Smith Micro Software Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Smith Micro First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Charles Messman, Vice President of Investor Relations and Corporate Development, please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everybody. We appreciate you joining us today to discuss Smith Micro's financial results for our Q1 ended March 31, 2023. By now, you should have received a copy of our 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. On today's call, we have Bill Smith, our Chairman of the Board, President and Chief Executive Officer and Jim Kempton, our Chief Financial Officer.

Speaker 1

Please note that some of the information you will hear during today's discussion consists of forward looking statements, including without limitations, Those regarding the company's future revenue and profitability, our plans and expectations, new product development, New and expanded market opportunities, future product deployments, migrations and our growth by new and existing customers, Operating expenses and the company's 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 forward looking statements. For more information, please refer to the risk factors included on our most recently filed Form 10 ks and in subsequent filings on Form 10 Q. Smith Meeker assumes no obligation to update any forward looking statements, which speak to our management's beliefs and assumptions only as of the date they are made. I want to point out that in our forthcoming prepared remarks, we will refer to non specific financial measures.

Speaker 1

Please refer

Speaker 2

Thanks, Charlie. Good afternoon and thank you for joining us today for our 2023 Q1 conference call. As I look at the Q1, I am quite pleased with the overall progress we made on some of the initiatives that we outlined and discussed during our Q4 conference call. First off, on our last earnings call, we reported that we had set a goal To reduce our expenses by $4,000,000 per quarter during 2023 as compared to Q4 2022. We intended to achieve those savings on an expedited basis.

Speaker 2

We took decisive measures across the entire organization in March to help us reach this goal, Taking actions that will result in the elimination of approximately 26% of our global workforce as well as taking certain other measures that we anticipate will result in achieving our cost reduction goal in the second quarter. This will bring our aggregate non GAAP expenses to approximately $11,000,000 compared to $14,300,000 that we reported in the Q1. Implementing our plan with such swift action was a challenging task and I am pleased that this alignment of the cost structure We'll position the company for a return to profitability. Another key initiative was the migration Of the AT and T Secure Family application to the SafePath platform, I am happy to report We expect to deliver the new build later this month to AT and T for their testing process, which we believe aligns well for a public launch during the Q3. This is a significant milestone for the company And we're looking forward to a successful launch.

Speaker 2

Lastly, I am very encouraged Over the last year under the leadership of Vaughan Cameron, our Chief Revenue Officer, and we are starting to see the benefits of these changes. Before Jim covers the financial results for the quarter, I want to cover a few highlights. The Q1 results came in line with our expectations with revenue for the Q1 of $10,900,000 down from $11,400,000 we reported in the 4th quarter. We did see our non GAAP gross margin tick up to 72% this quarter, an upward trend we anticipate continuing in the 2nd quarter. In addition, we continue to drive down our operating expenses with our quarterly non GAAP operating expense down by about $2,500,000 compared to Q2 of 2022 when we started our initial cost reduction This resulted in a non GAAP net loss for the quarter of $3,500,000 or a loss of $0.06 Let's now turn the call over to Jim for a more detailed analysis of our financial results.

Speaker 3

Jim? Thanks, Bill, and good afternoon, everyone. I I wanted to start my presentation today by calling on a change we're making to our non GAAP presentation. Starting this quarter, We are adjusting for depreciation as part of our non GAAP presentation, with the thought being that this is similar to our adjustment for amortization It is a non cash item. In the numbers being discussed today, the prior period non GAAP results have also been recast so that the results I'll be discussing are on a consistent basis.

Speaker 3

As a frame of reference, Appreciation was approximately $200,000 in the Q1 of 2023. With that, I'll now cover the financial details of the Q1 of 2023. For the Q1, we posted revenue of 10,900,000 Compared to $12,700,000 for the same quarter of 2022, a decrease of approximately 14% As a result of the decline in Family Safety revenues, coupled with the decrease in CommSuite revenues, When compared to the Q4 of 2022, revenue decreased by approximately $500,000 or 4%. During the Q1 of 2023, Family Safety revenue decreased by $1,300,000 or 12% compared to the Q1 of the prior year, primarily as a result of the reduction of the legacy Safe and Found platform revenue Related to the continued attrition of legacy Sprint subscribers, driven by T Mobile's acquisition of Sprint. Family Safety revenues declined by approximately $600,000 compared to the Q4 of 2022.

