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Edited Transcript of IPAS earnings conference call or presentation 8-May-18 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 iPass Inc Earnings Call

Redwood Shores May 17, 2018 (Thomson StreetEvents) -- Edited Transcript of iPass Inc earnings conference call or presentation Tuesday, May 8, 2018 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 & Secretary

* Gary A. Griffiths

iPass Inc. - President, CEO & Director

* Patricia R. Hume

iPass Inc. - Chief Commercial Officer

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Conference Call Participants

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* James Patrick McIlree

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology

* Marc Silk

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

* Scott Wallace Searle

Roth Capital Partners, LLC, Research Division - MD & Senior 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 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Darin Vickery. Please go ahead.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [2]

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Thank you, operator. Good afternoon, everybody, and welcome to iPass' First Quarter 2018 Results Conference Call. As a quick heads up, in our continuing efforts to cut discretionary spend, we have parted ways with LHA as our Investor Relations team. I'll be handling those duties primarily in-house moving forward. The IR contact information has been updated on our iPass investor website. I also want to thank Kirsten Chapman and her team for their help over the last few years and wish them all the best.

I'm here today with CEO, Gary Griffiths; and CCO, Patricia Hume. We distributed the press release over the wire services. The release and our earnings presentation are posted on our website at investor.ipass.com. This call is being broadcast on the website, and a replay will be available there until the next earnings call.

Before we get started, we want to emphasize that some of the information and statements you will hear during our discussion today will include forward-looking statements, including without limitation, those regarded to our projected performance of the financial outlook and revenues and profitability targets. These statements generally may be identified by the use of the words expect, intend, believe, anticipate and other similar words noting 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 day of the conference call, and we undertake no obligation to revise or publicly release results or any revisions to the 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 reports on Form 10-K filed with the SEC on March 8, 2018, and to be filed in the future on our Form 10-Q with the 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 the non-GAAP to GAAP measures can be found in the press release and on the website. Please note we will be presenting at the forthcoming Ladenburg Thalmann Technology EXPO on May 31 at Convene in New York City.

With that, let me turn it over to Gary for some color on the quarter.

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

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Thanks, Darin, and thanks to all of you joining the call today. Appreciate it. So on the last call, we talked about the efforts we were taking to get back to growth and by lowering the quarterly breakeven revenue target to around $15 million, shortening our path to profitability. So you've seen the press release today. We've taken a big step towards that goal of closing a multimillion-dollar license for the iPass SmartConnect platform. Now we said in the past that our growth will be driven by technology and data not by our legacy WiFi aggregation business. So to reiterate, this new deal is a software license and, as such, represents a significant milestone in our transformation to a business that is focused on software technology and, increasingly, data. We said that our growth this year would be dependent on this licensing and data revenue, and this new partnership represents a significant percentage of the total licensing revenue we'd forecasted for all of 2018.

Now with other deals of similar magnitude in the pipeline and our Q2 ACV to date already well ahead of the Q1 total ACV, we're feeling increasingly confident in our growth plans and have taken a big step towards our $15 million quarterly breakeven revenue goal.

So let's move on to the cost and expense side of the equation where there's more good news. Now Darin is going to share the details here, but in short, our network access cost, or NAC, dropped to less than $7 million in Q1 and is on track to be less than $30 million for the year. Combined with our operating expenses, also better than planned, total cost and expenses for the quarter decreased to less than $15 million, better than what we have forecasted.

And we continue to focus on operational efficiency. To that end, today, we announced a very important step forward in our expanding partnership with Tech Data. We will be outsourcing certain sales and support operations to Tech Data, which will further reduce our operating expenses while improving our operational efficiency. More importantly, by increasing our dependency on Tech Data's powerful sales machine, we believe we will accelerate sales and mitigate churn. And if I could just add an anecdote on this one, this deal from the time we -- that Patricia had this idea till it was completed and signed and announced was less than 2 months. So just a special thanks to Patricia as well as the whole Tech Data team which, so far, has just been an absolute joy to work with, and we're excited about our opportunities with the Tech Data moving forward.

We're also confident in our cash position and outlook. First, the SmartConnect license I mentioned as cash and revenue, not all the cash in the first quarter but a lot - -- enough cash in the first quarter. Second, we have over $7 million still available through our ATM with Aspire Capital, and we believe (technical difficulty) positive outlook we have for the second half, we may draw a few more million dollars from that line but trust it will only be as needed. And third, we'll return to sequential growth in this quarter, which Darin will discuss in more detail, giving us confidence that we're getting very close to generating cash.

Now with continued focus and tenacity, we're confident that we have the pieces in place to make iPass a bona fide software and technology company to achieve the profitable growth we predicted.

So let's talk about that for a minute. Let me give you some ideas on how to think about the months and quarters ahead and talk a little bit about the total addressable market that we see for SmartConnect and the derivative Veri-Fi data platform.

So as you know, we made a single investment in product and technology, which, of course, is SmartConnect-ed data. But from this single investment, 4 distinct but related markets have developed. Now first, there is the enterprise and, of course, this is our traditional bread-and-butter. But with iPass SmartConnect and Veri-Fi, we're now serving the enterprise with a new and improved value proposition based on our ability to deliver always best connected secure mobile connectivity. This, coupled with Veri-Fi analytics, provides the enterprise with insights on how mobile workers are connecting, leveraging WiFi and cellular technologies. We're arming those enterprise IT teams with the tools and services to have better control over their mobile workforce, which is a huge growth opportunity for us as enterprises spend billions of dollars to improve employee productivity, make data more secure and reduce the cost of mobility. In short, we're committed to growing our enterprise customer base while increasing our share of wallet across the existing base. And I would just point out again that Tech Data will play large in that initiative.

