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Edited Transcript of IPAS earnings conference call or presentation 3-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 iPass Inc Earnings Call

Redwood Shores May 8, 2017 (Thomson StreetEvents) -- Edited Transcript of iPass Inc earnings conference call or presentation Wednesday, May 3, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darin R. Vickery

iPass Inc. - CFO, VP and Secretary

* Gary A. Griffiths

iPass Inc. - CEO, President and Executive Director

* Kirsten F. Chapman

Lippert/Heilshorn & Associates, Inc. - MD and Principal

* Patricia R. Hume

iPass Inc. - Chief Commercial Officer

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Conference Call Participants

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* Joshua M. Seide

Maxim Group LLC, Research Division - Equity Research Associate

* Marc Silk

* Scott Wallace Searle

The Benchmark Company, LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the iPass First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kirsten Chapman of the LHA. Please go ahead.

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Kirsten F. Chapman, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Don. Good afternoon, everyone, and welcome to iPass' First Quarter 2017 Financial Results Call. This is Kirsten Chapman from LHA, iPass' investor relation firm. I'm here today with President and CEO, Gary Griffiths; Chief Commercial Officer, Patricia Hume; Vice President and Chief Financial Officer, Darin Vickery.

We've distribute the Q1 release over the wire services and posted it on the website at investor.ipass.com. Please note, we have also posted our Q1 earnings presentation to the site along with a updated company presentation. This call is being broadcast at investor.ipass.com, and a replay will be available on the website until the next earnings call. Please note, this webcast is the property of iPass and any copying of or rebroadcasting without expressed prior consent of iPass is prohibited.

Before we start, we want to emphasize that some of the information and statements you'll be hearing during our current discussions today will include forward-looking statements, including, without limitation, those regarding our projected performance of the business, financial outlook and revenue and profitability targets. These statements generally may be identified by the use of the words expect, intend, believe, anticipate and other similar words denoting future events or results. These statements involve risks and uncertainties that could cause actual results to differ materially.

These forward-looking statements reflect our opinion as of the date of the conference call and we undertake no obligation to revise or publicly release the results or make any revisions to these forward-looking statements in light of any new information or future events.

Please refer to the press release posted on the website and to the SEC filings, including under the caption Risk Factors in our annual report on Form 10-K filed with the SEC on March 14, 2017, and in our Form 10-Q filed in the future for detailed description of the risk factors that may affect our results.

On this call, we will provide non-GAAP financial measures. GAAP results and a reconciliation of non-GAAP to GAAP measures can be found in the press release and on the website.

Before I turn the call over to Gary, I would like to note that management intends to present at the B. Riley investor conference later this month. If you'd like a meeting or call with management, please contact the IR team at LHA.

It's now my pleasure to turn the call over to Gary. Please go ahead, sir.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [3]

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Thank you, Kristen. We said this would be a difficult quarter and it was. And make no mistake, we are disappointed with these results. But as I'll explain, despite reporting revenue and ACV below our expectations, we have tangible proof points that we are on right track. We are not veering from the course we set 2 years ago. We are confident in our ability to deliver our annual guidance and in our promise of being available on 1 billion devices by the end of this year.

This quarter, the financial results simply do not reflect the progress we've made, especially with iPass SmartConnect, our intelligent connection technology. This progress was significant, even though growing pains in our latest products releases, typical for new software technologies, contributed to the revenue shortfall. Well, more about that in the few minutes.

More importantly, thanks to SmartConnect, we made significant progress with partners embracing and, in many cases, starting to deploy this new platform. And I'll remind you that our future is 100% dependent on having a platform that intelligently manages connectivity in today's mobile world; and increasingly important, in harnessing that data that fuels this intelligence. For carriers, this means better consumer-user experience and improved margins. For businesses, SmartConnect means employee productivity, greater security and decreased mobility cost.

Well, many of you are new to this call, so I'll take a minute to set some context by highlighting the relevance today of the strategy that we initiated 2 years ago. The world is a very different place in 2017 than it was in 2015. And if we hadn't taken bold steps 2 years ago and taken them with urgency, it is unlikely that iPass would provide much value in today's mobile world.

First and most obvious, we reset our operational structure, streamlining the organization and eliminating overhead. These initiatives have reduced operating expenses by as much as $4 million per quarter.

Second, we said we needed to increase the size of our global network in order to attract the broader set of enterprise and strategic partners. And of course, our network footprint has more than tripled since then, and is now a key tactical and strategic asset as we control more network capacity than any other company on the planet.

Third, we changed our go-to-market approach, moving from pay-per-use plans to unlimited usage. While many question the wisdom of this 2 years ago, today, as carriers are beginning to offer unlimited cellular data plans, could you imagine trying to sell Wi-Fi based on usage? And let me assure you that unlimited cellular data plans put even more pressure on carriers to offload to Wi-Fi as a means to control cost and improve operating margins. Net, this is very good news for iPass.

And finally, we said we needed to change the product, that our future was not reselling Wi-Fi but into software that delivers intelligent management of global connectivity. Simply said, we are a technology company. A software company, cutting edge software, technology that requires defining and collecting data as the basis for managing connections intelligently. Massive amounts of data contained in our databases that are processing millions of records per day as our software analyzes and collects over 200 data points for each network connection detected. And today, 2 short years later, iPass SmartConnect is setting the standards for how to best manage global mobile connectivity.

