Good day and welcome to the Smith Micro Software Fourth Quarter and Full Year 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli, of the MKR Group. Please go ahead, sir..
Thank you, operator and good afternoon. Thank you for joining us today to discuss Smith Micro Software’s financial results for the fourth quarter and full year ended December 31, 2015. By now, you should have received a copy of the press release with the financial results.
If you do not have a copy and would like one, please visit the Investor Relations section at www.smithmicro.com or call us at 949-362-5800 and we will email one to you.
On today’s call, we have Bill Smith, Chairman, President and Chief Executive Officer of Smith Micro; Steve Ziggy Yasbek, Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer.
Please note that some of the information you will hear 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 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 2015 and Form 10-Q filings for the three quarters for fiscal 2015.
Smith Micro assumes no obligation to update any forward-looking statements or information which speak only as of the respective dates. Before I turn the call over to Bill Smith, I want to point out that in our forth coming prepared remarks, we will refer to certain non-GAAP financial measures.
Please refer back to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures. With that Bill, please go ahead..
Thanks, Todd. Good afternoon everyone. Overall 2015 was positive, with significant progress made on several fronts. Revenue for the fourth quarter of 2015 was $10 million, and we were profitable for the quarter, on a non-GAAP basis. Despite some challenges that slowed our deal flow in 2015.
We were able to increase revenues 7% year-over-year to $39.5 million. Increased gross profits 13%, decreased non-GAAP operating expenses by 11% and hold cash essentially flat for the year.
In addition, we secured multiple contracts with a variety of new customers, including the North American wireless carrier, a leading cable company, a handset manufacturer and an enterprise company in the hospitality space.
We expect revenue from these new agreements to start ramping by mid-year, which will help to offset decreased revenue, we are expecting from Sprint in 2016. I will share more about these new deals and others in progress after Ziggy provides the detailed financial results for the fourth quarter of 2015 and the full fiscal year.
Ziggy?.
Thank you, Bill. Let me first 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 related expenses and normalizes our tax expense or benefit to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2015 and 2014 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 differences between the two. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com.
Total revenue for 2015 was $39.5 million, an increase of $2.5 million or 6.8% from $37 million in 2014. Wireless revenues increased $2.3 million or 7.3% in 2015 to $33.6 million. Graphics which was firmly called productivity and graphics, revenue increased 4.4% from $5.7 million in 2014 to $5.9 million in 2015.
From a non-GAAP perspective total year 2015 loss per share was $0.00 as compared to a loss per share of $0.12 in 2014. From a balance sheet perspective, our cash position was $12.9 million at December 31, 2015, a decrease of $100,000 from the beginning of the year. In terms of our currently completed fourth 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 totaled $552,000 for the current period, broken out as follows; $2,000 cost of sales, $96,000 selling and marketing, $179,000 R&D and $275,000 G&A.
As has been the case in past years, we’ve prepared a revised tax provision at year-end. Since we are in a loss position our GAAP tax expense is primarily due to foreign income taxes. The fourth quarter of 2015, reflects a favorable non-GAAP tax adjustment of $43,000.
For the fourth quarter, we’ve posted revenues of $10 million and net income of $4,000 or $0.00 per share non-GAAP. This compares to revenue of $10.6 million for the same quarter last year. International sales were approximately $143,000 this quarter across all our business groups.
Our wireless segment reported revenues for the quarter of $8.1 million as compared to $9.1 million last year. Our graphics segment posted revenues of $1.9 million as compared to $1.5 million last year. Total deferred revenue at December 31, 2015 was $440,000.
Switching now to gross profit, our non-GAAP gross margin dollars of $8 million compares with $8.3 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 80% for Q4 of 2015 compared to 78.8% for Q4 of 2014. The increase in gross margins was primarily due to cost reductions and product mix.
Non-GAAP gross margins by business segment were as follows. Wireless was 81% and graphics was 75%. Switching to operating expenses, non-GAAP operating expenses for the fourth quarter of 2015 were $8 million, an increase of $484,000 or 6% from the fourth quarter of 2014.
From a year-on-year perspective, selling and marketing expense increased 7%, engineering expense increased 15% and G&A expense decreased 4%. Non-GAAP operating income for Q4 was $500,000 as compared to $797,000 in Q4 of 2014.
Non-GAAP net income for the fourth quarter was $4,000 or $0.00 earnings per share as compared to net income of $492,000 or $0.01 earnings per share last year. With regard to 2016 there are two significant changes that will impact our financial results this year.
