Smith Micro Software, Inc. (SMSI) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Smith Micro Fourth Quarter and Fiscal Year 2011 Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, February 22, 2012. And I would now like to turn the conference over to Charles Messman of the MKR Group. Please go ahead sir. Charles Messman – MKR Group: Good afternoon and thank you for joining us today to discuss Smith Micro Software’s fourth quarter and total year ended December 31, 2011 financial results. By now, you should have received a copy of the press release discussing our financial results. If you do not have a copy and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will immediately e-mail one to you. With me on today’s call are Bill Smith, Chairman, President and Chief Executive Officer and Andy Schmidt, Vice President and Chief Financial Officer. Before we begin the call, I want to caution that on this call, the company may make forward-looking statements that involve risks and uncertainties, including without limitation, forward-looking statements related to the company’s financial prospects and other projections of its performance, the existence of new market opportunities, and interest in the company's products and solutions, and the company’s ability to increase its revenue and regain profitability by capitalizing on these new market opportunities and interest in introducing new products and solutions. Among the important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in the demand for the company’s products from its customers and their end users, new and changing technologies, customer acceptance of these technologies,…

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mike Latimore from Northland Capital. Please go ahead. Mike Latimore – Northland Capital: Great, thanks. Mike Latimore. So, thanks for the time. In terms of the Sprint deal, can you provide just a little more clarity around how that deployment is going, do you think you'll get since current users of the phones – of the Android phones implemented in the second quarter just a little more color on the deployment would be great?

Okay, Mike. I guess the way to look at is this. We expect to still launch the first deployments of the software to Sprint users beginning late this quarter and it will go through at least to probably about a six-week period of slow rollout before it then expands into a more rapid expansion. We are initially deploying our software on all of the HTC-built handsets at Sprint. We will then be working on additional handsets after that. But this will provide a very significant base of many millions of users utilizing our software during the current year. Hopefully that answers your question. Mike Latimore – Northland Capital: Yeah, that's great. And then would you for some of the other deals that you are working on or in trials. Would you expect the deployment timeframes to be similar on those or is Sprint somewhat of a unique situation?

Yeah, actually I think because Sprint is the first, it's not – is the first for us obviously it's – it takes a little bit longer because I think for tier – tier one carrier, there is a lot of testing, a lot of reviewing to make sure that they are going to get the results that they are looking for that is already been proven that was very lengthy about six-month trial. We are going a little slower on the deployment than originally expected, primarily to make sure that there are any unexpected problems created for the network. So, again it's the first time it's ever been deployed. Sure, we'd love to have seen it deployed faster. But in all honestly, we are as exposed the Sprint, we want to make sure that this thing goes very well and so a more measured approach does seem prudent. Mike Latimore – Northland Capital: Okay. And just a last question, Bill you mentioned, you think the first quarter is looking similar to the fourth. Did you mean in terms of absolute dollar numbers or in terms of the kind of the change that you saw in fourth quarter versus third quarter?

Yeah, I think it's really looking more similar in terms of trend. So, I mean, I would look for slight – flat to slight – slightly down the first quarter and then as the launch goes on in second quarter, we can start to build things backup. Mike Latimore – Northland Capital: Okay, great. Thank you.

Thank you. And our next question is from the line of Rich Valera from Needham and Company. Please go ahead. Rich Valera – Needham and Company: Thank you, good afternoon. Bill, I was wondering if you can be willing to give us any sense of how much revenue you think you might be able to recognize from Sprint in this calendar year for the Mobile Network Director deployment.

No, I can't give you an absolute number, I mean, clearly we've got to get the deployment rolling, we've got to make sure that there are no pickups along the way and then based on that if everything goes smoothly, it's going to have a very profound effect on our numbers. But I think I made this point a number of times at various conferences and everything that this deal is just the first deal. This is where we get started and building our business case back. And it by itself is not large enough to recover back to the level we were at in 2010. What we need to continue to do is to close additional deals either from Mobile Network Director or Hotspot Manager or some of our other technologies and all of this is in process, I wish I had the perfect crystal ball, I could tell exactly when these deals were hit, but I don't. The good news is that we have a very full pipeline. The good news is we have a lot of carriers literally around the world that are either trailing or about to trial some of our software and all of this does well for the future, but obviously it isn't done until it's done. We have to get the contract signed. Rich Valera – Needham and Company: Fair enough. And with respect to OpEx for the first quarter, can we assume you'll actually be at that sort of $15.5 million to $16 million level in the first quarter or you still be sort of approaching that level.

