Smith Micro Software Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 7 speakers on the call.

Operator

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

Operator

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 the Q2 ended June 30, 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 consist of forward looking statements, including without limitations, those regarding the company's future revenue In profitability, our plans and expectations, new product development, new and expanded market opportunities, future product deployment, migrations and or growth by new and existing customers, operating expense 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 to risk factors included in our most recently filed Form 10 ks and our subsequent filings on Form 10 Q. Smith Micro assumes no obligation to update any forward looking statements, which speak of our management's beliefs, assumptions only as of the date they are made. I want to point out that in our forthcoming prepared remarks, we'll refer to specific non GAAP financial measures.

Speaker 1

Please refer to our press release disseminated earlier today for

Speaker 2

Thanks, Charlie. Good afternoon and thank you for joining us today for our 2023 Q2 conference call. I am excited today to provide an update on our progress on several fronts, all of which have trended very positively since our last earnings call. 1st and foremost, I am tremendously pleased to finally report That our development activities to add features from the acquired Family Safety platforms and prepare for migration to SafePath are complete. I recognize that this has been a lengthy effort covering approximately 3 years And required a significant number of resources.

Speaker 2

So I am happy that this effort is now behind us. Associated with the completion of these development activities, we anticipate AT and T to launch the new Secure Family in the near term and have been partnering with them on marketing activities aligned with the launch. I will cover more on this subject later in the call. Another positive It is our progress towards the return of Smith Micro to profitability through the rigorous methodical execution of our operating plans. In addition to our quick and decisive responses to the unexpected headwinds described back in Q1, We have moved aggressively to strengthen our business, both through expense reduction as well as through accelerated execution on sales and customer deliveries.

Speaker 2

We are making great progress and I want to thank Smith Micro employees for their focus, Commitment and tenacity. We have a clear path in which our confidence remains high And we are meeting and exceeding many of our interim targets along the way. While Jim will be discussing the quarterly I do want to highlight some key updates on our efforts to return Smith Micro to profitability. During Q2, we out Performed the targeted $4,000,000 per quarter reduction in our non GAAP expenses that we announced earlier this year. At the same time, we are forecasting revenue growth for Q3 over Q2.

Speaker 2

We are also continuing to see progress on several fronts for our sales team, which I'll touch on in more detail later in the presentation today. We're improving our gross margins, Driving them to 75% during the Q2 of this year versus 71.5% for the same quarter of 2022, and we expect an additional improvement for gross margins in the 3rd quarter. Overall and most importantly, each of these factors contributes to our confidence that we will return the company to cash flow positive operations And profitability on a non GAAP basis in this current quarter, Q3 of 2023. I will pause here and let Jim run through the numbers for the quarter in more detail, and then I will share some information about some of our most Important opportunities and relationships. Jim?

Speaker 3

Thanks, Bill. Good afternoon, everyone. For the Q2, we posted revenue of $10,300,000 compared to $12,700,000 for the same quarter of 2022, A decrease of approximately 18% as a result of a decline in revenues across all three product lines. When compared to the Q1 of 2023, revenue decreased by approximately $600,000 or 5%. Year to date revenues through June 30, 2023 were $21,300,000 versus $25,400,000 through the Q2 of last year.

Speaker 3

The $4,100,000 decrease is primarily due to declines in Safe and Found Family Safety revenue related to continued attrition of legacy Sprint subscribers driven by T Mobile's acquisition of Sprint, coupled with a decline in CommSuite revenues. During the Q2 of 2023, Family Safety revenue decreased by approximately $1,400,000 or 14% Compared to the Q2 of the prior year, primarily as a result of the reduction of safe and found revenue, Family Safety revenues declined by approximately $300,000 compared to the Q1 of 2023. During the Q2 of 2023, CommSuite revenue was 700,000 which decreased by approximately $700,000 compared to the $1,400,000 in revenue produced in the Q2 of 2022. This decrease is primarily attributable to the attrition of legacy Sprint subscribers off of the CommSuite platform over the past year. Revenue related to Sprint was negligible in the Q2 of 2023.

Speaker 3

Revenue from CommSuite was down by approximately $100,000 sequentially compared to the prior quarter. ViewSpot revenue was approximately $900,000 for the Q2 of 2023, which declined by approximately $200,000 compared to both the Q2 of the prior year and compared to the Q1 of 2023. The decrease in ViewSpot revenues was due to a decline in the variable portion of those revenues, which is related to device and promotional campaigns. And as such, the timing and volume associated with that portion of the revenue is less predictable. Compared to the Q2 of 2023.