Speaker 3

During the Q1 of 2023, CommSuite revenues was approximately $800,000 which decreased approximately $600,000 compared to the $1,400,000 in revenue produced in the Q1 of 2022. This decrease is primarily attributable to an implementation fee of approximately 300,000 Recognized in the Q1 of 2022, coupled with the attrition of legacy Sprint subscribers off of the CommSuite platform over the past year. Revenue related to Sprint was negligible in the Q1 of 2023. Revenue from CommSuite was down approximately $100,000 sequentially compared to the prior quarter. ViewSpot revenue was approximately $1,000,000 for the Q1 of 2023, which increased approximately $100,000 compared to the Q1 of prior year and $200,000 compared to the Q4 of 2022.

Speaker 3

As a reminder, ViewSpot revenue is comprised of both fixed and variable components. The fixed portion of the revenue is related to license fees and is generally the recurring component of the revenue. The variable portion of the revenue is related to device and promotional campaigns. In the timing and volume associated with this portion, the revenue stream is less predictable. As there was a higher component of variable revenue in ViewSpot during the Q1, we are anticipating ViewSpot revenues to decline in the 2nd quarter.

Speaker 3

Primarily as a result of this decline, we expect consolidated revenue for the Q2 of 2023 to be flat to lower by 4% Compared to the Q1 of 2023. For the Q1 of 2023, Gross profit was $7,600,000 compared to $9,100,000 in the same period in the prior year due to the period over period decline in revenue And approximately $200,000 of severance related costs incurred. Gross margin was 70% for the Q1 compared to 71.4 percent in the Q1 of 2022. Non GAAP gross margin for the Q1 of 2023, which excludes the severance was 71.8%. The gross profit of $7,600,000 in the 1st quarter Declined by approximately $400,000 compared to the gross profit produced in the 4th quarter.

Speaker 3

In the Q2 of 2023, we expect gross margin to increase by approximately 150 basis points to 2.50 basis points From the adjusted gross margin of 71.8 percent for the Q1 of 2023. GAAP operating expenses for the Q1 of 2023 were $14,600,000 A decrease of $1,600,000 or 10% compared to the Q1 of 2022. This decrease was driven primarily by a decline Research and development expenses of $1,400,000 due to a decrease in personnel related costs and consulting as a result of nearing the completion of SafePath migration activities. Non GAAP operating expenses For the Q1 of 2023 were $11,300,000 compared to $13,100,000 for the Q1 of 2022, A decrease of approximately $1,800,000 or 14%. Sequentially, non GAAP operating expenses decreased by approximately $500,000 or 4% from the Q4 of 2022, primarily due to decreases in personnel related costs and in contractor costs related to the SafePath migration.

Speaker 3

We expect Q2 2023 non GAAP operating expenses to decrease from the Q1 of 2023 By 25% to 30% due to the recent actions undertaken to reduce our cost structure. In March, we conducted a global reduction in force, resulting in the elimination of personnel in the United States, Portugal and Serbia. In addition, we announced the closure of our Zalina, Slovakia Development Office as of June 30, 2023. Similar to our closure of our Czech Republic operations in the Q4, because of statutory requirements, the closure required a notice period for the personnel in that location. In addition, we reduced the base salaries of our executive officers And the cash fees paid to our Board of Directors by 10% and suspended our quarterly bonus program.

Speaker 3

As a result of these and other cost reduction actions, we anticipate that our cost reduction goal of $4,000,000 of savings From our aggregate total non GAAP quarterly operating expenses and cost of sales for the Q4 of 2022 of 15,000,000 Will be achieved in the Q2. In other words, in the Q2, we anticipate our aggregate non GAAP cost of sales And non GAAP operating expenses will be reduced to approximately $11,000,000 compared to the $14,300,000 reported in the Q1. The GAAP net loss for the Q1 of 2023 was $6,900,000 or $0.11 loss per share compared to a GAAP net loss of $7,000,000 or $0.13 loss per share in the Q1 of 2022. The non GAAP net loss for the Q1 of 2023 was $3,600,000 or $0.06 loss per share compared to a non GAAP net loss of $3,900,000 or $0.07 loss per share in the Q1 of 2022. Within today's press release, we have provided a reconciliation of our non GAAP metrics to the most comparable GAAP metric.

Speaker 3

For the Q1 of 2023, the reconciliation includes adjustments for intangible asset amortization of 1,500,000 Stock compensation expense of $900,000 convertible note and stock offering fees and amortization of 2,100,000 Severance related costs of approximately $900,000 and depreciation of $200,000 partially offset by fair value adjustments $2,400,000 Due to our cumulative net losses over the past few years, Our GAAP tax expense is primarily due to certain state and foreign income taxes. For non GAAP purposes, We utilized a 0% tax rate for 2023 2022. The resulting non GAAP tax expense reflects The actual income taxes expense during each period. From a balance sheet perspective, we reported $8,700,000 of cash and cash equivalents as of March 31, 2023. I would note that the cash balance was impacted by the timing of the receipt of certain of our receivables, similar to the Q1 of last year.

Speaker 3

This concludes my financial review. Now I'll turn it back to Bill.

Speaker 2

Thanks, Jim. Let's first look at AT and T and the progress made on the migration efforts for Secure Family. As I mentioned earlier, We remain on track for delivery of our SafePath based version during the Q2 when AT and T can begin their final Testing efforts, which we believe will set the stage for a public launch sometime during the Q3. These migration efforts have been a long journey for Smith Micro and completing this effort will be a big achievement for the company. I want to note that in addition to creating a best of breed product that incorporates select features Of the former AVAS platform into SafePath, another critical yet time intensive aspect of this effort It was our investment in development that will allow us to maintain existing subscribers' user experience without interruption, Preventing extensive migration driven churn among the existing subscribers is an important goal As we seek a user friendly process that seamlessly moves the user from the old AVOS platform to SafePath.

Speaker 2

I would like to add that when AT and T Secure Family on SafePass goes live, it will conclude our migration efforts. This will allow us to reallocate resources to new customer activities and enable the expansion of our SafePath roadmap going forward. Beyond migration focused activities, Our teams continue to collaborate with AT and T team on a series of growth marketing initiatives Across different distribution channels, some of which have already started as we begin building momentum Going into the launch, I'll close my comments on AT and T by saying that we are very excited and optimistic for the pending launch of Secure Family powered by the SafePath platform. Our partnership with T Mobile continues to progress well. We had several new releases so far this year across There are various family safety offerings to support T Mobile in executing on several strategic and operational initiatives.

Speaker 2

Our internal team remains focused on and committed to both vertical and horizontal expansion of our working relationships with key T Mobile stakeholders, which we believe will lead to additional marketing opportunities to drive subscriber growth. We continue to help DISH launch its CommSuite driven Visual Voicemail is one of the first value added services on the DISH wireless network, as well as on the migration of Boost Mobile premium visual voicemail subscribers over from the legacy T Mobile billing system to the new DISH wireless billing system. This has been a very complex project and we believe that our efforts have strengthened our partnership with DISH. This could provide us with an opportunity to collaborate with them On offering other value added services to their subscriber base in the future periods And grow with DISH as it expands its footprint in the wireless space. Now let's talk about ViewSpot.

Speaker 2

We are seeing a significant opportunity to expand our ViewSpot business and anticipate that our business development efforts will yield additional customers in the near term, perhaps both in North America as well as in the EMEA region. Prospective customers are recognizing the value that ViewSpot can add with its analytics and content filtering capabilities. Our existing ViewSpot business remains stable With the recent extension of one of our existing contracts being executed in March. Beyond our ViewSpot opportunities, I remain very optimistic as our sales team has driven an expansion of our sales pipeline over the past several months and has positioned us to close a portion of these opportunities over the next several quarters. The feedback from our sales prospects, both in the U.

Speaker 2

S. And high R2 markets across Europe has been very positive. Despite the typically long sales cycle in our business, We are seeing the leading indicators of success from the improvements that our Chief Revenue Officer As made within our sales organization, including our go to market strategies and the way in which we sell our products. We need to close these opportunities, but I am bullish about our prospects and hope to be discussing new clients For both ViewSpot and SafePath with you over the coming quarters. As we announced On the last quarterly call, we have established a goal of achieving $4,000,000 in savings from the total non GAAP expenses that we reported in Q4 of 2022.

Speaker 2

To that end, I am pleased to report We have already made significant and favorable progress in achieving our goal and are ahead of the schedule as we expect to achieve this target during the Q2. This expense reduction effort Crosses all parts of our organization and is an ongoing effort to optimize the organization as we near the completion of the AT and T migration. Looking ahead, once we completely decommission the legacy Ring application And reduce expenses associated with maintaining 2 different platforms, we will be able to reduce third party costs associated with that product, thereby consolidating our costs to further enhance our gross margins and align our team's focus to only safe path going forward. Collectively, these actions position us On a direct path to return the company to growth and profitability. As you all know, we have encountered some headwinds in our business over the past few months.

