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Edited Transcript of SMSI earnings conference call or presentation 3-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Smith Micro Software Inc Earnings Call

ALISO VIEJO May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Smith Micro Software Inc earnings conference call or presentation Wednesday, May 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Messman

Smith Micro Software, Inc. - VP of IR & Corporate Development

* Steven M. Yasbek

Smith Micro Software, Inc. - CFO, CAO, VP and Corporate Secretary

* William W. Smith

Smith Micro Software, Inc. - Co-Founder, Chairman of the Board, CEO and President

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Conference Call Participants

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* Brian G. Swift

Security Research Associates, Inc. - Chairman and CEO

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Smith Micro First Quarter 2017 Financial Results Conference Call. Today's call is being recorded. And now, your host for today's conference Mr. Charles Messman, Vice President of Investor Relations and Corporate Development. Mr. Messman, please go ahead, sir.

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Charles Messman, Smith Micro Software, Inc. - VP of IR & Corporate Development [2]

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Thank you, operator, and good afternoon, everyone. Thank you, for joining us today to discuss Smith Micro Software Financial Results for the first quarter ended March 31, 2017. By now, you should have received the copy of the press release with the financial results. If you do not have a copy and would like one, please visit the Investor Relations section of our website at www.smithmicro.com, or call us at (949) 362-5800, and we will e-mail one to you immediately.

On today's call, we have Bill Smith, Chairman, President and Chief Executive Officer of Smith Micro; Steve "Ziggy" Yasbek, Chief Financial Officer.

Please note that some of the information you'll here during our discussion today will consist of forward-looking statements, including, without limitation, those regarding the company's future revenue and profitability, new product development and new market opportunities, operating expenses and the company's cash reserves. Actual results or trends could differ materially from our forecast due to a variety of factors. For more information, please refer to risk factors discussed in Smith Micro's Form 10-K for 2016 and Form 10-Q filings for the first quarter of fiscal 2017. Smith Micro assumes no obligation to update any forward-looking statements or information, which speaks only as of the respective date. Before I turn the call over to Bill Smith, I want to point out that the forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer to our press release disseminated earlier today for reconciliation of the non-GAAP financial measures. With that said, I'll now turn the call over to Bill. Bill?

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William W. Smith, Smith Micro Software, Inc. - Co-Founder, Chairman of the Board, CEO and President [3]

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Thank you, Charles. Good afternoon. Thank you, for joining us today for our first quarter earnings call for 2017. As I mentioned on our last earnings call, we have been very focused on completing the implementation of a restructuring plan designed to streamline our business processes and grow our leadership team. We have essentially completed that process. At the same time, we have continued to push forward with some exciting and significant new revenue and business opportunities. This should have a profound effect on our second half. As such, the first quarter continued to be transitional for us. Revenue for the quarter was $5.6 million with a non-GAAP net loss of $1.4 million, or $0.11 loss per share. Although revenue for the first quarter was down from the prior year first quarter, this performance was in line with our expectations due to a couple of key factors. First, our revenues are typically the lowest in Q1 due to the seasonality of our consumer-facing businesses and second, our teams have been focused on the transitioning of knowledge and responsibilities as a result of our substantial organizational changes. Later in the call, I will provide greater detail regarding some exciting new opportunities that we expect to land this year as well as update you regarding our MSO customer base relative to some recent market news. I remain enthusiastic about the year ahead, and we'll continue to look for a profitable 2017 and the resumption of free cash flow generation primarily in the second half. With that said, I will turn the call over to Ziggy, for more detailed financial analysis of the quarter. Ziggy?

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Steven M. Yasbek, Smith Micro Software, Inc. - CFO, CAO, VP and Corporate Secretary [4]

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Thank you, Bill. First let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock-based compensation expenses, the amortization of intangible assets, fair value changes and liabilities, the amortization of note discount and issuance costs and adjusts for pro forma tax expense or benefit to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2017 and 2016 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on Form 8-K, contains a presentation of selected GAAP financial measures and related non-GAAP financial measures and a reconciliation of the two. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com.

