iPass Inc. (NASDAQ:IPAS) Q2 2016 Results Earnings Conference Call November 3, 2016 5:00 PM ET
Kirsten Chapman - IR, LHA
Gary Griffiths - President, CEO & Director
Darin Vickery - VP, CFO
Patricia Hume - Chief Commercial Officer
Marc Silk - Silk Investment Advisers
Jim McIlree - Chardon Capital
Josh Seide - Maxim Group
Matt Reiner - Adirondack Funds
Good day, and welcome to the iPass Quarter Three 2016 Financial Results Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Kirsten Chapman. Please go ahead.
Thank you, Cynthia. Good afternoon, everyone. And welcome to iPass' third-quarter 2016 financial results call. This is Kirsten Chapman from LHA, iPass' IR firm. I'm here today with President and CEO Gary Griffiths, Chief Commercial Officer Patricia Hume, Vice President and Chief Financial Officer Darin Vickery.
We've distributed our Q3 release over the wire services and posted it on our website at investor.ipass.com. Please note we have also posted or Q3 earnings presentation to the site along with updated Company presentation and fact sheet. This call will also begin broadcasting at 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 broadcasting 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 words except, intent, 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 11, 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 our reconciliation or our non-GAAP to GAAP measures can be found in our press release and posted to our website.
Before I turn the call over to Gary, I would like to note that management intends to present at the LD Micro main event in Los Angeles next month. 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.
Thanks, Kirsten. Well, we've got a lot of material to talk about today, so let's jump right in. Here's what's important to know about the quarter we wrapped up on September 30.
First, our new business, our bookings of new business were a record $5.2 million this quarter. A year ago, we were very proud of bookings of $1.6 million, and we felt even better about $2.1 and $2.3 million in the first two quarters of this year.
Well, in this quarter we booked more new business than the previous three quarters combined. That said, attributed to the nature of some of this new business, we've been experiencing a lag between the booking and the revenue realization. This is typically related to deployment cycles of large strategic partners. But there are other factors which Darin will be addressing in more detail.
Second, cash. As we promised last quarter, we grew our cash position by about $1 million, ending the quarter at over $17 million. Darin will take you through the dynamics as there were some nonrecurring events impacting this. Notwithstanding, this is an extremely important step in our recovery.
Third, we made great strides in the product. Connectivity success rates have improved, and we are encouraged by the data we are collecting and processing. Fourth, churn. Recall that churn was a big disappointment in the last quarter. It did come back into line this quarter at $1.3 million.
The net of new bookings minus churn, about $4 million, is strong and moving again in the right direction. That said, churn particularly in our large enterprise accounts, will remain lumpy and an ongoing challenge.
And finally, growth. As we projected, our third-quarter revenues again grew over the same period of last year, while this growth was modest, it is good to have two in a row, and three in a row makes a trend. But it's not only revenue that's growing.
The growth in usage over last year was an impressive 57% attributed to the success of unlimited. I would also note that six of our top 10 accounts as measured by usage are new unlimited customers. In summary, as we forecasted 18 months ago, we have reversed the decade-long trend of declining revenue while slowing the cash drain.
With that as a backdrop, let's take a deeper look into the quarter starting with sales. Now, as I mentioned, our new bookings in the third quarter were over $5 million. These deals represent a good global cross section fairly distributed across Europe, the Americas, and Asia-Pacific. These new customers and partners are further validation that iPass Unlimited and the SDK are penetrating the large addressable market that we'd hoped.
Let's take a look at some of these new accounts starting with Bezeq. Bezeq is the largest telecommunications group in Israel offering a wide range of telecom services. With this partnership launched in September, Bezeq mobile subscribers now enjoy the convenience and security of global Wi-Fi connectivity.
It is worthwhile noting that the time elapsed between first receiving our SDK and the new product launch was only about five weeks, the model for technology integrations and deployment success.
Another new strategic partner is Telrite, one of the largest providers of mobile services to the US FCC-sponsored LifeLine program. LifeLine subsidizes mobile phones to millions of low-income consumers who will now enjoy access to Wi-Fi in their mobile plans. Meanwhile, Telrite will enjoy the cost benefits of offloading data from expensive cellular to inexpensive iPass Wi-Fi.
Gisk, a key provider of digital solutions for education and research in the UK, has chosen iPass as their global connectivity services partner. And we closed a three-year deal with the KKR-owned United Group, a telecommunications and media company in Serbia. Starting first quarter of 2017, over 200,000 United Group customers will have unlimited iPass Wi-Fi bundled into their existing mobility packages. Voyaxesm headquartered in Finland will, through its Voyager Wi-Fi service, use iPass to help traveling consumers stay connected worldwide.
Now, last quarter, you may recall I talked about Elo, the largest credit card in Brazil who now includes iPass as a perk for their premium customers. Elo is off to a fast start and has already started discussions for expansion to additional cards reaching wider audiences.
And in addition to Elo, we closed a similar customer loyalty offering with the Turkish Airport Operators or TAB, who is providing iPass services as a benefit to subscribers of the TAB Passport card.
I'll close with an important new partnership with Mobilise Consulting, a small but highly talented London firm led by entrepreneur Hamish White. Patricia and I had the opportunity to spend half a day with Hamish and his senior team last weak, and came away excited about the doors they will be opening for us in the rapidly expanding world of mobile virtual network operators, or MVNOs.