Yeah, I think you should look at about the $17.5 million and then it will drop down to the $15.5 to $16 in the second quarter. Rich Valera – Needham and Company: Okay, that's helpful. And then just one question on sort of the bigger picture architectural approach to sort of WiFi offload or cellular offload, you guys actually have – obviously have sort of a client maybe focused approach with the centralized policy server. I think some folks were working on more of a sort of core network approach, which at least in theory would seem ideal, but perhaps in practice turns out to network as well. So, just wondering, I am sure you guys have looked at that, just wondering what you can say about sort of the different types of architectural approaches to doing cellular offload?

Actually, I am kind of glad you asked that question. So, let me kind of step it through, because I think it's a very strong story. When you look at a client-server approach, which is what we have, whether in all cases the client is ours, but whether the server is ours or whether it's coming from the likes of the Cisco or Stoke, there are certain things you can do when you have a client-server approach, you cannot do on a server or a network-based approach only. For one thing, if you just look at the biggest numbers somewhere between 80% and 95% of our trial data suggests that about that percentage of time, the average user spends in either his home or in his office, a network-based solution cannot offload to WiFi in the home or the office. So, therefore, it cannot even have an effect on 80% to 95% of the usage that a user has. A client-server based approach can take care of that and does take care of that and therefore allows for much more effective offload to WiFi. The other thing is that these devices use WiFi, they use 3G, they use 4G, so you have to have the ability to turn the various radios on and off to establish a transitional connection, let's say, to WiFi from 3G. Will you make the hook up the WiFi before you break the line for 3G? Network-based solutions can't do that either. There is a lot of really compelling arguments to be made for a client-server base. You put intelligence as the point the users have, that intelligence can then detect what various networks are available if a network is having a problem you don’t try to change them to a network, that's going to cause a poor user experience. All these are the reasons why client-server based applications are the right way to go and as the way we believe over time will win up. Rich Valera – Needham and Company: Okay, thanks for that Bill. Good luck.

Thank you. And our next question is from the line of Mike Walkley from Canaccord Genuity. Please go ahead. Mike Walkley – Canaccord Genuity: Great, thank you. Bill, just maybe building on some of the earlier questions, you said revenues were flat to slightly down, you have to get to almost double in revenue to get back to profitability exiting the year. So, could you just walk us through kind of the thought process to get there one and maybe another way to ask it is how long did the Sprint trial go and what's the expectation on trials, how long it might last until it generates into a contract with some of your Tier 1 potential clients? Thank you.

Let me take that last part first and try to work into first part. If I don't answer it all, come back at me. The Sprint contract or the trials were lengthy. It was about six months. And then we are going to launch in the slower pace than we initially thought we would do just to make sure that we don't have any negative effect on the network, which we don't expect to happen by the way. I think this is really a phenomenon, because they are first. This type of technology has never been deployed at a carrier before. And so everybody is trying to be very cautious about how we go to market. Now, when we look at other carrier opportunities and we have a number of them in the pipeline and on the number of trials that are ongoing, lot of the trials are because they see it's already gone through the trial process. At Sprint, they are willing to accept a much shorter trial period. So, our fond hope is the trials will go a lot shorter and eventually they will not be a need for trials at all as we have more and more carriers deploying our software. So, that’s the first things about the trial and how we see trials going. Now let me talk for a second about the revenue build up. The revenue build up for the Sprint deal is a significant growth over the first 12 months in the deployment. That alone is going to have a strong effect in the outer quarters on what we can build up as far as revenues. But we expect to have other deals either done or being completed that will hit in third or fourth quarter that will have a similar effect and in doing so that will bring us back to the point, where we can be profitable. Keep in mind that our gross margin percentage is low right now because there are many costs that are fixed and we don’t have enough overall revenue to allocate those costs across. As we recover our revenue base, our gross margin percentage should improve that also will make it easier than to get the profitability. So, it’s all about execution and that’s we are all focused on here. Did I answer your question Mike? Mike Walkley – Canaccord Genuity: Yeah, that did. That’s helpful. And just building on that as you work with companies such as HTC it doesn’t matter on the OS, on the smartphone, is it mainly Android that you are working with today or can it work with IOS of Apple and other ecosystems going forward?

Yeah, at the present time, we are focused on the Android and that’s the platform that we work with. We are working on a couple of different approaches to provide somewhat of the same service level to IOS users. Unfortunately because of the fact that the IOS environment in Apple are not particularly open about various things that we need to gain access to. We can’t build a product that does everything that we can for Android. By and large our prospects and our customers going forward are satisfied by what we can do in the IOS area and are more than willing to move forward with us. Mike Walkley – Canaccord Genuity: Okay, great. And maybe you can discuss maybe some of the other opportunities such as your connectivity solution with carriers in India. Just trying to rank quarter, I mean clearly it looks like the MND solution is the big revenue driver, but you layer in other areas to get back to profitability. How do you rank quarters some of your other opportunities?

