Christopher Meinerz - CFO Dennis Becker - Founder and CEO

Casey Fitzgerald - Talkot Capital Greg Berlacher - Emerging Growth Equities

Thank you and welcome to Mobivity's third quarter fiscal 2017 financial results conference call. We appreciate your interest in our company.

In order to be more efficient with your time, we will be reading Mobivity's Safe Harbor statement following the Q&A session at the end of the call. On the call today is Mobivity's Founder, Chairman and CEO, Dennis Becker and myself Chris Meinerz, CFO.

It is now my pleasure to introduce Dennis Becker. Dennis?

Thanks, Chris, and thanks everyone for joining us on our call today. A key focus throughout 2017 has been to capitalize on the near 100% growth we've achieved in the last 20 or so months by enhancing our contract terms with blue-chip brand clients we've acquired.

Our strategy has been to convert month-to-month agreements with little minimum financial commitment to multiyear contracts requiring substantial increases in minimum fees which are prepaid upfront. While we've discounted some fees in exchange for converting key customers to multiyear prepaid agreements, we now have a far more robust contract platform that has enhanced our cash position and increased revenue visibility going forward.

We're pleased to report that we achieved a positive net change in cash flows during the third quarter of this year finishing with more than $1.7 million of unrestricted cash on our balance sheet. It's important to reflect on the fact that we had just launched our new SmartSuite solutions in 2016 with Subway and a few other key clients who are engaged with us during what we call the adoption phase of our product and technology.

During the adoption Phase, it's not uncommon that customers refrain from committing to long-term contracts and/or substantial financial commitments until the value of the new product or service is verified -- confident that our technology would deliver great value in the emerging battle by off-line brands to combat e-commerce giants like Amazon from taking over. Our goal has been to evolve our early adopter clients towards multiyear term contracts with meaningful minimum financial commitments and even prepayments of these commitments were possible.

We believe that customers' agreeing to multiple year relationships with material financial commitments is strong evidence that our technology is delivering a significant return. I'm delighted to report we're making great progress with this initiative.

Through the first three quarters of 2017, Mobivity's minimum contracted revenues have nearly doubled to $7.4 million compared to only $3.8 million in 2016. This number represents the minimum annual contractual financial commitment from our customers, which is now nearly 90% of 2016's annual reported revenues of $8.4 million.

Our average contract term has also more than doubled year-over-year from one to nearly 2.5 years. The total contract value in 2017 of these minimum financial commitments over the contract terms is now more than $19 million, an increase of more than 260% over our total contract value of $5.3 million at the same time in 2016.

I'd like to highlight that this $19 million in minimum contract value only reflects the base fees our customers are obligated to pay during the term of these agreements. Variable fees such as per message fees offer additional upside to the $19 million of revenues that these minimum contract commitments generate over the term of these agreements.

It's also important to note several of these contract wins have yielded large upfront payments and have driven a net increase of cash of more than $500,000 since the beginning of the year. As an example, one large customer has agreed to an annual minimum commitment of $1.4 million over a term of five years where this minimum is paid upfront at the beginning of each annual anniversary of the contract.

Beyond the $1.4 million minimum commitment, this client will also pay per subscriber fees which are currently estimated to produce at least another $500,000 in variable revenues per year. As I mentioned before, we strongly believe that our success in growing contract values is directly correlated to the results we're delivering.

Recall that our mission is to make the connection of what people buy with why they buy, so that off-line merchants can personalize and target their marketing in the same way that on-line merchants like Amazon do. Unlike Amazon with one checkout counter that being their website off-line merchants often operate 1,000s of checkout counters across their network of physical locations.

This is where our ability to engage consumers through their mobile phone and track their behavior to any of these off-line cash registers, combines with machine learning and artificial intelligence techniques to dial in targeted marketing engagements that cause consumers to spend more. I'm excited to share some of the results we have been able to demonstrate, now having touched more than 8 million consumers across more than 30,000 retail locations, while examining billions of purchase transactions all via our proprietary AI driven platform.

In one study, we worked with the analytics and data team one of our largest clients where we studied the behavior of consumers both before and after their enrollment in a simple text message couponing program. Together, we took a universe of hundreds of thousands of consumers and examine their purchases for a period of time before they join the SMS coupon program.