These new partnerships demonstrate the worldwide attractiveness of iPass from a very diverse customer base. Yet, as different as each of these organizations are, they share a common thread. Everyone on the planet today needs to be connected, and iPass offers the only global service that is affordable, easy to use, and secure.
But before moving on to our network operations, I want to say a few words about our current sales efforts and how they translate to growth, and while we won't be offering 2017 annual guidance till next quarter, I'm comfortable saying that we do expect double-digit growth next year.
Components of this growth include, one, enterprise accounts which we expect to growth mid single digits net of churn; two, strategic partners. In this quarter, growth in this important segment was a staggering 106% over the same period last year. 2017 growth will depend heavily on continued and accelerated expansion from the strategic partners and B2B2C opportunities including those we've discussed on this call.
Three, I mentioned that, in some cases, we've seen an unacceptable gap in the time between bookings and billings. But as this revenue is not lost but only delayed, these yet untapped 2016 bookings create a revenue backlog as we enter 2017.
And finally, new business opportunity, including iPass Verity and IoT, while expected to be modest next year, represents 100% incremental revenue. One of the ways we measure our growth potential is a metric called pipeline coverage, which is defined as the size of the sales pipeline divided by the sales quota for that quarter.
For example if the target sales quota for a given quarter is $4 million and the pipeline for deals that could close in that quarter is $8 million, the pipeline coverage is 2X.
Now, in a mature sales operation, Patricia likes to see pipeline coverage of about 4X. When we joined the business in 2015, there was virtually no pipeline, so the coverage was essentially zero. Today, we're at about 3X. So while we're not where we want to be yet, we've made significant progress growing this pipeline.
Not included in this pipeline are what we call whales. We consider a whale as a single deal that could exceed the entire quota for that quarter. Now as you may expect, the whales are characterized by longer sales cycles and complex deal structures potentially requiring some technology customization.
As we've expanded our reach and introduced the SDK, the number of whales in our ocean is expanding making us less dependent on any single partnership. As Darin and Patricia both mentioned in various investment conferences, we have added a lot more eggs in our basket of growth making us less dependent on any single partner.
So while it is difficult to develop forecasts that include the whales or accurately project the timing and magnitude of big partner growth, they are alive and swimming and we will continue to cultivate these deals that will help us achieve our growth targets.
So let's move ahead to our network, which was correctly cited in a recent analyst report as a key iPass asset and a significant competitive barrier to entry. By now you're probably sick of hearing me say that the size of our network is more than triple from just one year ago. But still, this expansion continues.
We've enjoyed growth as our current suppliers add new hotspots. We grow as our iPass SmartConnect technology identifies and adds new free hotspots. And network growth comes from new suppliers in new venues like United Airlines, which we announced in August, adding 1.5 million flights annually flights on which iPass customers will be able to connect.
Today I'm very, very pleased to announce that we've extended and strengthened our partnership with Gogo. We remain Gogo's sole partner for in-flight Wi-Fi services across all of Gogo's expanding partner airlines.
In addition to the eight new airports in China that I mentioned last quarter, Chinese network provider Xpossible has joined iPass, adding new hotels in Asia. We struck a deal with SitWiFi, which extends iPass coverage in a number of hotels, airports, and other key venues in Mexico, and with ER-Telecom, we're adding new hotspots in several Russian cities.
I would add that our hotel coverage has increased by 50% year over year. In short, we continue to extend iPass everywhere with focus on making sure everyone is able to connect in the places they need to be: on airplanes, in airports, trains, in the hotels, as well as in the cafes and retail outlets in their local neighborhoods. We're in a world where demand for data is growing 12-fold. One can never control too much global network capacity.
Moving on to the product, we are beginning to see the positive impact of iPass SmartConnect. Customers using the new SmartConnect software see dramatic improvements compared to previous versions. Connecting to Wi-Fi can be tricky and frustrating.
And while SmartConnect can't fix a broken Wi-Fi network, it can avoid a troubled hotspot or an entire network blacklisting them at least temporarily. We're seeing significant improvement in connection success rates on average over 50% better for SmartConnect customers compared to those who have not yet upgraded.
Last month we completed a major infrastructure overhaul with Databricks giving us massively more processing and analytic capacity for the data that we're amassing. We can now process an incredible 1 billion records per hour, literally orders of magnitude faster than where we were in September.
So why is this important? Well, let me tell you about Uber. Recall that we did a promotion with Uber for the Olympics. Free iPass Wi-Fi in Rio for Uber riders attending the games.
This was great publicity and a great experience for Uber customers. But that was not the only point. This was actually a data experiment. Over this two-week period, these newly connected iPass user’s collected over 5 million network records in the Rio area.
Of these records, over 700,000 hotspots were detected and analyzed. And of these, over 20,000 new hotspots met our criteria, criteria that was determined by the technology and were automatically added to the footprint.
Now, I will reiterate that we don't expect any big data IoT-related revenue till some time next year. But we're pleasantly surprised at the inbound inquiries we've been getting about our emerging data analytic capabilities. These opportunities cover a wide and surprising range of use cases, opportunities I'll be discussing further in subsequent calls.
You know, Darin, I'm going to go off script for a minute. Darin's laughing. No, I want to tell you about a new relationship that we just inked today with Armada, a very cool Boston start-up headed by Marc Held, a successful entrepreneur with his roots in supply chain management.
Now, Marc is going to partner with iPass not to connect people, but to connect things that drive economies. Armada will be utilizing iPass technology combined with their Armada IoT devices to track shipments of goods through their distribution cycles in order to predict what's going to happen in the global supply chain. Now, we'll leave it at that for now, Darin, more to come on Armada and others in the weeks ahead.
