iPass Inc. (NASDAQ:IPAS) Q2 2018 Results Earnings Conference Call August 8, 2018 5:00 PM ET
Darin Vickery - CFO
Gary Griffiths - CEO & President
Patricia Hume - CCO
Alan Klee - Maxim Group
Jon Hickman - Ladenburg
Scott Searle - ROTH Capital
Marc Silk - Silk Investment Advisors
Good day. And welcome to the iPass Inc. Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference call over to Darin Vickery. Please go ahead.
Thank you, Operator. Good afternoon, everyone and welcome to iPass' second quarter 2018 results conference call.
I'm here today with CEO, Gary Griffiths; and CCO Patricia Hume. We've distributed the press release over the wire services. The release and our earnings presentation are posted on the website at investor.ipass.com. This call is being broadcast on the website and a replay will be available there until the next earnings call.
Before we get started, we want to emphasize that some of the information and statements you will hear during our discussion today will include forward-looking statements, including without limitation those regarded to our projected performance or financial outlook, and revenues and profitability targets. These statements generally may be identified by the use of the words expect, intend, believe, anticipate, and other similar words noting 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 day of this conference call and we undertake no obligation to revise or publicly release the results or any other revisions to the forward-looking statements in light of any new information or future events.
Please refer to the press release posted on the website and to the SEC filings including under the caption Risk Factors in our annual reports on Form 10-K filed with the SEC on March 8, 2018, and to be filed in the future on our Form 10-Q with a description of the risk factors that may affect our results.
On this call, we will provide non-GAAP measures financial measures, GAAP results and a reconciliation of the non-GAAP to GAAP measures can be found in the press release and on our website.
With that, let me turn it over to Gary.
There's a lot to cover today, so I'm going to the jump right in starting with the second quarter results which Darin will of course review in detail. So let me start with some quick color as the results we've reported today serve as a microcosm of the transformation of the company we've been working on the past couple of years. So here's my take.
Costs and expenses were great. Revenue and ACV were okay, and churn was disappointing. Now you may ask why I think revenue and less than $11 million is okay. The answer is Darin will explain in detail is revenue recognition. The majority of the revenue for the $3 million license deal we announced in May, which we expected to recognize in Q2 has been deferred but will be recognized this year.
So with that deferred revenue included 2Q revenue would've been over $12 million above where we expected to be. And regarding that technology license, Pareteum reported on their Q2 earnings call on Monday that the iPass Alliance has quickly led to revenue for Pareteum. They reported the sale made shortly after citing this important Alliance in the form of a $2 million supplemental agreement for Wi-Fi services to one of Pareteum's existing U.S. wireless Internet service providers and that this customer is "very, very pleased." Well Pareteum and iPass see a lot of potential in this relationship and both teams are working hard to make sure that the Alliance grows.
On the cost side, our network access cost or NAC which you may recall peaked in Q3 2017 at $10.3 million dropped to $6.3 million and combined with continued operating expense control we are now well below the $15 million quarterly breakeven number we set as a target last year.
So what happened with churn? While I don’t want to minimize it, we do consider this an anomaly. First Q2 historically a churn quarter based on the renewals timing and second these results were exacerbated by a couple of large reductions in usage primarily by AT&T which does remain an important partner. Darin will elaborate on AT&T but the short story is that AT&T which has long been renting our international Wi-Fi footprint has decided to use only Wi-Fi networks that have been upgraded to the latest standards.
Today only about 10% of the global Wi-Fi that AT&T buys from us complies with the new standards. Now as our network supplier partners choose to upgrade, we expect our revenue from AT&T will increase proportionally but until then this pay-per-use revenue will continue to be impacted. And again just another point on the fragility of the old legacy pay-per use model.
Regarding enterprise churn, we lost a couple of big legacy pay-per-use accounts in Europe. To put this in perspective over 85% of the accounts of renewal in the quarter did in fact renew and from what we see today, we expect churn to be back to normal in the current quarter.
Also as we discussed on our last call, we've moved a number of our smaller enterprise customers to Tech Data maintaining the revenue for these customers while sharing with Tech Data any new growth that the Tech Data sales machine is able to gain from these accounts. While the annual revenue from these initial customers is only a few million dollars, this does protect iPass from churn in these accounts. And if this initial step with Tech Data is mutually successful, our intent would be to expand this initiative in the larger accounts for further churn mitigation in these legacy accounts.
So as I mentioned, this quarter exemplifies the transformation we are pursuing relatively high revenue and ACV associated with the new iPass products and technology aided by significantly lower cost and expenses but impacted by continued churn in the legacy enterprise pay-per-use accounts.
Moving from the past and into the months ahead, I'll start with our industry which is in rapid flux, followed by how iPass fits into this changing environment. Starting with the industry.