We then tracked their purchases after they join the program and learned that these consumers increase their overall spend by 45%, restaurants fight tooth and nail for every 1% increase in spend so this was an amazing result. Another brand challenged us to increase their customer frequency which is historically been an average of just one visit every 60 days.

By leveraging our platform including the application of machine learning techniques, we were able to create a targeted offer program that printed coupons on consumers' receipts. In some cases, consumers returned in eight days crushing the average of 60 days.

Within 90 days since launching the program, consumers are returning within days instead of months, and the program is on pace to generate an ROI of more than 400%. We believe that with growing contract values coupled with continued proof of strong ROI, we are building a lot of momentum going forward.

For starters, the willingness of our major brand clients to prepay some or all of their minimum financial commitments is bolstering our balance sheet and empowering organic growth. Secondly and just as important, our growing client base and highly visible ROI is enabling new and more aggressive client acquisition strategies such as ROI guarantees, revenue-sharing, while performance-based fee structures and bit shortening sales cycles, and in some cases increasing revenue potential.

For example, one of our new customers didn't have enough budget to fund the full rollout of our solution across their system in 2017. Given our positive return on investment, budget shouldn't have been a blocker, however in some cases a brand's budget is fixed throughout the year and outside of the guaranteed ROI they can take on the risk.

Confident in our ability to achieve a positive ROI for the brand coupled with the visibility of seeing every sale we generated in their point-of-sale data. We agreed to a contingent agreement where the brand would agree to lock-in to a two-year agreement should be exceed certain positive return on investment thresholds within the first 90 days.

Needless to say we succeeded. I will now turn the call over to Chris for more detailed review of our financial results and then I'll come back for a few summary comments.

Chris?

Thanks Dennis. For the Company's fiscal quarter ended September 30, 2017, Mobivity recorded revenues of $2.1 million, representing a 5% decrease over the prior year quarter.

The slight decline is primarily due to the front-end pricing adjustments associated with prepayments offered on long-term contracts with large enterprise customers. Revenues for the nine months ended September 30, 2017 were $6.4 million, an increase of $334,000 or 5% compared to the same period in 2016.

Deferred revenue was $2.1 million at September 30, 2017 compared to a $160,000 at September 30, 2016. Deferred revenue primarily consists of billings or payments, received in advance of revenue recognition from customers and is recognized as the revenue recognition criteria are met.

The increase in deferred revenue is due to large receipts of prepayments from large enterprise customers. The deferred revenue balance on a consolidated balance sheet does not represent the total contract value of annual or multi-year non-cancelable customer agreements.

Unbilled deferred revenue is an operational measure that represents future billings under our customer agreements that have not been invoiced and accordingly, are not recorded in deferred revenue. Unbilled deferred revenue at September 30, 2017 was $810,000, compared to $45,000 at September 30, 2016.

We discuss unbilled deferred revenue in more detail and provide a schedule by quarter of this operational measure in our 10-Q report filed with the SEC yesterday. Gross margin was 62% for the third quarter of 2017 and 70% year-to-date.

This compares to 74% in the third quarter of 2016 and 76% for the prior year-to-date. The decrease in gross margin is principally due to higher SMS and application costs associated with the messaging fees and new surcharges charged by text messaging carriers initiated in the second half of 2017.

General and administrative expenses decreased to $542,000 or 45% during the third quarter of 2017 compared to the same period in 2016. For the nine months ended September 30, 2017, general and administrative expenses decreased $754,000 or 23% compared to the same period in 2016.

The decrease in general and administrative expenses was primarily due to decreases in personnel costs and bad debt expense. Sales and marketing expenses decreased $261,000 or 24% during Q3 of 2017 compared to the same period in 2016.

During the nine months ended September 30, 2017, sales and marketing expenses decreased $468,000 or 15% compared to the same period in 2016. This decrease was primarily due to lower personnel costs and share based compensation expense.

Engineering, research and development expenses increased $492,000 or 72% during the three months ended September 30, 2017 compared to the same period in 2016. For the nine months ended September 30, 2017, engineering, research and development expenses increased $1.5 million or 92% compared to the same period in the prior year.

