Relations. I’m here today with Evan Kaplan, President and CEO of iPass, and Steven Gatoff, our CFO.

We have distributed our Q3 earnings release over the wire services and have posted it on our website at investor.ipass.com. We would also like to bring to your attention that starting this quarter we have introduced and posted a quarterly earnings appraisal on our IR site, along with an updated company presentation to provide investors with specific information on our quarterly results.

This call is being webcast at investor.ipass.com and a replay will be available on our website for one quarter until the next earnings call. Please note that this webcast is the property of iPass and any copying or rebroadcast without the 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 consist of forward-looking statements, including without limitations, those regarding our expected performance of the business, revenue and operating targets. These statements involve risk and uncertainty that could cause actual results to differ materially. These forward-looking statements reflect our opinion only as of the date of this presentation and we undertake no obligation to revise or publicly release the results or make any revisions to these forward-looking statements in light of new information or future events. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results.

On this call, we will also provide and talk about our results using non-GAAP financial measures. Our GAAP results and reconciliation of non-GAAP to GAAP measures can be found in our earnings press release.

Before I turn the call over to Evan, we would like to note for you that management will be meeting with investors and analysts in New York during the week of November 12 and we will be presenting at the IDEAS Investor Conference on November 14 in Dallas. At the LD Micro Conference on December 5 in Los Angeles and at Needham Growth Conference in January 2013 in New York. Along with the investor conferences, management will be present at the Wireless Broadband Alliance, WBA Wi-Fi Global Conference that is currently in progress in San Francisco. And also at the Mobile Roaming World Summit on November 13 and 14 in London.

Evan and other team members will be providing on the growing role of Wi-Fi and our role in defining operator strategies, providing insights and contributing the emerging Wi-Fi roaming business models. If you are interested in connecting with us, please feel free to send us an email at ir@ipass.com.

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

Evan Kaplan

Thanks, Anitha. Good afternoon everyone. It’s good to talk to you today. Thanks for joining us. As we make our way through the fourth quarter and continue to drive forward focused on some key milestones, we feel like it’s important to benchmark where we are at in the development of our business. The transition from legacy to Open Mobile and what we see going forward from an operating and financial perspective, both in the near term and looking out into 2013.

To that end, I would like to cover three things on the call today. First, I want to give you some color on the underlying fundamentals that are driving our increasing bullishness on our opportunity broadly, and the return to the growth of our core Wi-Fi business specifically. Second, I want to share some insights and details around our progress this past quarter in advancing our Open Mobile enterprise, our Open Mobile exchange and our managed network service businesses.

And third, I would like to give you some early thoughts on the road ahead and how we see things playing out in Q4 and into next year. Before I jump into that I want to share with you some of my excitement coming out of the Biannual Wireless Broadband Alliance or WBA meeting that I spoke at yesterday. The event is taking place in San Francisco and it brings together the key stakeholders driving the rapidly expanding Wi-Fi ecosystem.

As you would expect, the conference has been growing significantly over the last few years but this was the largest to date, and from the perspective of the participants, me included, it was particularly exciting and energizing. While there I had the opportunity to meet with fixed operators, cable operators, mobile operators, independent Wi-Fi providers, software platform and network equipment suppliers. All the key participants from around the world, an interesting many of whom are already our partners.

The excitement was palpable because everything is in motion. Consumer demand, user growth, device proliferation and importantly, network footprint, are all on the rise for the foreseeable future as Wi-Fi expansion both disrupts and complements traditional mobile operators, as all players attempt to deal with the unrelenting growth of data in our increasingly connected world.

With that disruption comes opportunity, and as I have said before, we believe iPass is uniquely positioned to take advantage of this opportunity as a natural market maker facilitating seamless global roaming on Wi-Fi. Every new user we get from a carrier enterprise and every new supplier we onboard to our global Wi-Fi footprint, builds a stronger more pervasive interconnect and leverages the network effect to add to the strategic value of the company.

This is a very exciting time. And coming off of a very full day yesterday, it’s hard not to be bullish about the broader Wi-Fi market and our role in it. On that note, as we enter November I want to talk about three or four dynamics in our user base and the broader market that support our continued excitement.

First and most important, after many years of decline on an apples-to-apples basis we see Wi-Fi revenue and Wi-Fi users finally growing again, as we approach the tipping point in our transition from legacy iPC to Open Mobile. Specifically, we are on the verge of an important transition where a majority of our revenue and a majority of our users will be coming from our Open Mobile platform. Almost by definition, it’s taken longer than we would have liked. But it’s gratifying to have improving near-term visibility to see the core business start growing again, and we are very enthusiastic about what's in front of us.

It’s also important to note that our traction and near-term results reflect still very early stages of smartphone and tablet adoption into our base. Specifically with regard to phones and tablets, I wanted to highlight that this early group of 13,000 or so user punch way above their weight in terms of Wi-Fi usage. To highlight this user behavior, our early data continues to reveal that phone and tablet users generate 2X the number of sessions as laptop users. And even more compelling, those that use on both devices actually use more 4X more sessions than those that use on laptops alone. Essentially one plus one equals four. The more you use, the more you use.