In short, the bets we placed 2 years ago were on target, and we're not diverging but doubling down on this direction. So you might ask, "Are these bets paying off?" Well, by the end of the second quarter, SmartConnect either already is or is expected to be moving from proofs-of-concept to deployment by 16 partners in 11 countries, crossing all 6 continents. Many of these countries you'd expect -- the U.S., the U.K., Germany, Australia and India. But also, in more obscure regions of the world like Serbia, South Africa and Sudan.

Some of these we've spoken about in the past, but I'll highlight a few today. In Vivo, for example, Telefônica's mobile network in Brazil. And TravelSIM in Australia, which recently closed a large deal with the Australian Post that will expose TravelSIM's SmartConnect-enabled service to hundreds of thousands of Australian customers of the Post. Or the United Group in the Balkans, which use our SDK to provide their customers iPass global Wi-Fi access.

We've spoken about Bezeq in Israel, which last month had a successful Passover promotion of their SmartConnect service and is looking for ways to expand the success with us. We signed an agreement with EDCH, the Etisalat Data Clearing House in Dubai that works with over 60 mobile operators crossing the Middle East and Africa. Combined, these operators have nearly 50 million subscribers. EDCH will be working with iPass SmartConnect, in combination with our partner Accuris, to resell our integrated solution across this region similar to Tata. And speaking of Tata, while the ramp of BSNL has progressed slowly, Tata has closed 2 new SmartConnect deals and reports a strong pipeline.

Then SITA, a $1.6 billion enterprise headquartered in Geneva. SITA is an international information services and technology company that supports the airline industry. SITA recently signed an agreement to use SmartConnect via our SDK and is already pursuing new deals. And finally, Telrite's Lifeline Wireless brand is ramping rapidly and now has over 130,000 new SmartConnect subscribers in the FCC Lifeline program. Telrite is well on its way to becoming our latest $1 million per year account.

Now the skeptics among you may point out that partners in regions like Serbia, South Africa and the Sudan are hardly household names, which is true. But I can assure you that there are others that we cannot talk about, big brands, whales, that have already embraced SmartConnect and are actively in trial. As much as I'd like to talk about some of these partners today, we have to wait.

So before I turn this over to Darin, here are the key points of take away from this quarter and the months ahead. One, the importance of our technology, which I've emphasized. And as part of this technology, the increasing role of iPass Veri-Fi, our Big Data services. As I noted on the last call, while we expect our data-related revenue to be small this year, it is 100% incremental over 2016. And I'm very pleased to announce today that we did close our first Veri-Fi deal in March. Although this initial contract is modest in terms of revenue, it was a sale to a big partner, confirming the value of this data and, we believe, setting the stage for much larger opportunities with this and other partners in the near future.

Two, our ACV was well below our expectations in this quarter, but we expect this as an aberration not a trend. As you may recall, we had a record fourth quarter ACV, with few deals left to spill over into January. And as Darin will explain, the actual bookings in the quarter were actually not far off our plan. The quarter was heavily weighted in enterprise accounts, including one large and important enterprise that agreed to double to 10,000 the number of employees using iPass. Another 7-figure enterprise deal was expected to close in March, but moved to Q2. The pipeline remains strong and we expect ACV to get back on track this quarter.

Three, relations with our network service providers are strong. We spent a lot of time on the last earnings call and in subsequent weeks explaining our rationale for increasing our global committed network capacity. These increased commitments to suppliers, of course, impacted our 2017 EBITDA projections and certainly impacted the gross margin in the first quarter, as roughly 80% of our network access costs, or NAC, is now fixed. But we been in discussions with our key network providers and have succeeded in striking new contracts with some. These new contracts will reduce the committed NAC in the second quarter and are expected to continue to decline as we progress through the second half. Darin, will give you more on that.

And four, HP. While we've experienced delays, we have made progress with HP recently and now expect HP worldwide sales of devices that include iPass to start, as we'd hope, later this year.

In summary, a bad quarter, but hardly a trend. Our technology is setting new standards. But when on the cutting edge, errors do occur. In this case, complex algorithms determining the relative reliability of various networks prevented some valid connections from happening. And our revenue from pay-per-use customers suffered as a result. Some of these issues were subtle and difficult to diagnose, but they have been resolved. And while, of course, there will always be learning required with new code, we anticipate a steadier cadence going forward.

With that, I'll turn it over to Darin for more detail on the financial results. Darin?

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [4]

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Thanks, Gary. Total revenue for the first quarter was $14.3 million, down 11% from $16.1 million last quarter and down 3% from $14.7 million in Q1 of last year. We missed the bottom end of our $500,000 guidance range on Q1 revenue by $200,000 or 1% on the unexpected network issues in mid-quarter, items Gary mentioned earlier.

In early February, when we guided to Q1, we didn't have visibility to the impact a version update to SmartConnect would create in our pay-per-use customers the rest of this quarter. Absent these network issues, we would have comfortably been at the upper end of our guidance range on revenue as other drivers, such as backlog conversion and churn, were well within our expectations.