Since the introduction of the iPhone in 2007, mobile data consumption has accelerated from nice to have to necessity. This explosion in mobile data consumption has put significant pressure on constrained cellular capacity. However, in the past year driven by consumer and competitive pressures, mobile operators large and small have essentially been forced to offer unlimited cellular data plans making an already difficult situation worse.
Now, has access to unlimited server data plans impacted our enterprise business and contributed to churn? Embedded has. More and more of us simply use cellular for low bandwidth applications and more companies decide not to pay for usage of a service that is perceived to be free but while this may be viewed as free to users, it certainly isn't free to mobile operators.
To respond to this demand, MNOs have to build more infrastructure and buy more spectrum and is not free to the mobile virtual network operators who have to buy this precious cellular capacity from the MNOs.
Fact is consumers are now consuming much more cellular data so the MNOs and MVNOs need to offload more cellular data to Wi-Fi and this is where SmartConnect plays a key role as it means to intelligently offload cellular traffic to Wi-Fi dynamically and globally.
SmartConnect can provide intelligent networks steering to the lowest cost network alleviating MNO margin pressure associated with cellular data growth. Moreover, when SmartConnect is embedded on the device, the friction of network selection and the frustration of poor network quality is reduced.
The challenge for us is that the mobile operators cannot casually make technology decisions that impact hundreds of millions of users. These decisions require months and months of evaluation and testing and navigation through multiple mazes of corporate approval cycles, that's the bad news.
The good news is that many of these cycles are and have been underway some for well over a year. While this segment needs our technology more than ever, our challenge continues to be trying to predict the exact decision timing.
So what does this all mean to the months and quarters ahead? First we know that our technology is credible and plays a key part in the mobile global future. How do we know this? Well first, as you've seen we've received a credit line of up to $20 million from the Fortress Group alone based entirely on the value of our intellectual property. We've heard from respectable sources that IT loans of this type would be funded on roughly 1/2 to 1/3 of the estimated value of the technology, a number that would certainly be north of our current market cap.
And also as I just noted, Pareteum has already been using our technology to close new Pareteum business. Our advancements in SmartConnect and the related data allow us to address not only our traditional enterprise market but also affords us access to new market segments including of course the MNOs and MVNOs that we just stuff.
For using this power of SmartConnect and the data it includes to reposition the way we are selling to the enterprise. As corporate workforces are all virtually mobile today, having the technology and tools to get the most productivity out of the mobile workforce is increasingly important.
By using our new location technology, businesses can keep their employees securely connected making a more productive by providing the operational visibility and insight needed to keep cost predictable. We have a number of new enterprise customers already in the early stages of evaluating this new value proposition and the data associated with it.
Now the final market segment facilitated by SmartConnect can be described as brand royalty and a location intelligence. Location intelligence represents a huge market opportunity. With the data we collect from SmartConnect, we offer brands and opportunity to power their mobile applications and to leverage global Wi-Fi connectivity as a benefit to their consumers when using their applications.
The value derived for the brand is twofold. First, the brand gets access to the most accurate first party location services data about their customers and second customers of that brands application can be always best connected with access to 65 million hotspots across the globe.
In short, in a crowded app market fighting for space out of constrained smartphone screen, SmartConnect can help brands differentiate their apps.
In summary before turning over to Darin, on this call three months ago our balance sheet was weak casting doubts on our future despite the great progress we've made with the product and our success in reducing costs. Today, thanks to the partnerships with Fortress and with new technology licensing deals, we have sufficient cash to meet our objectives especially with lower expenses and anticipated revenue growth.
As I mentioned, ours is an industry influx and times like these are right for consolidation. And as I've mentioned in the past indeed there are opportunities for iPass to bolster our positions in both connection management and data services just as iPass may provide others some missing pieces in a larger jigsaw puzzle.
Before closing, I want to acknowledge the addition of Neal Goldman to our Board of Directors. I've known Neal for over two years, he has proven to be much more than just another investor and as such I frequently reached out to Neal for his advice and counsel. He understands both the opportunities and the challenges we face. And Neal's commitment of his limited and valuable time is further validation of the course we've taken. And now that we've bolstered the balance sheet and have sufficient runway, I look forward to working with Neal as we navigate through that global jigsaw puzzle.
With that Darin, how about some detail on the results.
Total revenue for the second quarter was $10.5 million down from $11.4 million in the first quarter. Three major factors impacted our revenue for the second quarter. First, we sold a perpetual license for iPass SmartConnect software to Pareteum, a growing leader in the mobile networking software and services space.
The license includes 25 million seats for $3 million and has an annual renewal for maintenance and support of $600,000. The license does not include commercial Wi-Fi footprint so that is an add-on if any underlying Pareteum customers decide to add commercial Wi-Fi to their mobility solution.
