Good day and welcome to the Smith Micro Software Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Charles Messman, Vice President of Investor Relations and Corporate Development. Please go ahead..

Thank you, operator and good afternoon everyone. Thank you for joining us today to discuss Smith Micro Software financial results for the third quarter ended September 30, 2016. 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 e-mail 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.

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 can differ materially from our forecast due to a variety of factors. For more information, please refer to the risk factors discussed in Smith Micro’s Form 10-K for 2015 and Form 10-Q filings for the three quarters in fiscal 2016.

Smith Micro assumes no obligation to update any forward-looking statements or information, which speak only as of the respective date. Before I turn the call over to Bill Smith, I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial measures.

Please refer back to our press release disseminated earlier today for reconciliation for the non-GAAP financial results. With that said, I will now turn the call over to Bill.

Bill?.

Thanks, Charlie. Good afternoon. As reported in our preliminary earnings announcement, revenue for the third quarter of 2016 was $6.5 million. Clearly, this is not what we expected when we gave guidance in the range of $7.9 million to $8.4 million during our last earnings call.

This miss was primarily driven by two orders being pushed out due to timing from our customers. One of those two orders was received last week and has been booked, while the other is still in the works. I can assure you that all members of the executive team take this miss very seriously.

To streamline our operations and better integrate our recent acquisitions, we are making significant organizational improvements designed to reduce operating costs and improve our ability to respond more quickly to customer needs. We anticipate that this will result in accelerated revenues.

Before I discuss the steps we are taking to address our revenue shortfall and return to profitability, Ziggy will provide details on the Q3 financial results.

Ziggy?.

wireless was 70.2%; and graphics was 80.9%. Switching now to operating expenses, non-GAAP operating expenses for the third quarter of 2016 were $8.7 million, which was $900,000 higher than the third quarter of last year, primarily due to the Birdstep and iMobileMagic acquisitions.

From a year-on-year perspective, selling and marketing expense increased 12%; engineering expense increased 22%, but G&A expense decreased 3%. Non-GAAP operating loss for Q3 of 2016 was $4.1 million as compared to a loss of $224,000 in Q3 of 2015.

Non-GAAP net loss for the third quarter was $2.4 million or a $0.19 loss per share as compared to a loss of $137,000 or $0.01 loss per share last year. Cash at September 30, 2016 was $5.9 million, a decrease of $7 million from the end of last year. This decrease includes the $2.6 million that we paid for Birdstep and iMobileMagic.

In terms of housekeeping, we expect to file our quarter end 10-Q by the end of this week, which will represent our final statements for the period. And at this point, I will turn the call back over to Bill..

Thanks, Ziggy. The executive team is working rapidly to review and improve all aspects of our business to regain the momentum we were seeing earlier this year. From an organizational perspective, we are realigning certain functional areas to increase efficiency and better leverage our talented engineers in the lower cost offices.

We have also streamlined the sales, marketing and product organizations and we will closely examine all departments to reduce costs without affecting our ability to deliver high-quality software to our customers.

Looking at our market traction and customer successes, we continue to see strong interest in several areas of our portfolio, including analytics, mobile engagement, family safety and device management.

In the analytics space, our carrier and cable MSO customers are finding great value in the connectivity and user experience data provided by our NetWise optics solution.

We provide both software and expertise to help these customers extract new insights from their data, identify more data types to collect and generate new dashboards that will allow them to better plan and manage their wireless services.

The manner in which we collect performance data from mobile devices across both cellular and Wi-Fi networks is very unique in the industry and allows our customers to reduce churn and improve the overall quality of experience for their end users.

In a similar fashion, the unique consumer behavior data collected by our NetWise Captivate solution is proving highly valuable to both carrier and enterprise companies.

In Q3, we successfully completed two trials of Captivate with both the carrier and an enterprise delivering strong results, and expect to convert these trials into commercial contracts in the coming quarters.

While smartphone based consumer analytics is a primary driver for these two deals, the ultimate goal for most B2C companies is to build closer, more profitable relationships with their end customers through mobile engagement.

There are numerous studies from companies like Internet Retailer, Forrester Research and Comscore, reinforcing how important the mobile experience is for both online and brick-and-mortar businesses.

Since consumers continue to spend 50% to 80% of their mobile time using mobile apps, delivering a great experience with mobile apps is increasingly critical. With massive growth of big data, enhancements of analytics is a strong focus for the company and we will be updating you in coming quarters on our progress.

