Good afternoon, and welcome to the Smith Micro Q1 2018 Earnings Call and Webcast. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. At this time I like to turn the conference call over to Mr. Charles Messman, with Smith Micro.

Sir please go ahead..

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss Smith Micro Software's financial results for the first quarter of 2018 fiscal year ended March 31, 2018. 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 of our website at www.smithmicro.com or call us at (949) 362-5800, and we will e-mail you one to you immediately.

On today's call, we have Bill Smith, Chairman, of the Board and President and Chief Executive Officer of Smith Micro; and Tim Huffmyer, Chief Financial Officer.

Please note that some of the information you'll 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 cash reserves.

Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by our forward-looking statements. For more information, please refer our risk factors discussed in Smith Micro's most recently filed 10-K Form.

Smith Micro assumes no obligation to update any forward-looking statements, which speak to our management's belief and assumption only as of the date they are made. Before I turn the call over to Bill, I want to point out that in our forthcoming prepared remarks, we'll refer to certain non-GAAP financial measures.

Please refer back to our press release disseminated earlier for a reconciliation of the non-GAAP financial measures. That said, I'll now turn the call over to Bill.

Bill?.

Thank you, Charlie. Good afternoon, everyone, and thank you for joining us today for our 2018 first quarter earnings conference call. Overall I am encouraged with the progress made during the quarter across several areas of the organization.

The first quarter results were in line with our internal expectations as we continue to build momentum with the launch of our SafePath platform at Sprint. This brings to mind some exciting news in the mobile world with the recent announcement regarding the proposed merger of T-Mobile and Sprint.

Later in this call I will share some thoughts on how this deal could impact us and how I view it as an opportunity for growth, particularly with our two leading products SafePath Family and CommSuite. Now let's talk about the quarter. 2018 first quarter revenue came in at $5.5 million which was nearly flat to the fourth quarter of 2017.

Gross profit was $4.2 million, with a non-GAAP loss of $1.5 million or $0.10 loss per share. I should note that seasonally Q1 tends to be our lowest quarter for revenue and our highest expense quarter due to participation in Mobile World Congress in Barcelona.

Before I turn the call over to Tim, I also want to address our recent private placement that was announced last week. We believe this is very positive for the company, strengthening our balance sheet, allowing us to accelerate our product roadmaps and M&A activity for 2018. Tim will provide more detail of the transaction in his remarks.

So with that I will turn the call over to Tim..

stock compensation expense of $163,000; intangible amortization of $64,000; amortization of debt discount and issuance cost of $65,000; and a warrant fair value adjustment of $139,000. Due to our cumulative net losses over the past few years, our GAAP tax expense is primarily due to foreign income taxes.

For non-GAAP purposes, we utilized a 24% tax rate for 2018. The resulting first quarter non-GAAP tax benefit was $476,000. This now concludes my financial review. Now back to Bill.

Thanks Tim. Before we drill into the details about the first quarter, I want to reaffirm our strategic direction of providing our carrier customers and prospects with software that enhances their users experience and satisfaction. Strategies to boost customer loyalty and reduce subscriber churn remain a high priority for all mobile service providers.

Of course one of the most effective ways to combat subscriber churn and create stickier customer relationships is through value added services like our SafePath Family platform and our CommSuite messaging platform. Let's start off by talking about our SafePath implementation at Sprint, known as Safe & Found.

Subscribers of the new Safe & Found service at Sprint continue to grow in correlation with the carriers increased marketing efforts. New subscribers are added each and every day, seven days a week, plus Sprint continues to transition users of its legacy service to Safe & Found.

There are several initiatives underway to acquire new users for the service as well. For example, Sprint is rolling out a new MMS-based acquisition campaign this month, targeted at its wider travel base. To support this initiative, they will also launch a retail-based campaign to build service awareness.

To promote the Safe & Found service, Sprint is training and compensating retail associates and will be launching additional new promotional activities throughout the year. These new marketing initiatives will coincide with some significant upgrades planned for the core SafePath Family platform.