Speaker 3

Gross profit was $7,700,000 in the Q2 of 2023 compared to the $9,100,000 during the same period of the prior year due to the period over period decline in revenue. Gross margin was 75% for the 2nd quarter compared to 71.5 percent in the Q2 of 2022. The gross profit of $7,700,000 in the second quarter by approximately $100,000 compared to the gross profit produced in the Q1 as a result of the increase in gross margins. In the Q3 of 2023, we expect gross margins to increase by 50 to 100 basis points from the gross margin of 75 reported for the Q2 of 2023. For the year to date period ended June 30, 2023, gross profit was $15,400,000 compared to $18,200,000 during the corresponding period last year.

Speaker 3

Gross margin was 72.4% for the June 30, 2023 year to date period. As we discussed on our last call, We conducted a global reduction in force in March, resulting in the elimination of personnel in the United States, Portugal and Serbia. In addition, we announced the closure of our Zelinas, Slovakia Development Office effective June 30, 2023, As a notice period for the personnel at that location was required due to statutory requirements. 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. As a result of these and other cost reduction actions, GAAP operating expenses for the Q2 of 2023 were 11,000,000 of $6,400,000 or 37% compared to the Q2 of 2022.

Speaker 3

GAAP operating expenses for the year to date period ended June 30, 2023 were $25,600,000 Compared to the $33,600,000 in the prior year to date period, a decrease of $8,000,000 or 24% compared last year. Non GAAP operating expenses for the Q2 of 2023 were $8,300,000 Compared to the $13,700,000 in the Q2 of 2022, a decrease of approximately $5,500,000 or 40%. Sequentially, non GAAP operating expenses decreased by approximately $3,000,000 or 27% from the Q1 of 2023, primarily due to the cost reduction activities undertaken in March. With these results, we did exceed 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 We expect Q3 2023 non GAAP operating expenses to decrease by 2% to 5% compared to the Q2 of 2023. Non GAAP operating Expenses for the year to date period through June 30, 2023 were $19,500,000 a decrease of $7,300,000 or 27% compared to last year.

Speaker 3

The GAAP net loss for the Q2 of 2023 was $5,700,000 or $0.09 loss per share compared to a GAAP net loss of $8,500,000 or $0.15 loss per share in the Q2 of 2022. The non GAAP net loss for the Q2 of 2023 was approximately $600,000 or $0.01 loss per share compared to a non GAAP net loss of approximately $4,800,000 or a $0.09 loss per share in the Q2 of 2022. Within today's press release, we have provided a reconciliation of our non GAAP metrics to the most comparable GAAP metric. For the Q2 of 2023, the reconciliation includes adjustments for intangible asset amortization of 1,500,000 Stock compensation expense of $1,000,000 note in stock offering amortization of $1,900,000 changes to derivatives and warrants of approximately $300,000 Depreciation of approximately $100,000 and personnel severance and reorganization activities related costs of approximately $100,000 For the year to date period, the non GAAP reconciliation includes adjustments for intangible asset amortization $3,000,000 stock compensation expense of $2,000,000 note in stock offering amortization of 4,100,000 Depreciation of $400,000 costs related to personnel severance and reorganization activities of approximately $1,000,000 partially offset by changes to derivatives and warrants of $2,000,000 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.

Speaker 3

For non GAAP purposes, we utilized a 0% tax rate From a balance sheet perspective, we reported $6,400,000 of cash and cash equivalents as of June 30, 2023. This was driven in part due to some administrative issues related to certain receivables that we were working through with a couple of our customers, which resulted in our accounts receivable increasing from $10,500,000 as of December 31, 2022, to $11,900,000 as of June 30, 2023. We expect to resolve these AIFR issues and be cash flow positive during the Q3. This concludes my financial review. Now back to Bill.

Speaker 2

Thanks, Jim. I would now like to add some context and color about several of our most important growth opportunities. As I noted in my opening remarks, our development efforts to support AT and T's migration to SafePath are complete, And we expect AT and T to launch the new SafePath based version of AT and T's Secure Family during this quarter. Our relationship with AT and T is strong and we are getting enthusiastic support from AT and T at all levels. Our launch and growth plans across multiple marketing channels will be a template for future SafePath launches.

Speaker 2

More specifically, we are collaborating with AT and T Secure Family Marketing efforts With current promotional activity, we believe that will lay the groundwork for a successful launch Driving subscriber growth. As I noted in prior calls, I'm very bullish on the opportunity for AT and T to significantly grow Secure Family from a largely untapped subscriber base. On the T Mobile front, our relationship continues to perform well. During the Q2, we successfully delivered several Operating system and compliance based updates to T Mobile's 3 family safety apps. These were time consuming and technically complex projects that required significant collaboration between the two companies.

Speaker 2

We expect to deliver a number of releases over the back half of the year, some of which will include enhancements to the current feature set on Family Mode to continue to improve the customer experience with the app. We also continue to explore ways where we may be able to partner with them to drive subscriber growth. From a CommSuite perspective, we are excited about our partnership with DISH as they continue to work through the complexities of standing up I'm pleased to tell you that we were able to successfully work together on migrating Boost premium visual voicemail subscribers From the legacy Sprint billing system to DISH during the Q2, our working relationships both at the executive level And at the working level, our collaborative and we are delighted to continue adding value to DISH's business. We believe our partnership has upside potential and we are excited to deliver mutually beneficial value to DISH and its subscribers in the coming quarter. Turning to ViewSpot, I am pleased to announce that we added a new ViewSpot customer to our portfolio of carrier customers.

Speaker 2

While we cannot disclose the details, this significant North American cable operator represents a new logo in the Smith Micro family. The launch on ViewSpot can be accomplished quickly, So we expect the solution to roll out during the current quarter. As such, we also Our anticipating revenue from this new customer this quarter as well. I believe this is the first of several new contracts that we will be discussing over the coming quarters and consider the completion of this deal An indicator of our ongoing value and health of our ViewSpot solution as well as our field sales team's Increasing ability to identify and close deals with new and existing customers. These opportunities span all three of our product lines and encompass not only North American targets, but also European and Middle Eastern prospects.

Speaker 2

As we mentioned in prior calls, Late last year, we overhauled our Europe based sales team and that investment is beginning to pay dividends. Our pipeline in Europe and the Middle East is as strong as we've seen in many years. While we must stay focused to ensure the pipeline's conversion to revenue is realized, we are confident that our value proposition Resonates with European operators and that we're building the team and infrastructure to convert those prospects to customers This year and next. Shifting back to our 2nd quarter operating results, I am pleased that the company exceeded our target of $4,000,000 in savings from the total non GAAP expenses reported in Q4 of 2022. This expense reduction effort Across all parts of our organization and drove an optimization of our organizational structure, Especially now that the development efforts associated with the SafePath migration are complete.

Speaker 2

Looking ahead over the next several quarters, we expect to completely decondition the legacy Ring application And reduce expenses associated with maintaining 2 different platforms, 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 will position us on a direct path to return the company to growth and profitability. These combined improvements are part of our overall operating plan to restore the company's long term financial health. We are moving in the right direction to achieve our goals. While some challenges remain, I remain encouraged by our team's resolve, focus and progress in the recent months.

Speaker 2

As I reflect on the significant accomplishments that the company has made this year and the opportunities That we have positioned ourselves for in the months ahead, I am very bullish about our company's future. With that said, operator, we can open the call for questions.

Operator

We will now begin the question and answer session. The first question comes from Scott Searle with Ross MKM. Please go ahead.

Speaker 4

Good afternoon. Thanks for taking my questions. Nice job on the cost side and nice to see a return to growth looking out into the Q3. Maybe on that front to start, If you could give us some idea of what you're looking for sequentially from a unit perspective or an end market perspective, I would expect, I guess, The new customer view spot there was growth there, but do we start to see an uptick on the SafePath side of the equation given the timing of AT and T?

Speaker 2

Yes, Scott. This is Bill. Yes, look, I think we feel very, very bullish about what's going on at AT TNT, we look for a very strong launch and rollout. And as a result of that, we're definitely looking for Some very strong sub count growth there as well. So everything's looking the way we would like it to look.

Speaker 4

Okay, very good. And Bill, to follow-up on the AT and T front, congratulations on the nice to see it actually moving into commercial launch. I wonder if you could put some parameters around it. Is it going to be a basic SafePath offering? Is it going to include DRiV or are there going to be some different plans around it?

Speaker 4

And how are you going to define success here? It's obviously a huge base to sell into. I believe there are 30,000,000 plus accounts within AT and T. What success when you look out over the next 12 or 18 months and how quickly should we expect adoption or any other color you can provide related to marketing dollars, etcetera?

Speaker 2

Yes. Well, look, I always try to point to prior history. And so I would ask you to maybe to look back at How the rollout worked at Sprint? Sprint is half the size or was half the size of what AT and T is today. It was a remarkable growth activity.

Speaker 2

We saw a big number of growth quarter over quarter And frankly, that's what I'm looking for here too.

Speaker 4

Okay, great. And lastly, if I could, On the Sprint front, I just want to make sure I heard that correctly. It sounds like basically the headwinds in terms of Sprint deactivations are done at this point in time. And then couple that with T Mobile, what are your expectations over the course of this year? Do you expect the launch to formally happen?

Speaker 4

Should we start to see some additions, subscriber additions on that front. Thanks.

Speaker 2

Yes, I guess I would say that first off, yes, The decommissioning of the CommSuite activity at Sprint T Mobile is over. All revenue going forward for CommSuite For the near term, we'll come from DISH and we're very bullish about what we see there as well. We do have other sales activity for CommSuite, I'm pleased to report. So hopefully, we'll be able to add another logo to that list. But as far as our activities at T Mobile, they are very Cordial and Collaborative, they are working with us and we continue to see some growth in their subscriber base And we hope to see that accelerate.