The first was reported during the Needham conference in January, which is an estimated 25% to 32% reduction in revenues from our largest customer Sprint, due to a significant cost cutting measures on their end to address issues with their overall business.
As a result we expect revenues for the first quarter of 2016 to be in the range of $6.4 million to $6.8 million. As Bill mentioned earlier we close several new deals at the end of 2015 that we believe will help us fill this revenue gap left by Sprint.
However, we don’t expect those new customers to begin generating revenue until mid-year as it typically takes about six months to get a new customer deploy. The second change is the pending acquisition of a key competitor Birdstep.
This acquisition will also help us recover some loss revenues from Sprint and also offers many operational and sales advantages that Bill will talk about later.
At this time, we are not in a position to provide annual guidance due to the uncertainty of the ramp in the new customer revenue as well as the pending acquisition of Birdstep, but we will continue to provide quarterly guidance on our future conference calls.
In terms of housekeeping, we expect to file our year-end 10-K by the end of this week, which will represent our final statements for the period. At this point, I'll turn the call back over to Bill..
Thanks, Ziggy. The impact of reduced revenues from Sprint is clearly taking the total on our business. While this is extremely disappointing, our CommSuite business with Sprint remains solid and we have maintained a good relationship with Sprint, which allows us to continue to pursue new opportunities in the pipeline.
The good news is, that we are already on a path to fill that revenue gap, there is the pending acquisition of Birdstep and the new deals we close in the last half of 2015 and others we expect to close in the first half of 2016. These deals should begin to make meaningful contributions to our top-line by mid-year.
The main driver of growth and transformation for Smith Micro continues to be our NetWise platform. This solution is proving to deliver both detailed customer insights and sophisticated device controls needed to solve a number of problems through wireless service providers, device makers and enterprises.
After a successful launch of NetWise and Comcast we’re able to secure a new deal with another large cable company in the U.S., this customer will be adding our NetWise Optics analytics solution to their over-the-top application that will measure and enhance Wi-Fi service quality for their customers.
We expect commercial launch early in the second quarter. We also signed a NetWise Director contract with another North American wireless operator to provide 3G, 4G, and Wi-Fi traffic management beginning in the second quarter of this year.
The initial deployment for this operator will have NetWise pre-loaded onto multiple Android devices and we expect this customer to include our SDK in their over-the-top application later this year. BlackBerry is another new customer who’s now pre-loading our NetWise device management client on the BlackBerry approved Android devices.
This standard-based client allows BlackBerry to comply with carrier-specific device management requirements for updating software and settings over-the-air. The software already has been deployed in multiple Tier 1 operator networks in North America and we look forward to growing our business with BlackBerry as their Android footprint increases.
In December, we signed our first enterprise contract for NetWise Captivate with a company called Zonetail, which provides multiple applications to the hospitality industry in order to connect guest to on-site amenities and local businesses.
And just last month we signed a second Captivate contract with a company that provides mobile solutions to large venues such as stadiums, convention centers and malls.
We expect both of these companies to begin commercial deployment in the second quarter with subscription based revenue streams that should grow as more users adopt their mobile applications. We have many other sales opportunities and works for NetWise Captivate.
And we are gaining very positive feedback from industry analysts who have recognized our unique value proposition for both enterprise companies and telcos looking to monetize data services with relevant, contextual mobile offers.
I also want to point out the terrific fourth quarter results from our graphics business, with a 26% increase in quarterly revenue year-over-year. We launched a new version of our Poser 3D animation software in November and the timing was perfect to take advantage of holiday sales and year end promotions.
Although the majority of our revenue and growth continues to come from wireless and mobile solutions, the graphics team has maintained a large and loyal customer base around the world. And they continue to deliver high quality, feature-rich products that will enable us to grow that base through both direct and indirect channels.
Looking ahead to 2016, the new deals that I have described are not only contributing to revenues later this year, they’re also helping us to generate momentum with similar customers in North America and abroad.
We recently attended Mobile World Congress, where we met with executives from multinational companies in telecommunications, banking, retail, hospitality and travel. In almost every case we uncovered new business opportunities that align closely with projects we have already rolled out or about to roll out.
These include Wi-Fi offload and on boarding, quality of experience measurement, customer insights through device analytics, consumer engagement via smartphones and firmware updates also called FOTA through Internet of Things devices. In addition, we are very excited about the pending acquisition of Birdstep.
This purchase provides us with several advantages. One, they are our primary competitor in the network optimization space. So a merger gives us additional leverage with customers.