Now the second segment, mobile operators and mobile virtual operators. These unlimited cellular data plans are great. They're great for consumers. But the mobile operators and the virtual operators who depend on them are faced with a worsening problem of increasing demand on a constraint capacity. For the MVNOs, the cost of cellular -- wholesale cellular is growing proportional to their customers' insatiable thirst for data. The ubiquitous availability of reliable and secure connectivity is critical in making the intelligent offload to WiFi essential. Intelligent means we have enough data about available access points to steer the connection to the best available network. And SmartConnect can run without an app embedded in the device, making the user experience invisible and letting the technology do the work. With SmartConnect, the operator can command, control and steer the end-to-end connection experience. This provides new opportunities for embedded solutions to take advantage of the technology and for data to improve service quality while managing costs. And as unlimited cellular plans become the norm, this opportunity for us only increases.

The third segment, in-flight connectivity. Now while this may seem like a simple extension of the iPass global network, it's anything but. First, WiFi connectivity in-flight is a growing market. Today, only about 25% of the world's commercial aircraft offer in-flight passenger connectivity. And second, as we've all seen, the connection experience varies from airline to airline, and it's not always great. But this is a great opportunity for SmartConnect, and we're working across this ecosystem, the airlines, the service providers, the various technology partners, to help improve and streamline the in-flight user experience. Industry estimates will tell you that they see the WiFi -- the in-flight WiFi market growing to around $8 billion annually over the next few years, and I can assure you that iPass is right in the middle of these discussions. Providing an in-flight user experience, coupled with highly reliable WiFi, allows the airlines to focus on driving incremental revenues associated with the in-cabin experience. For (technical difficulty) that the airlines need to understand not only the performance of WiFi in-cabin but, more importantly, the behavior of their customers between flights.

And the fourth and final segment is the hospitality and loyalty markets. And I can assure you in this segment, data is king. Leveraging data allows marketeers to better understand how to deliver long-term customer value, build brand loyalty and retain customers. For example, Company A wants to know how many of its customers spend time in their competitors' locations not as individuals but as a group. We can provide this anonymous device location data, allowing Company A to understand this behavior and then react perhaps with new marketing initiatives aimed at altering these behavior patterns. Our loyalty customers are excited by this promise. Using iPass SmartConnect and our 65 million global hotspots, their customers are collecting valuable data every day, and we're only starting to scratch the surface of this huge opportunity.

So on adding up these 4 markets, there's clearly a lot of opportunity to pursue, literally billions of dollars will be spent here, and it's going to keep us busy. But let me reiterate, while these are different markets, the single SmartConnect Veri-Fi platform serves them all.

So in summary, momentum has clearly shifted. The recent iPass SmartConnect software license is a milestone in our transformation, and we expect more of this ahead, including revenue-generating rollouts from recently closed MVNOs like Lycamobile in Europe and Republic Wireless in the U.S. And with our goals to reduce costs and operating expenses accomplished, we can see a clear path to EBITDA profit while taking steps to strengthen our balance sheet without resorting to means that would significantly dilute our shareholders.

Now before I turn this over to Darin, I just want to give a public thanks to this team, to Patricia, Darin, Raghu and Raj. In an environment of Silicon Valley where, frankly, there's a lot of selfishness and greed, this team just comes to work every day and works 24/7 and never asks for a damn thing. They don't ask for bonuses. They don't ask for increases. They don't make excuses. They just go out and do the job. So thanks, guys. Appreciate it.

And with that, Darin, why don't you tell us about the numbers.

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

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Well, thanks, Gary. I got to get that tear out of my eyes. I appreciate the sensitivity.

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

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Yes, yes, yes. Well, you can sing Kumbaya when we're all done here.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [6]

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Total revenue for the first quarter was $11.4 million, down from $13.2 million in the fourth quarter of last year. As we indicated on the earnings call in February, we had expected revenue of approximately $12 million for the first quarter based on run rate coming out of year-end. But 3 events adversely impacted Q1. First, churn was slightly higher than expected. Second, several major winter storms distributed travel in U.S. in February and March and adversely impacted our pay-as-you-go revenue base. And finally, downward pressure on WiFi pricing continued, especially in the in-flight sector as airlines are tinkering with their retail models, including subsidizing prices on certain flights and segments. Each of these 3 items contributed about equally to the revenue coming in under the $12 million mark. Also, we had no nonrecurring revenue from technology licensing or Veri-Fi in the first quarter to offset these run rate declines. As a reminder, we had about $1 million of nonrecurring revenue in Q4 of '17. But as Gary mentioned, we have now signed our first significant strategic partner technology license contract in May. It's a typical perpetual software contract with a significant upfront payment upon delivery of the software and annual maintenance and support in the range of 20%. Beyond the positive impacts this first domino should have on closing similar deals, we are also filling our pipeline of revenue expectations for the rest of the year and expect solid growth in revenue in Q2 '18.

We expect the year-to-date softness in closing Veri-Fi deals, we believe fueled by uncertainty around the upcoming GDPR laws in Europe, to improve post the May 25, 2018, enactment date of GDPR. Our pipeline of opportunities in Veri-Fi is strong. We are on course to be fully GDPR-compliant by the launch date, and we believe we will close several data deals before June 30, providing additional upside and visibility to rest-of-year revenue projections by the time we exit the second quarter.