In closing, this team continues to make progress in this radical transformation of iPass proving that our simple strategy, unlimited, everywhere, and invisible, is working. But unlimited, everywhere, and invisible is only the foundation, the table stakes, if you will, to unlocking massive demand for secure mobile connectivity.
Now, this is not about Wi-Fi, folks, which like unlimited, everywhere, and invisible is only a means to the end. The Holy Grail is having truly intelligent global connectivity, connectivity that is independent of the boundaries of technology, of media, of customers, or the boundaries of geography.
It is this intelligence that will finally allow consumers to take ubiquitous connectivity for granted. It is this intelligence that will allow enterprises to maximize the productivity of their employees whenever and wherever they are on the planet.
But most importantly, it is this intelligence that will allow mobile network operators and MVNOs like Bezeq and Telrite and Voyaxesm and United Group today, and many, many more tomorrow who combined will save literally billions of dollars by more efficiently managing the costs associated with delivering content to their subscribers.
As I said, this is truly the Holy Grail of a connected planet. And in the pursuit of this goal, our largest and most important partners have told us that our iPass SmartConnect technology has a 12- to 18-month lead over any competition.
As I've been telling you for months now, we have been taking significant risks to buy an unprecedented footprint of global connectivity capacity. And again, we are not here for Wi-Fi. So consider this. iPass has first the world's leading intelligent connection technology backed by a strong portfolio of patents.
Second, we have control of the world's largest network. And third, we enjoy a customer and partner base approaching 1,000 organizations, among them some of the worlds largest and most respected brands.
Now, consider the power of these three facts in a world that truly has become mobile and demands to be connected, and demands increasingly more data ubiquitously, combined with the telecommunications industry that is struggling to meet these consumer demands profitably. That is why we are here, intelligent global connection manager.
And with that, I'll turn it over to Darin for some in-depth insight on our growth, our risks, and our opportunity.
Thanks, Gary. I did enjoy your off-script story. I thought it was perfect. Moving on to my commentary on the quarter, total revenue for the third quarter was $15.9 million, down 4% from $16.5 million in the second quarter, and up from $15 million in 2015, the second consecutive quarter of year-over-year growth.
The sequential quarterly decline was primarily a result of the following factors. On the plus side, first, we had $400,000 of incremental revenue on new ACV customers, and secondly, $500,000 of increased revenue from install-based growth primarily in our strategic partners.
Those two favorable trends were more than offset by, one, an adverse impact of $900,000 from churn mostly related to the churn number we reported last quarter; a decline of $400,000 due to seasonality as Q3 tends to be our weakest usage quarter in our enterprise pay-as-you-go business due to summer vacations in Europe; and lastly, a $200,000 decrease of nonrecurring one-time revenues period-over-period.
This was primarily related to the $300,000 of nonrecurring shortfall revenue we previously reported in the second quarter. One interesting point on that partner, they had annual shortfall revenue in Q2 2016 but are now actively ramping, and they have doubled their consumption of hours in October over September making them one of our top 20 consuming users as of this point in time, so a success story.
Even with the overall decline in revenue, we see the impact of our enterprise unlimited and strategic partner business clearly reflected in our Wi-Fi network user metric, which increased 8,000 average monthly users or 6% over the prior quarter, and up 32% over the same quarter in 2015.
On top of that, we saw usage in terms of hours consumed by our customers increase 11% over the prior quarter, and an impressive 57% over the same quarter last year. While those numbers might seem contradictory to my earlier comment on seasonality in the third quarter, they point out a very important fundamental concept about our new business model.
Enterprise unlimited and strategic partner customers drive astronomical Wi-Fi usage compared to our historical pay-as-you-go enterprise customers. Patricia would tell you that is a key element in our value proposition and a reason behind the health of our sales pipeline.
To add some very recent data to this point, of our top six usage customers in October ranked by hours consumed, five of them are deals we signed as ACV in the last four quarters.
Three of the five are enterprises and the remaining two are strategic partners. I'll come back to this concept of higher usage in a minute when I talk about our network acquisition costs and our related buying strategy.
As I mentioned on last quarter's call, we entered Q3 at 15% of enterprise revenue being unlimited, and we exit the quarter at roughly 16%, which is also the average for Q3. Two things contributed to this slower growth.
First, in our seasonally slowest months of July and August, unlimited subscription revenue increases as a percentage of totals as pay-as-you-go revenue declines. That trend reverses in September and October. So it requires more unlimited revenue to maintain the same percentage mix. Second, as I'll discuss in a minute, ACV mix has skewed toward strategic partnerships over the last two quarters.
Looking at revenue by stream, strategic partner revenue increased $500,000 or 17% sequentially, while enterprise took the brunt of our churn and seasonality declining $1 million, or 8%.
Legacy revenue continued a managed decline of $100,000. Year over year, strategic partner revenue increased 106%, while overall enterprise declined 5% driven by churn of pay-as-you-go customers.
On our remaining key operational metrics for the third quarter, we booked $3.7 million of ACV representing a 60% increase over the second quarter. As a reminder, we define annual contract value or ACV as the committed annual revenue of any new logo or significant up-sell to existing customers that was signed or started the up-sell billing in the reported quarter.
Under a more traditional definition of bookings, which would include any up-sell or expansion commitments regardless of whether they were incremental to run rate revenue, we signed several significant existing customers to larger commitments in the quarter totaling $1.5 million over their prior contractual commitment.