In addition, we are still early on in our European customer migration, while we estimate that we are less than 35% migrated from our current installed base, the vast majority of those are from U.S. domiciled companies. Generally, our European customer base tends to generate significantly more revenue on a per user basis. Of all our current active monetized users on OM, only about 25% of them are coming from European domiciled companies.

Further underpinning our bullishness, I am glad to share a period to period cohort analysis that we have been tracking for more than 50 migrated enterprise customers. We have consistently seen that customers who migrated to OM showed approximately a 25% increase in Wi-Fi users and a 40% increase in Wi-Fi sessions, as compared to legacy platform. Both very good numbers and they should only go stronger as we add more smartphone deployments and increase our penetration in our European customer base where there is greater opportunity.

The second dynamic we are watching closely is the addition of signed customer OM agreements. Because they are strong indicator of commitment to transition to the new platform. This quarter we added 80 plus customers to bring total commitment to 640. The reason why this metric is important, because as I have said before, if we don’t transition them to OM we will eventually lose them as a customer. And if we do transition to them, we see nice organic growth.

The quality of the new platform, the expansion of the network and importantly, a new openness by IT teams to embrace Wi-Fi again for their employees, are key drivers of this growth in OM customer and associated gross monetized users.

The third dynamic contributing to our confidence is that we have been growing our network footprint at a steady pace and adding important new transcontinental and domestic in-flight capacity. These in-flight services are very important for our enterprise customer. In addition we have added a significant number of home hubs, which as I discussed on our last call, are shared public-private hotspots that are available to iPass users. We currently don’t include these in our reported footprint number. But we are starting to monetize them effectively. Stay tuned for more on this as we enter into 2013.

And lastly and critically, as I alluded to earlier, we see only acceleration in the broader industry. Growth in Wi-Fi only and Wi-Fi enabled devices, growth in data consumption, growth in global Wi-Fi build-outs, all continued at an accelerating pace. Describing those dynamics is only moderately useful without appropriate metric to track. And as we have said in the past, we want to share with you the information that we depend upon to run the business.

In that light, we wanted to give you some more visibility around the Wi-Fi network business, specifically users and revenue. This is very important because as Wi-Fi has evolved and become an increasingly strategic measure of user behavior, it will likely be the best predictive value of performance for iPass going forward.

In addition, we want to give you some way to evaluate our progress migrating from our legacy iPC base to our growing Open Mobile business. And the respective decline and growth rates of those product lines. We believe that if you understand these two area, it will help you understand and better quantify the large opportunity in front of us and put in prospect of the strong progress that we have made to date. To that end, we have started breaking out the legacy and OM revenues and have included them in our presentation materials on our website.

Overall, exiting Q3, we have about 35% of our mobility revenue driven by Open Mobile with that percentage growing fast. In a few minutes, Steven will walk you through those metrics. On that note, let me turn to some specifics on the quarter.

Through Q3 we were please to see some solid progress in both our mobility and our managed services business. Starting with our enterprise mobility business, Q3 has historically been a slower quarter in total as more than 70% of our enterprise mobility usage is in Europe, and July and August in Europe are obviously peak summer holiday months.

Another dynamic this past quarter has been the end of life of our legacy iPass Connect or iPC product set. Which we formally notified customers that we would no longer sell. And we will support only with extended support services or end of life fees. There is good news and bad news in this. The good news is it forces large companies to put a migration plan into place to move to OM. It also generates near-term extended support fees, which we refer to as EOL fees. The bad news is that it does trigger accelerated user declines for customers who had planned on phasing out the service. We saw some of this in Q3.

From an enterprise customer perspective, we were pleased to sign 80 plus large customers to OM agreements including Cisco, Airbus, Fujitsu, ZyLink, Australia Post, Thermo Fisher, and John Holland among others. This brings the number of committed OM customers to more than 640 and drove a 54% quarter-on-quarter growth in gross monetized users, both solid numbers.

Another highlight from the past few months is the resurging interest that we are seeing from global carriers for our enterprise platform. Yesterday we announced a very important SingTel win. Singapore Telecom plans on rolling out our enterprise platform to their multi-national customers throughout Asia. This is a nice win for us as it’s our first real enterprise partner in Asia and we are developing a nice pipeline of enterprise divisions of larger carriers. Stay tuned for a few more announcements on the carrier enterprise front in the coming months.

Turning to the products side. During the last few months we have also had some very important product advancements. In September, we announced our new end user liable payment option that allows an IT department to sponsor a corporate service, negotiate a rate with iPass and promote it to their employees. We have this service paid for on an employee’s credit card. Having this capability is important as we see an increasing trend, particularly in the U.S. to have employees bring their own devices and expense their communication services.

A few weeks ago we rolled out our new Windows 8 product which supports both Windows based tablets and laptops. This product rolled out the same day as Windows 8 shipped and one of the earliest business apps in the MS App store. Right now it’s too early to tell how successful this platform will be but we felt it was important to be early into the market as we suspect the Windows 8 tablet will see some early adoption in our enterprise base.

Turning attention to our emerging OMX or Open Mobile Exchange business, which as a refresher is our business focused on providing global roaming services on Wi-Fi to mobile and fixed operators for their subscribers. On OMX we continue to have strong success signing up new global carriers and service providers. Since our last call we have added four new large operators. While we can't announce many of them until they go live, I am pleased that we could announce, Etisalat, the tenth largest mobile operator in the world to our OMX platform and AlwaysOn, the largest Wi-Fi service provider in South Africa.