Speaker 2

Some of Those are common across many sectors of the software industry. But fortunately, most of the challenges are within our own Scope of control and we are meeting these challenges head on. That leaves us empowered and enthusiastic as we chart our course forward. In conclusion, with the latest technologies We've acquired and the migration efforts complete. We can now put our effort on the acceleration of our roadmap To increase market opportunities, we continue to operate our business based on sound strategy and remain confident that we have the right people, products and processes to execute against that strategy.

Speaker 2

We have already started seeing significant progress in curtailing the expense side of the business where we were able to make rapid changes and are now seeing early indications of progress on the revenue side. Yes, it has been challenging, but we believe that these challenges have been and will be met, leading to a very exciting time at Smith Micro. With that, operator, we can now open the call for questions.

Operator

We will now begin the question and answer session. Our first question comes from Scott Schier with Roth MKM. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking the questions. Hey, I'm sorry to belabor the point on OpEx, But I just wanted to clarify, Jim, in terms of the $4,000,000 reduction, is that purely in OpEx or is it OpEx in COGS, just for Clarification. And then moving over to the revenue front, Bill, what gives you the confidence now that AT and T is going to ramp in the 3rd It sounds like your tone on that front has certainly improved. What's really driving that increased confidence?

Speaker 3

So I'll answer your first question, and then I'll turn it over to Bill Scott. That $4,000,000 reduction encompasses both COGS and OpEx. So the aggregate expense We are from Q4 of this past year, 2022, we are reducing by $4,000,000 and that would encompass Both COGS as well as OpEx. Does that make sense?

Speaker 2

Yes, absolutely. Just want to clarify. Yes. Thanks. And then Scott, as we get ready for the launch of the SafePath based Product at AT and T, we are seeing very heavy activity from our customer.

Speaker 2

They are very engaged. They're very excited. It reminds me of something I've seen before, and it was a time when We saw some impressive growth at Sprint with similar products. So I'm pretty bullish. Okay.

Speaker 4

And then real quickly going back to T Mobile, it sounds like one of the dialogue was focused on AT and T, but T Mobile is certainly A key customer where you've had success in the Sprint base in the past. What are the last remaining milestones that you have to hit here to start to see an inflection? And lastly, It sounds like there are some incremental opportunities with ViewSpot. It sounds like there are some opportunities internationally. But I'm wondering if there are some Numbers in terms of wins that you're looking for within 2023, both for ViewSpot and SafePass that are non AT and T and T Mobile.

Speaker 4

Thanks.

Speaker 2

Yes. Look, I'm not going to name names or give you actual numbers at this point, but I will simply say that there is a very strong pipeline for both SafePath and ViewSpot, And we feel very strongly that we will be closing new business. So I think that the New sales organization led by Von Cameron is executing very nicely. And yes, We should see wins both in North America and in Europe. So that I feel strongly about.

Speaker 2

As far as for the T Mobile side, we are seeing some organic growth already. We do believe that this product will perform very nicely there, and we just have to continue to work with our customer And support your customer in the support of their users. And that's something we're very much focused on. And if we do a good job on that, I'm sure you'll see some nice growth there going forward.

Speaker 5

Great. Thank you.

Operator

Our next question comes from Griffin Baugh with B. Riley.

Speaker 5

Hey, thanks for taking my questions. So, yes, saw the $4,000,000 cost savings now We realized in the Q2, that's nice to see. Has this changed your expectation for a return To profitability and I think you previously mentioned in the Q3, is that still the cadence going forward or Any more color on that would be helpful.

Speaker 3

At this point, we're still committed on the Profitability in the Q3, so we are not moving that up yet.

Speaker 5

Okay. All right. Great. So I guess, along the same lines, I was just curious if you could give any additional color on margins in the back half I know you got it in 2Q. Is there anything you could talk to there or is it a little too early to tell?

Speaker 3

That we don't give guidance beyond the next quarter. So what I would just leave you with is that We're expecting the margins off of the adjusted gross margin So this quarter to be up 150 basis points to 250 basis points and to at least maintain that or perhaps better as the year goes

Speaker 5

Okay, excellent. Thanks for that. And then lastly, you talked about additional AT and T growth initiatives That you are working on right now, can you elaborate on those at all? Can those opportunities be quantified at all at this point? Any additional color would be helpful.