Major drivers of the revenue decline over Q4 '16 included, first, the onetime revenue from a strategic partner buyout in Q4 of $950,000 as we discussed last quarter, this was fully expected. Second, churn had a $1 million impact on revenue quarter-over-quarter, $800,000 was related to Q4 '16 reported churn and $200,000 related to Q1 '17 reported churn. Again, this was well within expectations.

Third, $300,000 of declining pay-per-use revenue on a variety of network issues, including the blacklisting of hotspots, supplier outages and slower-than-expected ramp into up-committed premium network footprint. Based on seasonal trends and planned rollout activity, we had expected this usage revenue to increase $400,000 over Q4 '16. So we were adverse to our forecast by roughly $700,000 on this issue. While this feels like a legacy-type issue, remember roughly 2/3 of our total revenues still comes from customers that pay for Wi-Fi outside of our unlimited plans.

And fourth, collection problems related to past due or unpaid invoices adversely impacted revenue by $100,000 this quarter. But that was well within the range of expectations as well. Offsetting these declines, we had $500,000 of incremental revenue recognized based on ACV close, which was as expected. This increment is purely a Q4 versus Q1 concept and represents revenue growth based on ACV conversion over that short 2-quarter comparable period.

But to be clear, this is slightly different in the backlog conversion metric we reported in the press release this quarter. As discussed in the last earnings call, we had $8 million of incremental revenue we expect to recognize in 2017 revenue over 2016 revenue.

In the first quarter, consistent with our plan, we converted 11% or $900,000 of that backlog into revenue. Each quarter, we would expect to convert a bigger percentage of that backlog, such that by the end of the fourth quarter, we have converted a 100%, resulting in an $8 million revenue increase year-over-year as we talked about on the Q4 earnings call. We will continue to report our progress quarterly against the December 31, 2016 backlog expectation, as that conversion is a key driver in our annual guidance for this year. We have also included a slide in our investor deck to summarize our progress on this metric.

Another favorable note, we billed and collected or started recognizing revenue on additional of our 2016 ACV, which can be seen in the ramp of deferred revenue from $2.5 million at December 31 to $3.2 million at March 31.

By the end of the first quarter, we believe we've effectively remediated much of the SmartConnect issues that resulted in maximizing connection success rates over optimizing network connections, and expect pay-per-use revenue to rebound in the second quarter. In addition, we are implementing even more stringent network monitoring tools to early identify supplier network issues and begin resolution dialogue with the suppliers real time.

Even with some softness early in the month, March was the strongest usage hours month on record for iPass, with 865,000 hours of network consumed. And while April took a slight step backwards with 5% lower hours consumed, that was expected with the midmonth Easter holiday. And was still the third strongest usage month in the last 12 and 14% better than February of '17.

Speaking of usage hours, based on the network issues previously discussed, much of it self-inflected, we saw hours consumed fall 3% sequentially in the first quarter, the first such decline quarterly since mid-2015. Without the network issues, we would've expected Q1 '17 to be up slightly. Q1 '17 was up 47% over the same quarter in 2016, and we would expect usage hours for Q2 '17 to be up approximately 10% over the first quarter.

On annual contract value, or ACV, we booked $800,000 in the first quarter, compared to $4.8 million in Q4 and $2.1 million in Q1 of last year. As a reminder, we define ACV as the committed annual revenue of any new logo or significant upsell to existing customers that were signed or started the upsell billing in the reported quarter. While this is our weakest ACV quarter since we reported $700,000 in Q4 of '15, over 90% of reported ACV is enterprise, which will result in faster backlog conversion.

In addition to ACV, we signed a $1.9 million renewal in upsell with a strategic partner to extend their term by 7 months through early 2018 and increase their quarterly purchase commit. As this customer is currently exceeding their commit, we don't recognize ACV on this deal as it is not incremental to the last quarter run rate. But it is hard to argue that locking in the term for an additional 7 committed months is not a big win for the sales team and a valuable contribution to future revenue and churn mitigation. Including the benefit from the $1.9 million upsell, bookings for Q1 '17 were 70% of our financial plans, so well within spitting difference to make up in the second quarter.

On churn, we reported $1.2 million compared to $4.3 million in Q4 and $600,000 in the first quarter of last year. As a reminder, we define churn as the inverse of ACV, meaning, for any customer that terminates or has write-down of commitment in the reported quarter, we calculate the last full quarter of run rate revenue and annualize to determine the adverse impact on our revenue over the next 12 months.

Annualized, our churn number for this quarter represents roughly 2% of 2016 revenue, and was slightly better than our financial plan expectations for Q1 of '17. For a historical perspective on net churn, defined as ACV minus churn, see the slide in our investor deck on our website.

On the gross margin. which decreased from 34.9% in the fourth quarter to 21.2% in the current quarter. The contributing factors of this decline were, first, adjusting Q4 for the $950,000 of onetime buyout revenue we talked about earlier, gross margin would've been 30.9% last quarter. Second, for one key supplier of premium network, we had up-committed in late 2016 to lock in an extended term and buy additional usage at a lower effective rate. This agreement represented $700,000 or 88% of the sequential increase in NAC quarter-over-quarter and contributed nearly 5 percentage points of adverse impact to gross margin.