As we have said before and consistently delivered on, we have a healthy pipeline for OMX. We continue to look for more wins and announcements in the coming quarter. On a more challenging note, we continue to work closely with our OMX partners to roll out their Wi-Fi roaming offerings, but we are still very early in the revenue cycle. And while we are ramping up platform fees, we continue to work with our partners to progress through a challenging roll out process that I am confident will drive increases to Wi-Fi revenue.

Candidly, this being a new service for virtually all of the mobile operators, this is more work than we had hoped for. But our commitment to the opportunity has only grown and we have high confidence that we will get through this period and there will be a very significant business for iPass that will complement and improve our enterprise offering and begin rolling up meaningful revenue in 2013.

Turning your attention to the managed network service business, we continue to be pleased with the growth profile and the increasing profitability of that business. Over the course of the last 12 months we have grown that segment by 13% and we now manage 23,600 endpoints for our retail customer. We are particularly excited by the increasing adoption of Wi-Fi services by those customers and our initiative aimed at rolling out Wi-Fi for mobile operators and real estate holders.

On that note, let talk a little bit about the road ahead. When we started the year, we laid out three financial guiding points for 2012. We said we would generate positive EBITDA for the year, we said we would generate cash and we would grow revenue in the backend of the year while still investing in our core business to set them up for solid growth in the future.

As you will see from our guidance going into Q4, we feel comfortable we can deliver on the first two commitments. But we have been challenged through the year by faster than expected legacy declines and a slower than desired ramp for OMX. While we don’t have perfect information for Q4, our guidance is essentially in the same range as Q3.

While we are not calling the ball yet on top line revenue growth for Q4, we do want to be direct and tell you that we did not achieve the kind of top line revenue growth in the back half of the year that we had hoped for when we started the year. Frankly, we have done everything we can to manage an orderly transition from declining legacy revenue streams but have struggled with calling the exact day accurately.

However, we do believe the fundamental dynamics driving the company are very strong, specifically accelerating growth in OM related revenue, positive flywheel dynamics around migration, and importantly the return to growth in the Wi-Fi business. It’s very straight forward. We are in the turn and legacy to OM lines are crossing. As we look ahead into 2013, first look for us to continue to manage risk and meet our financial commitments, second, look for us to continue to grow our open mobile enterprise business fueled increasingly by growth in smartphones and tablets. Third, look for us to continue to aggressively grow our network footprint in interconnect to facilitate our exchange business. And fourth, look for a steady stream of OMX carrier win announcements with a meaningful revenue ramp.

Finally, and most importantly, look for 2013 to be a year characterized by solid growth and profitability throughout. On that note, let me turn it over to Steven for a closer look at the quarter, our metrics, our financial results, and our guidance. Over to you Steven.

Steven Gatoff

Thanks, Evan. I would like to cover three topics today. I will first provide some brief insights on a few key dynamics around our Q3 financial results. Second, share with you some color on the tangible and pronounced visibility that we have on our revenue model and the metrics that are giving way to a Wi-Fi led revenue turn. And third, provide guidance on Q4, our path forward and our view of some milestones.

To start with Q3 results. Overall, total revenue came in, in the middle of the guidance at $30.8 million. Adjusted EBITDA was significantly better than expected as a positive $700,000 for the quarter. And we generated positive free cash flow of $900,000, increasing cash to $26.5 million. Jumping into the P&L. I want to provide some color on two revenue dynamics that merit discussion.

First, the end of support for iPC that Evan talked about and its greater than anticipated impact on total platform revenue. And second, some non-recurring revenue pickups that benefitted Wi-Fi network revenue in Q3, but are not expected going forward. We were glad to see Open Mobile driven platform revenue continue its strong growth forward at an annual rate of about 25%.

Legacy iPC platform revenue however, declined approximately 25% in the quarter. This drop modestly offset the positive OM momentum really for the first time in more than two years. And it was due to the unique impact of the legacy user declines that we see associated with the end of support of the legacy iPass Connect offering that was terminated on July 1.

While we underestimated the EOL transition a bit, the platform revenue impact was about $100,000, marginally down but not material. We wanted to also share with you some color on Wi-Fi network revenue in Q3. There were two non-recurring revenue pickups that contributed about $400,000 to Q3 Wi-Fi network revenue, both of which we do not anticipate to occur going forward. The first item was a onetime favorable collection of approximately $200,000 in Wi-Fi network revenue from a customer for billing adjustment in our favor and from prior periods.

In addition, we recorded approximately $175,000 of low margin network revenue in Q3 from a non-standard customer Wi-Fi traffic configuration. That was adjusted out in the quarter and is also not expected to occur going forward. Thinking ahead, this will make Q4 Wi-Fi network revenue, look nominally lower over Q3. Notwithstanding, the key takeaway though is that apples to apples, we forecast growing Wi-Fi revenue in Q4 with these two onetime events removed.

In closing out for you to insight, I would like to note that network gross margin increased again for the fifth straight quarter, this time by more than 110 basis points to 48.6%. On a combination of usage patterns, the non-recurring items I just mentioned and our continuing ability to drive leverage with our suppliers and manage our costs. Also, adjusted EBITDA came in much better than expected for Q3 on a combination of the onetime items and our continued vigilance around expenses.