As Pareteum discussed on their Monday earnings call, they are already embedding SmartConnect at the code level in their software stack and have closed new deals that include integrating the iPass solution.
Revenue recognition on this license sale was not straightforward as one, this was our first sale of a large-scale perpetual license so we have no history of delivering this product as a license. Two, the payment terms stretched through the end of 2018 including $1 million that was paid in Q2 and $1 million each due in Q3 and Q4 of this year.
We carve the first year annual maintenance of 20% from the total sales price and recognize that ratably over the first 12 months. And four, accounting guidance requires us to assess variable consideration and estimate a constraint on any potential event that could result in material reversal of revenue in subsequent periods, such as a failure receipt payments for future installments due.
Based on those factors, we recognize approximately $850,000 of revenue in Q2 on the license sale with 2.15 million being booked to deferred revenue. Remaining license fee revenue will generally be recognized as payments are received from the customer.
While deferring and recognizing monthly, the maintenance component for $600,000 is normal standard operating practices. We would hope on future license sales to remove the uncertainties related to constraint on variable consideration and not defer license revenues to future periods.
Had the license revenue been recognized fully in Q2, we would have added 1.6 million of revenue for a total Q2 revenue of 12.1 million just about where we expected to be for the quarter ended June 30, 2018.
Second, under our contract renewal we signed with a large channel reseller in EMEA in 2017 for their legacy pay-per-use customers. We began invoicing them for unique active users of our open access or curated footprint in January of this year.
As we've talked about before, open access connectivity is a feature set of SmartConnect along with other features such as security, data analytics, and seamless authenticated connectivity commercial Wi-Fi access points. This contract has been renegotiated to remove their standalone platform fees that cover the use of iPass SmartConnect software for their end customers and to consolidate that platform fee into a user account billing mechanism.
The customer was unhappy with the level of detail we were able to provide on the transactional trail of the open access users to enable them to build their in customer accounts and disputed our invoices during Q2. We billed in accordance with the contract but as a sign of good will to a significant partner agreed to credit out approximately $500,000 of billed revenue for the six months ended June 30, 2018, roughly half of that was related to Q1 '18 billings.
We are currently working to amend the agreement with them and replace the platform fees that were removed last year and replaced with these open access users. While this set of events was unfortunate for a revenue perspective, it points to the intrinsic value that is being generated by our SmartConnect software. As the reseller users have transitioned from a mix of commercial Wi-Fi versus open access users of 95% versus 5% two years ago to roughly a 60:40 split as of today.
Licensing our technology will continue to be the most advantageous way for iPass to recoup monetarily on the significant curated offload functionality we have built into SmartConnect.
And third, churn was expectedly high in the second quarter totaling $6.8 million. Remember, we calculate churn as the annualized impact on revenue based on prior quarter run-rate of any customer that terminates or has write-down of committed contract value during the quarter.
Approximately $4 million or 60% of the annualized churn is already represented in Q2 run rate revenue as revenue declined quarter-over-quarter by $1 million based on those churn customers. I’ll add some additional color around churn later.
Summarizing those three factors, and adding ACV conversion from Q1 and Q2, run-rate revenue assuming recognition of one-third of the deferred perpetual license revenue in Q3 will be approximately $10.5 million going into Q3. Our stated goal is to add to the four additional license sales by year-end which will be critical to reaching our revenue goals for 2018.
Net annual contract value or ACV increased to $3.5 million for the quarter up from $1.6 million in Q1. The Pareteum license accounted for $3 million of that while enterprise deals were $400,000 and other strategic partner deals were $100,000. We did not closed any standalone Veri-Fi data deals in the second quarter but data analytics was a contributing factor in the sales cycle of all the deals we closed this quarter.
Now coming back to turn, two-thirds of the reported $6.8 million of Q2 churns occurred in four customer accounts. As Gary mentioned earlier, the biggest single impact $2 million or 30% of that churn was from the expiration of a committed contract with AT&T to purchase global Wi-Fi access through iPass.
They continue to buy access to very limited networks for us but will only accept networks operating at 802.1x specs. Very few global network suppliers currently support that spec and AT&T's usage of iPass network has declined significantly over the last six quarter.
In 2017 the users accounted for 22% of iPass's total network usage in terms of hours consumed. That percentage fell to 13% of total hours in Q1 2018. The last quarter under their committed contract and down to all the way to 2% of total hours in Q2 '18 as they moved fully to pay as you go.
As Pat would tell you, if they were using SmartConnect their users could enjoy an 802.1x like experienced using our quality of service, command and control functionality. Trust as she is working to convert them to our technology as soon as possible.