Combining the two elements, we did $5.2 million of traditional software as a service, or SaaS, bookings in Q3. Interestingly, while only 5% of ACV in the quarter related to enterprise business, 37% of the $1.5 million in expansion bookings was related to enterprise customers who up-committed users to obtain more favorable overall unit pricing.
As we've discussed in the past, these think big opportunities are a huge part of growing our enterprise business and are a testament to customers' opinion of our technology as a true mobile connection solution for all their employees.
Churn normalized back to our expected run rate and was $1.3 million in the third quarter, an improvement from $2.9 million in the second quarter. As discussed on the last call, we had planned for 6% churn in the 2016. The impact of churn reported through Q3 is extrapolated as a 6.4% reduction in 2015 run rate revenue, so very close to our expectations.
To simplify, 6.4% of the 2015 revenue of $62.6 million is $4 million, which is the adverse impact to 2016 revenue when bridged against the 2015 run rate. As a reminder, we define churn as the inverse of ACV, meaning 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 run rate revenue over the next 12 months.
Deferred revenue increased slightly to $2.6 million from $2.3 million at June 30 primarily on pre-paid sales of annual enterprise unlimited plans.
On gross margin, it decreased from 37.9% in the second quarter to 35.2% in the current quarter. Seasonal declines and pay-as-you-go enterprise revenue was the largest contributing factor.
With the majority of our revenue still tied to users and usage, a decline in revenue does not have a one-to-one relationship with a decline in our network acquisition cost, or NAC, due to our strategy to buy excess capacity in monthly fixed-price supplier deals.
Circling back to my earlier comment on higher network usage, the numbers are telling. Sequentially NAC expense was flat even though total network usage in terms of hours increased 11%.
Year over year NAC expense increased 18%, but hours consumed increased 57%. We view investing in our network footprint as one of our key strategic initiatives to support unlimited and the go-to-market positioning.
As Gary has mentioned, we're all about commoditizing Wi-Fi and driving volume. We are also about being everywhere, and that includes acquiring key networks across the high-value spectrum: places like airplanes, hotels, and transportation hubs.
To support that strategy, we are committing spend to buy down our effective unit rates. The strategy has worked to date to keep our gross margins in the mid-30s. We will experience lumpiness in gross margins as we commit additional spend and work to ramp revenues.
But our goal is to conceptually treat NAC as a revenue share with our suppliers committing roughly half of our revenue to acquire Wi-Fi and spending 10% to 15% of operating expense, classified as network operations in our P&L, to support our network. With scale, a percentage spent on supporting our network will decline and margins will improve.
We exited the third quarter with approximately 60% of our Wi-Fi usage under capacity purchase commitments, up from 50% last quarter and giving us increased flexibility in pricing and winning significant strategic partner opportunities.
Our per unit cost of acquisition measured in terms of dollars per megabyte has declined 27% over the same quarter in the prior year. We will continue to prudently invest in network to improve our coverage and lower our cost of service delivery.
Moving on to our OpEx. Total GAAP operating expenses decreased to $8.6 million from $9.2 million in the second quarter and from $11.1 million in the same quarter last year. Q3 2015 did include $900,000 of restructuring expense.
On a GAAP basis, net loss was $1.3 million compared to $1.4 million in Q2 and $3.4 million in Q3 of last year. This reconciled to adjusted EBITDA loss of $400,000 in the current quarter compared to a $300,000 loss in Q2 and $1.6 million loss in Q3 of 2015.
The significant bridge items between current quarter net loss and adjusted EBITDA include depreciation of $600,000 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 financial metric.
With regards to cash, our balance at September 30 was $17.2 million, up from $16.1 million at June 30. The biggest driver was $1.6 million of cash received from stock option exercises related to the end of the modification periods for executives terminated in the 2015 restructuring event. Most modification periods have now expired and we expect exercises will decline significantly in the fourth quarter.
Cash burn is expected to be approximately $1 million in the fourth quarter including annual prepayment of our corporate insurance renewals and annual renewal of our infrastructure, database, licenses and support.
And finally, on guidance, as we close out our third quarter, our line of sight for full year and Q4 is crystallizing. Today we are updating revenue to the very bottom of the range we originally set back in February. Two significant drivers are contributing equally in this update.
First, as Gary mentioned, we have been challenged in converting ACV into revenue as quickly as we had expected. In the parlance of a SaaS company, our backlog is growing. While total ACV booked is within spitting distance of our 2016 expectations, the big driver here is the mix of enterprise for strategic partnership deals that we have signed.
Enterprise deals ramp quickly and turn into build and recognized revenue quickly. Strategic partner deals are typically larger and have more upside, but take an extended period of time to ramp and begin recognizing revenue.
Our plan for 2016 expected roughly 70% of ACV to be in enterprise. And while that number held in Q1 of 2016, year to date, only 30% of actual ACV is in the enterprise sector.
To put some data points behind this, we will exit 2016 with approximately 28% of the ACV booked over the last four quarters, that being Q4 2015 through Q3 2016, translating to top-line revenue during the year compared to approximately 55% we had initially expected.
While this mix is adverse to 2016 revenue, this backlog bodes well for 2017. And as we continually refine our go-to-market strategy, we are taking steps to improve the time to revenue on strategic partners, things like streamlined on-boarding, clearer product definitions, simplified contracts, and reallocation of internal resources.