And finally, our balance sheet story is the consistent theme of solid working capital and a strong debt free financial profile.

Let's move on to our second topic, our commitment to and execution of providing transparency and visibility for our stockholders. In the past few months, we have had increasing conviction on the value creation occurring with Open Mobile, both in current results and looking forward. We are seeing favorable OM user and revenue metrics that are improving outlook for us and to the revenue turn. Specifically, the mix of OM versus legacy Wi-Fi users and the impact on Wi-Fi revenue.

As you know we have been very focused on accelerating on the migration of customers to Open Mobile, as the flywheel effect of OM on improving usage and economics, is showing the intended result of growing users, growing OM Wi-Fi revenue and the expected growth in total revenue. Starting with users, strong growth in Open Mobile users yielded approximately 760,000 gross OM platform users at the end of Q3 and we delivered 38% sequential growth in active OM users to 293,000. Large numbers in aggregate and a continued strong growth rate, both of which are key.

A very important dynamic of migrating platform users to OM is the derivative impact on migrating and growing Wi-Fi network users, a key driver in turn of total revenue growth and value creation for iPass. Evan mentioned this in aggregate and we have also provided quantitative metrics and information about the growth that we are seeing in Wi-Fi users and revenue as a result of the flywheel effect of migrating to OM. We are working to be in a position to add the kind of network user growth of a few thousand users each month. And based on what we see in the early data, customers are showing meaningfully greater network usage when on OM. And ever more certainly when smartphones and tablets are added to the mix.

And so that’s the focus. Driving Wi-Fi network users and moving the mix of total Wi-Fi users over to OM to drive revenue growth. In this regard, we expect to see OM driven Wi-Fi network users reach the important 50% threshold of total Wi-Fi users, relatively quickly coming out of this quarter. If you were to point to one thing that would be a key milestone in calling the ball on the revenue term. In understanding the components of mobility revenue and growth therefore, we are focused on the delineation in OM versus iPC as an important indicator for success and driver of value.

We see Open Mobile driven revenue on both platform and Wi-Fi network consistently growing quarter-over-quarter as we migrate customers to OM and see meaningful organic growth within accounts. A key part of that story and the metrics that we are now providing, is that the mix of OM versus legacy revenue is such that OM driven revenue is now the larger portion of total platform revenue, and we expect to see the same dynamic for Wi-Fi network revenue.

Overall, total Open Mobile driven revenue was about 35% of total mobility revenue in Q3. That breaks out to be about 60% of platform revenue and 33% of Wi-Fi revenue being driven by OM. Importantly, we expect to exit this quarter with OM driven total mobility revenue on track to outpace the decline in legacy iPC mobility revenue on the heels of OM Wi-Fi users and OM Wi-Fi revenue surpassing legacy iPC. A near-term and promising driver of value.

Consistent with our MO of transparency and the goal of providing you with the information and metrics that we see and use, we have added new charts and metrics in the new quarterly earnings deck that Anitha mentioned, around these Open Mobile contributions on Wi-Fi, both in terms of users and revenue.

Looking back and to put things in a bit of perspective. It took us about eight quarters to ramp up and have OM contribute to a third of total mobility revenue. With the strong traction of recent OM user milestones as a backdrop as we look ahead to exiting 2013, we expect the proportion of OM related total mobility related revenue and Wi-Fi revenue to both approach 90% on Open Mobile as we exit the year with a strong correlation between the growth in Wi-Fi users, the respective Wi-Fi revenue and total revenue.

We continue to lean forward and invest in our migration efforts to OM and driving smartphone and tablet adoption, adding large new customers and expanding our Wi-Fi footprint. And our key initiatives are focused on driving this migration in revenue growth. With that as we continue to execute and move into Q4 and the end of 2012, we would like to provide our perspectives on some key milestones and our thoughts on the path forward.

On the revenue turn element, as Evan discussed, the downward pressure from the legacy iPC business decline was greater than anticipated, pushing the milestone of turning the revenue corner further out than we expected at the beginning of the year. However, we believe that the attainment of that is well within our execution path as we exit 2012. I also wanted to comment on OMX revenue which also contributed to moving the turn out a bit.

Looking at the two important topics of 2012 profitability and free cash flow generation, we are very confident in our ability to maintain our trajectory to deliver these targets. And so given all these elements for Q4, we anticipate total revenue to be in the range of approximately $28 million to $32 million and we anticipate adjusted EBITDA for Q4 to be in the range of a loss of $1.25 million to income of $0.25 million.

In closing, our confidence in the Wi-Fi opportunity and our strategy in capitalizing on it is bolstered by our visibility in to some favorable user dynamics and metrics around Open Mobile. Stay tuned for more good stuff on both of these fronts. With that, we appreciate your time and support and we will be glad to open the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Marc Silk with Silk Investment Advisors.

Marc Silk - Silk Investment Advisors

Is that your tagline, the more iPass -- the more you use, the more you use?

Evan Kaplan

No, hopefully the IT guys won't notice that and it will just start happening faster.