In terms of our currently completed first quarter let me provide some details. For the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp expense totaled $446,000 for the current period broken out as follows: $3000 was in sales and marketing; $79,000 was in R&D; and $137 was in G&A; and $227,000 was related to restructuring. In terms of the amortization of the intangibles, this totaled $65,000, $53,000 reported in sales and marketing and $12,000 reported in R&D. In terms of the amortization of debt discount and issuance cost, this totaled $190,000 reported on the interest income and expense line of the income statement. Because of our accumulative losses over the past few years, our GAAP tax expense is primarily due to foreign income taxes. The first quarter 2017 reflects a favorable non-GAAP tax adjustment of $856,000. For the first quarter, we posted revenues of $5.6 million and loss of $0.11 per share non-GAAP. This compares to revenues of $7.2 million for the same quarter last year. International revenue was approximately $148,000 this quarter across all business groups. Our wireless segment reported revenues for the quarter of $4.4 million as compared to $6 million last year. Our graphics segment posted revenues of $1.2 million, which was equal to last year. Total deferred revenue at March 31, 2017, was $684,000.

Switching now to gross profit. Non-GAAP gross margin dollars of $4.3 million compares with $5.1 million during the same period last year. Non-GAAP gross margin as a percentage of sales was approximately 77% for Q1 of 2017 compared to 70.7% for Q1 of 2016. The increase in gross margins was primarily due to cost savings because of our recent restructuring. Non-GAAP gross margins by business segment were as follows: wireless was 76% and graphics was 80%.

Switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2017 excluding restructuring expense were $6.2 million, a decrease of $2.2 million or 26% compared to the first quarter of last-year. From a year-on-year perspective, selling and marketing expense decreased 25%, engineering expenses decreased 37% and G&A expenses decreased 12%.

Non-GAAP operating loss for Q1 was $2.1 million as compared to an operating loss of $3.3 million in Q1 of 2016. Non-GAAP net loss for the first quarter was $1.4 million, or $0.11 loss per share as compared to a net loss of $2.1 million or $0.18 loss per share last year. Cash was $2.5 million at March 31, 2017.

With regards to guidance, we are still not in a position to give revenue guidance for the second quarter due to the uncertainty of the timing regarding new deals. However non-GAAP operating expenses should normalize in the second quarter in the $5.8 million to $6 million range. In terms of housekeeping, we expect to file our quarter-end 10-Q this week, which will represent our final statements for the period. And at this point, I'll turn the call back over to Bill.

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William W. Smith, Smith Micro Software, Inc. - Co-Founder, Chairman of the Board, CEO and President [5]

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Thank you, Ziggy. Our primary focus for fiscal 2017 is new revenue growth in a profitable manner. With a focus on those products that are quickest to sell, easiest to implement and will also provide maximum impact to both our top and bottom lines in the shortest period of time. Namely those products are our SafePath platform and our Device Management, firmware over-the-air also known as a DM photo update products. We believe that our DM photo offerings will provide a significant opportunity for us in 2017 and beyond. As such, we have decided to rebrand these offerings using our strongest brand names QuickLink. This move demonstrates the importance we place on this part of our product portfolio. Going forward, our DM photo offerings will be known as our QuickLink IoT services. Building on the success of our QuickLink brand, it has already enabled carrier-grade wireless connectivity and security for hundreds of millions of devices around the world. We see great opportunity in the booming IoT segment for our DM photo technology. As it is one of the few independent M2M solutions available in the market today. A void has been created in the marketplace by recent M&A activity where some of the traditional players such as Red Bend and InnoPath are now owned by specific chipset manufacturers. We believe that customers do not want to be tied to a particular chipset vendor, opening up an opportunity for the Smith Micro QuickLink IoT solution for not only legacy business but also for new deployments. Later this month, on May 17 through the 19, we will be hosting a TestFest event at our Pittsburgh location organized by the Open Mobile Alliance focused on the new lightweight M2M device protocol. As the IoT used cases continue to mature and proliferate, OMA's lightweight M2M protocol is essential for standardized and secure management of connected devices. This open testing form allows for echo system suppliers to perform interoperability tests between devices and infrastructure components. We are proud to host this worldwide event and I believe it demonstrates our thought leadership.

We have also seen some exciting new initiatives from Comcast, that recently spoke about launching their new wireless service. While we are very excited about this significant opportunity, we remain tempered with the revenue expectations as we work to grow their user base. We are optimistic about the timing and associated revenue impact of this opportunity for our future.