While we had accepted, the early months of this deal would be in shortfall, meaning we will be paying more of the network than we would otherwise recognize economic benefit through revenue realization. We had some operational issues that slowed our fill-the-bucket initiatives on this up-commit. We worked with a partner to renegotiate the ramp schedule, cap the monthly commit and save $1.6 million against our financial plan for the rest of 2017, starting in April.

The other good news, we buy capacity on this network in a cumulative bucket, as opposed to a "use it or lose it each month" concept. So if we are successful in ramping usage, we will significantly improve margin contribution in the back half of 2017, as we use up inventory of usage we have already purchase to drive increasing revenue without a corresponding increase in variable cost. Lastly, the lower usage hours in Q1 '17 and resulting lower pay-per-use revenue contributed to the remaining decline quarter-over-quarter in gross margin.

The above example on one key supplier examples our solid working relationships with our network partners, who are mostly helpful making course corrections on our ramp and commit schedules. And if a network agreement is just not salvageable, we generally also have an economic hardship clause that allows us to terminate these agreements if necessary. In other words, we'll monitor these situations carefully and we'll take corrective actions when and if necessary.

The combination of lower usage hours and higher NAC cost, resulted in cost per hour increasing 12% from $3.69 in the fourth quarter to $4.14 per hour in Q1. The silver lining, with hours rebounding in late March, our cost per hour fell back to $3.66 for the month. Lower than the average for Q4 '16 and should continue that downward trend through the remainder of the year.

For the second quarter, we expect NAC to be flat to down slightly over Q1 '17 and gross margin to start rebounding, showing quarter-over-quarter improvements sequentially for the rest of the year.

We exited the first quarter with approximately 80% of our Wi-Fi usage under capacity purchase commitments up from 70% last quarter. At this point, we are not looking to move any significant remaining percentage of our purchase agreements into the capacity bucket. And we'll optimize the mix by moving agreements into or out of the capacity bucket selectively upon term renewals. On a GAAP basis, net loss was $4.3 million, compared to a net loss of $1.3 million last quarter and $3.7 million in Q1 of last year. This reconciles to adjusted EBITDA loss of $3.4 million in the current quarter, compared to $500,000 loss in Q4 and a $2 million loss in Q1 of last year.

Even with the unfavorable miss in revenue, we managed discretionary operating expense spend and improved on the midpoint of our adjusted EBITDA guidance range for the quarter. Please refer to our earnings press release for a table reconciling GAAP net loss to the non-GAAP reported adjusted EBITDA financial metric.

While the first quarter started the year off a bit behind, we still remain committed to our annual guidance numbers released last quarter. And we reaffirm guidance for both revenue at $69 million to $73 million and adjusted EBITDA at a loss of $4.5 million to a loss of $2 million.

With that, back over to you Gary.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [5]

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Thanks, Darin. Before turning it over for Q&A. In summary, as we said, not a great quarter, but it was still an important one as in this quarter, with the increase in strategic partners who have embraced iPass SmartConnect, it marks the most tangible evidence to date that we are indeed a software company.

Our future is no longer simply selling Wi-Fi, but it's firmly entrenched in the growing need to intelligently manage the complexities of connectivity in the mobile world and as for both operators and for enterprises.

With that, let me back -- turn over to Don for any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Scott Searle with Benchmark.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [2]

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Darin, quick question. Just to get a couple of clarifications on your financial comments. I think you indicated about 2/3 is the pay-per-use user base. Do you have more granular numbers in terms of the UNLIMITED mix and the subscribers? And also on the NAC cost, how will that scale up over the next couple of quarters? It sounds like you've renegotiated some things, but it should continue to step up a little bit over the course of the year. And then I had some follow-ups.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [3]

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Yes. So I'll get NAC one first. So on NAC, as I mentioned in the script, actually, we expected to be flat to down slightly next quarter, so in Q2. And then, I wouldn't expect not much of a ramp the rest of the year. We will continue to be diligent in negotiating any shortfall that we see, until I feel like we're in pretty good place with what we're done coming out of Q1 and with some other things we have in the works for Q2.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [4]

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Yes. And -- just let me jump in there, Scott. As Darin did mention, just with one supplier alone, the total commit that we had for the year drops by $1.6 million in terms of committed NAC expense. So pretty significant.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [5]

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Without giving up much in way of capacity, by the way.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [6]

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Right.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [7]

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Oh -- and just in the terms the mix of UNLIMITED revenue and subscribers?

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [8]

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Yes, on the mix of UNLIMITED revenue, and when you look that other 1/3 bucket, roughly about -- and so if you figure that's 33%, figure about 15% of that is strategic partner and the rest of that is UNLIMITED on enterprise. And if you'll notice, we still report a number, which is active platform users. For the first time in a long time, our active platform users went up in Q1 over Q4. And the biggest contributing factor there is -- while we don't put UNLIMITED subscribers in that number yet, we don't actually disclose a subscriber number from UNLIMITED, if they are active on a network, they fall into our active platform user number. So you can see by the fact that active platform network -- or active platform user number is going up, that many of those UNLIMITED users are actually on the network and driving usage.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [9]

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Got you. And then, Gary, to follow-up on your HP comments. Just wanted to get a clarification in terms of -- you expect that to get done and there will be some contribution this year. How is that going to roll out into the P&L this year?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [10]

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Well, I'll let Darin address the P&L part of it given the deferred component of that under the structure we have today. But yes, we do expect that to be back on track later this year.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [11]

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Yes. I mean, to be honest, I still don't have a lot of upside in the plan for the rest of the year. So if something like that does occur, we'll actually have some upside in what we were forecasting. It's pretty marginal as far as revenue recognition for the rest of 2017 in our forecast.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [12]

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But you would see that deferred revenue line continue to increase once that...