Marc Silk - Silk Investment Advisors

Okay. So you know on the legacy coming down quicker than you anticipated for this quarter, am I right to say that means nothing in the sense that if it was slower so your numbers would have looked a little better. But it doesn’t matter down the road, I mean we all know the legacy is going to be a non-factor. Is that correct to assume?

Steven Gatoff

It’s Steven. Yeah, what you are saying resonates with us and I think a lot of what we have heard from our stockholders is very much the same. Focus on OM and keep growing that. And to your point, if the old legacy hung around a little bit longer you would have a little bit more revenue in the short term, but that doesn’t really drive a lot of value over in the long term for sure.

Marc Silk - Silk Investment Advisors

Okay. That’s what I figured. So the transitioning to OM with the existing customers, is that exceeding, meeting or not necessarily hitting your internal expectations?

Evan Kaplan

From a total monetized user, active monetized users, we started out the year thinking that we would be lucky to hit 300,000. Now we are already north of that and should grow quite a bit through the rest of this year. So we are exceeding expectations in terms of that. We are also exceeding expectations in terms of our guidance around the platform. The platform on open mobile and that’s sort of up, so it’s accelerating in a nice pace. And the smartphone data that’s been supporting some of the recent Wi-Fi growth is really compelling for us and has captured our attention, even more that it had.

Marc Silk - Silk Investment Advisors

I got you. Actually, I wanted to focus on, last conference you were focusing on transitioning the customers as quickly as possible.

Evan Kaplan

Yes.

Marc Silk - Silk Investment Advisors

So is that exceeding expectations or, you know hitting expectations or...?

Evan Kaplan

I would say that hitting expectations.

Marc Silk - Silk Investment Advisors

Okay.

Evan Kaplan

I think we are getting -- and let me just lay that out a little bit more clearly. We are very very effective at transitioning customers to Open Mobile where we have had direct relationships with them overtime. So very strong in the U.S. Some of the larger multinationals in Europe. You know in this quarter people like Nestle and Airbus and people like that. Where it lags for us is in places where we have gone through carrier channels where it’s a little bit slower to test your customer, we don’t get to touch him as directly, it gets built in to the carrier platform in their child accounts. So that’s taking some time.

And where we have seen our terminations, most of the terminations that created, you know that’s creating the downside is in value added reseller channels that have been inherited for four or five years and many of them aren’t active with us at all. So some of this was programmed and understood. I don’t know if that’s helpful, Marc.

Marc Silk - Silk Investment Advisors

Yeah, but so how do you try to -- the ones that are -- I don’t want to say slipping through the cracks but through VARs etcetera or carriers. How you can directly access them if it’s not really -- if you can give a better shot of maintaining them if you can reach out to them. Or that’s not really an option?

Evan Kaplan

That’s a great question. We are doing a much better job particularly in the last six months of that than certainly we had earlier. And a bunch of these now, this category in this quarter are coming from or carrier partners. Specifically if you look at Deutsche Telekom, and Orange and Telstra, you know we have definitely had devoted sales force and account managers to work with those guys and technical folks. And we are getting hand in hand calling on those customers directly to migrate. And so we are starting to have an impact there.

Marc Silk - Silk Investment Advisors

Okay. Few quarters ago you talked about OMX, OMX drink, it was like drinking from a hydrant. Is that, anything changed on that front?

Evan Kaplan

Nothing has changed on the hydrant front. We continue to work our way to negotiating deals and driving business. What I think you are catching from the script and from the tone is that it’s been tougher to get these guys to market than we had hoped. To get them at least to market broadly than we had hoped.

Marc Silk - Silk Investment Advisors

Why is that?

Evan Kaplan

Part of it is the technical integration but again as I articulated in the script, these guys are not used to offering a Wi-Fi service. They are a mobile operator with a different set of infrastructure. We have road map things that are helping with that. We also have we think it’s going to start getting better here towards the end of this quarter. We have some program rollouts. But it’s -- I want to be frank, it’s not been easy. Having said that, there is no slack in demand on the backside of carriers who want to do this and view this strategic. And coming out of yesterday’s conference, I am only affirmed in that.

Marc Silk - Silk Investment Advisors

It seems like the Wi-Fi phenomena is something you can't ignore. Having said that, even though it’s on a nice trajectory, is there something that could slow down the whole Wi-Fi movement, in your opinion?

Evan Kaplan

No, I don’t see it. Just being honest, of course there are, but I don’t see it. There is just -- the way the chess board has been laid and the way Wi-Fi is growing organically from either real estate holders or cable operators or things like that, I just think it’s poised to be very very disruptive. And it’s probably a broader investment thesis across just other than iPass. I you watch closely, you have seen there have been -- I think as (inaudible) file their IPO and you are seeing really nice growth and a lot of attention to a bunch of emerging companies in this space too. I think that add....

Marc Silk - Silk Investment Advisors

Okay. That’s exciting. Now, what would see possible hockey stick growth? Maybe into some point in 2014, and this is obviously, would just be your opinion?

Evan Kaplan

Yeah, I think that falls under more forward-looking guidance. But let's -- what I can do is talk about -- you know for the last year our attention has been really focused on the migration from the existing user base which is primarily laptops. The place, the dynamic for us, the two places where we are likely to see hockey stick like growth coming out of this is, our effectiveness in penetrating smartphones into the IT base. Right. Into the enterprise base. And secondly, you know seeing some meaningful revenue ramps on OMX. Both of those will change the curve.

