Smith Micro Software, Inc. (SMSI) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Smith Micro Software First Quarter 2012 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, May 2, 2012. I would now like to turn the conference over to Charles Messman with MKR Group. Please go ahead. Charles Messman – MKR Group: Good afternoon and thank you for joining us today to discuss Smith Micro Software’s first quarter 2012 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 us at 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 CEO and Andy Schmidt, Vice President and Chief Financial Officer. Before we begin the call, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitations, forward-looking statements relating 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 new solutions. Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s products from its customers and their end users, new and changing technologies, customer acceptance and timing of deployment of these technologies, new and continuing adverse economic conditions,…

Thank you. We will now begin the question-and-answer session. (Operator Instructions) and our first question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead. Mike Walkley – Canaccord Genuity: Great, thank you. Bill, can you just update us on the WiFi offload, I mean, we met with you at Mobile World Congress and certainly WiFi offload was a big theme there. What did you learn from your trials and conversation with carriers and then that's what's leading to your Netwise passport product and just update us on the pipeline and how to split to the new products?

Well, the network, the Netwise passport product, we had always referred to prior to this is the application control product. Well, it is a close cousin to the mobile network director now. We are in the Netwise manager. It is a – it serves a different purpose and we have opportunities that we are aggressively working at the present time and we look forward to talking about successes with that product as well. When you talk about the WiFi offload clearly that was a major theme of the Mobile World Congress and I'm sure we will be a major theme of CTIA next week and what we are learning is our approach to this particular problem and solution was very well product. We have a very strong product that is meeting the needs of the market and meeting the needs of our customers and lot of those needs are somewhat unique. It's not like a one-size fits all as we go to from opportunity-to-opportunity. And I talked about we have in excess of 10 opportunities we are working on right now, let me try to find what mean by that or either in lab trials, field trials or proof concept with all of those. In many cases, we are right now looking at ourselves has been so source. So, this is an effort where we need to demonstrate to the marketplace and to the future customers that the product will indeed meet the needs of objectives as they have laid out and was installed. Long answer to the simple question. Mike Walkley – Canaccord Genuity: That's helpful. And maybe you can just discuss what you learned so far with Sprint with the ramp appearing in Q3 is there any technical hurdles that you are learning from it or is it just the timing, just the slow rent before you have larger rents in the back half of the year? And then if you can maybe help us kind of quantify all the new deals and how to think about the trajectory of the models if you are still in maybe breakeven exiting the year hits your goals?

Yeah, we've learned a lot in Sprint. The first one is always the most challenging and is challenging for all parties, I mean, it's challenging for us is the software provider is challenging for the device manufacture that has to integrate our client and the hardware and the version of the android operating system if they are using and it’s challenging for the carrier who is concerned about the overall user experience. As we've moved through this with Sprint, we've learned a lot, I think all parties have learned a lot. I think its going fine. Yeah, we will start the rollout. There are three target cities that will be launched next week, and then it will continue through Q2 with what we believe will be the largest percentage of installs for the installed base happening in the early part of Q3. Mike Walkley – Canaccord Genuity: Okay, great.

There was more to your question I think, but I can't recall. Mike Walkley – Canaccord Genuity: Yeah. That answered a lot of that. On the Sprint side, just more in terms of the pipeline of products and if you still think that they layer on top of each other that it could be reaching a breakeven level exiting the year? And then I have one follow-up question and I'll pass it on?

Okay, yes. I mean, this is what we are focused on. We need to start to really – we need to see some improvement in the current quarter, I don’t think its going be a large improvement by any means and then see a step up in Q3 with the larger volume of the launch of MND at Sprint as well as some other wins that we expect to see by Q3. Following that up, we get more wins that we expect to see for Q4 and meet our overall goals of getting into a breakeven of positive number by the end of the year.

Yeah, Mike, just following up, I think you stated that correctly and that it's an internal goal to get the breakeven certainly and still said though we've got to close deals. We don’t have deals closed yet to get there today, but we have deal from Verizon that are possibilities. We've got to get them close and then they have to get launched.

Okay. And that last part is always the caveat, it seems like, we think going through all the trials and field trials and all that kind of thing again the contract done will be the hard part. I think the hardest part is getting it launched after all the contracts are signed and the ink is dry and just seems to be somewhat of a painful process to get it going? Mike Walkley – Canaccord Genuity: Yes. Well, good luck closing the other. It's always tougher with the carriers as you look to the process and just a one last follow-up question on Sprint. Just given the last six months big share shift within their sales to more iPhone, has that changed? These are opportunities for you at Sprint or is it still about the same as your initial expectations?

Well, I think it's still about the same as our – as we are going in we knew that they were going to have the iPhone and obviously they've – they've done a great job there and we look for ways to maybe even piggyback on, on that going forward. So, you'll have to say stay tuned. Mike Walkley – Canaccord Genuity: Okay, great. Well, thanks for taking my questions and we look forward to seeing you in CTIA next week.

Thank you.

And our next question comes from the line of Scott Sutherland with Wedbush Securities. Please go head. Scott Sutherland – Wedbush Securities: Great, thank you and good afternoon.

Hi, Scott. Scott Sutherland – Wedbush Securities: So, following on those questions, you mentioned over 10 deals in the pipeline for the network director, I guess in the new Netwise Director product. How are the deals do you see there? You are the only guy and how many are competitive, especially regarding the CTIA we're getting e-mails from other people who claimed to have a WiFi offload type solutions.

Sure. There are – there is a split, I mean, obviously somewhere we are in the very competitive position. And there is others where we are not, and yeah, I am not going to breakout the exact numbers, but I just kind of let you know, it goes both ways. And the good news is that this has a very global look, that’s a good news. The challenge is we also have to manage all of these efforts on a very global platform. And we’re doing so with somewhat reduced headcount over the size we used to be. So, we have to be very judicious about how we go about this, but we are also very conscious on the need for very successful trials and then very successful implementations. That’s the key to our whole recovery strategy. We are very much focused we look forward to good results. And I look forward to being able to tell you about it. Scott Sutherland – Wedbush Securities: So, competitively seeing other people come out of woodwork and offering a network offload, you've really pushed your client side advantage. Are you seeing any one adopted client side? Architecture is where our most of these multi-service side?

You see both. The traditional competitor is first step. We haven't really seen green packets if they have the clients. And then we have at least one case, where we see some competitive action from synchronous, but that really exist, but rest are pretty much all non-client side competitive undertakings. And I think the way we view that is not necessarily a competitive issue, it's more a matter that as this thing evolves, they could really be our partners, because we make our money primarily for selling the clients. If the carrier wants to use somebody else’s server, that’s fine too. We build both. There is no reason to not to use us across the board, but if that's what they want to do, I think that’s a way that you can take what you might view as a competitive situation into a partnership opportunity. But the other thing that I think is really very important and it's the part that I think we are very unique about is we always talk about things in relationship to WiFi. In many cases, these prospects and customers that we are working with WiFi is a secondary part of the overall equation. It’s maybe more important to some carriers that they establish least cost routing for roaming. It maybe more important to some carriers that you seamlessly move between 3G and 4G and WiFi becomes a backup plan. So, you have to be careful, we all have to be careful when we talk about this whole area that we don’t pitch and hold this thing into just being all about WiFi, because it's not. And some of these carriers don't even care about WiFi. Scott Sutherland – Wedbush Securities: When you look at the 10 plus customers in the pipeline, would you say they are cross carrier sides the Tier 1 to Tier 3 or is there anything that dominates there?

Yeah, they are almost all Tier 1. Scott Sutherland – Wedbush Securities: That’s great. Last two questions, last year, you announced a lot of international deals for connection manager, new international revenue is still kind of flattish, any expectations for that to ramp or start benefit a new or is it just a very slow process international there?

Well, I think real play for international is going to be with the Netwise Director product, because that’s where the really significant revenues are. We have some deals in the works that are very substantial to us and we look forward to seeing a successful outcome. And I can’t talk about them yet and we don’t have the deal signed, but everything is looking constant. Scott Sutherland – Wedbush Securities: Okay. And last what’s your target to go for OpEx and what's the cash flow and CapEx in the quarter?

Sure. Scott, we were right around 16.3 million on the pro forma expenses, which includes $300,000 of restructuring expense in the current period. We look forward about mid 15s 15.5 million on our pro forma OpEx. CapEx is at this point pretty much minimal. We did quite a bit of invest in last year in terms of preparation of data centers and whatnot for the current product lineup. So, cash flow was pretty much mirrored our pro forma operating loss, which was net use of cash and little bit over 8 million for the period. And again, CapEx is going to be under $0.5 million a quarter and in many cases maybe about a $100,000 a quarter, unless it’s specifically aligned with the deal, where particular customer is asking us to host the solution. That’s somewhat different, but we are not forecasting that scenario at this time. Scott Sutherland – Wedbush Securities: Okay, great. Thanks guys.