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [13]

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Once they start to ship, we'll see that deferred revenue line start to ramp up again, like we saw the first time we did with the Asia-Pacific deal with Hewlett-Packard.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [14]

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Got you. And Gary, just to follow-up on your Veri-Fi comments. It sounds like you're starting to see some revenue from that now. Are you getting a better handle in terms of what the business model looks like there, what you can charge for? And can you maybe provide a little bit color about how that will evolve over the next several quarters?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [15]

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Yes, let me let Patricia address that since she is fresh off of the call, and I'll be anxious to hear what she has to say.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [16]

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So Veri-Fi, we're looking at a couple of offerings, Scott. One is location services data, it's a really hot topic these days. So one of our offerings will be related to location services. Another has to do with the fact that we know where all the hotspots are around the world. So the ability to provide heat maps to be able to provide location of the hotspot is another use case. The deal that we did in Q1 was actually a representation of our analytics. It was a compilation of different dashboards that our customer needed to be able to take a look at metrics associated with Wi-Fi. From a price point, we haven't published our prices yet, but we're looking at both onetime charge depending on what they're purchasing; as well as a subscription model, which says you buy an annual subscription and you get updates on a monthly basis and they pay X number of dollars per month against that subscription model.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [17]

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I would just add to that, Scott, that the data part of this has moved more quickly than I expected. And that's really customer-driven. It's demand-driven more than it is us getting the product figured out.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [18]

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Maybe just to extend that thought, Gary. Originally, this was a gee-whiz, it's kind of neat, it helps you with customer sales. Is there a number in terms of the mix, if you looked out at 2018, that this could represent either in terms of absolute dollars or percentage of the mix from data analytic measure?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [19]

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Not yet.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [20]

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Not yet? Okay.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [21]

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Not yet. Give us -- yes, give us another quarter. I mean, I think it's going to be important to see what happens here in the second quarter with some of these deals that are in the pipeline. We'll have a much, much better view on the next call and the answer may be, holy smokes, this is more significant earlier than we thought or it's going to be, yes, it's still there, but we'll keep to our modest growth projections.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [22]

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Last question and I'll get back into the queue. The -- maintaining the guidance for the year is not any different, I guess, than coming into this quarter. But it certainly implies a big ramp in the second half of this year, that's almost 50% revenue growth by the fourth quarter. I know part of that is contained in the ACV that you guys had won last year. But could you just provide a little bit more color commentary in terms of what else needs to happen? What do you have in -- how much is this is execution versus what you won versus what you still have to bring in the door to give us confidence to share on your level of confidence to maintain those numbers?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [23]

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There's a lot of execution. I'll let -- I'm sure both Darin and Patricia have their own view of this. But my answer is a lot of execution. I took the time to go through some of those deals that are going on literally all over the world with SmartConnect. And so it's execution on those deals that have already been won or, in some cases, are in some very interesting proofs of concept. Now it doesn't take the pressure off Patricia in continuing to close new deals and to fill the ACV going forward, but there is a lot pent-up revenue still to claim from deals that were already done and, as I mentioned, are in various stages of deployment. You guys want to add to that?

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [24]

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Yes. I mean, I feel that -- when we put out the annual guidance and we gave a range, I felt very comfortable in the bottom end of that range just based on execution against backlog. I've got no reason coming out of Q1 to have anything other than continued confidence in being able to execute against that backlog, which gets me easily to the bottom end of that range. Yes, we still have some ACV to close this year and convert into revenue this year. And in addition, I'd love to see some of the ACV we reported on strategic partnership deals -- historically, that's a fairly low number, overachieve on those. Things we talked about like the Tatas and the pass, et cetera. But that's still the line of sight between the bottom end and the top end of that range.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [25]

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Yes. And I'll just add, Scott, we have a couple new contracts that we're working that, I would say, fall under the auspices of execution that are new to us. So some new opportunities that I didn't anticipate that we're getting through the final stages of contract and could be significant for us as well.

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Operator [26]

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(Operator Instructions) We'll go to our next question from Brian Kinstlinger with the Maxim Group.