Marc Silk - Silk Investment Advisors

Okay. Just a few more quick ones. I know this is early, but how sticky is the OM customer?

Evan Kaplan

Pretty sticky. We don’t see much turnover once they convert to OM. We haven’t seen any meaningful (inaudible). We see it steady month to month growth.

Marc Silk - Silk Investment Advisors

Okay. There was a small article on The Boston Globe that says Comcast that supplies all those hotspots in Boston, New Hampshire and it just adds to their services in Philly, in New York, New Jersey, Maryland and Delaware. I am assuming this is something you would love to see because it just gives Wi-Fi just more cache.

Evan Kaplan

It’s something I love to see and it’s elemental to the industry globally. Cable operators, traditional telco operators are going to monetize there in the ground pipes, their optical networks, their cable plan, to offer Wi-Fi services to a variety of different constituents.

Marc Silk - Silk Investment Advisors

Okay. My last question is, I obviously don’t really look at your quarter-to-quarter whether you make a penny or lose a penny at this stage. So I am looking at every year how you create value for the company or maybe even say this company this year than it was last year because of this. Is that a good way to look at the company and if so, is there -- I think you have really discussed the value you have created unless you want to add something else.

Evan Kaplan

There is -- I think the right frame for on investor on iPass is, the things that we pay attention to that we believe to add value. I tried to articulate some of that in the script as obviously you want to see revenue start turning around and you want to see consistent profitability growth and things like that. As do we. You want to see it accelerating from legacy to new. But what you also want to see is more traffic and users, and I think if there is one dynamic that I would be looking at over a long period of time is, how quickly can we add Wi-Fi users on a monthly basis. Because a couple of great things happen when that happens. One is, obviously you see revenue and profitability associated with those.

Two is, you get economies of scale, the more traffic you drive. But three is, if you are adding them from both the carrier side and the enterprise side, you are now creating a platform that has tremendous strategic value just by virtue of the number of suppliers, the people connected to it, the number of users. And it’s very unique. We don’t believe there is any asset there, anything like this. And we don’t believe there is anybody close to us in this space. And so we feel very strongly that we should be on a land grab for these multinational customers, these enterprise carriers, and these consumer oriented carriers too.

So we are trying to balance that land grab, we are trying to drive some profitability here given the history of the company.

Operator

We will go next to Fred Ziegel with Topeka Capital Markets.

Fred Ziegel - Topeka Capital Markets

On the 80 new Open Mobile customers you announced earlier. How many of those are from the installed base versus new wins all together?

Evan Kaplan

Steven, I don’t know if you have the exact number, I think it’s -- do you have it. Steven?

Steven Gatoff

About 20%.

Evan Kaplan

20% are from new logos and 60% from existing customer base migrating.

Fred Ziegel - Topeka Capital Markets

Okay. And so when you look at the installed base that hasn’t migrated, how much more do we have to migrate in terms of number of customers or how are we -- whatever metric.....?

Evan Kaplan

It’s a tricky question but I did give you some -- and we have had to think about it because you know the migration has its own dynamic too. We are talking about users and logos and that sort of stuff. But we sort of feel like we are less than 35% of the way on that migration.

Fred Ziegel - Topeka Capital Markets

On users?

Evan Kaplan

Yeah, on users.

Steven Gatoff

So, if you look, Fred, from a customer count standpoint, which to Evan’s point is probably less meaningful from a value creation. It’s more tactical operational. We have 600 plus customers signed on OM. It’s most of our large enterprises, but it’s probably roughly half of the overall enterprise base of customers. But the more important element is what percentage of users are there and the expansion of that.

Fred Ziegel - Topeka Capital Markets

Okay. Then on the smartphone and tablet phenomenon, I wrote it down, you said you had 13,000 users?

Evan Kaplan

Yeah, we had 13,000 what we call active users. Yeah.

Fred Ziegel - Topeka Capital Markets

You have had an iOS product out for while and I am just curious, that’s a tiny number compared to any smartphone and tablet metric you want to compare it to. So what do you think gets that number really juiced up? Is it the adoption of BYOD at the corporate level or how do you think about that?

Evan Kaplan

I thinks that’s a fair comment that’s a tiny number, which is obviously a good thing and a bad thing. Good thing is, it’s on a road to move and the bad thing is it’s a tiny number. So the dynamics are downloads way exceed that. But in order for somebody to activate a client, they have to get their corporations permission, basically. And there is an activation code and a profile that goes with it. And there is still of friction and there is a lot of control by the enterprises concerned about people using smartphone on their own time. We feel like that’s fading away. We are doing some things from product and technology perspective, both alone and with some of the OS vendors that we think is going to take some of the friction out of that. And we are pretty excited about and we are very very focused on on-net users on smartphones and tablets.

When we started to see these numbers come in and started to see the real impact of them, we realized what a powerful it had to change our business. If you look at the broader market, Fred, I think there was an article today in the paper of Mary Meeker doing a midterm update on her smartphone -- on the smartphone and tablet and there is, don’t quote me exactly, but we are about to pass total OSs deployed just smartphones and tablets to laptops, globally. And so, yeah, this is where the business is going. Period, full stop.

