Good day and welcome to the Smith Micro Software Second Quarter 2014 Financial Results Call. Today's presentation is being recorded. At this time, I would like to turn the conference over to 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 second quarter 2014 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 smithmicro.com or call us at 949-362-5800 and we will email one to you. On today's call we have Bill Smith, Chairman, President and Chief Executive Officer of Smith Micro; Steve Yasbek, better known as Ziggy, Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer of Smith Micro. 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 execution of our recently announced restructuring, our ability to hold for the client our cash reserves in light of our continued losses, 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 the potential for disruption and loss of customers and business from the transfer of duties and responsibilities in our recently announced restructuring, the risk that we will continue to incur losses and not regain profitability, the risk that we may need to raise additional capital to fund our operations and that such capital may not be available to us at commercially reasonable rates or at all, changes in demand for the Company’s products from its customers and the…

Thank you, Todd. Good afternoon, everyone, and thank you for joining us as we discuss financial results for the second quarter of 2014. Revenues in the second quarter were $8.5 million, slightly higher sequentially from last quarter. Despite further decreases in our legacy connection management products, CommSuite revenues have increased and we have brought in some new orders in Q2 through our NetWise product and our enterprise connectivity offering. We expect these new orders when combined with expected gains in CommSuite revenues in Q3 to result in improved financial performance in the third quarter of this year. In addition, we have completed the restructuring plan we announced in Q1 and we should receive full benefit of that action in Q3 with significantly lower operating expenses. Ziggy will include details associated with the restructuring along with our full financial report, and then I will give some color to the new deals we have in place for the remainder of the year. With that, I'll turn it over to Ziggy.

Thank you, Bill. As we mentioned on our last earnings call, the Board of Directors approved a restructuring plan this May. This plan involves changes in the management structure in order to streamline the organisation. It included headcount reductions that amounted to approximately 20% of the Company's worldwide workforce and an update to our sublease assumptions that we made in our 2013 restructuring. This resulted in a one-time restructuring charge of $2.4 million that was recorded this quarter. $1.3 million was non-cash stock-based compensation cost, $500,000 was employee and severance pay and other costs, and $600,000 was related to updating our 2013 sublease assumptions. The result of this restructuring will result in cost savings of approximately $2 million per quarter going forward. So let me go over on some of our customary introductional items, as we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock-based compensation and related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, all results I refer to in my prepared remarks for both 2014 and 2013 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on Form 8-K, contains a presentation of selected GAAP measures and related non-GAAP measures and a reconciliation of the two. The earnings release can also be found in the Investor Relations section of our Web-site at www.smithmicro.com. Our June year-to-date sales for 2014 were $17 million, which was down from $22.1 million from June year-to-date 2013. Wireless sales had decreased $4.9 million or 26.1% June year-to-date 2014 versus 2013 to $13.9 million. Productivity & Graphics sales decreased $200,000 or 6.4% June year-to-date 2014 versus 2013 to $3.1 million. From a non-GAAP perspective, the year-to-date…

Thanks Ziggy. As you heard, our post-restructure business case is significantly improved and we are engaged in several exciting new initiatives in three areas; business-to-business, direct-to-consumer and machine-to-machine. On the consumer front, the messaging market continues to draw significant attention from the media, financial [indiscernible] and Internet giants like Facebook. Today messaging is no longer just the means of communication but a social platform that offers multimedia engagements and create a self-expression. We are excited to have watched our first direct-to-consumer messaging app called AniMates which is an avatar-based app that was released on the Google Play Store in June and on the Apple App Store last week. AniMates combines the convenience of our CommSuite voice messaging platform with creative animated characters built using award-winning Anime Studio product. The app is available to download for free and can be used to share messages with anyone via SMS, e-mail, web browser, Facebook or app-to-app with other AniMates users. The revenue model behind AniMates is based on mobile advertising and selling avatar content that will be generated from our professional artists' community as well as [novel] (ph) artists. With that, yesterday we announced a new education program and contest with Sprint designed to cultivate the next generation of digital artists. The program, called the Avatar Challenge, is targeted to educators and students in secondary schools, colleges, universities and trade schools. The program incentivises students to learn digital animation skills in order to create animated characters with a new avatar messaging feature coming soon to the Sprint Visual Voicemail service, which is based on our AniMates offering. Teachers who join the Avatar Challenge will get free copies of our Anime Studio software to use in the classroom and their students will be able to submit their avatars to a national contest with a…

(Operator Instructions) We will take our first question from Rich Valera of Needham and Company. Please go ahead.