The other three large churn customers were enterprises, two in EMEA and on in the U.S. all of which were on legacy pay-per-use plans. Amazingly all were heavy users of the network service but we had no luck in converting them to our unlimited plans.
Undoubtedly, when perceived as a standalone Wi-Fi connectivity option for enterprise employees, the value proposition can fall on deaf ears especially if the enterprise has decided to purchase unlimited cellular data plans for its employees.
As we've been saying for several quarters now, we have to be embedded in the mobility stack starting at the always best connected technology layer to provide ultimate value and long-term stickiness within the enterprise. We aren’t an MVNO and we don't resell cellular connectivity. So we are only part of an enterprise's end-to-end solution for mobility cost.
The long-term value in iPass continues to be the level of partnerships with other mobility service providers where our technology can to reduce the cost of service, improve intelligence to data mining, and deliver a seamless and secure connection experience regardless of the bear.
Lastly on churn, we originally plan for roughly 12% annualized churn in our 2018 budget. Q2 is always our highest churn quarter just based on renewal cycles of our customers with roughly 40% of normalized annual churn hitting us in Q2 for each of the last three years. But with the unexpected magnitude of this quarter's churn, our annualized plan number is now closer to 20% from the original 12% for this year.
Network Access Costs or NAC was $6.3 million for the second quarter down from $6.8 million in Q1. The decline correlated with our 10% reduction in commercial network hours consumed in the second quarter. Gross margin declined slightly from 28% in Q1 to 26.7% in Q2.
On a GAAP basis, net loss was $4.5 million compared to $4 million in the prior quarter. Operating expense adjusted for foreign exchange gains and losses was $100,000 higher in Q2 versus Q1 and gross margin contribution was $400,000 lower. Our adjusted EBITDA for Q2 was a loss of $3.7 million compared to a loss of $3.4 million in the prior quarter.
Moving on to the financing front. We raised $3.3 million in equity during the second quarter from the Aspire at the market arrangement at an average price per share of $0.37. While we still have dollars capacity left under our shell, we have fully used the allocated shares. So the ATM is effectively used up at this point. We exit Q2 with 79.5 million common shares outstanding.
In June we closed a four-year term loan with Fortress Credit Corporation backed by evaluation of our intellectual property portfolio. It was an exhaustive process to review our IP, conduct validity checking and support our collateral value for the hard work our engineers have contributed to the development of our technology over the last several years.
We funded $10 million with an additional $10 million of collateral value that can be drawn at the approval of Fortress. We will pay interest only for the first 18 months at a variable rate currently up 13% tied to LIBOR fluctuations.
We also issued Fortress 2.8 million warrants good for seven years with an exercise price of $0.30 per share. As standard whit this type of debt, we now have various covenants of default as discussed in our 8-K we filed on June 19. We will also be filing the relevant credit agreement documents as exhibits to our 10-Q to be filed tomorrow August 9.
While the debt capital is relatively expensive, we are grateful to Fortress pursuing the value and the technology we have developed and believe the cash infusion will provide iPass the financial help to complete our turnaround.
We exit Q2 with $8.2 million of cash up from $2.8 million at March 31. We use a substantial amount of proceeds from the debt and equity raises to catch up on some 8 trade payables with our traded fee balance declining $3.7 million from March 31.
And finally under our current plan with NASDAQ to prevent the delisting of our common stock under exchange, we are initiating the reverse stock split process that must be concluded by August 23 including finalizing all investor outreach over the next few days.
We continue to execute on our plan to increase our market capitalization including issuing additional equity to meet the $35 million threshold required by the NASDAQ capital market and remediate that efficiency in our listing requirements.
That concludes my remarks and I'll turn back over to Gary for some closing comments.
Thank you, Darin.
So let me just summarize before turning over to Justin the operator. So, as I mentioned the elements in this transformation are pretty visceral in this quarter. We do have sufficient funds to execute the plan that we have in place and we have - as we’ve discussed some exciting new partners to do that.
I am confident our technology and our product and I do believe that the market is at the point reaching the point where these advantages and the value that we created over the past two years is actually going to start paying off.
So with that Justin could you please open the line for questions?
[Operator Instructions] Our first question will come from Alan Klee with Maxim Group.
Could you talk a little bit about your Veri-Fi product and how the pipeline looks for any new deals with that?
Patricia, do you want to address that?
Certainly. Thank you. Appreciate the question. So the Veri-Fi pipeline is growing and as we spoke last quarter there was the whole GDPR compliance concerns that was - if you would slowing our ability to take to build the pipeline I think that after the compliance announcement and the regulation going into effect in May.
We have seen pipeline growling. What's fascinating for us is not only are we starting to see the brands but to find interest in this first party data that Gary spoke about in his remarks, but also the suppliers, our network suppliers and are in-flight suppliers are starting to appreciate the value of the data that we collect as it relates to how the device is connecting to their Wi-Fi whether it be on the ground or in the air. So the pipeline is growling and we're finding a nice diversification of use cases.