You know laptops aren’t going away but these things, this is where it’s going. We have known that for some time and now we have to engage IT. This is part of the reason why we are doing the end user liable, so that people can bring their own device and they can use it and IT can sponsor it. There is a bunch of creative ways to go after it. We think we will make good headway here.

Fred Ziegel - Topeka Capital Markets

Are you trying to get preinstalled on any smartphone or tablet?

Evan Kaplan

You know it’s hard to do these days because it’s not like old cellular days where you are trying to get on the carrier deck. Everybody is comfortable coming out of the app stores. And so there is no -- they download it. What you want to do is get to be downloaded right out of the app store and be able to activate right away. Which is what we are working on. Basically our objective is download should equal activation. We are also doing some interesting initiatives with Apple to make a whole Wi-Fi experience a little bit more seamless on iOS which is the most important platform.

Fred Ziegel - Topeka Capital Markets

And pricing for smartphones and tablets is (inaudible) about the same as the other platforms?

Evan Kaplan

It falls under our existing plans. Yeah.

Operator

And we will take our next question from Donna Jaegers with D. A. Davidson.

Unidentified Analyst

It’s actually [Nick] here for Donna. Just a quick question on kind of the OMX side of things. So we have seen kind of some deal and announcements with the -- like the Devicescape and U.S. Cellular. And I was just wondering kind of, are you going after those type of bids as well and kind of what the competitive dynamics are there?

Evan Kaplan

No, no, we are not. We actually -- this is publicly available information. We use, we provide free footprint to some of our customers, to our customers in our footprint. And that comes from Devicescape. So we can add that anytime we want. There is some sensitivity around where that footprint comes from, who is allowed to use it, how is it support to work. It’s a free Wi-Fi footprint, it’s not a paid Wi-Fi footprint. So it tends to be very stronger in the U.S.

And where we think it’s commercial grade and useful, we incorporate it. So no, we do not, we view that as our target and a healthy part of the ecosystem. We also, we don’t view large carriers at this point adopting that kind of approach. But good question.

Unidentified Analyst

Thanks. And just one last follow-up, I just want to make sure I got that right. When, I think you were talking about the OM driven revenue and you are thinking that, have I got this right that 90% of the revenues to be driven by OM exiting 2013? Is that the hope and the goal?

Steven Gatoff

Yeah, that’s right. And that really applies to users at that point and revenues. There is a strong correlation.

Evan Kaplan

Yeah, I think -- just to follow up on Steven -- I think what you will track, if we do this right and obviously we will try to do that, is you will track a business that grew from 2011 to 2012 to 2013 in a pretty aggressive fashion. That if you could take away the legacy business, and then you just look at that business, it would be a pretty exciting growth profile.

Operator

We will go next to Kevin Henehan from KMH Capital Advisors.

Kevin Henehan - KMH Capital Advisors

I had a question about SingTel. So can you kind of compare what you are doing with them with your new announcement to what you are doing with Telstra and Deutsche Tel, am I on the right page there?

Evan Kaplan

You are on the right page. So what we are doing with SingTel is we will take our OME platform that we sell to enterprises here in the U.S., and we will brand it for SingTel and they will sell it to their multinational customers. Right. And so it is very similar to what we do today with Deutsche Telekom and with Orange. With Telstra, it’s a little bit more embedded and tied to their 3G network also. But very close.

Kevin Henehan - KMH Capital Advisors

Okay. And on the OMX side, I am just kind of trying to keep track, so last time you spoke with us, I think it was August 7, about three months ago. You said you had a few wins you could not announce. Now you have a couple wins, the big one in the Middle East. And you have gotten a few more wins that you still can't announce. Am I on the right page on that?

Evan Kaplan

I think we like to be in a situation where we are announcing one a month, two a quarter, somewhere in that range where we can roll them out. Again, what also delays the announcement, the offset, is how long it takes them to go to market. Some of these carriers do not want to announce and they view Wi-Fi as a competitive advantage. One thing I can share with you is traditionally most of the people we have been dealing with have been mobile operators. But recently we have been able to sign some cable operators which we are pretty excited about.

Operator

(Operator Instructions) We will go next to Scott Searle with Unterberg Capital.

Scott Searle - Unterberg Capital

I apologize if I missed this and I haven’t seen the presentation online, but what was the actual legacy number when I am looking at network revenue or a percentage of the mix?

Steven Gatoff

Sure. So in the deck, when you look in the deck on page five, there are some charts which show two things. One on the left side they will talk about total Wi-Fi revenue, and it will show Wi-Fi revenue for Q3 of $10 million. $3.4 of which is from Open Mobile and $6.6 of which is legacy. And it shows the median of those curves which is a important dynamic. And then it will show the same dynamic at the larger total mobility revenue. That’s our total mobility revenue essentially the segment, right. There is $22 million of which about $14 is -- $7 million is legacy and about $7.6 million, almost $8 million is Open Mobile. And the growth trajectory of those over the past four-five quarters.

Scott Searle - Unterberg Capital

Got you. And the 90% comment, does that relate to platform or does that network, or does that relate to everything?