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Joshua M. Seide, Maxim Group LLC, Research Division - Equity Research Associate [27]

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Hi, guys, this is actually Josh Seide in for Brian. Could you maybe give us some color on any visibility into what early conversion rates might shape up to be from partners, such as BSNL or Vivo, that are now in the process of rolling out iPass to their end-users?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [28]

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It's pretty early, Josh. They are -- typically, what we're finding, is that they start slowly by testing in certain markets or certain areas before they actually put a marketing launch behind it. So -- and that's what we're seeing kind of across the board that there's a lot of that going on, but it's hard to say. I can only -- I'll reiterate what we heard from these partners is -- when these big companies like BSNL that have roughly 100,000 subscribers, they expect somewhere 4% to 6% conversions or activation rates. But we're seeing a much higher -- the one I would comment on that we've -- that I did talk about on the call is Telrite. Telrite is seeing a much higher conversion rate, here is a company that has fewer than a million subscribers and we're already up to a 130,000 there that have activated, and that number is increasing literally over a thousand every day.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [29]

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And the reason that it's even that low is because every new subscriber that's signing up is almost -- almost every new is activating.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [30]

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That's right.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [31]

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So you're seeing a real uptick in the folks that are coming on new into our service.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [32]

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Yes.

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Joshua M. Seide, Maxim Group LLC, Research Division - Equity Research Associate [33]

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And is the driving force behind that, that Telrite is marketing iPass' technology directly upon...

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [34]

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They are. They are marketing it. Because not only is this a real benefit for the Telrite consumer, it's a significant value for Telrite because they're able to take advantage of the offload, which, of course, we see as increasingly important. We're also getting a lot of great data from that customer base, so when we think about 130,000 customers roaming around collecting data for us, that's -- and they're -- candidly, they're roaming around places where a lot of our typical users haven't been.

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Joshua M. Seide, Maxim Group LLC, Research Division - Equity Research Associate [35]

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Great, that's helpful. And then you mentioned in your remarks that about 91% of the ACV this quarter for enterprise deals. Could you maybe give us a little bit context into that absolute number? Does that imply that ACV for the quarter associated with enterprise deals grew either sequentially or on a year-on-year basis, and that the otherwise kind of decline in ACV was attributable maybe to more strategic partnership that got pushed out or didn't close this quarter?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [36]

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Yes. So Josh, it's Pat. The ACV from the enterprise was -- the number of customers was up significantly from what we had seen in the second half of last year. So the good news is we're getting more enterprise business. I think we did tell you guys that we were focusing both on enterprise and strategic deals this year to make sure we had a balance in the mix between enterprise and the strategic deals. Candidly, as Gary said, we had a couple of the bigger enterprise deals actually roll into Q2. So we are seeing, I would say, new momentum, increased momentum in our enterprise business. Now the good news is that we continue to see momentum in our strategic partnerships, yes? So I'm very -- I feel good about the fact that both verticals, both opportunities, have a velocity to them, a volume to them, that would help us -- to Scott's earlier question, help us not only execute for attainment of our guidance this year, but also allow us to drive the ACV we need to do that.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [37]

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And I'd also point out -- and I may have say this publicly before, if I haven't, I'll all say it now. Expect to see a convergence of enterprise and strategic. Because at least in the high end of the enterprise, I will be shocked, if we don't do some SDK deals with large enterprise this year. As is said, I may have said that before publicly, if not, I'm saying it now. There is a lot of reason for a large enterprise to adopt iPass across the entire organization and use iPass as the means to intelligently manage their mobility cost. This is a big opportunity for us. And while I think there was some skepticism about this 3 or 6 months ago, we're actively discussing it now with enterprises and we're starting to see some real interest in taking control of their own mobility cost by using SmartConnect through the SDK. Would you disagree with that Patricia?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [38]

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No. And I think the other good news is some of the companies also have a need for mobile connectivity to fuel their go-to-market initiatives. We were with some very large accounts last week in Europe and 2, in particular, both expressed an interest to expand the partnership from a supplier-vendor relationship to a strategic relationship, using our SDK as part of their go-to-market offering.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [39]

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And also expand it from used only by employees to used by devices.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [40]

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That's my point.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [41]

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IoT.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [42]

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That's my point. Yes, yes. That's my point.

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Operator [43]

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(Operator Instructions) We'll go next to Marc Silk with Silk Investment Advisors.

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Marc Silk, [44]

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The -- I guess, Hewlett-Packard, is there a term as far as how long you -- that deal is for going forward?

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [45]

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Contractually, once they start roll out cycles, I believe it's a 2-year deal.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [46]

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2 or 3, yes.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [47]

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Yes. And it'll vary then by regions. So if they roll out a country in a period of time, then that country will launch in and have a term. The next country they roll in, maybe 2 months later, has a term on top of that. So it's -- once they get started, it could go same way the HP pack deal has gone, which is on-running for nearly 3 years of this point in time.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [48]

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Past -- I think past the original.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [49]

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Past the original, and they continue to ship devices absolutely, yes. So it's (inaudible) once they get into those devices.

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Marc Silk, [50]

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And it's the same exact deferred revenue? Or are you able to kind of tweak that little bit?

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [51]

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Under the current structure and the current contract, it will be exact same rollout, which is we paid -- they pay a fee per device and we are required to recognize that revenue over a waterfall of how long they have to use the Wi-Fi on that device.

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Marc Silk, [52]

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And obviously, 2018 is where you'll have a full year of this. But have they projected kind of how many of these devices they are going to sell in 2017, just so we have a guide of what 2018 could look like?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [53]

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No, we don't have that level of detail from them yet, Marc.

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Marc Silk, [54]

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Okay. Well, that's very...