Patricia, if you can - and you also name brands but it might be helpful if you just gave an example of the breadth of those opportunities. Other words the types of brands that are interested in this type of service like the call you had this morning.
We’re speaking with automotive manufacturers, we’re speaking with our financial services organizations which includes banks and credit card. We’re speaking with the airlines as it relates to loyalty programs and the ability to see intelligent location services data as it relates to their loyalty members.
We’re also seeing as I indicated a desire from our suppliers to be able to truly understand network performance and the characterization of the different attributes that we collect and what that actually means to the performance of their networks and their user experience.
So it’s pretty broad which is interesting for us I think as we spoke we've learned a lot about the value and the differentiation of the iPass first party data versus as Gary indicated the other providers that are out there. The different applications that are in fact collecting location services ours is unique because of the level of accuracy due to the presence of Wi-Fi and the SmartConnect technology.
And then with your Tech Data partnership how do you feel about not on the customer support side and the ability of the control some churn there. But on the side of them being essentially a sales, an additional sales force for you. I guess they have to get trained also but could you maybe talk a little about where that stands and how you see that as an opportunity?
Absolutely. So a couple of things. In the United States we've actually taken a position where we've actually moved one of our sales guys to be present in the Tech Data facility in Clearwater to be able to walk the halls and talk to the sales guys. And really be present to be able to drive kind of the daily we’re here where iPass and that's kind of the way you manage your channels.
We have a bunch of different opportunities going on with them right now some of them are high volume opportunities which are actually quite exciting, whereby some of their larger resellers are looking potentially at iPass as an embedded solution.
We have begun to identify resellers for us in the United States and across the European market that are if you would ideal to position iPass as part of their go to market portfolio. We’re talking with Tech Data and some other vendors who they already work with. So you can think about some of the bigger brands where if we added iPass to the “bill of material” and did a channel assembled solution that is including the iPass solution as part of another offering.
This then allows not only Tech Data to deliver more value to their resellers, but it also allows the resellers now to go back into their installed base increasing their ARPU their average revenue per user and also having a richer value proposition for net new prospects. So progress is being made, I hope that we have more to report next quarter.
And then you mentioned something of your partnership with Pareteum of ways that in certain examples how you can share revenue - I wasn't aware that full detail. Could you maybe going into that a little more?
They have purchased a license agreement which of course both Gary and Darin have spoken about in their remarks today. Darin did tell you that when they go into an opportunity where the customer is interested in our premium networks, there is additional revenues for iPass in over and above the value of the license that they purchase. So, the perpetual license gives them the ability to integrate the power of our technology into their end to end platform.
And then predicated on the customer needs we can actually derive additional revenues through the addition of our premium network as a value proposition to their - either their existing customer base or their net new prospects that they’re going to market with our solution.
And this my apologies because I’m new to you guys, but there was something you mentioned something I thought it was something like 10.3 million I’m not sure if that's what you said was maybe your estimate for next quarter or something else. I don't if you know what I'm talking about I have to clarify that?
Yes, we didn’t say as per next call, we said coming out of this quarter based on churn, based on ACV conversion et cetera. Our run rate coming out of the quarter was 10.5 so that the extent next quarter we sell new business, new licenses et cetera that number can go up to the extent that people use more of our network that number can go up.
And then to the extent we have churn above and beyond expectations that number can go down. So it's just trying to normalize our revenue this quarter and say what is the run rate going in the next quarter.
And next will be Jon Hickman with Ladenburg.
I have this question for Darin. I think you said that you needed two or three deals by the end of the year to meet your revenue expectations. Did you say something like that?
Yes, I said our goal for the rest of years is two to four more license is to similar to the license we did with Pareteum.
To meet your expectations for the year, right?
So what are your expectations for the year?
Expectations for the year haven’t changed from what we originally said going into 2018 which we expect to grow revenue and say significantly, but grow revenue in 2018 over 2017. Our 2017 number was the 54.4 million. So again with the expectation we closed one of the license deals this quarter and closed one to two next quarter and one to two in the following quarter and get the revenue recognition stuff cleaned up based on terms and conditions in the contract. We can hit those kind of targets.
And that's the key, Jon, we - and this is, as Darin said, we just didn't understand all the elements of revenue recognition on a licensed deal. So that $3 million to $2.4 million if you take out the service, the annual service contract we had fully expected that was in the second quarter, we'll be smarter in this quarter and the fourth quarter and how we structure those deals so that we get the full revenue recognition in the quarter that they're closed.
The primary driver here was the installment plan we gave him, Jon, which said that a $1 million paid this quarter, a $1 million paid next quarter, a $1 million paid in Q4. Given that we have a history of selling these licenses, there's always concerns in accounting language and to your point from auditors around granting concessions and other or not getting paid - in order to get paid grant concessions etc cetera. So, under accounting guidance, you're kind of stuck in a box.
And by the way the good news in that, that revenue doesn't go away, it just gets recognized in the third quarter, in the fourth quarter. So, it's still there, it's just spread out.
So, how many quarters are going to take to get the rest of the $2.4 million or whatever?
It will all be this year. Right now the payment plan structure is, a payment in Q3, and a payment in Q4. So as long as those all come to fruition, it would be fully recognized in 2019.
And then there's ongoing quarterly maintenance with that.
So, that 600,000 was deferred and recognized ratably over 12 months from the time it was signed. So there'll be some support and maintenance that leads into 2019.
So, can you name any names about the enterprise guys that you closed this quarter? I hope you said three - I think three enterprise customers?
I think we said that $400,000 of ACV, I don't know we said how many customers. Pat, any color on the ACV for enterprise this quarter?
Yes, we don't have. I apologize Jon, but I don't have permission to name them, right, because they've asked to be anonymous. So, I apologize for that, the customer doesn't want us to share their names.
And next will be Scott Searle with ROTH Capital.
I got on the call little bit late so some of this may have already been covered. But I wanted to - Gary and Darin, quickly if you could just tell me how much from Pareteum was recognized in the quarter? And where do that fall? I assume that's in strategic revenue.
Clearly it sounds like you guys are optimistic that the pipeline is going to translate into P&L in the next couple of quarters. So, there's some larger deals around that. I mean, I was hoping you could provide a little bit more color because the implication of being flat this year and as you know to do a number like that it certainly implies some big numbers in the second half. And I know if you're talking about three or four deals the size of Pareteum that gets recognized, that could happen. But could you give us some more color as to why the optimism is there?
And also as part of it, talk about maybe how the balance sheet is impacting the business now, now that you've done in the Fortress deal, is that actually changing the dialogue that you're seeing with customers on that front?
Let me start with your first question. And it was in our prepared comments. When we recognize $850,000 of revenue in Q2 related to the $3 million ACV Pareteum deal, that was all in the strategic partner as you mentioned, there's $2.15 million sitting in deferred revenue for them that will be recognized in Q2 and Q3 or upon receipt of payment from customer for those outstanding installments.
On the question about the balance sheet strengthening and how that's impacting our conversations with partners and additional closing of deals, Pat, you want to add anything there? My first take is, I was having some very difficult conversations when financing came up with some key strategic customers. And I had to say, don't worry we'll do something about it, those conversations have gotten far easier when the sales team says, hey CFO, can you go talk to my customer and allay their fears about our balance sheet and about our continuing ability for going concern?
So, those conversations have become less and easier to have. Pat, maybe you have some additional color around that.
Scott, what I would add is that, prior to the improvement in the balance sheet, we're being asked almost every day to have a conversation with the CFO on the liquidity and the stability and sustainability of the business. And I can say that since we've been able to improve the balance sheet, those questions have stopped. So, that friction in the sales cycle has been removed, which is very good for us.
And Gary and Pat, maybe just from a pipeline perspective, could you give us some idea as to why the level of optimism, and maybe adding on to that as well, the sustainability of it. So we get to the end of this year and you're doing $15 million, $16 million plus a quarter, if you're talking about $3 million types of sales figures for those one-time licensing fees, what is the breath of that portfolio pipeline look like that that will continue to shake out or you seeing more behind it? Can Pareteum be a $10 million a year customer? And what are you - how are you thinking about that pipeline and that funnel of sales opportunities?
Well, can Pareteum be a $10 million a year customer? I think, I wouldn't want to answer for Pareteum but I think if I look at their growth plans and their penetration in the amount of revenue backlog that they are accumulating, as well as the rapidity with which they got into the market with our product, I would say, yeah that's certainly -- I don't think Pareteum would say that that's out of the question, right. I mean, they've already reported a deal worth $2 million to them, I don't see how they wouldn't be fine $10 million a year out of the question and the kind of return there could be for us.
But I would point out that, Scott, just again, this is a license. So it doesn't mean if they do a $2 million deal that we're getting $2 million from that. We have -- they can now serve as up to 25 million users for that that $2 million. And to the extent that they consume that, then of course it would require more licenses.
And then as I believe Patricia mentioned or Darin, the network access is an addition to that. So to the extent that their customers are using not just the technology but the commercial network, that is of course added to revenue.
Gary, maybe to quickly follow-up on that point, how quickly do you expect to see some of that license monetization turning into network utilization? They've got a base as an example out there to go out and start populating with SmartConnect technology. Is there a ratio that you guys are thinking about in terms of network utilization versus licenses that you'd be willing to share?