The increase was primarily due to an increase in personnel related costs as compared to the prior year to support the Company's growth as well as fewer software development costs being capitalized. Operating loss for the third quarter of 2017 was $1.5 million compared to $1.6 million in the corresponding period in the prior year.

For the nine months ended September 30, 2017, operating loss was $4 million compared to $3.9 million for the same period in 2016. Comprehensive loss for Q3 2017 was $1.6 million or $0.04 per diluted share compared to $1.6 million or $0.05 per diluted share in the third quarter of 2016.

Comprehensive loss for the first nine months of 2017 was $4.2 million or $0.11 per diluted share compared to 4 million or $0.12 per diluted share for the same period in 2016. Non-GAAP adjusted net loss, a non-GAAP metric was $1.2 million for Q3 of 2017 compared to $901,000 in Q3 of 2016.

Year-to-date non-GAAP adjusted net loss through September 30th of 2017 was $2.9 million compared to $2.1 million for the same period in 2016. Net cash used in operating activities decreased to $1.2 million through the first nine months of 2017.

This is a 31% decreased as compared to a $1.8 million use of cash during the first nine months of 2016. The decrease in cash used in operating activities was primarily due to collections of prepayments on customer contracts and timely collections of accounts receivable.

Cash and cash equivalents totaled $1.7 million, as of September 30, 2017. I would now like to turn the call back over to Dennis for his closing remarks.

Dennis?

Thanks Chris. The third quarter of 2017 marked a key period in the growth of our business as customers have begun committing to the long-term use of our technology.

Deferred revenue increased more than 1,200% and the growth in our contract values has been tremendous. It's only a matter of time for our top line growth to start accelerating as word of our name brand clientele’s success becomes more widespread.

For perspective, I’ll point out that our top three clients operate marketing budgets that combine for nearly $1 billion. A lot of that budget will continue to transition from legacy marketing channels, such as print, to AI powered digital solutions like ours.

Exceeding the adoption phase of our product and technology coupled with new sales and marketing leadership coming out of their ramp-up period, having just come aboard in the last six months, we are confident the top line revenue growth will begin to show signs of acceleration in the fourth quarter. We appreciate your continued interest in our company and look forward to sharing ongoing progress with you.

Operator, you can now open up for questions.

Can you guys elaborate on the 19.3 million and the minimum contract values for '17? And how that reflects revenue and cash flow for 2018?

What's the general disposition of that?

Hey Casey, great question. So I think that what we have found through this year is that our -- a lot of the customers that we acquired really just launching our services in 2016, have now agreed to multi-year contracts which means they are now committing not just to being customers for the long-haul sometimes upwards of five years which was a contract we signed just a few months ago.

But also committing real financial minimums whereas last year during the adoption phase we were trialing the product with a number of brands, therefore they were on month-to-month non-committal short-term agreements, really with no minimum licensing fee, so that all changed this year. And so what that has reflected is now a much larger contract value that these customers combined for.

So to you as an example of the new deal that we're chasing actually a call that I was on just earlier this morning with the national oil change brand. The potential annual recurring revenue commitment from the deal like that would be upwards of $3 million.

And so if we sign say a three-year term on that contract then the contract value of that customer could be upwards of $9 million. Now in terms of cash flow, we are also pretty excited about and that we have been successfully throughout this year is and getting these customers not only to commit for multiyear agreements and large minimum licensing fees, but we've also found that these customers are willing to pay those licensing fees upfront, and now that’s an exchange for some small discount they will give to the licensing fees, but that really bolsters our balance sheet allows us to use those cash flows to continue to try and aggressively grow the Company.

So, the big buzzword in areas of interest for the investment community right now is the AI side, everyone is excited about what that means. If I think through your guys modeled here, you are collecting significant amount of data.

What can you do with that data? What's the thought with that specific data?

And are you using your proprietary AI to build additional tools and/or additional products that you can increase your ARPU to your existing clients? And then I have a follow-up as it relates to the additional revenues over and above your basic contracts.

Yes, so I'll tackle this first question what that relates to artificial intelligence and machine learning. So that’s really a -- with a key investment this year based on their success of 2016, we basically our thesis that collecting this data would unlock other revenue upside amongst our existing customers.

We did bring on a data scientist team that's led by actually the lead data scientists where we are able to post from Canada's largest retailer Loblaw which is a multibillion dollar retailer up in Canada, and Dr. Saleh who has a PhD in artificial intelligence from Waterloo has led the build out of our data sciences' team throughout this year.