First just a question on the post restructuring OpEx level, I had assumed something in the $8.3 million, $8.4 million range going off of the Q1 level, but it seems like maybe based on Q2 that you're ahead of that. Can you cut it any finer where you think you'll end up in Q3 on an OpEx level?

This is Ziggy. I think that your assumptions are fine.

Okay, perfect. And then just on the cash front, you guys needless to say have a pretty low cash level. I'm just wondering, do you have any sort of contingency plans, credit available, it only take another sort of bad quarter and you guys would effectively have no cash, so just wondering what's sort of the backup plan here, how do we think about cash over the next couple of quarters?

Rich, I think the way to look at that is, we're working on a number of different contingency plans, that's well underway, but we have nothing that we will want to announce at this time.

Fair enough. And Bill, can you say if you saw any revenue from Intel in 2Q, and if so how much that was?

Rich, that has slipped into Q3, so it was not much okay.

Okay, so you do expect then to get sort of the back half of that contract effectively in Q3 now?

Yes, we do.

Okay, fair enough. And then with respect to your AniMates, Bill, nice to see you launch that product on the various app stores and the joint challenge you're doing with Sprint certainly sound encouraging, is there anything more you can say about your relation today with Sprint and how that might not be launched with them?

I think it's certainly clear from the release yesterday that it is the intent of Sprint to add the avatar capability to the Visual Voicemail platform. Here in Pittsburgh where the event was held at the Art Institute of Pittsburgh, we had a Sprint representative who addressed the crowd that was there. She was very, very clear that that is their intent. She also was demonstrating the app with the avatar capability in it to those there at the show.

Great, appreciate that clarification.

And next we'll hear from Howard Smith of First Analysis.

First just a recordkeeping numbers question, could you go over 10% customers in the quarter?

Yes. Sprint was the highest of course, and FastSpring which does our web stores for the consumer software, that was second. Those two were it.

Okay. And can you provide or do we need to wait for the Q for kind of what percent each of those were?

I mean it will be out on Friday. Sprint was very high.

Okay. And then in terms of the new wins, Verizon I guess, is that contract signed or is it just in the final stages, and the other Tier 1s, I'm just trying to kind of assess, I know they're going to take time to ramp to revenue and probably different amounts, but I'm just trying to assess kind of risk in final contract negotiations as we go throughout Q3?

That's a good question, Howard. Let's first talk about Verizon. Frankly, Verizon gave us the go-ahead to mention their name, but under the ground rules we'll say nothing more. I can say that work has already started on that here at Smith Micro and the contract is well through the process, so we see very little risk in that particular deal. As far as the other two Tier 1 opportunities that we mentioned, one is also very far through the process and we look for some sort of announcement in the next few weeks, the mid part of August or if it falls into the last part of August we'll probably announce it in September. The third one is a very unique opportunity. We are working with this carrier to prove out the business case, so that can move forward in 2015. As you look at when revenue would be produced, we would expect that there would be some revenue from Verizon in Q4, we would expect that there will be revenue from the second opportunity also in Q4 and that the real revenue ramp will start in the second quarter of 2015. The Verizon revenue ramp will start probably in the first quarter of 2015. The third opportunity would probably, first revenues would be seen in the second quarter of 2015 and grow off of those starts. The one opportunity that I also talked about with a cable MSO is very far down the process and we are trying to finalize all the pricing and other terms. Launch of that particular opportunity would be in the fourth quarter of 2014. So that's timing coverage alone I think.

That's great color, thank you very much. Those were my questions.

At this time we have got one question remaining in the queue. (Operator Instructions) Next we'll hear from Kevin Dede of HC Wainwright. Please go ahead.

Bill, congrats on software launches with Sprint, that's good to see. I noticed you touched a little bit on your mobile advertising initiative with Sprint. Could you maybe talk a little bit more to that and what you think the opportunity could be in taking that to other carriers?

I can't really talk too much about it. That's a question you're going to have to ask Sprint. The platform is a platform that they own and they really need to be the ones that answer it. It's a good question, I don't think it's prudent for me to try to answer it though. As far as our advertising with other carriers, first off, we do have advertising revenue built into our animation application [over the top play] (ph). As far as other operators, some are looking at advertising, some are not, and we'll have to kind of call that for later.