Speaker 4

Great. Thank you.

Operator

The next question is from Josh Nichols with B. Riley FBR. Please go ahead.

Speaker 5

Yes. Thanks for taking my question. And just to touch on it a little bit, great to see the company expects to be up sequentially quarter Quarter for the top line in 3Q. Any indication you could give us at a high level for how that breaks out between the segments? I know you have a View Customer that's going to be ramping up, how much of that growth is related to that customer versus maybe the other areas of the business?

Speaker 3

Hey, Josh, it's Jim. I would say that it's most of the growth Well, we do expect that ViewSpot add to help with that, the growth That we're projecting, most of it we're seeing coming from the family safety side of the house.

Speaker 5

That's good. So effectively revenue that you expect coming in from the anticipated 3Q launch with ATT, fair to say?

Speaker 3

That's a portion of it, yes.

Speaker 5

Great. And then very significant progress on the gross Arjun front as well, another 50 to 100 bps of expansion expected in 3Q. When are you going to be able to complete The migration to a single software platform and how long do you think it would take to get the company back to that 75% plus gross margin hurdle rate that you've

Speaker 3

We're expecting to exceed that as we go into Q3 here. Beyond that, we're expecting Next year to really fully realize some of the 3rd party cost savings associated with the decommissioning of the Ring platform.

Speaker 5

Thanks. And then last question for me. I realize it's relatively early days, so hard to say too much about it. But Any comments you could have about what's going on with the marketing efforts at ATT or what's expected? Specifically, are there going to be Material amounts of spiffs that are usually used to incentivize the employees at the carrier Historically has been a big determiner of how successful these launches are.

Speaker 1

Hey, Josh, it's Charlie. I will tell you, I'm not going to get into specifics, but I will tell you that we're we've been working very closely with them across the board on several different channels. And I think that following the blueprint that we've done in the past is probably a good way to look at it. And so I I can't tell you we're much further along than we've ever been. It's very collaborative.

Speaker 1

And I think you can kind of see things that are already happening. There's a press release that went out From AT and T regarding back to school, which is promoting it, there's a lot of cross collaboration efforts underway. And I think that I'm actually quite excited about the launch and there's been a lot of work that's been going in the background.

Speaker 5

It's great to hear and great to see the company is on track for growth and profitability in the back half of this year. Thanks.

Speaker 1

Thanks.

Operator

The next question is from Jim McElroy with Dawson James. Please go ahead.

Speaker 6

Yes. Thanks a lot. Good evening. Jim, you talked about the AR going up in the Quarter. So can you quantify how much this particular issue that you identified contributed to that increase?

Speaker 3

Well, there were a couple of issues and I'd equate it to roughly The increase in the AR that I mentioned in my prepared remarks.

Speaker 6

Okay. So it's reasonable to expect that AR comes back down to the low $11,000,000 or is it something more than that in Q3?

Speaker 3

I would yes, I would say even perhaps below that would be the expectation.

Speaker 6

Okay, great. And then some of the cost cutting measures that you've taken Yes, they are probably going to be temporary like bonuses, exec pay, things like that. Can you talk about when you You might unwind some of those things, not necessarily a quarter, but what events are you looking for? Are you For a certain gross margin level, a certain cash flow from operations level, something along those lines?

Speaker 2

Yes, it's a fair question, Jim. I'd say that from the standpoint of the exec team and the Board, We are looking for sustained return to profitability and growth. And Those will be the actions that would trigger a return to more normal conditions.

Speaker 6

And in the meantime, is there are there other areas where you Could be increasing the cost reduction programs? I know that you've done that.

Speaker 2

We are constantly yes, no, we are constantly looking at our cost structure. We're looking for ways to streamline the business to be more cost effective And to service our customers better. So, to that extent, if there are opportunities to reduce Other than the obvious one with the decommissioning of the Ring platform, that is going to take Some costs out of our model for

Speaker 3

sure. And then we did mention on the call That we expected to decrease our OpEx to decrease another 2% to 5% in Q3. So I would note that as well, Jim.

Speaker 6

Right, right. Noted. Got that. Thank you. All right.

Speaker 6

That's it for me. Thanks a lot, guys.

Speaker 3

Thank you.

Operator

Well, this concludes the question and answer session. I would like to turn the conference back over to Charles Messman for any closing remarks.

Speaker 1

Thanks, everyone. I want to thank you for joining us today. We look forward to talking to you on our next earnings conference call. Should you have further comments, questions, please feel free to reach out to us here at Smith Micro. And have an awesome day.

Speaker 1

Thanks, everybody.

Operator

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

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