Not yet. I mean we candidly, we haven't really modeled that yet. I think it's - I would tell you Scott that it's not - I don't expect network related revenue from Pareteum to be material this year. I think it's more of a 2019 - and I say this from experience on what it takes in both the sales cycles but also in terms of integration cycles and getting customers.
And again, I'm hesitant to speak for Pareteum. But I think just the fact that they're causing a lot of deals but they recognize fully what the integration implementation cycles are when they make those reports. So that's why a lot of that revenue is in backlog rather than immediately being been recognized.
I would just say that similar – we can close as you know we've closed a lot of deals with a lot of partners where in hindsight its closing a deal which is difficult enough in itself, but that becomes easy part the hard part is actually getting it into the market and getting, utilization from that partners – consumers or customers.
One last one if I could Boingo reported last week had great results on the Wi-Fi off-line load side of their business growing 20% plus sequentially for two quarters in a row that they've been doing it. I was wondering if you had any thoughts, comments or reaction to that because I would imagine you should be seeing some of the same trends and utilization patterns within your customers or potential customers out there that would hopefully drive business? Thanks.
Certainly we have seen it certainly that's encouraging certainly all kudos to Boingo I mean their performance was terrific. I characterize the difference is this Boingo owns and operates their own Wi-Fi networks. Therefore that they control that traffic and can offer that network to a AML just like they offer it to us right. In other words we have access to that network. We can also traffic to that network, but they have direct control over it.
Now for us to do what Boingo is doing with a carrier, they have to have a SmartConnect technology on their devices to be able to take advantage so that’s the first step. We have to work with the carriers get our technology embedded and then they can offload broadly and generally not just to a specific network in other words a set of instead of going to Boingo. Let’s say I’m Sprint who is certainly a Boingo partner customer. Sprint goes and makes a deal with Boingo and says okay we want to offload to your network.
With SmartConnect Sprint can offload pretty much anywhere we have a footprint including and very importantly to that curated network which is very much in demand now is that open access free network if you will which would be dangerous in a sense if not for SmartConnect technology differentiating between what's good and what's bad. So that's where the real key is and that's where a big part of this future is for us.
But to get there we have to get that first step and get the carriers putting the technology in their stack on their devices so that they can take advantage of that offload. And that when I talk about months-and-months of trials and valuations and kicking tires and driving us crazy that's what I'm talking about.
Gary maybe to follow up one more question just when you look at the pipeline of devices out there right. You look at license with what SmartConnect did with ATM. And you talking about these deals what is that sales funnel look like in terms of the potential number of devices that SmartConnect will verify if we’re sitting out because that’s where the power of the network effect really starts to kick in? Thanks.
Well I’ll give you a number and Patricia feel free to jump in because I’m doing this off on top my head shooting from hip. But if I just said well who were guys we’re talking to what does there install base, subscriber base look like its north of 500 million devices pretty easily. Is that right Patricia.
That’s a good number for what’s in the pipeline.
And our next question will come from Marc Silk with Silk Investment Advisors.
So the customers that you’re working with, with pilots doing offloading and or switching from Wi-Fi to cellular. I know you know we’re waiting for some nice deals there but maybe it would be helpful if kind of give us feedback as far as what they are telling you about your technology?
Patricia why don’t you take one your closest to the actual trials and the results of the trials.
Hand on a heart they're saying that we definitely have a tremendous advantage over any other connection management software in the market that we are really advanced in leveraging machine learning, predictive analytics, predictive steering. So I would say that the feedback we've had and it’s not just verbal feedback the data speaks for itself.
So we have results from numerous pilots where the potential customer such of KPIs that they expected us to achieve and in every pilot that we've completed thus far we have over exceeded their expectations as it relates to the achievement of those KPIs.
Gary mentioned the term command to control the thing that's beautiful about the SmartConnect technology. The MVNO the MNO gets to set their own quality of experience threshold quality of service, thresholds. They get to determine predicated on the results that they want to see how they want the technology to behave.
And so it’s easily managed to be able to be dialed up or dialback predicated on the outcomes that the MNO or the MVNO is looking for as it relates to light least cost routing, intelligent network selection, predictive steering which is all around machine learning technology that we built into the product.
So I feel very confident, very confident that the innovations around our patents that have led us to where we are today allowed us to have probably the best technology in the market today as it relates to connection management intelligent offload.
Patricia if you won't mind, could you talk some specifics without naming names, but just kind of way these trials have been structured in terms of number of users the geographical spread the way the control move that kind of detail I think would be helpful.
So we have done pilots of thousands of users so these are not small pilots these are statistically significant pilots. They have to be and as Gary indicated these customers will not take these decisions in the cavalier fashion, they need to have the data, they need to have statistical sound results in order to be able to take the decision to embed the SmartConnect technology into their devices. And then in turn make it available to the consumer base.
Now we go into these pilots with KPIs with respect to how many megabytes or gigabytes of data would to be offloaded to a lease cost routing or Wi-Fi. And that comes both in the flavor of the commercial networks that we have, but they also want to test the curated network. The open access network they want to see whether or not the QOS on those curated access points are in fact up to quality and will the user have an equivalent - a quality of service experience as if they were perhaps being offloaded to one of our commercial networks.
The results of the trials have indicated that yes in fact because of the manner in which our data driven software works and then our algorithm in our server data server, we will not steer a user to a network that or an AP that doesn’t have the quality of service that would be equivalent to that of a cellular data connection.
The other great news from compilation of pilots that we have completed is that the user survey is come back and the difference in satisfaction between being seamlessly invisibly offloaded to a premium network versus seamlessly invisibly offloaded to a curated network there is really no distinction in customer satisfaction.
So very good news for the market, very good news for MNOs or MVNOs that are trying to improve margins and very good news for their consumers because they will not see a degrading and the performance of their connection, their ability to access the data that they're looking for.
That's extremely encouraging, and at the same time frustrating that these people aren't signing in the bottom line, but again as long as the technology is there than it's - again, encouraging. On the Veri-Fi, would you say the biggest opportunity dollar wise is the expansion of 5G, I know it's not happening tomorrow but are there - is that the main thing that could be huge or are there other things that I should be looking at?
Marc, I would say it is about 5G, it's is not so much - yes, I think there is a role in the data in helping operators plan 5G rollout and where they're putting the infrastructure - I think the bigger opportunity frankly comes back to Wi-Fi, because from everything that we've heard in seeing about 5G - of course we know it operates at a high frequency, and higher the frequency the shorter the - the closer you have to be to a cell.
And when you start doing that math, when the carriers start doing that math, they say holy smokes, the capital required to put in a 5G network is significant. Because the towers or small cells that are very close together in relative terms.
That says that they need something to complement that 5G network, that's lower-cost and available, which you know is Wi-Fi. The problem with Wi-Fi, if it's not filtered is the reliability and the quality and the security, but then again that's where SmartConnect comes in.
So we see - I mean I would say while both are important, I think the most exciting element for us in 5G is again going back to the offload, and I know someone would ask us; well, doesn't 5G put an end to Wi-Fi? The answer is actually the opposite. We can't wait for 5G to start - my fear, my concern is that it still more hype than reality and it's still going to be a while before people get really serious about putting 5G at any significant scale.
So, during the call when talked about the $20 million potential loan, I did talk to some IT experts as well and they concurred that it's - people would lend money two to three times what the intellectual property is worth, which could get you though anywhere between $40 and $60 million.
So, I want be clear because about 10 minutes ago somebody just sold 50,000 shares of your stock at $0.16 and if recovered, that's the dangers of pre and post market trading. But $0.16 at $12 million valuations - so help - but anyways, this is more important.
So, let me walk us through this so people have more information because I feel bad for that person who just sold down there, but is it the - just the intellectual property so the stuff that's pending they're not touching, your relationships et cetera, et cetera because I think you'd like to clarity because again, I really felt that when the third-party valued your intellectual property and who did a lot of scrutinizing, I think we need to know kind of what where we signed off on as far as what they are used in the collateral?
What they evaluate, they can only evaluate the patents that were already granted. I don't - I can't speak for Fortress, I mean - I suspect given that they knew what was in the pipeline, they probably took that into account but I believe that they could only base there, and in fact I asked them this thing, they said, no we really only can base the analysis on patents that are only granted. But again, it's not an exact science in terms of how they do that. And I'm sure that if you're a lender, you take other things into account. But I really can't answer that question.
Even as you said, what their final valuation of the technology was, I don't know what it is, I didn't ask, and I don't really want to ask because we know from what others have said, and our concern was getting capital not so much putting a valuation on the Company.
And I know, I've put an evaluation on that property, but I read a little bit about and talked to them a little about. I mean, at the end of the day, the value you put on intellectual property is the amount of money you're willing to spend to defend that intellectual-property in any kind of wrongful action type suit.
So they obviously took a look at our intellectual property and said there is value here, whether it's in monetizing it through the process iPass is doing it or and arguing it in front of people who are potentially infringing upon it. So, there's two ways to look at that valuation.
I think we're running over a little bit on time. Operator, I think we've got to move on. Marc, sorry to cut you out.
You can go ahead and continues sir.
Thank you, Justin. That concludes our call for today. Appreciate your participation and questions. And thank you, have a good evening.
Well, thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.