Steven Gatoff

It related to network and Wi-Fi for sure and should track to everything, meaning total revenue as well. Platform will be a little bit higher.

Evan Kaplan

I think it will be probably higher, yeah.

Steven Gatoff

So you know you are talking about the difference between 92% and 98%, so that’s why kind of put it in that bucket of north of 90%.

Scott Searle - Unterberg Capital

Got you. So essentially by the end of December, legacy revenues are more or less eradicated from the mix?

Steven Gatoff

Right, December 2013.

Evan Kaplan

2013.

Scott Searle - Unterberg Capital

2013, okay. And to go back to OMX. It sounds like things have slipped a little bit not in terms of activity but in terms of translation to the P&L. So just to clarify, does that mean there is any revenue in the current quarter. And as you talk about meaningful revenue in 2013, can you give us a better of idea of what that means. Is that either in a minimum absolute dollar amount or maybe as a percentage of the mix?

Steven Gatoff

Yes. So...

Evan Kaplan

Let me answer the first part, I will let Steven answer the second part. Which is yes, there is some revenue in Q4 associated with and we are seeing a little bit of the ramp we had hoped for. Just not what we projected. And then you can answer for....

Steven Gatoff

Yeah. And then the number, we have all sorts of models and predictions and....

Evan Kaplan

Still on the planning phase.

Steven Gatoff

Yeah, we are doing our planning right now, Scott. And the good news is we are kind of attached with a hip with a lot of our carrier partners on this. So folks that are on this platform have pretty detailed models as do we. And it just feels a little early to give that number. You know orders of magnitude, gosh, is that $20 million in 2013? Not so much. But it’s more than a million. So we expect it to growth nicely and contribute nicely but it’s not that saying hockey stick.

Scott Searle - Unterberg Capital

Got you. And just in terms of the carrier relationships for Open Mobile. I think in the past because there weren’t that many announcements that you had out there publically. But I was wondering if you could give us some idea with the carriers that you signed. What the size of their installed enterprise base is? Are you going after, is this 10 million subs that are addressable in terms of the existing carrier relationships in footprint or is it 50 million. You know give us some idea of the magnitude of maybe kind of where you are in the aggregate and what you think that number is going to look like two, four quarters out in the future.

Evan Kaplan

So the question is, Scott, are you talking about the OMX side with the carriers facing consumers?

Scott Searle - Unterberg Capital

No, no. Carriers on the enterprise.

Evan Kaplan

What's that?

Scott Searle - Unterberg Capital

Carriers into the enterprise, not on the consumer OMX side?

Evan Kaplan

So it’s safe to say, it’s hard for me to give you the -- it’s actually for you to give a subscriber count on the consumer side. I am not sure how meaningful it is, but it’s easier to give you them. On the enterprise side, it’s safe to say that what we are doing is targeting not the smaller carriers but the larger carriers who are addressing multinationals. So if you look at the carriers we have already signed and there is more coming like, you have got SingTel, who really is a dominant player in South East Asia and so some extant into China.

And you have got Deutsche Telekom who is a very big player on the European continent across the multinational and even has business here across multinational. And you have got Orange and Telstra. And so those carriers that fit that kind of profile where they are really dealing multinational. You know they probably have historical roots in PTT are the ideal players for us.

And so I don’t know what that available subscriber base is.

Scott Searle - Unterberg Capital

Okay. And just two more items if I may. Steven, I think sales and marketing was down sequentially, so anything in particular going on there. And also just looking at the -- what looks like the Wi-Fi utilization rate of the OM base is -- or active OM base is like it’s running around 10% but it seems like a lot of the statistics you are talking about could imply something a lot higher than that. So is there some place where you think that will be going over the next four quarters. You know when we have this conversation at the end of 2013, do you think the utilization rate is going to be closer to 20% as you have more multi-device users as part of your OM user base?

Evan Kaplan

Scott, so on a broader base, these are one of these classic things when you are facing into the transition. The legacy, there is a lot of moving parts and everything looks confusing but once you are on the other side, you will see what hopefully we are starting to see which is, the key metric here is Wi-Fi user. And I think you honed in on it. On the OM platform, if we deploy to x number of users, we see roughly 10% of those show up on a paid network in a month. Historically on iPC, if we deploy to that number we would see a little like 2.1 of those show up on a network in a month.

So the difference is pretty dramatic. And so we are looking at the number of -- the key value driver is a number of Wi-Fi users showing up on a paid network in a month. And those ARPU numbers are holding up and so that’s a very good predictor of value.

In terms of will it growth above 10, the key trick there is it looks like it can grow again. I want to see once we have got meaningful, I would say meaningful is too strong of a word, once we have got better smartphone penetration. But if we can start approaching where 40% or 50% of our base is on smartphones and tablets, you would expect that number to go up.

Steven Gatoff

Scott, just to answer your question on the -- you asked about the expense dynamic on OpEx. The answer is there was really nothing of very specific or material nature that drove that. It was really kind of across the board of all buckets, of just good program management spend, favorable headcount, as well as probably one or two smallish increases in expenses in the prior quarter that made it look a little bit lower now. But it’s nothing of note.

Operator

And with no further questions in the queue this does conclude today's conference. We do thank you for your participation.

Evan Kaplan

Thanks everyone.

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