Now let's talk about SafePath. During Q1, we made significant progress with our SafePath platform in terms of both the technology and sales aspect of the product. As such, we expect to significantly increase our user base and revenues in the remaining part of the year. To date, we have successfully launched SafePath with 3 carriers in the APAC region including AIS and DTAC in Thailand and Digi in Malaysia. With a similar number of carriers in Europe, including Portugal Telecom. I believe these initial rollouts are significant for Smith Micro, as we build momentum for our SafePath brand with carriers around the world. This month, we expect an additional SafePath launch with our first Tier 1 carrier. In addition, as we mentioned on our fourth quarter conference call, several late stage SafePath discussions are in process particularly here in the U.S. We expect to have our first Tier 1 U.S. carrier in the very near future. The demand for our SafePath platform is strong as we offer a unique full-service platform that work seamlessly across both Android and iOS and integrates important functionality such as parental controls, family location, geo-fencing, notifications, alerts and phone security. We are also seeing demand for the product in relation to several types of wearable devices. Wearables may provide yet another potential new revenue stream. I believe SafePath represents a true game-changer for Smith Micro.

Turning to graphics. We continue to push forward with our plan to rebuild and rebrand our 2 key products Moho and Poser, bringing to the market a stronger graphics product line with a more aggressive focus on content creation. During Q1, we participated in 2 co-marketing events featuring Microsoft's new surface studio PC and our award-winning 2D animation software Moho. As part of these initiatives, we collaborated with Microsoft to showcase the functionality and unique user experience of Moho Pro 12 running on the surface studio PC at Super Bowl 51 and as part of the launch events for Disney's live action Beauty and the Beast film held at Microsoft's retail stores.

In summary, I am pleased with the progress of our strategic restructuring over the past 2 quarters. With the restructure essentially complete, we are now focused on maximizing these efforts to return the company to growth and profitability. We continue to work diligently at closing new opportunities here in the U.S. and abroad. Executing to deliver high-quality software to customers and continue to look forward to a strong fiscal 2017. Showing solid growth with profitability and expanding cash reserves. With that said, I will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And for our first question we go to Brian Swift with Securities.

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [2]

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Bill can you -- I got couple of things. One in the SafePath area, you were talking about going after U.S. carriers. They pretty much all currently offer location type services. And so how do you propose to displace the incumbents since the carriers have been -- they are to get and tend to be fairly sticky? So what kind of advantages do you offer?

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William W. Smith, Smith Micro Software, Inc. - Co-Founder, Chairman of the Board, CEO and President [3]

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Sure. Let me try to step through that. There is a competitor that has been used by the North American carriers all of them use the same one. That competitor was acquired couple of years ago by another firm. That firm was just acquired a few months ago and as such, they have lost their focus on the family safety side of their business. And what we are being told by our perspective customers is that they do not believe that this competitor is moving the product forward and therefore, they are looking to make some changes. That has provided us with very strong opportunity. We have a better product today than what they offer. It's more complete, covers more area and that really sums it up. It's a strong product. It's a product that's got good recognition already in the marketplace. And we look forward to some very significant announcements.

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Brian G. Swift, Security Research Associates, Inc. - Chairman and CEO [4]

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Okay. And on this new -- this DM or QuickLink IoT area. Can you give -- you're not mentioning name, but can you give some ideas of what -- some examples of what type of product should be you are out there chasing and trying to get designed?

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William W. Smith, Smith Micro Software, Inc. - Co-Founder, Chairman of the Board, CEO and President [5]

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Well, we already have wins with a number of device manufacturers who need to update mobile phones, et cetera around the world. And they're already using the product for that purpose. But in addition to that, especially with the IoT marketplace, gaining momentum, there is the opportunity to provide the same kind of capability for mobile devices around the world, whether it's on trains or trucks or wherever, to update those devices in the field and our product offerings, as I said in my prepared comments, is the really only M2M solution available in the marketplace right now as the more traditional providers have been acquired either by Qualcomm or Samsung. The folks building the devices want to have the flexibility to use differing brands of chipsets and as such, we offer the best answer for them.

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Operator [6]

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(Operator Instructions) And with that ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Messman, I will turn the conference back over to you for any closing remarks.

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Charles Messman, Smith Micro Software, Inc. - VP of IR & Corporate Development [7]

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Thank you, operator. Thank you, everyone for joining us today. Should you have any further questions, please feel free to reach out to us directly. And we look forward to talking to you on our second quarter conference call. Have a great day. Thanks.

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Operator [8]

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And again, ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect.