Smith Micro Software, Inc. (SMSI) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro Software Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] This conference is also being recorded, today March 6, 2014. I would now like to turn the conference over to Mr. Todd Kehrli of the MKR Group. Please go ahead, sir.

Thank you, Operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software's fourth quarter 2013 and year-end financial results. By now, you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit our website at www.smithmicro.com or call us at 949-362-5800 and we will immediately email one to you. With me on today's call are Bill Smith, Chairman and President and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer. Before we begin, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitation, 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 and introducing new products and 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, customer concentration given that the majority of our sales depend on a few large client relationships including Sprint, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continuing adverse economic conditions, and the company's ability to compete effectively with other software companies. These and other risk factors discussed in the company's filings with the Securities and Exchange Commission, including its filings on Form 10-K, 10-Q and 8-K could cause actual results to differ materially from those expressed or implied by any forward-looking statements. The forward-looking statements contained in this press release and call are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this release, and the company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this call and release. Before I turn the call over to Bill Smith, Chairman, President and CEO of Smith Micro, I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures. With that, I'll give it over to Bill. Go ahead.

Thanks Todd. Good afternoon and thank you for joining our conference call to discuss earnings for the fourth quarter and fiscal year ending December 31, 2013. Total revenues for the quarter were $11.8 million, up 35% sequentially from the third quarter primarily due to new revenues from Intel, which is the chip manufacturer we have referenced in previous calls as well as a strong holiday season for our Productivity & Graphics products. Although fourth quarter revenues were down approximately 2% from the same quarter last year, we saw a total year-over-year increase in our CommSuite, NetWise and Productivity & Graphics product lines of $4.6 million. In addition non-GAAP loss per share improved from $0.06 in the fourth quarter of 2012 to $0.01 loss per share in Q4 of 2013 reflecting the positive impact of our third quarter restructuring. We achieved significant progress in broadening our channels and establishing key contracts in the last half of 2013 including the reseller agreement with Panasonic that launched a more premium service – six [ph] services with Sprint and two new NetWise contracts in Latin America, one with Televisa, the largest cable provider in Mexico and the other was a wireless operator in Argentina yet we expect to formally announce in Q2. Most notably, we had several connectivity related engagements with Intel that when combined with a 21% sequential reduction in pro forma operating cost in Q4 enables us to come very close to achieving breakeven for the fourth quarter. In addition, we are successfully pivoting our product lines to sell manageability problems and bring increased value added services to the machine-to-machine or M2M market. Our rich heritage in wireless connectivity and device-based policy management is a natural fit in the M2M space. And we have several opportunities coming up that I will describe later in the call. First, our CFO, Andy Schmidt will present our full financial results for Q4 and the 2013 fiscal year. Andy?

Thank you, Bill. First, let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. Non-GAAP results discussed in this call net out stock compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, our results that I refer to in my prepared remarks for both 2013 and 2012 are non-GAAP amounts. Our earnings release, which will be furnished with the SEC and Form 8-K, contains a presentation of selected GAAP financial measures and related non-GAAP financial measures and a reconciliation of the difference between the two. The earnings release can also be found in the Investor Relations section at our website at smithmicro.com. Total year revenue for 2013 was $42.7 million down slightly from $43.3 million in 2012. Wireless revenue decreased $1.3 million or 3.5% in 2013 to $35.9 million. Productivity & Graphics revenue increased from $6.2 million in 2012 to $6.8 million in 2013, an increase of 10.5%. From a non-GAAP perspective, total year 2013 loss per share was $0.40 as compared to a loss per share of $0.37 in 2012. Excluding the one-time restructuring charge of $5.6 million, a non-GAAP loss per share would have been $0.31 for total year 2013. From a balance sheet perspective, our cash position closed at $14.8 million at December 31, 2013, a decrease of $17.4 million from the beginning of the year. In terms of our currently completed fourth quarter, let me provide some detail. First, let me provide the difference between GAAP and non-GAAP P&L metrics for our fourth quarter. In terms of stock compensation for the quarter, stock comp totaled $843,000 for the current period broken up as follows; $4,000 attributed to cost of sales, $72,000 selling and marketing, $200,000 R&D and $567,000 G&A. As it has been the case in past years, we prepared revised tax provision at year-end. Since we are in a loss position, our GAAP tax expense is primarily due to foreign income taxes. The fourth quarter of 2013 reflects a favorable non-GAAP adjustment of $0.3 million. Moving on, the fourth quarter, we posted revenues of $11.8 million and a loss per share $0.04 GAAP and $0.01 non-GAAP. Revenues of $11.8 million compared to $12.0 million for the prior year period a decrease of 2%. International revenue was approximately $2.8 million this quarter across all business groups. Our Wireless segment reported revenues for the quarter of $9.8 million as compared to $10.1 million last year. Our Productivity & Graphics segment posted revenues of $2.0 million as compared to $1.9 million last year. Total deferred revenue at December 31, 2013 was $467,000. Our wireless of 10% customers for Q4 2013 including Sprint at approximately 47% and Intel at 19%. Switching to gross profit, non-GAAP gross profit dollars were $9.5 million a decrease of $200,000 in the same period last year. Non-GAAP gross profit as a percentage of revenue was approximately 80% for Q4 2013 compared to 80.6% for Q4 of 2012. The reduction in gross margin was primarily due to product mix. Non-GAAP gross profit by product groups were as follows; Wireless 81%; Productivity & Graphics 74%. Switching to operating expenses, non-GAAP operating expenses for the fourth quarter of 2013 of $10.1 million decreased sequentially $2.6 million from Q3 excluding the $5.6 million restructuring charge we recorded in the third quarter. Non-GAAP operating expense for the fourth quarter of 2013 decreased $3.1 million from the fourth quarter of 2012. Non-GAAP engineering expense decreased 28%, selling and marketing expense decreased 23% and administrative expense which includes the cost of our facilities decreased 18%. Total non-GAAP operating expense decreased 24% year-over-year. Non-GAAP net loss for the fourth quarter was approximately $400,000 or $0.01 per share as compared to a net loss of $2.2 million or $0.06 per share last year. Cash decreased $2.2 million for the quarter closing at $14.8 million at December 31, 2013. And in terms of housekeeping, we expect to file our year-end 10-K tomorrow, which will represent our final financial statements for the year. At this point, I will turn the call back to Bill.