One last data point, our recently announced deal with Lycamobile will start generating meaningful revenue in July, adding another influx for Q3. Even without any technology or Veri-Fi deals closing in Q1, net annual contract value, or ACV, increased to $1.6 million for the quarter, up from $1.2 million in the fourth of last year. Already, in Q2 '18 through today, we doubled that Q1 ACV number not even halfway into Q2. Churn, meaning the annual loss of revenue per customer termination or write-down, was $1.5 million in Q1, a little higher than anticipated but within the range of expectations for the overall 2018 plan year. Network access cost, or NAC, was $6.8 million for the first quarter, down 25% from $9.1 million in Q4 and down from $10.3 million in Q3 of last year. As we communicated last quarter, we have successfully renegotiated our WiFi purchase commits for 2018. And while our percentage of dollars spent on NAC capacity has declined to 63% of total NAC versus 37% on pay-as-you-go networks, we still have adequate capacity in our networks to fuel usage growth. In the first quarter, we had excess capacity of 65% versus excess capacity of 64% in Q4 and 60% in Q3 of 2017. We've added these new operating metrics to our earnings press release to show the historical data trends of these numbers.

While we were buying more of our NAC on a pay-as-you-go basis than in 2017, we continue to buy adequate capacity on our most strategic footprint. While we could see a slightly higher NAC expense in Q2, it should modulate, plus/minus a couple hundred thousand dollars per quarter for the rest of 2018 off the Q1 run rate.

One other item we updated on our earnings press release was to add unique open access or curated network users to our WiFi network user accounts, making the metric more representative of the SmartConnect users that are connecting to our service, not just via commercial footprint but also through the embedded software functionality of secure open access hotspots.

Under our license (technical difficulty) of 2018. And remember, the more users or devices that are running SmartConnect, more data we are collecting to empower Veri-Fi. In our earnings presentation posted on ipass.com, you can see the data from both the new metric as well as the old metric that was based only on commercial network WiFi users.

Our gross margin rebounded to 28% in Q1, up from 20.9% in Q4 and 10.9% in Q3, primarily on our NAC expense savings. As revenue ramps during 2018, our gross margin should strengthen each and every quarter. On a GAAP basis, net loss was $4 million in Q1 compared to $4.3 million in the fourth quarter. Our adjusted EBITDA for Q1 was a loss of $3.4 million compared to a loss of $3.8 million in the prior quarter.

While we still can't say we have definitely solved our balance sheet cash issue, we do continue to make use of the Aspire at-the-market facility, raising $0.5 million in Q1 and an additional $800,000 in April 2018, bringing our total raise to $2.5 million since inception of the agreement in November of '17. Signing our first technology software license in May will be another boost to cash as we collect a significant portion of the license fees toward the front end of the agreement.

We exited March 31 with $2.8 million of cash. And with the continued use of Aspire and the technology license arrangement recently signed, we'd expect to exit the second quarter at just north of $2 million of cash. We still see the path to cash flow breakeven in the second half of '18, but we will also continue to explore opportunities to raise additional capital if and when it is optimal.

Lastly, we attended a NASDAQ hearing panel on April 26, last month, to request additional time to remediate our delisting deficiencies, both the bid price being under $1 and our market cap under $50 million. We presented our plan and, yesterday, received word from NASDAQ that we are granted an extension of time to execute on our plan and regain compliance. The plan includes transferring our listing to the NASDAQ capital market from the current global market, which will reset our market cap requirement at $35 million. Our plan also includes obtaining shareholder approval to effect a reverse stock split, which will be voted on at our Annual Meeting on June 13, 2018. Finally, we highlighted fundamental business objectives and actions that will increase our market cap and/or our shareholders' equity balance to regain compliance with those deficiencies. We must keep NASDAQ abreast of progress and have fully remediated our bid price deficiency by September 10, 2018, to maintain our listing status.

With that, let me turn it back over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [2]

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I guess, first of all, are you willing to disclose what is the value of the annual contract value in your current deal pipeline?

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

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In our current yield pipeline?

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [4]

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Yes.

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

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So pipeline, Patricia, do you want to take a stab? It's a ridiculously large number, so I'm not sure if it really helps to put that number out there on a pipeline without reading it at percentage expectations. But Pat, do you want to give some color on the pipeline?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [6]

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Yes. I mean, we've been talking for months about trial programs that we're running with mobile networks operators and mobile virtual network operators and trust that those are large deals. They're significant. To Darin's point, I wouldn't put a number out there because the manner in which the sales process works for these large deals is different than the enterprise, but trust that we have a significant number of trials running right now.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [7]

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And I would say that -- I mean in terms of just ballpark numbers, Nehal, the total pipeline that I track is definitely an 8-figure kind of a number and, as Patricia said, that doesn't mean that all those are going to come in. But it's a big number, and it's not just licensing deals like the one we announced today. We -- for example, we signed a large enterprise deal just yesterday with a very well-known media company. And as I mentioned in my remarks, the enterprise is critically important to us, and it's not -- again, it's not just selling WiFi to international business travelers, this is selling a mobile workforce management package. It's not like connectivity, but it's data security and it's productivity and it's everything to do with making an enterprise workforce productive.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [8]

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Okay. That's really helpful. And can you also give some sense as far as what is the conversion rate of your pipeline in any given quarter?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [9]

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Patricia, you normally like to do kind of a 3 to 4x kind of a...