For obvious reasons, I don't want to share too much about the product roadmap until features are formally announced, but I think it is important to talk about the general direction of the product from a strategic perspective.

Currently in development, the next major release of SafePath will introduce a new, family-centric user experience that further extends the platform beyond a location focused service.

With the next release, SafePath will evolve to a digital lifestyle management platform for the entire family that will provide enhanced location services, easy to use parental controls, powerful web filtering functionality and built-in support for new IoT products and services.

This improved platform will extend the products capabilities to support a multitude of new consumer-oriented use cases around variable locators, tech trackers, onboard diagnostic devices and home automation platforms. As you can see, there some exciting things on horizon for SafePath.

It is also important to note the functional superiority of our SafePath platform on iOS devices versus the legacy service we're focused on replacing. For instance, some large carriers such as T-Mobile still use the legacy platform, do not even offer an iOS version of the family location app.

This lack of an iOS application leaves a significant portion of the user community without the access to a family safety platform. We see Sprint decision to replace the old service with the SafePath Family as a strong indicator that our vision for Family Safety services is directly on target. Now let's talk about other core solutions.

On the consulate front, I'm happy to report the revenues from the Sprint VVM service continue to grow with expansion of premium visual voicemail subscribers. This subscriber growth can be attributed to the backend product enhancements we implemented late last year.

As a value-added service platform, our premium Visual Voicemail enhances the overall Android experience for mobile voicemail users by providing valuable, time-saving features such as voice-to-text transcription and message forwarding.

It also delivers strong revenue channels through the proven service model, as carriers realize revenue from both premium service subscriptions and in-app advertising.

As I mentioned on the last call, we are actively developing integration pathways within our visual voicemail product, to tie in with other voice-centric devices, such as Amazon Alexa and Google Home. This expanded functionality will increase the relevancy of the platform with voicemail users of all ages.

Later this year, several new features, currently in development, will launch, continuing a theme of delivering a better personalized voicemail experience to a wide range of mobile consumers. With this strategy, we are confident that our market opportunity will expand throughout the rapidly changing voice messaging universe.

Next, let's talk about our, quickly, IoT platform, which continues to grow and evolve. The continued expansion of the IoT market has created emerging useful cases that we are well-positioned to address through our portfolio of proven wireless solutions.

Having robust Device Management and edge computing functionality for connected devices, continues to grow an importance, as low latency, IoT use cases proliferate. It is important competitive differentiator for Smith Micro in the IoT space, as our LightweightM2M clients can operate with intelligence on very constraints IoT devices.

We're currently in conversations with several device and chipset OEMs as well as IoT solution providers and operators who have active interest in using our LightweightM2M client to add substantial management functionality to these resource-constraint devices.

In the coming quarters, our QuickLink IoT product development team will continue their effort to reduce the size and resource consumption of our client, which will increase our competitive advantage in this attractive and growing market. Now for a bit about our Wi-Fi optimization and management solution, NetWise.

In terms of license count, the number of installed instances of our NetWise client continues to grow across our three major customers. Additionally, during the first quarter, we also saw growth in policy counts.

This is a positive and solid indicator of the utility and effectiveness of our NetWise solution as an enabling technology in the emerging market of Wi-Fi-first mobile service. We see a fresh upside with NetWise, as we expand our market presence on new device types.

We also enhanced our analytics engine during the first quarter to better capture important data metrics, central to network planning, cost-saving strategies and in-depth understanding of Wi-Fi usage trends in large device populations.

From these developments, it's evident that the cost-saving benefits and strategic insight, enabled by our NetWise solution, continues to have value across the mobile services industry. I'm very pleased with the progress of our graphics group across several fronts.

We achieved some key milestones in the first quarter, as we continue to build upon the changes made last year. Firstly, implemented some significant and much-needed upgrades to our backend e-commerce infrastructure and digital content marketplace.

And by adding an exciting new product to our portfolio, we expanded our existing graphics product line up.

As I mentioned in the last earnings call, this activity is central to long-term strategic vision of this business unit, as it supports the expansion of the customer base and helps reengage the incredibly loyal users of our core graphics products, Poser, Moho and Motion Artist.

As I'm sure you saw, we announced our strategic relationship with Escape Motions a few weeks ago. Under this partnership, we will resell for award-winning graphics products, Rebel 3, a market-leading paying application is the first product we've added to our graphics portfolio as part of this agreement.

I urge you to visit our online store, mydotsmithmicro.com, to take a look at Rebel. It is an amazing product. Rebel 3 also works very well with our other graphics products, such as Motion Artist and Moho, as digital artists can use these applications to bring their work to life with movement and sound.

Our graphics portfolio will continue to grow throughout 2018, as several more releases are planned. These additional releases will further energize our market expansion, as we seek to transform our graphics portfolio into our comprehensive toolkit for digital artists.

There are some exciting content-based opportunities emerging for graphics business in the expensive online universe of digital comics and the emerging virtual-reality market. Needless to say, there are exciting changes on the horizon within our graphics lineup, so stay tuned for future announcements.

Now let's discuss the proposed merger of T-Mobile and Sprint. This will be a major change within the wireless world. First off, we have seen mergers many times over the years. I understand the process. I know how to develop and position our wireless solutions to take advantage of new opportunities as they arrive.

In terms of the future of our business, I view this proposed merger as a stimulating and energizing opportunity. As you know, Smith Micro has always been very opportunistic, and I believe our ability to adapt and respond to the ever-evolving wireless marketplace is an advantage.

Our strength in balance sheet will allow us to accelerate roadmap development for both CommSuite and SafePath, products presently sold to Sprint. By executing on the strategy, we can markedly expand our competitive advantages and ensure our success with a combined carrier. Additionally, we have strong relationships with both Sprint and T-Mobile.

Both carriers know our solutions and are confident in our ability to deliver valuable service offerings. As such, should Sprint and T-Mobile complete their merger, we are confident in our ability to leverage our relationships to expand our market position and support theirs. With that said, I look forward to an exciting 2018.

It promises to be a year of expanded revenues and a return to profitability in the coming quarters. Now, operator, we can open the call up for questions.

Operator?.

Ladies and gentlemen we will now being the question-and-answer session. [Operator Instructions] Our first question today comes from Jim McIlree from Chardan Capital. Please go ahead with your questions..

I think you are muted Jim. We don’t hear you..

Sorry for that..

Mr. McIlree your line is….

You are right..

Please proceed..

Thank you. You are right I was muted. I’m sorry about that.

In round numbers or in the range, how much was SafePath revenue this quarter?.

Hi, James. It was measured in several hundreds of thousands of dollars..

Great, that's helpful.

And, I think, Bill, a couple of times you said that Sprint has legacy customers that you hope will migrate, can you size that in terms of how big that customer base is? And what you think is a reasonable expectation for you to get of those legacy customers?.

Yes. In past calls we've talked about this. When that customer base is transition to our platform, we expect to see a total revenue of about $3.5 million per quarter. I don't want to get into exact headcounts, that's really Sprint's business. But I would say that we expect a reasonable transition to reach that goal, but definitely not 100%.

There will be breakage, Sprint knows that as well. So it is a rational number..

Okay. And as far as CommSuite goes, I think you said you’re expecting growth from that for the rest of the year.

Is that a steady modest growth? Or is that are you expecting some big stuff step functions upwards?.

I guess I look at it this way, we expect to see a steady growth throughout the year. I don't think it's a monumental growth, but I think it's a good reasonable expected, steady growth..

Okay, thanks. And then my last one on OpEx, I think you mentioned $6 million OpEx.

Is that what you think it will be on a quarterly basis for the foreseeable future? Or is that referring to a different time period?.

That's a sort of some directional guidance for you. We've been running in $5.9 million to $6 million range. So that's there for the future..

Okay. I think that’s it from me. Thanks a lot and good luck with everything..

Thanks Jim..

Thanks Jim..

[Operator Instructions] Our next question comes from Mark Gomes from Pipeline Data. Please go ahead with your question..

Hello gentlemen congratulations on the progress.

Just to kick off, what I understand about 5G, it will enable wearables to more cheaply be connected to the network, can you tell us a little bit about how 5G will assist in this effort? And what that might be for Safe & Found’s future to attract things like pet cars and bicycles, and basically anything that the customer might be valuable..

I don't think they have to wait for 5G. I think wearables work well just fine under 4G as well. But I think probably the most important thing that we need to point out is the fact that SafePath provides a platform for which all wearable devices can be commonly connected to the carriers’ network.

So that's a major differentiator between SafePath and many of the competitive offerings that are out there, is that when SafePath was designed, it was designed with this in mind..

Okay. So looking at the pricing for Safe & Found, they are priced at $7 for five devices, versus $10 for 10 devices for all the other carriers.

My research has found that you have some significant functional advantages over the competition, which would justify the additional cost per device, but is the five device pricing design to kind of set the customers up for more up sales when the wearables become available?.

Well, first off, the pricing set by our customer, that's not really up to us. So this might be a question it would be better for you to ask Sprint. Yes, the concept is that wearable devices, that'll be another device in the family plan so I don't really know how to answer your question beyond that..

Okay. I’ll get back in the queue and come back..

Okay..

[Operator Instructions] And we do have a follow-up from Mark Gomes from Pipeline Data. Please go ahead with your follow-up..

Okay, good enough.

When you talk about the $3.5 million full transition, what kind of profitability would you expect? Can you give us some color on how that might look?.

Yes, Mark. The profit range for this product is set around 80%. So there – we've talked in the past about us not having to add much cost structure, necessarily to accommodate the scaling of this platform. So I think that probably will give you some good directional input from a modeling standpoint..

Okay.

So nothing has changed there in the last several months?.

Correct..

Great.

Okay, and then looking at the recent rates of $7 million, when might we hear a little bit more about more details about your M&A initiatives? What that use of funds might be?.

Hey Mark, it’s Charles. I think it's fair to say that the company has been quite acquisitive. So as soon as we have things to talk about, we'll announce that. I think this does put us in a much stronger position for all the different things that we're working on as far as with that money raise..

I hope that answers your question..

Absolutely. So shifting gears for a second. I’ve got a number of questions and I’ll get back in the queue just to give anybody else the chance kind of aggregated from investors. So looking at your – the business that you do at Comcast is pretty well known that Comcast and Charter Communications work closely together.

So what can you tell us about the recent initiatives of Charter and how that might be able to affect you positively in the coming quarters?.

I think it's intriguing to watch the growth of the wireless business at the cable MSO's. Comcast has long-term customer. We have added cable customers as well here in the U.S., a very large size.

So we have a lot invested in the sector, I think the activities that are going on between Comcast and Charter only serve to move this along, and we see this as a good opportunity. And we're here to really focus in and help them move their business case forward..

Okay, looking at Safe & Found, the Google clear reviews have risen from 2.1 star as before April to close to the 2.7 for the month of April, and now over 3 for the month of May.

To what can we attribute this?.

Hey Mike, I think there's several initiatives that we have ongoing with the operating. I think that we expect this trend to continue. There's a lot of – we've been much as far as some changes, we're taking the imprint that the people using the product and really making changes in the product itself to better serve them. That’s one aspect of it.

Being extremely proactive with our reviews and a lot of it is actually teaching them and showing them how to use the product more so. I mean I think, the most important thing is also just getting more reviews. There is a very small number of reviews, and I think you'll see that going forward. It is a very big focus of the company across-the-board.

So there's several initiatives underway to get that moving in the right direction. Hope that answers your question..

Yes thank you. So on similar lines, I do notice with the Location Labs Family Locator product has still been getting frequent updates despite Sprint telling, its customer service organization has been telling customers that the products already been decommissioned "and could" stop working at any time.

Are there any indications on your side that these updates are simply notifications a family locator is being something [indiscernible]..

That's again one of those questions it would be probably better to ask Sprint. I think that is very clear from Sprint that they want to get to a single platform and it's just a matter of time to get people to move across.

I don't think anything has changed on that I think some of the marketing that you’re going to be seeing coming out from Sprint, only reinforces what I just said. So as far as location labs has updated the app, I guess it’s really up to location labs, but I don’t think anything has changed at Sprint at all..

Okay.

You talked about moving your development M&A initiatives acceleration in those efforts, is that a direct result of the success you're seeing at Sprint or the happiness of the customer, giving you confidence to accelerate the roadmap there?.

Yes, I think this is one of those moments where you have great opportunity to cease [ph] the marketplace and really move beyond what any of the competition is up to. I think that really is something that works for both SafePath and CommSuite.

I think these are two products that we make a lot of our revenue off of, and we see that both these products being significant revenue providers for us in the coming quarters and we just would really like to get so far out in front of the competitors. There's just no way anybody would look to anybody else but us..

Great. One last question before jumping back in the queue along those lines.

You folks have been engaged with numerous carriers, some of which you assigned to various degrees of [indiscernible] understanding of what have you, I'm wondering if you could give us an update on that, what's happening in Latin America and Europe, and Asia, with various carriers.

At what point do you say, we've got the process down with Sprint so well that now we can replicate that and start ramping some of these others opportunities? Thanks..

Well, I think the Sprint implementation being the first Tier 1 carrier to roll out our software offering, has been a great opportunity for us to learn more about what it takes to compete, to fine-tune our product, to fine-tune our offerings, to understand the go-to-market strategy, to understand what the user base is really looking for and we're leveraging off of that.

And then we're going to take those learnings to the Tier 1 carriers, be that in the other part of the Americas, or in Europe, or in Asia PAC where we already have presence. And really tried to grow this offering. I think Family Safety is subject area as well as is one that’s near and dear to the hearts of people no matter where you live in the world.

And if these are scary times, there are strange things happening and being able to monitor the safety of your loved ones is really critical. So I think, it's a great opportunity, and we intend to seize it. We have been fortunate in raising additional capital that makes that even more possible. And we’re going to move forward..

Great. Well interesting. CNBC right now is showing a segment on whether or not there should be less screen time available for mobile devices for children, so very refreshing….

Yes Mark there’s no – if you got another one, we’re going to – I think that’s – you are the last one that’s lined up. So if you have any other one let’s pounce [ph] through them..

Okay sounds good. Based on your experience, do you have any indications, or internal expectations, or what the lifetime value might be for Safe & Found for customers? William W. Smith.

So I think it’s we do have it. I think we think it’s a little too early at this stage but is something that we obviously track going forward. And I think it will be a good metric, but we want more data..

Okay.

And it’s safe to safe to say that it's incumbent upon Sprint primarily to be marketing the product in terms of expense response ability?.

Yes, I mean Sprint owns the customer and so therefore, the actual marketing to their user base really has to come from them. We can help wherever they will let us, and we're more than willing to do so..

And that other thing I think is important that as far as timing updates around the app and some of that nature, we obviously are working very closely with Sprint, so we can maximize when they are actually running these campaigns. I think Bill spoke of, the retail store campaigns as an example..

Great.

And what are you folks seeing in terms of downloads? You talked about your advantage on iOS, what are you seeing in terms of uptake from the Sprint customer base on Android versus iOS?.

It’s a pretty interesting spot. I think you're seeing Android is actually stronger than iOS as far as downloads. That's kind of the split, but it's actually quite good on both. Obviously, iOS under the legacy platform was very, very, very small..

Okay so relatively speaking, is what you talking about, and insight into new activations? To existing customers?.

Yes, I don’t think we are going to get into specifics on that, but we're actually happy with – we actually have a very strong conversion upon people trying the app and using it to free trial. We're actually quite pleased with that at this stage..

Okay.

And is there anything you could share with us in terms of your sense of what needs to happen at least from your end, specifically, for Sprint to hold that [ph] to whatever their current sunset [ph] date is?.

So I think that there is a game plan in place for that. Again, it is tied to Sprint. And I think it's our efforts to keep executing and adding new ads and will pull the trigger when they decide it’s time to pull the trigger. And you could probably assume there’s some sort of marketing event around that.

But I can’t get into the specific time at this stage..

Okay.

I believe my last question on Safe & Found, you mentioned home automation that kind of, sparked my curiosity, can you give us a little bit more color on what it means Safe & Found becomes, or SafePath becomes more of a digital life style platform what kind of home automation can be incorporated into that?.

So we can't really get too deep into it, but if you start to think about some of the voice-centric devices, you can start thinking about the television. There's all sorts of ways that can go but I think you just have to wait to see how we – as we launch the upgrades going forward.

We think it's a really good opportunity, as the app, again it could expand into lots of different areas. Hopefully that's a little..

Little. We’re looking forward to seeing more. I appreciate all this and your patience with these questions, by the way being the aggregator is a interesting role here.

Any update on the divestitures that have been discussed previously?.

Yes I think what – on this level what Tim has talked about on the last call was really that we are looking strategically at all of our different product lines and remain profitability but that's all – it just a continued process with us going forward..

Okay.

And in one of those product lines, you have that Rebel 3 product announcement that went along with that, what can you tell us, any color you can provide on that in terms of how material should we view this and the life [ph] Smith Micro site in general?.

I think this is an exciting new product when you see what it’s actually capable of doing, it’s just amazing, it's really bringing painting to life on a PC screen and it looks just the same. And if you’re doing watercolor painting, you actually see the paint run as it would on in real life. So it's a very exciting product.

This is the product that will build over time. You start with the base and as you get more and more users, it will expand. We think this is a very hot product though. And we think it has great upside, and we just have to give it time to grow in into that..

Yes, what kind of operating leverage do you see in that side of the business? Is this something where you feel like you could discover new products from around the world and become kind of – or are you already in your minds, premier distributor of these types of products?.

Hi Mark sure. I think that we are the premier – we have two lead products that are – they're very, very well-received in the market. I think that we have traveled all over the world to find these products, and I think we can continue to do that. And it really just builds on this idea of having a digital portfolio for artists.

And I think what you see is a complementary group of products being slowly brought on board more and more, as we build out our network for different things, not only for what our products and support does, but also expanding the actual market. Some of our products can be very, very high end.

And I think you're going to start see what about basically anyone can use. So I think that's another avenue where we want to expand the actual overall reach over of where these products go to. And we think this is a great step in the right direction. So as you see us roll out more products throughout the year, yes that will be seen [ph]..

Okay fantastic. And I’ve seen the trailer for Rebel 3, it was stunning, very impressive product.

So one of the late breaking questions I just rolled into me, is there any color that you can provide with regard to the ramp you’ve seen on Safe & Found and how it’s tracking for March, April, to May and how you feel about the progression there?.

Hi Mark. The marketing activities in the quarter, the first quarter, were substantially more significant than they were in the fourth quarter. So we're pretty pleased with the ramps that we saw in the first quarter. We still have ways to go, and as I referenced earlier, I was measuring the activity in hundreds of thousands.

We, obviously, have again ways to go there. But as Bill addressed in his prepared comments, there are a number of events that are scheduled here, that we're excited about. And we think we're on track and have a good handle on how that’s going to ramp the rest of the year..

Great. I think that about comes with for me folks that I appreciate your generous allotment of time to indulge me. Thank you..

Thanks Mark. I think you are getting questions asked through you. So I appreciate that..

Okay everybody I think that we want to thank everyone for being on the call today. We think it's an exciting time for Smith Micro. Please feel free to give us a call if you have further questions. And we look forward to updating you on our next conference call, thanks, and hope everybody has a great day, and go download Rebel, it's a great product.

Thanks..

Ladies and gentlemen, that does conclude today's conference call. Thank you for attending. You may now disconnect your lines..