Speaker 1

Yes. Hi, Givitis. This is Charles. Yes, I mean, there's been a lot Different activities that are going on, I would call them preliminary type of things. So you've seen some digital marketing, we've run some tests, we've done some training, particularly with some of the different channels.

Speaker 1

And I think you'll start to see they have a newsletter. So it's a building process We want to build momentum into the launch where you'll start to see a lot more activity. Does that help?

Speaker 5

Got it. It does. Yes. Thank you, Charles. Appreciate it.

Speaker 5

All right. That's it for me.

Operator

Our next question comes from Jim McCleery With Dawson James, please go ahead.

Speaker 6

Thank you. Bill, in your commentary regarding DISH, You talked about additional value added services and growing with them. Were you referring just To ViewSpot or were you referring to the entire portfolio of services that Smith offers to discuss?

Speaker 2

Look, I think we have a very positive relationship at DISH From the top down. And it would not surprise me to see somebody like DISH Offering multiple products from us. And so we have 3 of them. One of them is well underway and there's 2 more, so we'll just wait and see.

Speaker 6

Okay. Thank you. And regarding The AT and T launch in Q3, I was hoping you could expand a little bit on how that interacts with the Carriers' usual pulling back on marketing the value added services in Q4 As they focus on subscriber additions, can you just discuss a little bit how that might interact the launch in Q3 with that The pullback is before?

Speaker 2

Yes. The pullback that you're Speaking to usually happens in late November December. It would be, Yaron, and Hope, that there will be many months between that point in late November where they can Start to grow their base at a good clip. So I think we have time. And I think in this case, time is going to work out.

Speaker 2

So we'll just wait and see.

Speaker 6

All right. Thank you. And my last one is, Jim, you talked about, I think, Some cost cutting that needed to be announced To the employees in Europe before it could occur, has that notification taken place? And if not, when will it take place?

Speaker 3

Yes, that notification did take Because of the statutory requirements in Slovakia, we can announce it, but then it takes a number of months Until that can be effectively shut down. So, that has already been communicated. That was communicated back in March. But because of the timing requirements around that, that's not going to be effectively shut down until June 30.

Speaker 6

Got it. So the full impact of the $4,000,000 OpEx Cost reductions we will see in Q3.

Speaker 3

We would expect To achieve the full $4,000,000 reduction in Q2.

Speaker 6

Right. But if the cost if the headcount reduction in Slovakia doesn't take place until the end of Q2, You're not going to see the full impact until Q3? That's my question.

Speaker 3

You won't see the impact of that until Q3, but there's other costs that are coming up. So for like example, The quarterly bonus program has been suspended for Q2, so things of That nature, so we are going to achieve the $4,000,000 of savings in Q2.

Speaker 6

Okay, very good. Thank you. That's it for me. Certainly.

Operator

Our next question comes from Mr. Harrigan with Benchmark.

Speaker 7

Thank you. It feels like unfortunately in this environment, family safety product is almost poker table stakes, so to speak, for The mobile operator, I was curious if you were seeing a lot more demand almost come in over the transom. I think instances like Mobile World Congress and all that. And then as a corollary to that, How do you see more competition shaping up? And in particular, the one M and O that defected, it seems They would have to do or would have to do something in house to try to replicate that capability.

Speaker 7

Are you kind of seeing a lot of Natural demand, are you seeing more competition either from other SaaS companies or from the in house development efforts Carriers who necessarily need to have an offering? Thank you.

Speaker 2

Yes. Okay. Let me try to tackle that. I guess the way I would say it is this. We're seeing a lot of Activity from names that will be new in North America as well as A little broader activity in Europe.

Speaker 2

There hasn't been a lot of installed base for family safety In Europe and some of those areas are very high ARPU markets and fit very nicely for the kind of offering That we have. So as I talk about the increased activity in our sales pipeline, Both for SafePath and for that matter ViewSpot, it really It takes place in both geos that we really focus on. So I think your comment that it is Certainly, especially in North America for carriers to have a family safety offering. I think you're probably right there. As far as carriers that are doing their own thing, there's Only one that we've talked about and that's the only one that we're really aware of at the present time.

Speaker 2

Thank you.

Operator

There are no questions at this time. This concludes the question and answer session. I would like to turn the conference back over To Charles Messman for closing remarks.

Speaker 1

Thank you, and thanks everybody for joining us today. We appreciate you taking the time. Since you have any further questions, please feel free to give us a call and we'll look forward to talking to you on our next Earnings Call for Q2. Thanks, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Smith Micro Software Q1 2023
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