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [10]

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Yes, we look at a 4x pipeline coverage in any given quarter in any given period of time, we look for a 4x against the committed ACV for that given quarter. Conversion rates vary. In the enterprise, our conversion rates are higher. The conversion rates in any given quarter for the mobile network operator, MVNO, are not as predictable by the nature of the selling motion. When you're dealing with the product organizations that have to do extensive testing, one cannot predict how a particular MNO or MVNO will behave against another. They have different testing criteria and whatnot, but I would say the enterprise conversion rates are good. And then, as I said, MVNO, MNO, less predictable.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [11]

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Okay, great. And then certainly agree that Tech Data should help sales. Tech Data is a leading distributor that works with many, many companies. And whenever a company does sign on Tech Data, it helps them as well, right? And so I want to understand if you -- your expectation with the relationship with Tech Data is going to be more helpful to iPass than, say, a similarly sized company that have signed on with Tech Data as well. And if so, what is the reason behind that?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [12]

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So our relationship with Tech Data is -- actually has 2 vectors. The one vector is Tech Data as a channel, whereby they will work with their value-added resellers and OEMs worldwide to position iPass as an additional value-added solution that the VARs will adopt and/or their OEMs will adopt as part of the go-to-market solution that they go to sell to their end customers. Remember, Tech Data is a 2-tier distribution. So Tech Data sales to VARs who then, in turn, sells to the customers. So my anticipation is if we look at the 250,000 VARs that Tech Data has globally, certainly not all of them are going to embrace iPass. However, Tech Data has a very strong focus on mobile -- mobility and, as such, they have specialized partners who major in mobility initiatives. We have identified a target list of VARs around the 2 geographies where we're working with them, that being North America and Europe. And our goal is to be able to augment our quota capacity by being able to recruit and onboard those VARs to help us have broader geographic coverage and greater quota capacity. So that is work in progress. On the OEM side, they've begun to introduce us to certain OEMs that find our value proposition compelling. And as Gary indicated, with our ability to embed the product now in the device, we are truly invisible. So you end up now with a device that is WiFi service-enabled with the service behind it versus just the WiFi ability, we also deliver the full service behind that. So I'm hopeful that the work with Tech Data will, in fact, yield increased revenue and ACV for us. And knowing channels, it takes some time, but Tech Data has been extremely responsive and aggressive to helping us get to market as quickly as possible. I don't want to usurp too much time, but I do want to say the other side of Tech Data, the announcement we made today, was an outsourcing announcement. Tech Data has a very large outsourcing services business. That business provides to us additional feet on the street, additional bodies, if you will. It's a white-label offering, so they will answer the phone as iPass. But with the scale and the experience and the operational excellence that Tech Data brings to the market for other outsourcers, other large companies who outsource to Tech Data, we're getting great, great economic efficiency, coupled with operational excellence, and helping us drive true quality in our business processes.

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Operator [13]

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(Operator Instructions) We'll take our next question from Jim McIlree with Chardan Capital.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [14]

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Is there a significant impact that Tech Data will have on operating expenses?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [15]

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Yes, so -- go ahead, Darin.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [16]

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No, go ahead, Patricia.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [17]

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The goal is that we will be able to streamline expenses for us in iPass as the Tech Data outsourcing initiative becomes more and more readied, if you would. So for example, if we needed to increase the number of CSMs, we can do that at a much significant rate with the Tech Data outsourcing than if we were to hire fully burdened employees here at iPass. And I'll pass the precision to Darin.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [18]

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Still 100%. So it will be rolled on phases, Jim. So while we'll have several hundred thousand dollars of savings this year even taking into account the set-up cost and et cetera of doing this, we could easily see this being, number one, a much more scalable model so that we -- as Patricia said, we scale at a lower price, but it could have $1.5 million to $2 million of annual savings even at the fully phased 2 and 3 that we expect coming out of this year.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [19]

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Okay. And that $1 million of annual savings, is that current volume? Or is that anticipating an increase in revenue?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [20]

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That's a current. But that's not taking in some calculation of scale, that's at current volume.

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

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This is, Jim, a strategic move for us.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [22]

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Yes. Yes, it sounds like it had some interesting possibilities. The license deal...

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

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Well -- and again, I mean as -- I'm sorry, Jim. I was just going to say, it's not just the cost part. As Patricia alluded, there's -- the primary reason for doing this is leveraging to a greater degree than just a straight reseller leveraging their sales force and their ability to do things like embed technology and devices.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [24]

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Right, right. I got that. The license deal that you referred to in the call, all of that is going to be recognized in Q2 revenue. Is that correct?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [25]

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It's undetermined at this. Obviously, ASC 606, and the new guidance that's come into play and this being our very first technology license, we're going to have to do some accounting work on that. But suffice it to say that it's certainly, ACV, meaning it'll happen in the year and a significant portion of it will happen in Q2, but we're still going to have to do some work behind the scenes, the deal just got signed today actually.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [26]

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Yes, we actually just signed. It's brand-new.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [27]

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And how much cash is it including in Q2?