Thanks Andy. Having just returned from Mobile World Congress in Barcelona, I'm excited about the opportunities that lay ahead in 2014. At the event, we met with executives from more than 40 different companies including top-tier operators, device manufacturers, network infrastructure providers and a wide range of M2M platform providers. Our solutions to connect, control and capitalize on mobile devices and networks continues to be recognized as highly flexible and innovative and most importantly we were able to demonstrate real working software while others are only showing [SlideWare] [ph]. This year we demonstrated several new solutions at Mobile World Congress including an M2M demo in which we integrated our NetWise platform with a CloudGate Router from Option Wireless. This news case addressed commercial passenger vehicles such as taxis, limos, or charter buses with NetWise enhanced ad sponsors or pay-for-use WiFi service to passengers. Device agents on a passenger smartphone or tablet can be dynamically activated to invoke customized promotions using location-based services that are displayed on digital signage within the vehicle. In addition, device is used as digital signage or for Internet access can provide analytics data to better understand passenger behavior and generate valuable metrics for advertisers. Because NetWise is a standard based platform, we were invited by the Open Mobile alliance to demonstrate NetWise in the showcase at the conference. In addition to the M2M commercial transportation scenario I just described, we also demonstrated our NetWise I/O tool kit for validating interoperability between clients and servers utilizing ANDSF traffic management standard. We recently announced that Amdocs completed interoperability testing using NetWise I/O and we are planning announcements with other partners who have successfully used the tool kit as well. Our research and development organization in considerable time contributing to the maturation and commercial application of industry standards, and this work has not only driving our own products but its helping our partners and customers to accelerate the rollout of standard-based solutions as well. Most importantly these engagements are opening up new sales opportunities with network server providers who want to extend their offerings with our NetWise client. As I mentioned last quarter, NetWise is being deployed by Televisa in Mexico and while in Barcelona, we demonstrated our new over-the-top solution to other potential customers. This enhanced version of NetWise SmartSpot supports Android and iOS platforms offering WiFi discovery and promotion, automated network authentication and radio management to help cable operators maximize their engagement via WiFi hot spots. Of course, this product can also be used by a lot of those operators and enterprises to offload data from 3G to WiFi networks. In fact, growing network utilization and the associated data costs are becoming increasingly important to enterprises with mobile work forces as well as [indiscernible] M2M modules. The flexible design and packaging of the NetWise platform allows us to address the wide range of needs and device form factors using pre-loaded apps over-the-top apps embedded software modules and APIs that could be integrated into a third-party applications. But, NetWise wasn't the only solution garnering high interest at Mobile World Congress. Our CommSuite platform was on display including our new Avatar Messaging app that lets user select from a variety of characters to send animated messages using their own voice. With the recent news that Facebook purchasing WhatsApp for $19 billion, it's clear that messaging is a high-value market. We believe our CommSuite Avatars will bring three unique elements to this market. First, we are the large community of professional graphic artist using our top-tier graphic products and they will be producing Avatars and related content for CommSuite that will satisfy a wide range of personalities. Second, unlike other messaging apps CommSuite Avatar messages can be sent to anyone and you don't need an app downloaded on your device to view the message. That means the entire smartphone world can receive Avatar messages out-of-the-gate. Third, CommSuite content store will be integrated with other messaging apps, social apps, web services and operator services including Rich Communication Services or RCS apps. And this allows us to create a monetization engine for a variety of markets above and beyond our own CommSuite premium service platform. We are very excited about potential for this platform and look forward to our first commercial launch of Avatars in Q2 of this year. Speaking of Avatars, our Productivity & Graphics business have a strong fourth quarter up 5% year-over-year with Manga Studio, Poser and Anime Studio all performing well. As in previous years, we had good response to our online holiday promotions driving up direct sales while also expanding our presence in direct -- I mean in Target stores increasing gross sales through Amazon by 26% year-over-year and expanding our geographic reach through bundle software with [indiscernible] and other OEM partners. Our commitment to deliver richer functionality with each new upgrade of our graphics products such as the release of Anime Studio [10 suite] [ph] drives our loyal customer base to keep coming back. We continue to look for ways to leverage our P&G assets with the focus on mobile such as with our CommSuite Avatar product. Last but not least, we continue to take advantage of a robust improvement connectivity features of our QuickLink product line will engage new customers and partners while we are providing standards based components for chip sets, broadband modules or a multi-platform mobile VPN solution for Panasonic's rugged devices, our connection management technology is still garnering – is still generating returns and opening new doors for us. By establishing a broad footprint of connectivity components and intelligent device agents across a wide range of platforms, we are laying the foundation for policy-based management of these devices by operators and enterprises opening up a vast set of opportunities within the Internet of things. The strategic transition of our business to new markets will take many months and will require us to take bold steps even as we manage our expenses prudently. While we remain focused on achieving profitability, our transition will result in a lumping revenue stream in the first half of 2014, specifically impacting Q1, which will be down from Q4 of 2013. However, the revenue stream should get smoother in the second half of the year with a growing base of new business as our evolving portfolio and new partnerships that are free. I look forward to updating you on our progress. Operator, at this time we can open the call for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Rich Valera with Needham & Company. Please go ahead. Rich Valera - Needham & Company: Thanks. Good afternoon gentlemen. First question on Intel after signing you got to announce them lets say kind of an X chunk of revenue, why don't you give some color on that project you're doing with Intel, it sounds like you've got a big chunk of revenue in the fourth quarter and I think there is perhaps more to come on that. If you can give any color on what you expect with this current project and then what might here be beyond what you're doing here with Intel, if there is any color at all you can give on that? Thanks.

Okay, Rick. Our relationship with Intel involves mobile projects. And so the first revenue that we've been able to work was in Q4. We will see additional revenues for the foreseeable future based on how many additional projects we get to sign up for. We are in the process, we have some already in the works, some are already signed up. So I guess, I can tell you that there will be additional revenues to put from Intel and we look forward to growing our business relationship with them, it is incredibly strategic and that something we find very exciting. Rich Valera - Needham & Company: Okay. That's helpful. And then, when we look into next year – well, actually sorry this year, and think about the various business lines relative to 2013. And I wonder you just give any color on how you would see some of those business lines trending for instance CommSuite, which sounds like showed some nice growth, wondering what kind of growth you think you could see in 2014 and obviously you'll have the Avatar launch I think adding to that in 2Q but any color on that business line that would be helpful.

I can't give you exact numbers, but I what I can say is this. If you look at history, the CommSuite business has grown year-over-year and it almost doubled. We have added in fourth quarter Voice-to-Text in Spanish. And we've added advertising fee individual [indiscernible] all of which generates revenue for both us and for Sprint. With the launch of Avatars as you mentioned, we're very excited about that, there was without any exception a great deal of excitement around the Avatar messaging at Mobile World Congress a number of companies, carriers and others that saw the product thought it was a very exciting something that they could really believe very successful. How successful, we don't know yet. It has great potential. And as we've mentioned there are other companies that has come before us with something similar. We can get it a little bit further, but if you look at a the like Vine, Vine in the first quarter of 2013 on the launch of their stickers, which are a way of getting emotion across in a message, it's static, if not full emotion, it's not animated like ours, had about $18 million of sales. They then follow that by doing $10 million a month for the balance of the year, do I think we can do that, I can't say that, that would be solely irresponsible, but what I can say is there is a track record and it's something that potentially it could be very exciting. Rich Valera - Needham & Company: I appreciate that color. Looking at the overall revenue line, I'm wondering if you could give any kind of qualitative color on – you mentioned the revenue might be down in the first quarter and then presumably up again in the second. Can you give us any sense of they'll be how much down, I mean are we talking down to sort of second quarter levels, I would presume not down all the way to third quarter levels. But any color in terms of how you might see that first quarter, second quarter ramp going and I know it sounds like you expect the second half to be a little more stable and presumably stronger.

Yes. I guess the way I kind of go back to what I said in my script. Fourth quarter was up substantially from Q3 primarily based on two drivers. The first time we've been able to grow significant annual revenues from Intel. And also the fact that P&G had a very strong holiday season that we know P&G is a cyclical business and Q1 is always their weakest quarter. Also in the case of Intel, I wouldn't look for much revenue if any from Intel in Q1, I'd like to see return in Q2. And that should give you some sort of color that you can draw a picture from. Rich Valera - Needham & Company: That's helpful. And from an OpEx standpoint, Andy I was wondering if you're going to comment on how we should think about OpEx into 1Q from 4Q, should we think about it sort of flattish or might there be some just beginning of the year cost that creep in there?

Sure, Rich. Typically, first quarter we have a couple of hundred thousand dollars related to obviously Mobile World Congress, [CTN] [ph] and collective trade show push that's primarily it, otherwise relatively flat with Q4 that's been established as our new baseline expense. Rich Valera - Needham & Company: And will you look to kind of hold it roughly at that line as we move through the year?

We're going to take it quarter-to-quarter obviously that's where we will start. Rich Valera - Needham & Company: Good.

We can pull the lever in which way we choose to pull it right now we're looking at the mid 10s is probably where our baseline for 2014. Rich Valera - Needham & Company: That's great and very helpful. Thanks gentlemen. And best of luck with your new initiatives.

Thanks Rich.

Thank you. And our next question comes from the line of Howard Smith with First Analysis Corporation. Please go ahead.

Yes. Good afternoon. I just wanted to follow up for starters Intel, it sounds like at this point, its kind of episodic project work that's discrete and you recognized the revenue and then you wait for the next project. But are you being built into something that will have more of a recurring or transactional or every time there is a chipset set out or something that over time will build or is that not the nature of the relationship at this time?

Okay. I really can't answer the question. My deal with my customer and Intel was that they would allow us to tell the world that they are our customer under the provision that I didn't tell the world what we're doing for them. So from that standpoint I'm sorry I just can't answer it.

No. We'll just congratulate you on at being a major customer now then and move on. And then so the international, did I hear it right that it was $2.8 million for the quarter?

That's correct.

Okay. So Televisa or some of these other things in Argentina starting to ramp again more generically but the same question. Is there kind of a significant either stocking or one-time component that then they absorb and will become more regular over time is that how to think about what's causing the spiking in international? Andy Schmidt In regard to the particular relationships you mentioned those are not one time type spiky revenue those are types of deals where we build a relationship and we hope to see that business build over time. Yes. International is a little bit also chunky right now include some one-time revenue. But once again, we just hope to backfill that revenue in future quarters with these other deals that we've already closed. And then as Bill mentioned and as you can tell from the script a lot of the new relationships they are international in nature, or they're with big partners such as Panasonic that actually do have international distribution. So once again, it's a pretty broad model we have. I think international is no different than our total revenue line and that right now it is subject to some lumpiness. But in total, it represents obviously a much better profile for the company.

Right. Okay. Well, thank you very much. That's all from me.

[Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Thank you, Operator. I'd like to thank everyone for joining us today. We look forward to updating you on our progress over the coming months, and of course, if you have any other questions, please feel free to contact me and I will be happy to answer any questions you might have. Thank you and have a good day.

Ladies and gentlemen, this concludes the Smith Micro Software fourth quarter and fiscal year 2014 financial results conference call. Thank you for your participation you may now disconnect.