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [55]

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We'll have much better visibility on that on the next call.

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Marc Silk, [56]

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No doubt, but congratulations on that deal. Okay, the UNLIMITED data plans, obviously there's been a lot of press and what have you. So since these plans are starting to become more ubiquitous, has this started to become a reality to your offloading business? And can you further comment how this could impact this part of the business?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [57]

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It has impacted it. I mean, it was interesting that -- I think it was Bloomberg's story that came out a couple of months ago, that implied that unlimited cellular data plans marked the end of Wi-Fi. Well, I would say it a little bit differently. I would say that the cellular -- unlimited cellular data plans marked panic in the mobile operators and that would include even those who did it just because of capacity constraints or cost constraints. And therefore, the absolute need to have Wi-Fi is an integrated part of their solution. It's -- Patricia, you have -- you did give a talk on this in Nice last week?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [58]

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I did. I did. So Marc, look, the unlimited data cellular plans have done nothing but help us, right? Offload has been around the industry for more than a decade, there's been ebbs and tides as to the importance of Wi-Fi offloading. I think that, today, due to the -- just the amount of data that's been pushed through the capacity of the Wi-Fi or the cellular spectrum that is out there and available, the network operators -- mobile network operators need now to embrace Wi-Fi as part of their solution to their customers. It isn't just low-cost routing that is important to them. It is data throughput, it is management of their network cost structure, adding more antennas because of the amount of data that's being consumed is very costly for them. If they can offset that expense through the use of Wi-Fi, it helps their bottom line dramatically. And the way we position the value of iPass versus just an offload to any network is the value of iPass SmartConnect, which is intelligently managing the connection for a much higher connection success rate. The offload to Wi-Fi is interesting, but it's not interesting if you can't connect. And so the marriage of our large footprint alongside of our advanced technology with iPass SmartConnect is a perfect combination to solve the challenges that the mobile network operators are facing as it relates to unlimited cellular data plans.

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Darin R. Vickery, iPass Inc. - CFO, VP and Secretary [59]

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And the cap on demand thing, why don't you tell the story about, you gave the keynote speech, how many people followed you back to the booth asking for follow-on meetings thereafter?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [60]

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Yes, yes. It was very interesting. We had probably about a 100 people in my keynote and we had a bunch of very large companies actually beat me to the booth to sit down and talk about tell us more about what you guys are doing. The 60 million hotspots are interesting for sure, but the fact that your technology can achieve almost double the industry average of Wi-Fi connectivity is extremely intriguing to them. And then you add in the data on top of it to provide the insight they need in order to know what to do with capacity and user -- usage of the data. It's just a very compelling story to them.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [61]

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Well, and this is what -- this I think is -- tell me, if you disagree. But when I said that we're seeing a pull for the data, I would attribute it, candidly, a lot of that to the UNLIMITED cellular data plans. They're saying, "Holy smokes, we need data to do exactly what you said to able to dynamically manage network and network availability."

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [62]

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Yes, yes.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [63]

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Predictably.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [64]

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Yes.

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Marc Silk, [65]

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So on this point, so the old regime, when this came out the offloading, it's said we've had so many inquiries, it's like drinking out of fire hydrant. And I think what we've learned is the reason why that can't take off, one reason was because the cost was prohibitive. But now that you've brought the cost down. And I'm just trying to find the inflection point. Like, for instance, are these MNOs and MVNOs, are they look like -- they're probably looking every month now and saying, "Okay, this is what we charge for UNLIMITED and this is where our margins are going and it's kind of keep shrinking and shrinking." Does it get to a point where it's kind of like -- just like Darin just said, they're following you to your booth. It seems like it's becoming more of a reality, where maybe you might be able to execute or close these deals faster than you have had in the past, is that something you see?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [66]

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Yes. So Patricia mentioned that Wi-Fi offloadings were around probably for 10 years. And there was a lot of excitement, I think, about offload before there was really the need for it. In other words, there was -- it was an interesting concept. But I remember in the early days of offload, it was difficult trying to find the right price point. And certainly, as you mentioned Marc, iPass would always be an advantage of that just because -- since we don't own and operate networks, our cost structure was -- made it hard to compete with someone who did. Now though, as you mentioned, that we have a lot of capacity, we bought all that capacity, we are definitely a player in that market. But what differentiates us is the intelligent connection management. This in isn't brute force offloading. If I'm at point A, I know that I have a supplier with a network there, therefore 100% of the cell traffic is going to offload. That's kind of the old way. The new way, what we do is having the ability to dynamically switch -- and that can be any place in the world, but it also can be with different customers standing at the same place. We -- some may switch over -- switch via technology over to Wi-Fi, others may be kept on cellular or vice versa. So it's a much different world when you look at intelligent connection management.

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Marc Silk, [67]

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Okay. Last week, the Comcast CEO, Brian Roberts, was commenting on Xfinity Mobile. He said the best part of this offering is that it automatically identifies your Wi-Fi without having to log on or do anything if you are on the Xfinity Wi-Fi. So 2 questions. First one is, this sounds like a technology you offer, can you comment on this? And second question, wouldn't it be a better business model to gain market share if in addition to giving customers access to the Xfinity footprint it makes sense to increase their offerings with, say, 60 million hotspots in 120 countries?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [68]

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Yes. First part -- Patricia gave me the easy one. I really can't comment. We're not allowed to comment on Comcast. And actually (inaudible).