Second, we will immediately gain a train and cost efficient engineering team that can help us to execute on our current customer projects and pursue many new deals in our pipeline.
Third, we will pick up Birdstep’s Sprint Business as well as a solid pipeline of opportunities in Europe and Asia Pacific, which are regions that we had to de-prioritize in recent years.
And fourth, we will give Birdstep’s technology, which includes complimentary components that we can add to our NetWise platform, cementing our position as the leading provider of network optimization mobile user insight and device control solutions for the wireless industry.
We expect the Birdstep agreement to be approved quickly by their shareholders and formally completed in early April. Finally, we continue to harvest our existing accounts and they continue to bear fruit.
In particular, I’m very proud of the work we are doing with Comcast, which is elevating our role as a strategic partner to them in opening new opportunities within their organization as well as with other cable companies.
Our legacy QuickLink products are still generating revenue from Verizon, T-Mobile and enterprise accounts, which keeps the doors open for us to pursue new sales opportunities with these customers.
As Ziggy mentioned, revenues for the first quarter of 2016 will be in the range of $6.4 million to $6.8 million, primarily impacted by the cost reductions at Sprint and have directly affected our business. That said, we anticipate steady improvement for the remainder of the year, with the strongest growth coming in the second half of 2016.
Our confidence to achieve this growth is driven by three factors. First, the new customer signed fourth quarter of 2015 will begin to generate meaningful revenue by mid-year. Second, new business signed in the first half of 2016 will generate additional second half revenue.
And third, the newly acquired Birdstep business will contribute revenues throughout the year. In summary, we expect to end 2016 as a much stronger company. Customer concentration issues should be behind us.
Customer opportunities will increase by regaining a global market presence and our market decision will be improved by the removal of a significant competitor. Operator, we can open the call for questions..
[Operator Instructions] Our first question comes from Rich Valera with Needham and Company..
Thank you.
A couple of questions on the Birdstep acquisition, one you guys didn’t disclose how much you are paying for that, did you?.
No we did not, but we can say that is in all cash transaction and we will be paying $2 million at close..
Okay, thank you. And then with respect to the revenue, I mean you mentioned gaining the Sprint revenue, but I guess as I understood that your member from Sprint was from connection matter or others. You just really tried to manage your, I’m sure your NetWise product which is the product of yours that is essentially going or go-to way.
So are you really going to be getting significant Sprint revenue from them, once this new Sprint cost reduction takes effect?.
Yes, that’s a good question, Rick. So the best answer is to say that we expect revenues from the Birdstep acquisition in 2016 to be somewhere in the neighborhood of $3 million. They do and have taken haircut as a result of the cost reduction to Sprint and that’s played into that forecast number that I just provided..
That’s perfect. That’s what I was looking for.
And should we assume from an expense standpoint, I mean should we assume anything in terms of additional expense cost are you going to hold wide on expenses counting on that revenue bounce back in the second half of the year?.
Yes, I think that’s another good question. Look we closed a lot of business in the later part of 2015 and we’re heavily into deployment at the present time. If anything the added personal coming from Birdstep. Birdstep will help us in getting that job done.
Plus when we look at the additional sales we expect throughout 2016 both from our own pipeline and the pipeline from Birdstep we are going to really need all of our people. So we will look where we can be prudent and actually execute on some cost reductions, but it’s going to be somewhat limited as to what we really think as the right thing to do..
Okay, that’s helpful. Thanks very much gentlemen..
[Operator Instructions] and our next question is from Brian Swift with Security Research Associates..
Thank you. I remember the last time you met with analysts and investors you were about to go into some meetings with Comcast I thought you might have a little bit better visibility on the outlook in terms of how the ramp might be throughout 2016.
Could you give us any update there in terms of how you see that going and what?.
Sure. First off let me start off by saying that Comcast was a meaningful customer in fourth quarter they were in about 10% customer for the quarter. We are very active with them and on a number of fronts we have earned a lot of trust with them. And as such, they are involving us in even more activities.
We look for Comcast to grow into being a very significant customer for us. And we’re very pleased with what we’re seeing at this point in time..
Okay. And just a little bit more clarification on the Sprint business with Birdstep..
Yes..
They did $6 million something last year, I think according to press release you said you’re accounting about $3 million from them and assuming the difference is what they’re going to lose from….
Actually they will lose or they have lost more than that from Sprint. They had a very active pipeline of their own. And they’re in the process of causing a number of new customers, primarily in Asia-Pacific marketplace as well as in Europe. And again, that’s a strong reason for doing this transaction. We were not really active in either of those geo’s.
We get kind of pulled back from that during some of the more difficult times. And this gives us an opportunity to reenter the markets, but reenter the markets with a meaningful statement where we see some real business and we should be able to demonstrate that to you over the course of 2016..
Okay.
So to-date, like you lose their Sprint business in that? They’re equivalent of a NetWise, right?.
Yes, on the NetWise side only, exactly, we did not lose any business per se on the CommSuite side. But yes, they lost the both of it. They had a couple of things that they were doing with Sprint that we weren’t doing and that remains at least for 2016. So there is some revenue from Sprint that comes with the Birdstep transaction.
It is not anywhere a meaningful percentage of that, $3 million, but it is there, that they have some..
And then lastly, on Birdstep, can you give us a little bit more color on their pipeline in terms of – and maybe update us on yours, now that you’ve signed some of these deals, what else you – are you chasing?.
We are very active in a number of fronts. And, we’re very active in continuing to grow our presence in the Kaitlyn [ph] or some marketplace. We are also heavily focused on a number of opportunities with wireless carrier in North America.
Thanks to the Birdstep transaction, I can expand that now and say that we have a number of opportunities that are well down the road towards closure in APAC. They have a lot of work that they've been doing in the Middle East and they have a presence in Europe, all of which bodes very, very well for us.
It gives us the opportunity to really step up what we are – what our targets are. We can take a global presence again with the removal of Birdstep as a competitor. We become that much stronger in the marketplace for network optimization software.
And all in all said, I think this is a great deal for our shareholders and I look forward to talking about it for the rest of the year..
Okay. Thanks..
[Operator Instructions] We’ll take our next question from Jeff Bernstein with Cowen Prime Advisors..
Yes, hi, guys. So you did a good job this year in preserving cash.
Can we just talk about how you see the cash burn kind of moving through the year in 2016?.
Yes, clearly, we’ll burn a lot of cash in the first half of the year. It will then continue to improve as we go deeper into the year. And we are clearly focused on trying to get back to profitability in the fourth quarter.
So know it’s the year that starts off in a bit of a whole, but then we continue to climb out of it, driven by the new business we have closed. Some growth in business we already have and the add-on of business coming to us from the Birdstep transaction..
And can you just talk a little bit mechanically on some of the new business. What has to happen before you guys start getting prepared [ph]? I think in some cases people have to download apps or sign up for services or whatever it is.
Can you just talk about that a little bit?.
Let me – it’s actually broader in that, I mean, we have to in some cases get apps preloaded on the devices that are sold through the wireless channel by various carriers. And in those cases it's a big process that we have to go through.
In other cases as you said, there are – our software needs to be incorporated into over the top applications that’s then need to be pushed out to users, and all of which take some time.
There is a lot of work and effort that goes into launching a new wireless carrier whether that’s cable or cellular, it makes no different, but there is a lot of effort. On the enterprise side with the Captivate business, it actually can flow a little bit faster.
And then you really then just waiting for the uptick in the number of users that are using the apps that our software is embedded in and that grows the revenue.
That answered your question?.
Yes, just a little bit further, and so with some of the carriers in Cable/MSOs, the wireless guys, did they buy a bucket of licenses up front that then get installed and put out into the market so you get paid and then they come back for the next unit that they need or do you actually have to wait until it goes on somebody’s phone?.
It’s an expect, typically for a cellular carrier it has to be embedded on the phones that they are selling and they have to sell the phones through, and we get paid based as to how when those phones get activated.
In other cases and we’ve talked about this is especially in the Cable/MSO marketplace they tent to buy in bunches or in trances, and as such that has the positive effective of providing a strong cash transaction that has somewhat of the negative the impact is being somewhat lumpy.
And the fact that we now can have a second Cable/MSO helps to balance that out we have Comcast plus somebody else now. And as soon as we get them online in the second quarter, we’re looking for a more balance play coming out of the cables beside our business..
Great, thank you..
[Operator Instructions] It looks like we have no further questions. So that does conclude our question-and-answer session. I’d like to turn the call back over to management for closing remarks..
Okay. Thank you, operator, and thank you everyone for joining us today. We look forward to updating you on our progress in the coming months. And of course, if anyone has follow-up questions, please feel free to contact me and I’ll be happy to answer the questions for you. Thanks again, and this concludes our call. Have a great day..
And once again that does conclude our call. We appreciate your participation..