As we look at our pipeline for MND opportunities assuming that we can be successful in a large of majority of cases that on its own could probably get us back into a profitable spot. But we have other opportunities that are also very exciting. When I talked about in my script one being we are really focused on what we can do to make the whole mobile hotspot experience a lot easier on the consumer and how we can reduce costs for the carriers and then number two our application can control product that I have talked about. It really helps build the fence to cut down on those folks that are free loading on the carriers wireless data service without paying them and giving them away to regain a lot of other revenue that with loss. And then lastly based on the release we put up this morning, we see some new plays for expanding our role in the connectivity space with our QuickLink Zero product. This product is a zero install, everything digitize on the USB device. There are no drivers is a particularly simple approach to getting users up and on the year and we see traction there as well. So, actually, I think when you really look at it, there is probably four different product focuses, all of which can have a strong impact on our revenues. And I say that not because I want to diminish the impact of products like Visual Voicemail or Push-To-Talk or some of the other products like device management, they also have opportunities and we see some of these that will close. So, I think there is a lot of place. It’s all about execution. I can’t fix what happened in 2011. The market changed. What we can do though is leverage on all the investments we made in R&D over the last few years by delivering these new technologies that carrier seem to want to buy, and clearly, the MND one is fully validated now with the Sprint contact. We hope to be able to validate the others with contracts. And then I think the question about how do we get back to profitability becomes a lot easier for all of you out there to gain the same confidence that I might have. Mike Walkley – Canaccord Genuity: Thanks, Bill. Andy, just a quick question for you and I’ll pass it on. How should we think about the tax rate for 2011 given the transitional business and any expectation for CapEx during the year? Thank you.

Sure. At this point, I'd model a 37% tax rate. Everything we've been talking about is then how do you get to profitability in Q4, so that’s just single quarter. So, expect the year to be at a loss, so then that would be a 37% tax rate against the loss. CapEx, we are not forecasting significant CapEx at this particular time, but it’s subject to probably as new deals rollout as you are well aware we have a number of trials underway. And depending where these trials are located, there is question and a decision between Smith Micro and our customers on how these deployments are hosted. To the extent that we host any of these rollouts, there will be a CapEx spend and to the extent that the customer does, there isn't. So, that's something that we’ll stay tuned to. Mike Walkley – Canaccord Genuity: Okay. Good luck gentlemen. Thank you very much.

Thank you. And our next question is from the line of Scott Sutherland from Wedbush Securities. Please go ahead. Scott Sutherland – Wedbush Securities: Great, thank you. Good afternoon. When you guys look at some of the potential deals or trials in the pipeline, are there any competitive solutions that those carriers are looking at as well and if not what are the alternatives for the carriers to manage all these devices and the data that they use?

Well, Scott I think the earlier question about the difference between a client-server based solution or a server-only network based solution is one particular area, where we see some competitive issues. We do see a couple of smaller competitors like Birdstep at some of our carrier opportunities, but they don’t seem to be particularly strong competitors. I think the ones that probably can create the most fun and challenge for us are the large hiring guys that are trying to push a server-only answer, but I think we have such a strong answer for that and the carriers see that quickly that I just don’t see that as a really big issue. One of the other things that I didn’t mention about the difference between clients and server-based solutions is when you have a client involved, there are many times where the user will never even touch the wireless carriers infrastructure, they will just be placed on to the WiFi that's available. You can’t do any of those kinds of things with a server-only answer you have to have a client. So, we are working closely with a lot of the big hiring guys, where we are the clients and they provide the server. And I think that really is the future. Now, you saw the Stoke press release we put out probably two or three weeks ago, and clearly is very complementary, our client offering with the iron guys, server offering. So, I think there is ways to work with them and mitigate the pressure from competitors. Scott Sutherland – Wedbush Securities: When you look at Mobile Network Director as the market develops, how should we think about the business model versus your connection manager, would pricing per unit be down, but there will be a lot more units in your traditional connection manager model?

Yeah, well, okay. The pricing per unit maybe less, but you're right you're looking at all of the Android-based phones to begin with and then following on as we come out with our iOS based solution. We can add that to it. And clearly, you are talking about even at a midsize Tier 1, millions and millions of units, well that’s a number far larger than was ever seen in our prior business case of providing wireless data access for PCs and Macintoshes. Scott Sutherland – Wedbush Securities: Okay. When you talk about wanting to get to profitability exiting this year, is that based on an OpEx run rate at $15.5 million to $16 million investing into revenue growth and gross margin expansion we get there, is that how you are looking at it?