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

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Yes, we really can't say yet.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [29]

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Okay, great.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [30]

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Not a very significant number.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [31]

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It's a significant number.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [32]

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So Darin, OpEx in Q1 around $7 million. Given all that's happening right now, has that changed appreciably for the rest of the year?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [33]

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That's a pretty good run rate from a modeling perspective. It is likely that it will come down a little bit based on some of the stuff we're doing with Tech Data, et cetera, but that's just going to slide in on a month-per-month basis as we phase, roll that out.

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

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Jim, let me just make sure though, you said -- I thought you said OpEx is around $7 million. You said OpEx was closer to $8 million. I mean, it's just under $8 million.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [35]

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Well, I assumed he was talking about on a cash basis, taking out stock-based comp, more of an adjusted EBITDA basis. Is that right, Jim?

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [36]

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Yes, correct. I think we're all looking at the same.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [37]

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Yes. So that's -- I mean we're just taking out $600,000 for depreciation and amortization. So -- I mean that's an okay bogey to roll forward at this point.

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Operator [38]

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And we'll take our next question from Scott Searle with Roth Capital.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [39]

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Guys, I apologize, I got on the call a little late, so I hope I'm not going to retread too much ground here. But in terms of the license deal, it sounds like you're not quantifying it in terms of size. The accounting still needs to be determined with all the issues related to ASC 606. But is this going to be something that you would expect to be recurring from this customer in particular, that this is maybe an initial buy? Do we have future buys? And what does the pipeline look like of other opportunities?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [40]

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Yes, I'll take that first part, then we'll let Patricia answer on the pipeline. It's a perpetual license deal with 20% annual maintenance and support. And it's obviously got a cap on a number of licenses. So from that standpoint, it will be -- so they bought an x number of licenses, they'll pay 20% annually on maintenance and support of those licenses. And then to the extent they want to come back and buy additional licenses, we'll sell additional perpetual licenses.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [41]

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Hey, Darin, maybe if I could quickly follow up on that. So in terms of the initial licenses, what sort of penetration do you trip that threshold in terms of the addressable user base within this customer? Is it 10%? Is it 20%? Can you give us some idea what the ballpark is to help us kind of size it?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [42]

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I don't know because I don't know how many actual subscribers you guys have currently. If I had to -- based on the discussions that we had during the negotiations, I would say they were okay with the capacity they were buying today but could come back in 6 months to a year needing additional capacity.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [43]

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Yes. I'd say that's fair.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [44]

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And Scott, if I may give you some update on the pipeline. So on the license deals, we have about a dozen of them, and they're significant sized deals. And this is across the MVNO and MNO space. But Gary did mention in-flight. And what's fascinating about what's happening in the in-flight space is we are being considered as a very viable connection management capability to help with the user experience in in-cabin connectivity. So there is -- there are new opportunities that are early days in the pipeline. But I can say that I was in Chicago yesterday where there's some of our partners and airline customers, and we've been spending a lot of time with the airline as well as with the IFC to be able to provide license technology to assist in improving in-flight connectivity.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [45]

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I don't suppose you'll frame for us kind of the pricing per user then, if not the absolute numbers of the contract. I mean are we talking about $0.50 per user here? Is it $1? I mean what -- is there a ballpark number you can help frame it?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [46]

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It's not $0.50. It's quite a bit lower than that, but it's more than single-digit cents per user per year.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [47]

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Yes, remember, Scott, this is -- think of this not as kind of usage-based access fee, this is technology. This is -- think of it more when Oracle goes out and licenses a database, they're not thinking of it necessarily in terms of user kind of -- I mean even other -- some assumes these are CPU, the technology that we provide.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [48]

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Yes, I think the clarity, Scott, too, we're not selling the network with these deals, at least not initially. So these are pure software deals. If the customers are interested in the premium network that's priced separately, that is more of a per-user pricing model as you would expect and then on a tiered structure for breakage. And then Veri-Fi is also priced separately. So this is just a pure straight-up software license side deals that we've got working.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [49]

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Pat, maybe to follow up on that point then. Are some of the deals in the pipeline and this one as well, are the -- is Veri-Fi? And is the network part of some of that discussion or evolution in terms of where these guys will be in another quarter or so?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [50]

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Absolutely.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [51]

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And maybe I could follow up as well. I don't know if this was addressed. But Gary, I think in the past, you talked about some potential location and some other types of applications out there. How have things progressed on that front? And did you put any sort of numbers around the Tech Data opportunity?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [52]

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Well, I think -- let me just make sure I'm understanding. You're asking me about the location services kind of application opportunities and then a specific number on Tech Data?

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [53]

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Yes. 2 separate issues, yes.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [54]

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I think -- Patricia, why don't -- you're probably best to talk about the -- about where you're seeing the opportunity with location services and, again, taking into account the GDPR uncertainty, if I may call it, that Darin mentioned.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [55]

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Yes. So Scott, first off, as you can imagine, the people that will be able to buy Veri-Fi first are the guys that are using our technology either vis-à-vis a voucher program, aka loyalty, or that they have embedded the SDK. So you can trust that we have circled back with all of those customers and have started to present the value proposition of location services data for their affinity and affiliate marketing, understand sort of cluster behaviors, et cetera, et cetera. The interesting thing is that the data, when we're going into a loyalty deal, it's kind of like the old razors and blades analogy where the data is what's valuable. So that's the razors -- excuse me, the blades. And the razor is the WiFi. And so we're in a, I think, a unique position in that. We have a very good application that provides real value where you can -- WiFi becomes monetizeable. But at the end of the day -- and it's valuable to the loyalty program. But at the end of the day, it's the data that the marketers are looking for to really gain more insight and understanding to how to manage long-term customer value. So lots and lots of work going on, on the data space right now. We're very active. We're very busy, and we have a lot going on with respect to location services data, which is kind of the super valuable data set that the marketers are looking for. If I jump over to the Tech Data question, the new outsourcing deal, as you would hope and expect from us, we did have a revenue component in the deal. Therefore, we are expecting and they are committing to drive revenues through this outsourcing deal. We did have a revenue growth objective stated in the contract that they signed. I won't share that here, but trust that Tech Data is as excited about this opportunity as we are. We do intend to cut over June 1 on the CSM, so we can see 0.5 year of their experience, our training -- full training of the individuals they're putting on this opportunity is in effect starting May 21. So we're moving very, very quickly to see results from this outsourcing.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [56]

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Patricia, I'm not sure that everybody on the call understands CSM. Can you just elaborate a bit?

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [57]

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Yes, of course, certainly. As you all know, we have 700, 800 enterprise customers today, and we have a small team. Our team can't proactively reach out to those customers every day. But one of our key values here at iPass is customer first. With Tech Data and their customer success managers, CSM, we're actually moving about 400 of our customers over to Tech Data, and they're hiring a staff sufficient enough to be able to start to proactively reach out to our long tail. Some of them may not know about the new iPass just because we haven't had the headcount to get to them. So the goal is to delight our customers, reach out to our customers, renew more of our long tail, up-sell more of our long tail. And so there's a different set of, what I would call, playbooks that Tech Data will run for us. But the primary objective near-term is to help us manage and mitigate churn in that long tail and start to delight the customers that we haven't been able to proactively serve over the last few years with the reductions that we've taken to manage our costs.

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Operator [58]

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And we'll take our next question from Marc Silk with Silk Investment Advisors.

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Marc Silk, [59]

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So after a challenging 2017, I got to congratulate you on the last month closing 2 7-figure deals. That needs to be acknowledged. So Gary, since you finished your comments with a PSA, I really need to start my comments with a PSA. And even though we got a 6-month extension, there's still a -- in regards to the recent request for shareholder approval of a potential of a stock split, I understand this may be a necessary action in order to obtain compliance with NASDAQ listing requirements. But presently, the shareholders are left with 2 unattractive decisions, every investor needs to make their own decision. And based on my years of experience investing in small companies, my decision is the vote against the reverse split. My reasons are as follows. First off, I have had some nice winners that have spent time on the pink sheets and were eventually reinstated on NASDAQ once their business has showed signs of turning the corner. It is important to note if the pink sheets are iPass' state in the future, as long as you continue to file 10-Qs and 10-Ks and continue to host quarterly conference calls, the transparency will allow investors, new and existing, to evaluate iPass appropriately just like any other publicly traded stock. I am fully aware of the arguments that the volume might dry up, making it less liquid, or that some funds won't be able to buy a pink sheet stock or you might have to call a trader with a proper bid or ask if you don't upgrade your software, but there is the other side of the coin. A reverse stock split reduces the shares outstanding. The float might be too low for a fund to accumulate iPass. In addition, some funds can't buy a stock if the market cap is below $100 million anyways. So split or no split, there are still a lot of investors that can accumulate iPass until the stock price recovers. And lastly, the $1 threshold is not the only criteria that NASDAQ looks at as the company needs to also maintain a market cap of $35 million. Therefore, even if the shareholders' vote for the reverse split, there is no guarantee that we will still be compliant with NASDAQ until the stock recovers. I have talked to a trading desk, and the consensus is every pink sheet stock trades differently. Some have decent volume, others not so much. Pink sheet stocks, like any others, will trade on news flow and the company's progress in regards to a reverse split. My experience with reverse stock splits had been less than stellar, usually causing a reduction in market cap. Also, it's important to keep in mind that once the reverse split is in place, the company could be more easily manipulated by short-sellers as it may be easier to borrow stock now that the price is higher. My last observation of the reverse split is permanent, and the pink sheets can be temporary. No matter what the shareholders choose, none of these will matter unless management can turn their offering into a sustainable profitable business, which I believe can be accomplished with a 4 to 5 balance sheet rising revenue and continued cost controls or reductions. Having said that, my first question is, now that it looks like you're turning a corner, I don't mean to put you on the spot, Gary, but is there a chance of being profitable in Q2 but not just a one-off but more sustainable profitability? And if that is the case, how could that be achieved?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [60]

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Well, Marc, let me go back to the reverse split because I just want to make sure that it's clear that by voting on the proxy, you're not voting for a reverse split. Your voting to give the board discretion to do it if necessary. And the problem is this, and here is where I don't want to be as CEO. I don't want to be in a position in June where we still have over 3 months to turn this around and get both the stock price and the market cap fixed and be in a position where we're forced to delist because we haven't been given the flexibility by shareholders to do a reverse split should it become necessary. And I understand your arguments. I could argue both sides of that as you have, but I would just say, in my own PSA, that I would encourage you to vote as management has recommended on the proxy to give us that flexibility. I mean I understand the stigma that is attached to reverse stock situations in this. But in my experience with this, it's usually not a result of the reverse split but a result of the fact that companies that typically have reverse split are failing and continue to fail. And again, I'm not arguing for a reverse split in any way. I just want to make sure that we don't get ourselves painted into the corner and that you'd give us the flexibility we need to get the business turned around and growing. On that point, in terms of profitability. Go ahead.

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Marc Silk, [61]

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So what you're basically saying is if the reverse split does get approved, you're not going to jump the gun, you're going to wait till the last possible moment. Is that kind of what you're alluding to?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [62]

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It's 100%. We had no intent -- intention of -- I mean, otherwise, we wouldn't have bothered going for the extension. If we thought we were going to be delisted, we wouldn't have bothered. I mean we would have asked for permission and done that ahead of time, but we really believe that given enough time and runway that we can remedy the situation. So you should not interpret the fact that we can do a reverse split as that we will have to do that. We have, again, the extension of -- until sometime in September to be able to...

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [63]

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September 10.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [64]

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Yes.

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Marc Silk, [65]

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All right. Well, so that goes the question about chance of profitability sooner than expected. What would your thoughts be on that?

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

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Well, again, a lot of this comes out -- as Darin said, this is a brand-new deal for us. We're looking at the accounting and the recognition. You're asking the question of sustainability. That's one of the issues that we took a big chunk of revenue in the second quarter. Yes, that would potentially make us profitable, but then we'd have to repeat that in the third quarter. So let's just say that this is a very positive step in both our growth and our momentum and in getting a significant licensing deal done, which bolsters the balance sheet for sure, which gives other prospective customers the confidence that, okay, the water is safe, we can jump in, too, because it's always toughest to get the first one.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [67]

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So 1 to 2 more deals of this size, yes, would get us to that breakeven number on revenue.

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

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Yes, we can definitely. As I said, and as Patricia mentioned, the pipeline is strong. There's a lot of big deals out there, and we're hoping this is the first dollar. We know, and we've talked about this in the past that, no question about it, our balance sheet has clearly slowed down business. I mean who wants to business with a company that they're afraid might be running out of cash in the next quarter? So we're -- look, we're definitely bolstering that balance sheet. We've done it in ways that are the most shareholder-friendly, which are taking cash deals but also our revenue rather than either equity or debt, and that's what we will continue to drive. Now some could say, "Boy, you guys cut it awful close." And that might be true but, at the same time, I would rather take some risks for the right kind of cash influx than go out and do a structured equity deal or a debt deal that would, I would argue in many ways, be a lot worse than a reverse split even. So we're doing, I believe -- well, I'll say it this way, the decisions that we make, I can guarantee are always with the shareholders' interest first and foremost.

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Marc Silk, [69]

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So when you talk about this recent deal, and you'd mentioned in the call the domino effect, but if you are not allowed to discuss this customer, how are you expecting your potential other customers to figure out what industry they're in? Or -- because I know, obviously, for competitive reasons, the customers are not going to want to let you mention them. In some cases, they will. But how do you kind of played that to your advantage, the [indiscernible]?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [70]

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Yes, it's a pretty small industry in a sense. And I would say that those who want to know will find out. And we don't have -- in other words, our making a public announcement is probably more for shareholders than it is for new business prospects.

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Marc Silk, [71]

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I got you. I'd like to know, too, so hopefully, I'll find out down the road. So with the -- it sounds like with -- so on the MVNO side, with freenet and Lycamobile, you had landed 2 of the biggest MVNOs in the world. Would that boost the credibility for the iPass offerings? How are you leveraging these victories in order to attract other MVNOs and, for that matter, MNOs, like acing incoming calls? It's probably like the NFL, it's a copycat league. So if the biggest ones are doing it, you got to figure the small guys are saying what am I missing.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [72]

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Well, I think that's absolutely true. And I think we had -- while we had some, I would say, early MVNO success in the first half of 2017, they weren't the players of this magnitude, and they certainly weren't the ones that can move the market. But this does feed on itself, and the more we can -- the more of these deals we do, the easier it'll be to generate new ones.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [73]

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Yes, Marc, if I could, Gary mentioned Republic Wireless. They're not as large as Lycamobile but I'll tell you they are an extraordinarily intelligent, technically savvy company. We've had -- they're very good to work with, and they're launching. Having the pedigree of the small guys that are super smart and growing and then the big guys that have been around a long time as part of our reference base helps a lot. We had incoming demand that -- people calling and wanting to have a conversation with me or others on the team about what we can do with command control and intelligence steering capabilities of our technology for the MVNOs. So there's momentum there, okay, and a lot more than I had seen in the last year certainly. We just were presenting it at the MVNOs World Congress in Europe, and we've got a lot of hot leads that came out of that event as well. We co-presented with freenet on stage, so there was credibility that it wasn't us talking, it was freenet talking. Lyca also did a lot of references for us at that conference. So I'm cautiously optimistic that things are starting to snowball a bit there in a very positive way.

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Marc Silk, [74]

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That's encouraging. So switching gears, so some people are worried that 5G will negatively impact iPass, with unlimited cellular affecting the return on investment in 4G. Do you see a different strategy for the 5G investment? And if so, how could that impact iPass?

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [75]

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Marc, I'm glad you asked that. I had a version of the script where I talked about 5G. So you're actually right, there's some people who think that 5G is detrimental to WiFi and, therefore, detrimental to iPass. And it's actually quite the opposite. Let me tell you why. 5G is, I would say, has moved from hype, in hyperbole, to the reality of budgets and capital planning. And what we're hearing, what we're seeing, is that because of the frequency of 5G, it requires a very dense footprint. And a very dense footprint means a lot of money. And what operators are finding is that it's just unaffordable to think that they can blanket the world or even a city with 5G, given the cost of the density. So what that means is WiFi will play a very large role in 5G. However, the WiFi that is wanted is the WiFi that would be defined, that fall under the standards of Hotspot 2.0 and 802.1x, which, I mean not to be too wonky, but that stuff has been around for, I don't know, at least 5 years, certainly longer than I have been on iPass. And the adoption rate has been very low. It's been in the single-digit percentage of total global WiFi footprint that meets those new standards, which kind of makes it not so attractive for 5G. However, SmartConnect kind of takes care of that because SmartConnect does the heavy lifting that an 802.1x network would do or Passpoint Hotspot 2.0 standard by literally qualifying the networks and only connecting to those that are reliable and secure and so on. So we actually now are looking at 5G and saying, yes, bring it on because the more 5G starts becoming prevalent, the more people will want to use SmartConnect to help offset the cost associated with 5G infrastructure deployment.

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Marc Silk, [76]

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So would you say this is maybe a 2019-plus opportunity? Or any potentially anything...

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

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Unfortunately, probably not. I mean, again, who am I? I mean, there's all kind of people who make a living predicting those kind of things. But my sense is that 5G -- true 5G rollouts is probably starting in 2020. And my guess is that they're probably going to more likely fixed line or at least take a major role in mobile connectivity.

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Marc Silk, [78]

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Okay. Well, so at least it's not a threat, and you could take advantage of it.

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [79]

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No, it's definitely not a threat. No, it's definitely not a threat. If anything, it's an opportunity as people start looking now. In 2019, people are definitely going to be planning budgets and planning rollouts and figuring out those strategies, which could be beneficial.

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Marc Silk, [80]

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So when this whole issue with Facebook happened, as far as the privacy, the first thing I thought of was that on your location services ads, et cetera, when -- I don't know what Facebook is sharing on my personal information but, more importantly, when I allow somebody to give my location, I know they know where I'm going to be. So the question is this could potentially open up, I would think, something for your ad location services because, again, it's not -- you're not hiding anything. You say, listen, you're telling us where you are. And if you're going to walk by a Dunkin' Donuts, all of a sudden you can get an ad that says get a free doughnut with a large cup of coffee. And I don't think that's as invasive as what happened with Facebook. Is there maybe traction you can potentially gain in this area?

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Darin R. Vickery, iPass Inc. - CFO, VP & Secretary [81]

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100%, Marc. So you're absolutely right. I mean, under GDPR or any kind of privacy standard, there's the concept of sensitive data versus nonsensitive data, right? The stuff we collect is nonsensitive. And to the extent that somebody else may want to commercialize that, there's a benefit going 2-ways because if you're walking by Dunkin' Donuts, you don't mind getting all of the coupon that says walk in and get 20% off a cup of coffee, right? So compare that to what Facebook and some of the other folks that have been identified in this process where they let go of what's called sensitive personal data, which tells you something about your ethnicity, or your religion, or your something that folks get uber-sensitive about.

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Marc Silk, [82]

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Sure. So Patricia, I was at a conference last week, and they were talking about security. And they basically said there's a lot of hotels out there that don't really have a VPN. Is that something you're finding out? And obviously -- I got to figure that's a pretty good opportunity for you guys.

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Patricia R. Hume, iPass Inc. - Chief Commercial Officer [83]

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Yes. Look, the venues where people connect, right? So as people move and we seamlessly connect to them, many of the access points are not secure, yes, in and of themselves, in and of themselves, right? And this is the big fear. I mean we published a mobile workforce report on security. And if you had the opportunity to read it, you see that there's a reluctance to allow people to just connect the free WiFi on behalf of the enterprise because of the fear of being hacked. Now as you know, our SmartConnect technology has a last-mile VPN capability in it so when you do, in fact, connect to an access point, a secure encrypted tunnel is created and then the other data that's uploaded or downloaded is, in fact, encrypted, thus affording the easy way for hackers or the man in the middle to attack the data, attack your credentials, attack whatever it is that you're presenting in that connection. And it's not just the client. It's also our back end that's secure. So we have done a lot of work in the last couple of years really fool-proofing the security of our solution end-to-end not only in cloud but also in the client. We also have now a patent on rogue hotspot detection, so that when the SmartConnect technology sees an AP, if the AP does not present a realistic and viable Internet address, we will not connect. So one of the things that we can provide to CIOs that Gary was speaking of is we can say this is how many rogue hotspots that you did not connect to because you had the iPass SmartConnect solution, yes. And that gives the CIOs the confidence that with iPass, they are free to allow their employees to connect to WiFi around the world. And when WiFi is not available, of course, we would hand that off to cellular. So security, big-ticket item, lots and lots of discussion around the value of our product as it relates to being a secure mobile solution, and we feel very confident that we have addressed a lot of the issues and corner cases that would otherwise really cripple an enterprise.

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

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And with that Marc -- okay.

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Operator [85]

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And that does conclude our question-and-answer question for today. At this time, I would like to turn the conference call back over to Gary for any additional or closing comments.

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Gary A. Griffiths, iPass Inc. - President, CEO & Director [86]

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Thank you, Ashley, and thank you all for joining the call. Look forward to catching up with many of you in our post-call meetings today and the remainder of the week. So thank you very much, talk to you next quarter. Bye.

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Operator [87]

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And once again that concludes today's conference call. We thank you all for your participation, and you may now disconnect.