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [69]

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Yes. And then the second one is Comcast is a very clever company and they're very interested in revenue growth. So trust that they are looking at every way to drive additional revenues. So again, can't give any specifics. But they're very good partners of ours, and we continue to have conversations around how we can drive more value together.

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Marc Silk, [70]

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Okay. Last week's blog on your website, you talked about the [evvee] report, where 2/3 of organizations ban their mobile workforce from accessing free Wi-Fi hotspots, 94% said free Wi-Fi is a threat to the company. So I guess what I want to know is if in the organization is educated as to the security option that iPass delivers with the SmartConnect offerings, so how successful have you been able to relay this message in order to change the narrative? And how is this progressing? And what kind of difficulties you encounter trying to change their vision of accessing free Wi-Fi hotspots when you're trying to close deals?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [71]

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Yes. So Marc, without security, there is no way to handle that objection. So the fact that we offer the last-mile VPN as well as have very secure back end on the server side, it allays their fears. I was with a large, large customer last week and we spent, I would say, a good part of our meeting discussing security. And when we left the meeting, there was a 3-phase plan that you would all want us to get, which was let's proceed. And there was no longer any trepidation on the part of the executive to allow his employees to access free Wi-Fi as long as they had iPass SmartConnect and the VPN. So I think there is no issue when you have an opportunity to educate and communicate effectively to prospective buyers or existing customers.

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Marc Silk, [72]

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And you mentioned the in the ACVs on the enterprise side, you -- it sounds like you closed a large number of deals, but they're small in scope as far as seats. Are these companies are just getting their feet wet? Or are these just small companies where you don't know if there's going to be much upside?

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [73]

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Both. It's both. There are some very large companies that are starting small, and there are some very small companies that are never going to grow. The interesting thing about the small companies is the cadence in which they're closing. We're just doing a lot of small deals without marketing to them. And we decided it's been going so well, we've just hired a third person to just take those calls as they come in. These are inbound calls, people looking for the service. And we don't spend a lot of time on them. We don't negotiate...

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [74]

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Yes, we don't discount. We don't negotiate. We have a 3-to-close process. If you can't close it in 3 calls, you move on. The cadence works, and it's a pretty interesting approach to -- we don't spend any money on it candidly, right?

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Marc Silk, [75]

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Yes. So you're seeing a lot of these inbound calls starting to progress as people get educated?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [76]

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That's correct.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [77]

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Definitely.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [78]

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That's correct. That's a result of building awareness through the marketing campaigns. That's right.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [79]

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The way that works -- not to get into too much detail. But we hire -- we have a small team, a very small team, that -- their primary job is calling out leads and passing them onto the account execs. In addition, these same guys, when they're getting -- if they get a lead that's a small deal, and they can close it themselves, they just close it. So as we've said, we've hired more people to do that because the demand is there. And they pay for their salary really quickly just in the volume of deals that are getting done on that end of the business.

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Marc Silk, [80]

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Last question, it's important. So at the present time, it's -- no doubt you have a ton in your plate as far as trying to close deals, et cetera, and you have the offerings that are ready to be rolled out. But the thing that makes the iPass story even more attractive is the potential future additional revenue opportunities. Scott covered the Big Data analytics, Veri-Fi, et cetera. But can you comment on mobile ad-driven CPM/premium access in IoT without compromising your competitive edge, obviously?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [81]

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Yes, so mobile ad using Wi-Fi as the vehicle for advertising, we are not involved in that at this time. That is a very different sales cycle, a very different sales process. You have to have the advertisers on your side in order to deliver targeted advertisement with Wi-Fi as the bearer of the ad. Technologically, we can do that, but we have a very focused go-to-market model for the year and deviating from that is not in the best interest of you, as our shareholders, and our customers. So we stay the course on what we established as our go-to-market model for the year. As it relates to IoT, we actually closed an IoT deal in Q1, albeit a small deal. We are starting to see more inbound leads for IoT. The concept of INVISIBLE, which was part of our mantra: Everywhere, Unlimited, Invisible. IoT requires invisibility in the technology, and we are making great strides with what is needed there. So while we do not have IoT revenue called out in our plans this year, I do anticipate we will get a few more IoT-like deals. I think that 2018 and beyond will be the IoT growth time. So I anticipate that it'll take hold much more readily next year than this year. And I will restate, it's because we are highly focused on what we set out to do this year to achieve the guidance.

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Marc Silk, [82]

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Well, IoT and HP, 2018, could be very interesting.

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Operator [83]

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That concludes today's question-and-answer session. At this time, I'll turn the call back to Mr. Gary Griffiths for any final remarks.

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Gary A. Griffiths, iPass Inc. - CEO, President and Executive Director [84]

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Yes, thanks, Don. And thanks to all of you who participated in the call today. Thanks especially to our new analysts who joined us today, Scott Searle and Jon Hickman, appreciate it. And we'll talk to you all soon. Thanks very much.

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Operator [85]

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This does conclude today's conference. Thank you for your participation. You may now disconnect.