And secondly, using Gary's earlier terminology, we had two large whales that we signed in prior years that were expected to contribute more meaningfully to revenue in 2016. In both cases, we have worked diligently with those partners to drive rollout schedules and have been unable to ramp them yet even on our relatively conservative forecast.
Partly as a result of our revenue update, we are also lowering our adjusted EBITDA guidance for 2016 to a range of a loss of $4 million to a loss of $3 million, while we have met our goals on containing OpEx this year.
We have made the business decision to continue investing in our network footprint, a huge barrier to entry for the competition and a meaningful strategic asset in winning new business.
Signing supplier deals like United Airlines and extending exclusivity and capacity with other of our key providers is vitally important to iPass' long-term success. But unfortunately, it comes at the cost of our bottom line until sustained revenue growth persists.
With that, let me turn it over to Patricia for a few comments.
Thank you, Darin. Gary asked if I'd summarize before opening the lines for questions. So as I reflect on the progress of the past quarter and of the past 18 months three things jump out.
First, the truly global appeal of our services we offer. As you heard, just in the past three months, we've closed deals in Finland, in Serbia, in Russia, in Mexico with organizations ranging from government programs to large enterprises to small businesses to MNOs and MVNOs to customer loyalty programs, and many others.
Second, I think we've proven our thesis that our market is much bigger than international business travelers. As evidenced not only in our growing B2B2C base, but also in the extraordinary growth we've witnessed in users and usage.
And third, I'd note the pace at which we've transformed this business. We've made a lot of progress in a very short time, which has required placing a lot of bets in a lot of areas and taking a lot of risks, big risks.
Most have paid off, but some have not. But in the balance, I am extremely pleased with our progress and very, very excited about our future.
With that, operator, could we please open the lines for questions?
Thank you. [Operator Instructions] And our first question comes from Marc Silk of Silk Investment Advisers.
Thanks, guys, for taking my questions. First one, can you elaborate on next year's double-digit growth prediction?
Hi, Marc. It's Gary. Yes, I think, as we mentioned on the call, there's a couple different elements in that that make this, for us, pretty confident in the double-digit growth. First of all, let me start with the point that Darin just made in terms of this backlog that we have going into the year.
As Darin noted, we've seen a shift, a greater shift than we thought to the strategic deals, which is great because the strategic deals are typically larger. But at the same time, they do require more time.
And so as we've seen that shift in the business, we weren't anticipating the lag in the revenue. So these deals are done. They've been booked. And they will happen. But it's going to take a little more time, which, again, sets us up well for 2017.
At the same time, we've taken absolutely no emphasis off of the enterprise deals, and we'll continue to drive them. And we see no reason why we won't maintain that mid-single-digit growth in those because we will continue to have churn in the (inaudible) enterprises.
Churn comes, by the way, not simply from losing accounts. We don't lose that many accounts. What happens often is that we do strike a new deal with those accounts, and in many cases. We will be offering service for more employees for actually less money because of the different economics that we have now compared to the past.
Yes. And Marc, if I may. It's Pat, nice to hear from you. One of the things we're also finding because we're learning all the time, we're going into the enterprise now, and because we have the application, the SDK, we have data, we are starting to treat our enterprise partners like we do our strategic partners.
So the opportunity to drive higher annual contract values into both the install base enterprise as well as net new also presents an opportunity for us to be able to grow the revenue into a double-digit kind of number in 2017.
The other thing, Marc, you didn't ask this, but I would say that once we get into next quarter and start talking about 2017, I just want to put you at ease in that, for as much as we do expect double-digit growth on the revenue side, we are not looking at anything like that on the OpEx side. We don't plan on significantly growing our operating expenses as we go through here.
I think as we've been consistent over the last several quarters talking about expense management that will continue. And so you can expect that we'll see top-line growth without commensurate OpEx growth.
Yes, I think you've made that clear. And it makes sense that you're going from an old model to a new model as far as just focusing on enterprise to basically the entire world. So your new bookings, or ACVs, which very impressive, obviously it's far greater than expected, was that an anomaly or a trend?
Yes, so Marc, when we entered into the quarter, as Gary said, the pipeline continues to grow. So it's - we have a number of prospects in the pipeline. Some have larger ACVs than other. So if I tell you that the trend will be to continue to add more and more customers’ quarter-over-quarter with the goal of course of trying to drive similar growth in ACV, some deals are big and some deals aren't as big. So you will see a little bit of lumpiness. But I mean, I've told my team, the goal is each quarter should be better than the next.
And by the way, your team is young in terms of their time in the business. They're still coming up a learning curve right?
Also, so can you kind of provide me more color on the bookings to billing leg, because I think that you made that clear? I just wanted to dig down a little deeper as far as some deals taking a little bit longer to generate revenue.
Yes, sure, Marc. It's Pat again. When you look at some of these bigger strategic partnerships that I signed, Darin said that they are complex deals, and indeed, they are. And so when we sell our SDK, sometimes it's simple, takes five weeks like Bezeq.
Other times there is deeper integration that's required in order for our customers to deliver the value that they want to deliver through the integration of iPass. So that complexity flows down the ability to get revenues.
We go into these deals with a product definition, and as Darin also indicated, we need to make sure we're clearer with respect to the product. And as you can imagine, sometimes a customer will ask for some additional things.
In large, large whales, we will do some customized development, but we need to make sure that as we continue to go to market with strategic partners, that we do it with a lot of clarity around the product itself.
And then the other thing I'll note and this is things that we're working on, our systems and processes in iPass I made a comment that we moved very quickly, and in a very short period of time, made a lot of progress with the company, there are still some things we need to fix in the back end.
And we're cognizant of what those are, and those things are in process. But when we built the plan coming into 2016, we really didn't anticipate the ratio of strategic to enterprise. So as you can imagine, we're moving very quickly to catch up on what that means to us from a process and a system perspective.
Let me say this, Marc. There's a very tangible set of actions that we've already taken to address this problem. We haven't talked about this outside the company yet. But we've made what I consider very significant and very positive organization change in the business specifically to address this issue.
Keith Waldorf, who some of you know has been reporting to me and has been running all of our technical operations, our engineering team, our network operations and so on, happens to be a very highly talented executive in terms of representing our product and our business to our customers.
We've sent Keith out with what we call innovation summits, meeting with the most senior people at least in the technical ranks of our customers with great success, explaining SmartConnect, explaining what intelligent connection technology really means, and that has had a very positive effect on the customers that Keith has been able to touch. The problem is, that's not Keith's job, his day job is running our engineering team. However, we feel so strongly about fixing this problem and mitigating churn that we moved Keith as CTO over to the commercial organization.
So Keith now reports to Patricia, and he will be able to spend virtually all of his time or his day job with customers in the field, showing them the value of moving to SmartConnect, and showing them, again, what intelligent connection management really means. And that's not just for enterprise customers. This [isn't] dealing with the MNOs and the MVNOs, showing them how important it is, they know how important it is to save money on their data costs. What they haven't seen is the SmartConnection technology that allows them to do that.
So we're very excited about that move. Keith is very excited about that move. And as soon as we announced that yesterday to the team, Keith said that the sales team was filling his inbox with congratulations because, as you can imagine, they love the fact now that they will have full access to Keith and all of his talents. So I'm very excited about that move. Is there anything else you want to say about that organization change, Patricia, because you have a lot -- there are some other elements to it. But are you good with that?
Okay, appreciate the color. So out of all of your announcements this week, I thought the one focusing on the MVNO opportunity with Mobilise looks to be the most promising. Can you elaborate on this relationship and what it brings to the table?
Yes, Marc. So Mobilise is, as Gary said, a company that is a mobile, virtual network enabler. They are a group of entrepreneurs, been in business for five, six years. But they really, really understand the space.
So the time Gary and I spent with them last week in London was really to sit down and do the plans for 2017 go-to-market and how we position an end-to-end solution as a solution sell to go into the MVNOs with a Wi-Fi first strategy allowing MVNOs to be advantaged by our SmartConnect technology and the margin benefit associated with leading with Wi-Fi and using cellular as a secondary offer as they deliver value to their constituents.
Mobilise has years and years of knowledge in this space, and we think the combination of their talent and their sense of being a system integrator, if you will, married with our technology is an ideal marriage for us to be able to do more and more business in the MVNO space worldwide next year.
And let me tell you, serving as a channel to that MVNO marketplace, Mobilize actually has the potential of becoming a whale. I mean, maybe a beluga whale. But that's still a whale.
Last question. You announced you extended your relationship with Gogo. Can you kind of fill us in on how long that is, and in the press release, you said iPass is currently the only Wi-Fi service provider that offers its users access to the Gogo, so what does that mean for you guys going forward?
Yes, it's just strengthening of our current relationship. We've got a little bit of creativity around how we're buying Gogo going forward. So we can do a little more interesting stuff with our unlimited customers and providing them access to that Gogo [ph] footprint at a reasonable price.
And absolutely having that exclusivity is a huge key to not only Gogo as a key provider, but several of the others that we've negotiated similar terms with. So very exciting. I think it extended the deal for another year, if I remember correctly.
It was one year, yes. Which by the way, correct me if I'm wrong, but that was -- we were actually on a month-to-month with Gogo, were we not?
I believe we were. Yes, we were.
Month-to-month with some kind of a notice period, but just locking that in for a year is…
And certainly given that the deals they're signing now with some of the international carriers et cetera, the more planes they're going to be adding…
Air France, British Air, a bunch of others, so yes, they are…
And the upgrading they're doing in their own technology to improve their own Wi-Fi coverage and their on-plane experience.
All right. Thanks.
Marc, I think we got to cut you loose and let you get on to whatever you're going to do and move on to the gym.
Keep up the good work, guys. Thank you.
Your next question comes from Jim McIlree from Chardon Capital.
Thanks. Good evening. And I apologize, I hopped on to the call late, so if I asked anything that I could just get from listening to the call the replay, just tell me, and I won't waste your time with it. Darin, did you give a percent of enterprise revenue that came from unlimited plans, and if you didn't, could you?
I did. And I think I need to clarify something. I think last quarter I said 15% at a point in time. That point in time was going into Q3. So we were at 15% in July. We exit Q3 at roughly about 16.5%.
Okay. Great, thank you. and I'm trying to understand the enterprise dynamics and your guidance. It seems to me that if you were expecting enterprise to be a bigger portion of the ACV, and your raw guidance numbers are kind of the same, that you've fallen short in the enterprise.
And one, I am trying to understand, is that a correct assessment, or and if it is, what's going on, why are the enterprise customers not as excited about this product as you and I are?
I'll let Pat -- and I think we talked about it a little bit in our prepared comments -- and I'll let Pat talk about whether they're excited or not excited. You are correct in that we had a higher percentage of enterprise expectation in our ACV for 2016 than it's turning out to be.
As we've talked about, clearly enterprise translates into revenue far quicker because it's easier to get 5,000 employees of a customer up and running on our platform and using than it takes to onboard a B2B2C customer.
But so, the mix has been what I talked about in my comments, been flipped this year of what we thought it was going to be. We thought going into the year it'd be 70% enterprise, 30% strategic partner and year to date, we're exactly the opposite. We're 30% enterprise and 70% strategic partner.
Before Patricia takes this, I want to give a reflection of that myself, Jim. I would say, if you could generalize with enterprises, first of all, if I look at our incumbent base, they've had the product for a long time. They have their own experiences plus or minus with it.
But enterprises in general, I think are more affected by what they read about roaming costs going away and external forces and, therefore, are less likely to, on their own, say, hey, this is something I really need.
An enterprise is more -- Patricia's shaking her head that she doesn't agree with that -- my point is that strategic partners are not impacted by that, they know what their costs are. They know where they can save costs, they know what their customers want better. I think, in many cases than the enterprise. Now you can go ahead Patricia, debate with me on that.
No, I am not debating, I think that Jim, you asked a question, why aren't enterprise customers as excited about this product as you and I, I would say they are. I have called on numerous enterprise accounts around the world when we have the opportunity to spend time with the executive staff and talk about their mobile strategy and talk about the challenges they face as enterprises trying to keep people always connected securely, et cetera, and we tell the iPass story, there's always excitement, always excitement.
That was my point. We have to – they are not going to come to that conclusion without us sitting down saying, look, let me tell you what you're missing here.
Yes, look, they don't all think yet Wi-Fi first, but when you get in front of the executive staffs and you start to really have a good discussion around their strategic initiatives, and you talk about a Wi-Fi first strategy, the light bulb goes off.
And I mean, I have had conversations where customers will say, oh, yeah, 2,000 of our 100,000 employees, or 500 of our 300,000 employees and by the time we're leaving, they say, this would make sense if I could put it across my entire employee base. And so I think there is excitement.
And I think the delay you're seeing is just a matter of time. As we said, the sales force is relatively new. We were getting a lot of inbound strategic opportunities. I have a finite number of feet on the street. And so our goal was, let's drive the ACV, let's drive that revenue growth. Not one at the expense of another.
I feel confident as we go into next year that we will be able to continue to bring in enterprise deals. And as I said earlier, enterprise deals are not just the employees using the product.
We talk to IoT manufacturers about the value of, of course their employee base, but how about the SDK for what you build or how about the SDK for your applications, so the dialog, it's interesting, it's compelling, it's strategic in nature, and so we're not selling a commodity to enterprise. So again, I'm bullish. So that's where I'll leave it.
Which is again, you're making the case for why Keith joined your team so you can extend - you can still only be pretty much in one place at one time. There is only one of you and so there needs to be more coverage of that kind of thing in the field for these large accounts.
A100%, and you know, we're training the team, Jim - solution selling, playbooks, the whole nine yards. We learn something every day, and trust that we are adaptive. When we see something that's working, we get it out in front of that team, and we push hard. And I'm going to state it again, I am bullish about the enterprise.
Yes, thank you. I am not doubting your sincerity or the team's excitement or the confidence of anybody, I am just trying to understand, it seems to me like the enterprise -- if the enterprise customers come on quicker once you have them signed up, it's just taken longer to get them signed up for all of the reasons that you articulated in the past couple of minutes.
And the partnerships, they come on slower, but it seems like you've had more luck getting them to sign up. And so you've just been caught in this timing issue, if I can put it that way.
I think that's very fair, very fair summary.
And I just wanted, again, if you went over this during the prepared remarks then stop me, but Darin, I am just completely confused by the sentence in the release that says, it includes historical annual contract value of $3.7 million combined with the $1.5 million of significant annualized up-commits. For the life of me, I've read that 17 times, and I have no idea what a $1.5 million up-commit is, can you help me understand that?
Yes, absolutely. So historically, we've defined ACV as it has to be incremental to run rate revenue if it's an existing customer signing a commitment. So as a for example, say I've got a customer I'm billing $100,000 a month to.
But they are only committed to $50,000 a month, they decide they want to up-commit to $110,000, which does drive some piece of incremental revenue, and I historically have called that $10,000 of incremental revenue, ACV.
But in actuality, under a SaaS model, you would typically report that entire up-commitment to $60,000 above the $50,000 original commitment. So that's what that $1.5 million relates to. Our customers that upped their commitment, but didn't necessarily have an increase in run rate revenue.
Now, the reasons we're doing those are the big thing opportunities. So you're going into a customer, who's got 5,000 users at a given price, but he's actually got 11,000 using, but he's paying the price that he would get at 5,000 users. If he'll up-commit to 25,000 users because that's how many employees he has, and he wants all of his employees to have the iPass service, then we'll give him a lower unit price, that make sense?
Yes, that does. So is the $2.1 million and $2.2 million of ACV that you reported in Q1 and Q2 respectively, is that including or excluding any up-commit amounts?
That's excluding. So that's on an apples-to-apples basis the same as…
Yes, okay. So it's 2.1, 3.3, 3.7 is the trend for the same things, okay. And just last thing, I do my own potato math on pricing, and it seems like you've had a little bit of a decline in pricing on the strategic partnerships. Is that consistent with what you're seeing?
Yes, it is. So in the strategic partnership deals, a lot of them will start out at a nice commitment. But as they grow their user rate, once again, we're willing to go back and renegotiate a per unit price down if they want to add thousands and thousands or hundreds of thousands of more users. So absolutely, the ARPU, as you would look at it, on a strategic partnership deal, probably comes down over time.
All right. And I think this might be my last one. But the churn in the quarter was down versus the churn in the prior quarter. I'm trying to get a feel for if this is a good level of churn or let's call it a normalized level of churn or if you expect churn to continue to decline, if you can just talk about what you think churn's going to look like going forward?
Yes, obviously we had a fairly poor quarter of churn in Q2. It improved considerably into Q3. As I talked about in my remarks, it pretty much hit exactly the percentage for churn off of 2015 revenue that we expected year-to-date.
It will be lump, we will have quarters that are bad and quarters that are good. But the $1.2 million, while not great or $1.3 million, while not great, was right in line with what we were planning in our plan for the year.
And I think, to answer your question directly, it's probably a pretty reasonable number to expect.
Okay, great. Thanks a lot. Appreciate it.
Your next question comes from Brian Kinstlinger of Maxim Group.
Hi, this is actually Josh Seide in for Brian. Hey, how are you? How's everyone? So can you give us a sense maybe of how many of the 24 total strategic partners that are currently using and developing technology with the SDK.
How many of those 24 total strategic partners have already rolled out that technology to their end market, or versus how many are still in the development stage with that?
And then could you maybe give us a sense of how we might think about the timeframe for companies to go from the development stage into rollout into their consumer markets? Thanks.
Hey, Josh, I don't have the exact number of how many of the 24 are actually in market today. But I can tell you it's a pretty small minority of them. Most of them are still in a deployment phase.
About a third have translated into an ACV deal at this point.
Okay. All right, good. A third.
Or two-thirds, we're still working with in development and we'll determine whether or not there's a deal to be had there kind of thing.
Understood. That's helpful. And then was the triple digit growth overall in the strategic partnership business, was it the result of kind of a handful of strategic partners or would you say at this point it's broad-based across a number of partners or can you give us kind of a snapshot of how the expansion and growth there is occurring?
Yes, absolutely. At this point, it is a handful. As we have talked about before, there is more eggs in the basket at this point. So we'd like to believe that going forward, it's less dependent on two or three of those deals taking off. But to date, it's been two or three fairly significant deals taking off and not 10 or 15.
Right. And one of those, I won't say who it is, but there's one, Darin, Patricia, that you now was dormant, literally dormant for almost a year and just recently in the last couple months started coming alive, which we really didn't expect, and it's another great reason why we want to have a lot of those in the basket.
Well, as I mentioned in my comments, there was a shortfall partner last quarter who actually came up a year after they had signed their contract, got to the end of their 12 months, and they had to pay us a shortfall because they hadn't used enough.
That's a strategic partner deal who is ramping at this point in time and doubled their usage throughput in October over September, and September had doubled it over August. So there's a partner who's ramping fairly significantly.
Once these strategic partnership partners ramp, it's pretty amazing. I mean, you talked about a few of them, Bezeq, in your comments, et cetera. So the more eggs you have in that basket, the less dependent we are on a handful. And hopefully by the time we're talking about this next year, it's a hand and a foot and a basketful.
Okay. And then of the current set of strategic partners, can you give us a sense of maybe which strategic partnerships or maybe which types of partnerships have the greatest long-term potential in terms of the number or the volume of consumers that those partners might give iPass access to?
Sure. Josh, it's Pat. So if you look at, let's say by vertical if we could, you think about your MNO partnerships, significant, the MNOs have significant reach into the consumer base. They talk about millions and double-digit millions and hundreds of millions. So those clearly, from a standpoint of numbers of consumers, are the largest opportunity for us.
That said, we talked about some of our loyalty deals, Elo has been an amazing partner ramping very quickly, one of our strategic partners, and just by the nature of their business, the numbers of credit card holders that they actually have under management is really quite extensive. So we see growth there.
And then of course the MVNOs predicated on which niche market that they are actually delivering service to, some of them are actually really quite large, as you can imagine. So I think by vertical, there's a different magnitude. Clearly, MNOs are the largest.
That's helpful. Thank you.
The next question comes from Matt Reiner of Adirondack Funds.
Hello. Hey, how are you? Sorry, I had to just connect there. Hey, can you give us any more color on, I guess, as you describe them, the two whales who have been around for a while, but still quite haven't - I think part of the reason why you're at the lower end of Q4 is that those really haven't played out yet the way you thought they might start to ramp. Can you give us any more color on that?
Look, you know, when you're dealing with large partners like that, when you get a corporate deal that is governed out of their headquarters, there's a lot of rigor that they put you through that when you're doing a regional deal isn't quite as stringent.
So we've been working the teams on a set of requirements that we need to meet in order to pass, if you would, some tests that these guys put us through. We have a plan, we have commitments.
It's just a matter of getting through some hurdles that aren't - it's part of what happens when you sign up with some of these really big companies.
Okay. All right, that's all I have for now. I'll chat with you guys later. Thanks.
That concludes our question and answer session for today. Management, at this time, I would like to turn the conference back to you for any additional or closing remarks.
Thank you. This is Gary. Appreciate all of you, again, who joined us on the call. I know we'll be speaking to many of you in the next day and a half in private follow-up meetings. So thank you again. Look forward to speaking in the next couple days. And if not, look forward to speaking to you again in three months. Good evening. Good afternoon.
This concludes today's conference. Thank you for your participation. You may now disconnect.+