Our recent announcement of 4D App Studio outlines a new core skill set for Smith Micro. As part of the iMobileMagic acquisition, the Braga team brings deep experience in building mobile apps, including the design and development expertise that spans the full mobile life cycle, from initial strategy to long-term app maintenance and support.

The 4D App Studio team has delivered more than 30 mobile apps for global customers on iPhone, Android and Windows phone devices. With this service, we can help startup companies like Skyüber and AirTM, accelerate their go-to-market plans by delivering a high quality mobile experience, while they build out their teams.

We can also help large companies by offloading mobile app development for specific projects or initiatives, such as musical festivals, customer loyalty programs and mobile commerce. Adding our unique technologies for mobile engagement and device analytics will further enrich our mobile app development value proposition.

We are excited about this new opportunity of becoming an integral mobile partner for our customers, both carriers and enterprises worldwide. Since the completion of the iMobileMagic acquisition last quarter, two carriers in Asia have deployed the family safety solution, Digi in Malaysia and AIS in Thailand.

We have re-branded the new platform as SafePath and intend to offer a variety of solutions using the platform, the first being, SafePath Family. Others will follow that will apply location tracking services to new use cases, such as asset management, public safety and mobile workforces.

In addition, the former CEO of iMobileMagic has assumed responsibility as Vice President, Worldwide Products and will be relocating to our Pittsburgh office in the very near future. Last quarter, I mentioned a growing need for carrier grade device management software as the Internet of Things market matures.

Device manufacturers like Askey Computer Corporation, seek reliable proven solutions in order to launch consumer and IoT devices on carrier networks in the U.S.

This trend continues and we have recently signed an agreement with another device manufacturer who is a global leader in RFID and real-time location solutions to license our NetWise Device Management technology in order to perform over the air diagnostics and configuration on their ruggedized devices.

We anticipate having our initial launch with this OEM at one of the leading carriers in the U.S. in early 2017. Before leaving the wireless side of our business, it is important to note that we have delivered the first phase of our next generation avatar messaging client with the launch of the new AniMates Stickers for iPhone users.

The new iOS 10 operating system allows third-party developers to integrate content and apps directly into the iPhone messenger user interface. Last week, we announced the first of many new sticker packs that showcase our redesign content for AniMates.

This content created using our Moho 2D animation software will be included in an upcoming enhanced avatar messaging app that builds on our first generation AniMates app.

It will be available over the top as well as integrated into other third-party messaging clients and will offer a richer, more flexible and convenient experience for those who want to communicate with dynamic imagery and not just text.

Our Moho 12 launch in August was well received, getting positive feedback from artists and animation directors like Mike Morris at Disney Television Animation and Danny Sugar at Sugarcubes Studio.

Today, we announced participation as one of a very few vendors invited by Microsoft to demonstrate Moho at their launch event in New York City earlier today, where they announced their new surface device and accessories designed for creative development.

The latest release of Moho includes new features optimized to work with Microsoft’s new device, making it faster and easier to create complex animations, turning the digital artist desktop into a highly productive design studio.

We believe that this Microsoft announcement greatly expands our reach into the Windows design community and will allow us to better penetrate the total addressable market for our graphics products.

We continue to look for new ways to leverage our graphics software and content assets in other parts of the business as well as pursuing new channels to sell our graphics products with recent progress in the education market as well as with international distributors.

To summarize, we are acting aggressively to streamline our operations, reduce costs and get the ball over the finish line on a few big deals over the next several months that will help us return to profitability. We have several new opportunities in play for analytics and data collection, mobile engagement, family safety and device management.

We continue to make progress to developing advanced mobile messaging solutions and evolving our graphics business to support new platforms and sales channels. We are carefully managing our cash flow. We grow our revenues. Profitability is near, but likely push out a quarter or two quarters.

Despite some near-term challenges, I believe our long-term goals are very achievable and we have the experience and determination to achieve them. With that operator, we can open the call for questions..

[Operator Instructions] Our first question comes from Jeff Bernstein with Cowen. Please go ahead. Your line is open..

Hi guys.

I just – in the press release, you guys said you were currently expecting to receive the orders that had flipped over the next few quarters, but then you just said one of them just closed and you expect the other one soon, can you just discuss what’s going on there?.

The one just closed, that’s the right answer. Sorry..

Got it, okay. So this closed, sort of since you wrote the press release.

And is the other one expected to close soon or over the next few quarters?.

Yes. Let’s leave it open and just say it’s over the next couple of quarters, but I’d like to see it close this quarter..

Got it. Okay. And then we have been waiting for quite a while on Comcast and other cable Wi-Fi opportunities.

And I guess talked about it and other wireless carrier that hasn’t been disclosed yet, where are we on the ramps here?.

Okay. On the cable side, let’s take that. The CEO of Comcast has made public statements and you can go look at that as to what their strategy is and the fact that they do see themselves as becoming a wireless carrier both for Wi-Fi and for using cellular services..

Absolutely..

And so I think he has made that very, very clear. I think he has talked about really launching towards the end of the year, but that’s a question you really have to go to them on. I can’t comment on that. I would be out of place. I will say that we believe that this will grow in to be a very significant account and nothing has changed.

We have also talked about that there is another cable MSO that we are working with and that has proceeded very nicely. We are installed. We expect to expand our footprint. And I feel very, very bullish about that. It starts slow and builds. And I think that’s really where we are with that one.

But again, I think it could be a very significant customer going forward. As far as on the cellular side, yes, we have another Tier 1 carrier that we are deployed at. The deployment is going well. They are not a 10% customer and they will not allow us to identify who they are.

Although I do expect they will continue to grow and will become a meaningful part of our business going forward..

Okay, thank you..

Thank you. We will go next to Kevin Dede with Rodman. Please go ahead..

Hi, Bill..

Hi, Kevin..

Zig, can you – I missed that cash number that you discussed regarding the cost of the two deals.

Was that $3.2 million, Zig?.

The cost of the two deals?.

Yes. You mentioned cash was down....

Oh, yes. Both of them were about $2.6 million of cash..

Okay. $2.6 million, okay. Yes, I missed it. Okay.

Bill, why are you going through a re-branding process of that family app?.

Well, they didn’t really have a brand name when we acquired them. I mean, so our process was really one of bringing it into a family of product that fits under our umbrella just like NetWise does, just like CommSuite does, just like QuickLink does.

And so that led to the creation of the SafePath name and there will be various products under the SafePath name, just like there are various products under the NetWise name. Other than that, that’s kind of marketing-driven kind of thing..

Okay.

But the revenues will still fall out within wireless, correct?.

Oh, of course. Yes..

Okay, fair enough.

The reorganization that you are talking about, when do you think that manifests in results? What are you looking at? Can you give us a little more inside color on that?.

Well, part of the reorganization has already taken place. There – we are looking at how we can streamline and better utilize our lower cost locations to drive our cost of operations down. It is a work in process. And so we can’t really talk about it yet. It’s not all done. And we will update you as soon as it’s possible to talk about it..

Okay.

Is there anyway to quantify what you think you might gain in terms of cost reduction or we have to wait?.

I think you have to wait. I will just tell you that on a percentage basis, it’s meaningful..

Okay. I know that you have gone through this process not too long ago.

It just – it’s really about resizing the acquisitions to fit the program that you are going to operate under going forward?.

Yes, that’s a good general statement. I think it’s all about streamlining the business to take advantage of some of the capabilities and cost structures that were presented via the acquisitions..

Okay. Is it fair to say that say Birdstep and – excuse me, but I have misplaced the....

iMobileMagic..

Right. Right. Right.

Have they done development outside of Portugal and Sweden, respectively?.

Well, no, that’s where their development centers are located. Both of those centers are lower cost centers than anything that we have anything in the U.S. I can say that for certainty..

And your iMobileMagic CEO is going to Pittsburgh?.

Yes. He is taking over product management and really very excited about that. He has a very strong background from his years with Microsoft and he is already kind of in the job and only a few weeks and he is doing a great job..

Okay.

And that includes some of the messaging apps like AniMates?.

That’s everything. Everything, yes..

Right, okay.

Could you give us sort of a trajectory on what you are looking at for your course back to breakeven? I mean, you mentioned the next couple of quarters, but is there anything that you can add more specifically given that we are a month into the fourth quarter?.

Yes, we are not giving guidance. We obviously didn’t do a very good job against our guidance last quarter. We will say to you that we do look for, on a percentage basis, a fairly significant improvement in Q4 and that we look for that to continue in the beginning of 2017 and we look to be profitable as early as possible in 2017. That’s the game..

Was one of the orders and deals that pushed out, was that the IoT deal that you discussed?.

No. No, these were – these deals were actually fully papered. They are fully contracted and we just couldn’t rev rec them. And as I say, one of them actually, the largest one, has – is in-house and then has been booked, but in the fourth – in fourth quarter..

Right, okay, fair enough. Okay, well thanks very much for taking my questions and congrats on getting that one over the goal line..

Okay. Thanks, Kevin..

Thank you. We will go next to Brian Swift with Sutter Securities. Please go ahead..

Yes, to continue on that last question, the total of the two orders that you referred to, would that get you – would have gotten you within the range of what your guidance was?.

Yes, it would..

And you say the one that you already closed was the larger of the two?.

Yes..

Okay. So at least you are off to a good start for December with those. I also wanted to look at from the financial standpoint if you figure out the math you have burned through about $4.5 million from operations.

And so this is pushing out when you are going to turn to – return to profitability, what’s your estimate of how much more cash you will – of the $5.9 million you will burn through, because it looks like you may have to dip into the well again or raise some more money.

Can you discuss what your plans are that way?.

Yes. A dip in the well could be that I have to write another check. And if that’s what has to happen, that’s what has to happen. So I believe both Unterberg Capital and myself will look at that as needed..

Okay.

But what did you burn – since the Q isn’t filed, I couldn’t really tell for sure how much your burn rate was in this September quarter, which will basically, the cash element of it will happen in December and then whatever you do in December will happen in March, so can you give me any kind of idea what cash you expect to burn through, based on where you are now?.

For our Q3, we went down a net of 1.2. But we got in our debt and then we paid out for iMobileMagic. So that’s a net number..

Alright.

Any guesstimate of what you would burn through in December, based on what you did in September?.

As Bill said, we are going through a lot of exercises. So we would rather not say at this time..

Okay. Alright, that’s all I have. Thanks..

Thanks Brian..

Thank you. We will go next to Mark Gomes with Pipeline Data. Please go ahead..

Hi. Thank you.

So with the larger deal over the goal line, I mean the other one, pretty close, what’s the difference between the organizational changes that you are making now in response to that as opposed to having made those changes regardless of the delays in closing those deals, especially concerning that the larger one is now in?.

I guess really, the way to look at it is, it became fairly apparent to us that we would have a difficult time to turn profitable in Q4. And as such, made – we did a serious deep dive into what could we streamline, what could we better execute on that would lower cost to protect cash until we can get profitable in the early part of 2017..

Yes.

But what does that sacrifice relative to and having gone through that exercise say, three months ago, even thinking that deals were coming through?.

Well, that’s kind of – I don’t know how to answer your question. All I can say is we didn’t look at it three months ago. But we did look at it now..

Okay.

I don’t mean to be flippant and I am just trying to work through this because your cash level was...?.

I have – there is always 20-20 hindsight..

Right. Yes.

I mean so my main concern at this point is obviously, it’s all well and good that you have the confidence to write another check perhaps, but as a common shareholder on the other side of the equation, I am concerned about the potential for the capital structure to work against us, so what would you say to that?.

I would say that the two largest equity holders in the company are working hard to protect your interest and safeguard the value of your equity position..

Okay. Thank you..

Thank you. [Operator Instructions] We will go back to Jeff Bernstein with Cowen. Please go ahead..

Yes.

Hi, so we were talking earlier in the year about a pretty good hockey stick and the Q4 coming in would add $11 million or north of that in revenue and I understand that with the issue this quarter, with rev rec, etcetera, having a big hockey stick expectation is sort of difficult, but what really has changed if it really is just that two contracts slipped, one of them is now in, the other one we are – hopefully, everything is all set, it should be in at some point, how does the – that bear on the original expectation of an $11 million in Q4?.

I guess the way that we looked at it was that to make a jump from $6 million something to $11 million just seem to be a leap too far and we try to be pragmatic about it..

Alright.

So – but what you are saying though, then is that actually, in truth nothing has happened in the business to change the prior expectation of $11 million – meaning it could still happen, there could be an $11 million in Q4 or do you want to say something more about what’s going on with the rate at which people are adopting things or anything?.

No. I really don’t want to get into it. I think that – in the prior question, we talked a little bit about where we see some of our customers and things like that. And in some cases, it’s taking a little longer than we would have thought it would take to get to the meaningful revenue rate. And so that impacts things.

That’s really about all that I can say..

Okay.

So – but there isn’t any business that someone else has taken, anything you feel like has gone off track in any way, it’s much more a timing kind of issue and obviously you can’t control some of these very large organizations?.

I couldn’t have said it better. That really is – when you dance with elephants, sometimes you got to be careful, yes..

Okay..

Thank you. It appears we have no further questions at this time. I will turn the call back over to Charles Messman for any closing or final remarks..

I just want to thank everyone for joining us today. If you have any questions, please feel free to give us a call in the office. And we look forward talking to you on our Q4 call. Thanks..

Thank you. This does conclude today’s conference. We appreciate your participation. You may disconnect at any time and have a great day..