Okay. So does that just fold in on top of the messaging platform, I mean just hypothetically apart from the carrier involvement? I'm just kind of wondering how I'd actually see it when I use that messaging platform.

Kevin, this is Carla, and yes, the CommSuite platform has the ability to integrate with multiple advertising platforms through an SDK capability. So we can work with a variety of partners to offer ads through that platform but we are also working on the NetWise platform in being able to offer targeted promotions through that platform as well. So there will be multiple ways to use our agent capabilities or client capabilities going forward to provide marketing capabilities to consumers.

I think to kind of add something to that, everybody listening to this call, in the past we've always talked about NetWise as a way to do Wi-Fi offloading. It really is so much more and today we are working with various customers and prospects in defining how to use the policy management capability of NetWise to solve a number of different problems. But please, think about NetWise as a lot more than Wi-Fi offload.

Tangent on that point, Bill, can you elaborate a little bit on your developments in machine-to-machine? I imagine one or more of the deals that you touched on might be related to that. So if you could just give us an idea on how far that's developed internally and not so much contract wise but just how far along you think you are in reaching a marketable solution?

Okay, let me just address that a little bit for you. Our NetWise platform has many capabilities associated with policy management through an intelligent client and that client can be something that lives on a smartphone but can also live on other types of connected devices. And so we are building out our M2M capabilities on top of the NetWise platform. So while I can't comment on any particular user or customer engagements right now, I can say that we have developed on several areas that we are targeting for NetWise in terms of initial solutions. For example, the platform will be able to support asset tracking in kind of a fleet manufacturing, energy types of scenarios. It will be able to support things like commercial vehicle gateways. You may recall that at Mobile World Congress we demonstrated an example of a router that existed in a taxicab and how we would be able to instrument connectivity and provide value-added services on top of that connectivity. Things like proximity-based services that will allow location and other metrics being captured by the NetWise platform to be used to trigger certain types of events. So there's a number of different areas in which we're building up a solution that will service M2M markets. It will also service what we're calling P2M, person-to-machine, markets which are largely focused in areas of retail marketing, venue-based marketing, and being able to use that platform to instrument a wide variety of devices whether it's phones, tablets digital signage, again vehicle routers et cetera.

So, Carla, just to take one step further, would you mind giving us a little bit more color with regard to how close you are to having a marketable solution in each of those sections or segments that you talked about?

I can't say that we are demonstrating the concept now, as I pointed out. So we have technologies that are demonstrable now. As Bill mentioned, we have proof of concept projects that we are working on as well. The thing about these platforms though is that they are not – most of this capability is not something that is off-the-shelf type of an app that a bunch of people are just going to be able to purchase the same thing and use it. There's a lot of customization and there's a lot of integration required in order to support our customers with the system they already have in place with certain custom devices, custom interfaces, backend systems that they need to support, et cetera. So we're not looking at this as announcing a product that's going to be able to be used by everybody, we are looking at this as doing what Smith Micro does really well, which was understanding individual needs of our customers, building technologies that will fit their environment, enable to use our expertise with device integration, service layers, APIs, clients applications, being able to bring all of that there so that that customer will have a successful deployment, and then being able to leverage on that success to reach more customers, but each customer will have their own unique needs and we're going to be prepared to customize the solution that we plan to build in a very flexible and modular way such that we can deploy into different environments for industry needs, different vertical needs. So, at this point I can say we're definitely for the remainder of this year going to be working with customers on proofs of concept, early phase deployments that are very limited, and then in 2015 we expected commercial deployments that will start to generate significant revenues for us.

Okay, so probably if you're at midpoint of making sure that the software is selectable, modular and that you work on customization projects as they come up, but my understanding was at one point you were trying to build something that you thought would be universally adaptable to a general solution in machine-to-machine. Is that still fair to think of a NetWise program as sort of solving that need and is there a chance that you could push that to some sort of effective standard?

Yes, okay, so what I think you're getting at is our first drive is to build a horizontal platform for end-to-end, and then after success in that area and mostly in tandem with key carrier customers, we would then drive to build out key applications in various verticals that seem to be the most profitable for us and the carriers. The whole end-to-end space is somewhat like the Wild West right now and it's just evolving and it is really an opportunity to really demonstrate leadership and bringing this sector into a much bigger role going forward.

But that is still our plan, that is still our plan, a horizontal end-to-end platform for which vertical solutions can be built for key customers.

Okay. So just taking a step back and looking at the bigger picture, in light of the restructuring, can you give us an idea on how you're focusing your development dollars at this point, is it primarily on a project basis or you're still trying to build a universal platform?

Actually this kind of ties into a question that Rich asked earlier when he was asking about the cash. After we have reviewed our business plans going forward, we believe in Q3 we will reach a point where while we are not giving guidance you should look to the opportunity that we may lose a little cash or lose no cash at all. And this quarter is pretty well locked and loaded, so we feel pretty confident about it. When we look forward to Q4, we are looking for an opportunity to break-in into the box and actually add cash back to our balance sheet. So that's our goal. The way we go about that, Kevin, to your question, is that we're focused on our key competencies. In the case of avatars, most of the work is now completed to get the product launched, and so that falls into the CommSuite platform. We have already been working on a number of additional initiatives with our key partner, Sprint, that will be added to their CommSuite platform over the balance of the year and should help us grow additional revenues on top of the revenue growth that we've already demonstrated. Clearly there is a lot of work and a lot of initiatives underway in the NetWise platform and that is one that we think will be very fruitful for us going into 2015 and beyond. The QuickLink platform is a platform on the enterprise side, it's in the decline. In fact we shouldn't see as much value I would think sometime in 2015, but the enterprise platform on the other hand is growing. The product is basically complete and it's really more of how to add additional features as required by the enterprises. I guess a long answer to a simple question but hopefully it clarifies a few key points.

Absolutely, Bill, very helpful. Last topic for me just headcount given that it's been a couple of quarters since I've joined you, could you give us the headcount at the end of June last year, end of March this year and then finally this quarter just so I can sort of see how you shape the Company?

I don't recall at the end of June last year, but at the end of year we were at about 244 heads, maybe staying about flat for the first quarter, so were down to about 240. At the end of June, our headcount is about 195. Now I don't know if you guys recall but we had a big restructuring in Q3 of last year. So offhand, I don't recall what the June headcount was of last year.

Maybe something also to add to that question is that I think the major focus rather than on the absolute number of heads is where those heads are going to reside going forward. While we continue to have strong workforce in Southern California, in California in general, any growth in the future will more likely directed to our two lower-cost locations, that being Belgrade, Serbia as well as here in Pittsburgh.

And then it's fair to assume at least for the time being you will stay at that 200 level?

I think it's fair to assume that and we'll let the business growth dictate what additional resources are required.

Thanks very much, Bill and Ziggy and Carla, for the additional color, much appreciated.

And Brian Swift of Security Research Associates has our next question.

You mentioned earlier on in your presentation and a little bit in some of the Q&A about that you expect September to be a stronger quarter going forward usually sequentially and then you had talked about wanting to be at or near cash flow breakeven. So besides Intel, what would be the drivers because you already mentioned that Intel would be back as a revenue generator in the September quarter, and you talked a little bit about some of those new things but they don't seem to be doing any revenue generation until Q4 and beyond, so could you give us a little idea, two things, one, what will be the revenue drivers, and two, can you remind me of what your breakeven level range should be now with after the restructuring going forward?

Brian, first off, you're going to see continued growth in the CommSuite area and that could be fairly strong. So that's one of the biggest drivers for Q3. Also we are closing business on the enterprise side as well as we're seeing some pretty solid numbers coming out of P&G. So in general, as we look at what we believe we're going to do in Q3, as I said before, we think it's fairly well up and loaded. And so we feel pretty positive about that.

Okay. Enterprise area what you were referring to was Panasonic and NiSource or whatever [inaudible]?

That NiSource is a new customer, of size by the way, but that is the kind of customer we are seeking. We believe with the enterprise business that the sales cycles are significantly shorter than the sales cycles are with carriers. So it's a nice piece of business for us.

Okay. And what's your breakeven level going forward now in terms of the top line?

It's probably in the $10.5 million to $11 million range.

Okay. Alright, thank you, that's big share of my questions.

That does conclude today's question-and-answer session, and at this time I'd like to turn the call over to Mr. Kehrli for any additional or closing remarks.

Thank you, operator. I'd like to thank everyone for joining us today. We look forward to updating everyone on our progress over the coming months, and of course if you have any questions please feel free to contact me and I'll be happy to answer them. Thank you and this concludes our call and have a great day.

And that does conclude today's conference. Thank you for your participation.