And that has also been what we believe a strong influencer to the increase in our average contract value and the multiyear commitments that our customers have agreed to, in that we see that there's a lot of up selling and growth from the baseline revenues that we've accumulated through these customers by taking all of that information we're getting from these receipts across all their locations, which we've now examined billions of transactions at full basket level detail, which is something that credit card companies can't even do in most cases. And then our data science is building what's called the cognitive models where they're applying artificial intelligence and machine learning to unlock insights that these large brands can't do without this new technology.

For example, we just completed a couple of exercises where we were able to show a multibillion dollar brand, that there really being 100s of millions of dollars on the table based on their current pricing strategies as basically concluded through the artificial intelligence exercises completed our data science team. So, going forward, as you know we've been able to help these brands and I talked about some of these results -- you saw the Smashburger results a few days ago, that's another perfect example where we're taking a brand whose customers visit once every couple of months and getting them to return within days.

We're doing that because we're able to take all of their purchases, the transaction data from the brand, apply artificial intelligence to determine what would be the best offers to drive consumer traffic. And so, this is huge potential that we see in building upon this massive dataset that we're accumulating through these customers.

So my quick follow-on is for example on the five year 1.4 million contract, you guys, what type of additional revenues do you think is reasonable to expect on that above -- over and above the 1.4 million that you're currently contractually going to receive?

So for that particular contract which again is 1.4 million that we get every year over the next five years, as in the form of minimum licensing fee commitment, just based on their current usage which then goes above and beyond that, above and beyond the minimum, that particular plan for example, we expect at least a $0.5 million of additional revenue through usage fees above their minimum license commitment. Now what we're starting to explore is how we can use our AI solutions to come in and now implement performance driven campaign, in other words, whether we're helping the brand predict pricing fluctuations and apply pricing strategies to increase revenue, or we're helping them renovate their offer and value platform strategies, so that we can increase consumer frequency and average ticket, where we can get a piece of the performance.

And so just to give you an idea, we've one customer that where the system braces about $14 billion, $15 billion a year in revenue. And so aside from the minimum contracted fees that they have with us for our current platform services, we can add data science services on top of that where we move the needle for that brand, say 1%, well that's a $140 million of incremental revenue that we can deliver to that brand, if Mobivity can take a nominal revenue share or performance fee of say 10%.

Now, we're talking about projects that scale in the millions that we can stack on top of these recurring contract values.

Greg, this is Christopher Meinerz . Let me just follow-on to that, so one of the operational metrics, the non-GAAP operational metrics that you can look to going forward that we've filed in the 10-Q is called unbilled deferred revenue, that will give you some visibility into the incremental revenue that will be over and above those contractual minimums and that's what we expect to monetize going forward.

So, that will help kind of put some metrics behind that.

Thank you. I'd like to thank you all for your time on today's call and your interest in Mobivity.

Before we close, I would like to read our Safe Harbor statement. On this call management personnel prepared remarks contained forward-looking statements which are subject to risks and uncertainties and management made additional forward-looking statements during the Q&A session.

Therefore the Company claims protection of the safe harbor for forward-looking statements as contained in the private securities litigation Reform Act of 1995. Actual results could differ materially from those contemplated by our forward-looking statements as a result of certain factors and not limited to general, economic, and business conditions, competitive factors, changes in business strategy, or development of our plans, the ability to attract or retain qualified personnel, and changes in the legal and regulatory requirements.

In addition any projections as for the Company's future performance represent management's estimates as of today November 15, 2017. Mobivity assumes no obligation to update these projections in the future as market conditions change.

The Company has filed its 10-K with the SEC on March 31, 2017, and third quarter 10-Q on November 14, 2017, and also issued a press release announcing financial results for the third fiscal quarter of 2017. Participants on the call, who may not have already done so, may wish to look at these documents as they provide summary of the results discussed on this call.

Today's call may include non-financial measures which require a reconciliation to the most directly comparable financial measures which are calculated and presented in accordance with GAAP and can be found in this week's press release which is also available at mobivity.com. This concludes Mobivity's fiscal third quarter 2017 financial results conference call.

Thank you.