Yeah. Why don't you – that’s a good place to look at it. Scott Sutherland – Wedbush Securities: Okay. Lastly, Andy what was the CapEx in the quarter and the international revenue?

Sure, okay. International was I believe, I said here $1.7 million for the quarter. And let me get you some CapEx, CapEx for the period about $331,000, total CapEx for 2011 was about $13.4 million. Scott Sutherland – Wedbush Securities: Okay, great. Thank you, gentlemen.

Thank you. Our next question comes from the line of Brian Swift with Security Research Associates. Please go ahead. Brian Swift – Security Research Associates: Yes. Most of my question have been answered except could you give a little bit color on the Stoke announcement that was made a week or so go just from the standpoint of – we view that more of a reference type of an account or it kind of gets you into some areas, some companies that you haven't been in before or just kind of how do you view or how should we view that relationship?

Sure. As the Stoke answer as well as the interoperability testing we've done with Cisco are both similar. Obviously, Cisco is much larger. And where this has a impact is were certain carriers want to go with a hardware answer for the server side and then they use our client. Now, in many cases, the carriers in question already have a business relationship with us. So, we don’t necessarily view Stoke or Cisco as potentially being a customer as much as being a partner in building the final solution. Brian Swift – Security Research Associates: Okay. Are there any other – is it open up opportunity get to some other customers that?

Of course, it does. And there are certain carriers where all of these folks are bidding and in most cases they were all bidding and using our client. I mean, that’s a very compelling situation to have. Brian Swift – Security Research Associates: Okay, thank you.

Okay, thank you.

Thank you. (Operator Instructions) Your next question is from the line of Charlie Anderson from Dougherty & Company. Please go ahead. Charlie Anderson – Dougherty &: Good afternoon. Thanks for taking my questions. Just a piggyback on the earlier question iOS and Android, I think you said there maybe some limitations, some things you couldn’t do in iOS that you could do in Android, I wonder if you could maybe provide a little bit more color there?

Good afternoon. Thanks for taking my questions. Just a piggyback on the earlier question iOS and Android, I think you said there maybe some limitations, some things you couldn’t do in iOS that you could do in Android, I wonder if you could maybe provide a little bit more color there?

We have the most obvious one is really fairly straightforward. In the iOS case, Apple does not provide us with the APIs to turn radios on and off as needed. That's something that’s really important to doing the couple of things run down the battery on the devices fast because you don’t have more radios on than you need ad on and that also allows us like I said earlier it could be online with the data call unless say you are in 3G or 4G and you want to move to WiFi that just become available to you. We will make the WiFi connection before we break the 3G or 4G connection that guarantees a seamless handover for the user. Totally transparent the user and then doing so it provides not only the most effective use of the various wireless networks available at the time, but also provides the most cost effective approach for the user. Charlie Anderson – Dougherty &: Got it. Thanks for the color. Just a couple of housekeeping questions, to look at your short of core connectivity business, it took a couple of legs down earlier, but it seems to short of found level around $.5 million. I wonder we are short of steady on that level for a while given how some of those contracts are structured or just kind of how we should view the trajectory of that line item?

Got it. Thanks for the color. Just a couple of housekeeping questions, to look at your short of core connectivity business, it took a couple of legs down earlier, but it seems to short of found level around $.5 million. I wonder we are short of steady on that level for a while given how some of those contracts are structured or just kind of how we should view the trajectory of that line item?

Yeah, that’s a good assessment and probably you will see more than anything else. Some accounts are going to continue to decline, while we are also picking up new accounts in this offshore and as Bill pointed out the zero install is part of that whole evolution of that product line. So, I would say we found the floor. Charlie Anderson – Dougherty &: Good and then Andy, have you guys bought any stock back in Q1 here?

Good and then Andy, have you guys bought any stock back in Q1 here?

We have not bought back any stock at this point, but as Bill announced we have got approval now to do so and we anticipate taking a hard look at that over the next couple of months.

Actually the reason for that is quite simple. The trading window doesn’t open up for a couple of more days after this call and the company must abide by the trading window just like other insiders have to do. Charlie Anderson – Dougherty &: Go it. Thanks so much.

Go it. Thanks so much.

Okay.

Thank you. And at this time, I am showing no further questions in the queue. I would like to turn the conference back over to management for closing comments. Charles Messman – MKR Group: Thank you again for joining us today. Again if you should have any other questions, please feel free to give us the call in the office and we will look forward to updating you on our first quarter conference call, which will be late April. Also I would like to invite anyone that’s attending the Mobile World Congress next week in Barcelona, please come stop by and say hello at our booth. Thank you.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and at this time, you may now disconnect.