And the next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead. Charlie Anderson – Dougherty & Company: Good afternoon. Thanks for taking my questions. I wanted to start with your answer earlier on the tougher part is getting these things ramped up you signed the deal, I think you signed Sprint in January and we are not going to see that really ramp until Q3. So, if I think about sort of the 10 engagements you have, it feels to me that the lag would push those into 2013, where we really start to see revenue contribution. I wonder if there is any reason that would come earlier than kind of the same gestation period you're staying with Sprint?

Yeah, that’s a really good question. I guess, first off, obviously none of us really know the answer to that until we actually get to that. But let me try to give you the best answer that I can see. First of, lot of the issues that we had to work through with Sprint are really all about – this is the first time has ever been done. The next ones aren't the first time. So, you learn from those experiences. To the extent that some of the next wins, our product offerings that may pretty closely to the client service offerings being used by Sprint, I'm talking about feature Sprint. Yeah, those could be deployed much quicker. In some cases, some of the very largest cases, some of the uses cases that carriers looking at are much more complex in some areas and very similar and others and that might have some impact on schedule. I guess the net is as we go through this over a number of times with the different carriers, I do believe that the overall gestation period that getting a thing from signing to deployment. We'll get much smaller because we will have already gained experience and know what the potential issues are.

Sure, certainly adding to that, there is no doubt about and I think a positive is 2013 and beyond is definitely more than part of the opportunities. They are not flash the pan opportunities where you see a one quarter hit and then you go find other customers. It's more it's similar to the old connection manager business group for multiple years. So, the best again get this landed at that point then you launch on multiple devices and continue to rollout in partnership with your carrier customers, which is good on the longer run. Another side of acceleration Bill would mentioned before that in cases of the server only type solutions. There are partnership opportunities. Partnership opportunities can actually accelerated revenue trend, but those have been yet to be determined. So, there is different ways that they can accelerate the key takeaway should be these are long running opportunities, not just let's get a good Q3 or Q4, is there are opportunities where we look at and being producers in 2013 and 2014 and so on. Charlie Anderson – Dougherty & Company: Perfect, thanks for the clarity there. And I just wanted to move to the connection manager, you see it being relatively stable or do you see might may be an uptake with some of the new opportunities even talk about a little bit in the next quarter.

Yeah, the new opportunities could be very, very positive, I mean, the opportunity I talked about where we think we do have a deal well and handle with QuickLink Zero is with the large Tier 1 carrier and that's the positive re-surgeons of the whole space. This particular usage case will be heavily built around WiFi pucks and so that's exciting as well. We have other deals that we are talking about, none of them are – none of them are signed, but we – everything is moving forward and everything looks good. So that could stabilize and actually may be over some period of time the list that whole sector so that the QuickLink family of products will become more meaningful again in our overall numbers.

And Charlie, it's – I'm glad you brought up point because it's an important question, I believe some people thought that whole line of business was a continued rates to zero and from what we are seeing that's not the case. We did about roughly $5.5 million in just peer connection manager business in Q4. Current period is about $4.9 million. So, it's so much stable, this is just basically USB type connectivity business and we've got other business that lays on that shows it up and begin with and then we go from there. So, rather than being a continuing decline in piece of the business, it shows signs of stability around the four to five – may be $5 million level, which then adds just takes the declining part of the model away and we can start looking at how we layer new deals on top of that. Charlie Anderson – Dougherty & Company: Perfect.

I think another one that you should not with side of it as we talked about is what we see going on in the first three responder federal LTE network rollout, I mean, our enterprise connection manager is a big play in that whole space and we see that is having a lot of legs over a fairly substantial amount of time and we're getting a lot of leverage there. So, that's another area for the overall CM space that will and probably could grow very nicely. Charlie Anderson – Dougherty & Company: And then just last from me, let's say that gestation period turns out to be longer and we are still doing $10 million, $11 million, $12 million in the back half. I wonder if you adjust OpEx at all if we had a scenario like that beyond this for $15 million, $15.5 million?

Obviously, I think we’ve demonstrated that we will do the right thing of about OpEx and very hopeful and really don’t believe that the – what you said we will actually be the case. Of course, we would do what we have to do where the business we know what to do. Charlie Anderson – Dougherty & Company: Great. Thanks a lot.

(Operator Instructions) And I’m showing no further questions. I’d like to hand over back to management for any closing remarks. Charles Messman – MKR Group: Again, I’d like to thank everyone for joining us on our conference call. We look forward to updating you on our second conference call. I also wanted to note that the company will be attending CTIA next week, which will be in New Orleans and interrupt the following week in Las Vegas. So, if you are there, please come stop by, and of course, if you have any questions, please feel free to give a call to my office. Thanks again and have a great day.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect.