Smith Micro Software Q1 2024 Earnings Call Transcript

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May 8, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Smith Micro First Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Charles Messman, Vice President of Marketing. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Smith Micro Software's financial results for the Q1 ended March 31, 2024. 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. 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 and profitability, our plans and expectations, new product development and availability, new and expanded market opportunities, future product deployments, migrations and or growth by new and existing customers, operating expenses, cost reduction efforts, 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 our forward looking statements. For more information, please refer to our risk factors included in our most recently filed Form 10 ks. Smith Micro assumes no obligation to update any looking statements, which speak to our management's beliefs and assumptions only as of the date they are made. I also want to point out that in the forthcoming prepared remarks, we will refer to non GAAP financial measures.

Speaker 1

Please refer to our press release disseminated earlier today for the reconciliation of these non GAAP financial measures. With that said, I'll turn the call over to Bill. Bill?

Speaker 2

Thanks, Charlie. Good afternoon and thank you for joining us today for our 2024 Q1 conference call. We appreciate your interest in Smith Micro Software. Let me start my remarks today by saying that we are focused on returning the company to growth in the near term and have several initiatives underway to realize that target, which I will touch on throughout the presentation today. While we're not quite there yet, we have made a lot of progress in several areas that are projected to set the stage for growth in the back half of this year.

Speaker 2

Along with our return to growth, we are also working to return to profitability on a non GAAP basis. In conjunction with our revenue growth initiatives, we plan to bring down our cost structure to achieve that non GAAP profitability and positive cash flow. We'll touch on the cost reductions a little later in our presentation. So let me begin by discussing some key milestones we achieved that have laid the foundation for revenue growth. Most significantly, we are pleased to announce today that DISH will be our 1st customer to launch SafePath Global.

Speaker 2

DISH is in fact the customer we referred to in our earlier press release announcing the signing of our first SafePath Global agreement. DISH's forthcoming launch is particularly exciting for us as SafePath Global is a key component to our long term strategy, allowing for fast launch that only takes a matter of weeks from contract signing to availability in the market. We believe that this deployment model is very repeatable and is an enormous difference from a more typical launch that can take several months. DISH will also include premium visual voicemail to its value added services, which is powered by our CommSuite platform. We see a strong and collaborative relationship coming together as we are aligned with DISH on our goals for both product success.

Speaker 2

Our other recent contract win is with our Tier 1 carrier in Europe, which is expected to launch in the second half of this year. This delivery will introduce a unique product approach to a family safety solution that is yet to be seen in the market. We believe that the launch will drive significant interest in SafePath. Tailored towards European customer base, leading to other opportunities in that region, which will be a bonus to the revenue expected to be generated under this contract. As far as our Tier 1 carrier partners here in the United States, we have fully completed the migration to SAFET at AT and T and made a few release updates throughout this year to further improve the user experience and reach.

Speaker 2

More specifically, SafePath is now available to AT and T prepaid and Cricket Wireless customers, also further expanding our addressable market. With those migration activities behind us, a new wave of marketing activities is underway that we expect will pay dividends in the near term. At T Mobile, we are enjoying productive discussions and our teams are sharing new energy and alignment, which we believe may yield mutual benefits, particularly around some of our new advancements of the SafePath platform with our expanded product roadmap. We are cautiously optimistic that these discussions may result in a renewed focus on expanding family safety offerings and result in subscriber growth over the back half of twenty twenty four. Another key milestone that we believe sets the stage for revenue growth is the launch in April of our affiliate influencer program.

Speaker 2

In addition, our retail store ambassador program will be launched very shortly. We see these programs as a tremendous opportunity to build awareness and education for our carrier partners, SafePath based family safety solutions. It will also help us to incentivize retail staff at both corporate and authorized resellers with a seamless program that is easily deployed and implemented. I will discuss both the affiliate and ambassador programs in more detail later in the call. With the progress that we've made on these several fronts, we believe we are gaining momentum for the revenue growth in the back half of this year.

Speaker 2

Following Jim's comments, we will dig in a bit deeper and add some additional color. Let's turn the call over to Jim now to discuss our financial results in greater detail. Jim?

Speaker 3

Thanks, Bill, and good afternoon, everyone. I'll now be covering the financial details of the Q1 of 2024. Please note, all of my comments today regarding per share metrics reflect the retroactive impact of the 1 for 8 reverse stock split that was approved by our shareholders and effectuated in early April. For the Q1, we posted revenue of $5,800,000 compared to $10,900,000 for the same quarter 2023, a decrease of approximately 47%. When compared to the Q4 of 2023, revenue decreased by $2,800,000 or 33%.

Speaker 3

During the Q1 of 2024, Family Safety revenue decreased as anticipated by approximately $4,600,000 or 51% compared to the Q1 of the prior year, primarily due to our having recognized no Verizon Family Safety revenues during the Q1 of 2024 as that contract concluded in the Q4 of 2023, coupled with a continued decline in the legacy Sprint Safe and Found revenue. Family Safety revenues decreased by approximately $3,000,000 or 40% compared to the Q4 of 2023, driven by the conclusion of the Verizon Family Safety contract. During the Q1 of 2024, CommSuite revenue was $700,000 which decreased by approximately $200,000 compared to the Q1 of 2023. Revenue from CommSuite increased by approximately $100,000 compared to the Q4 of 2023. ViewSpot revenue was approximately $700,000 for the Q1 of 2024, which declined by approximately $300,000 compared to the Q1 of the prior year and increased by approximately $100,000 compared to the Q4 of 2023.

Speaker 3

The decline in ViewSpot revenues compared to the Q1 of 2023 was primarily due to the previously announced termination of 1 of our ViewSpot contracts in the second half of twenty twenty three. In the Q2 of 2024, we are expecting consolidated revenues to be in the range of approximately $5,000,000 to $5,500,000 This anticipated decline in revenue is driven in part by a projected decrease in ViewSpot revenues, primarily due to less variable revenue related to device launches and marketing related activities in the Q2 of 2024 compared to the Q1 of 2024. For those of you who follow us closely, you know we only provide next quarter guidance. But as Bill stated earlier, we are focused on returning the company to growth in the near term. For the Q1 of 2024, gross profit was 3 $800,000 compared to $7,600,000 during the same period of the prior year, a decrease of approximately $3,800,000 primarily due to the period over period decline in revenues.

Speaker 3

Gross margin was at 65.7% for the quarter compared to the 70% realized in the first quarter of 2023. The gross profit of $3,800,000 in the Q1 of 2024 decreased sequentially by 2,600,000 compared to the gross profit produced in the Q4 of 2023, driven primarily by the sequential decline in revenues quarter over quarter. In the Q2 of 2024, we expect gross margin to be in the range of 66% to 70%. During the Q1 of 2024, because of the sustained decrease in our stock price, we evaluated the carrying value of our goodwill and and expenses for the Q1 of 2024 were $35,300,000 an increase of 20,700,000 dollars or 142 percent compared to the Q1 of 2023 due to that goodwill impairment charge of $24,000,000 partially offset by the effect of cost reduction activities undertaken during 2023. Non GAAP operating expenses for the Q1 of 2024 were $8,100,000 compared to the $11,300,000 in the Q1 of 2023, a decrease of approximately $3,200,000 or 28%.

Speaker 3

Sequentially, non GAAP operating expenses increased by approximately $100,000 or 1% from the Q4 of 2023. As Bill outlined in his opening remarks, we are undertaking further cost reduction actions in the second quarter as we work to return the company to profitability. We expect Q2 2024 non GAAP operating expenses to decrease by 6 percent to 10% compared to the Q1 of 2024. Given the timing of the actions we are taking, a partial quarter effect of these reductions will be realized in Q2 and the full quarterly effect of the reductions will be realized in the 3rd quarter. So we would anticipate a further decline in non GAAP operating expenses in the Q3 of 2024 compared to the Q2 of 2020 4.

Speaker 3

The GAAP net loss for the Q1 of 2024 was 31,000,000 dollars or $3.28 loss per share compared to a GAAP net loss of $6,900,000 or a $0.97 loss per share in the Q1 of 2023. The non GAAP net loss for the Q1 of 2024 was $4,200,000 or a $0.45 loss per share compared to a non GAAP net loss of approximately $3,600,000 or a $0.51 loss per share in the Q1 of 2023. Within today's press release, we have provided a reconciliation of our non GAAP metrics to the most comparable GAAP metric. For the Q1 of 2024, the reconciliation includes the goodwill impairment of 24,000,000 dollars adjustments for intangible asset amortization of $1,800,000 stock compensation expense of 1,100,000 and depreciation expense of $100,000 partially offset by changes to the fair value of warrant of $200,000 dollars and nonrecurring other income net of $100,000 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 the Q1 of 20242023.

Speaker 3

The resulting non GAAP expense reflects the actual income taxes expense during each period. From a balance sheet perspective, we were able to effectively manage our working capital and decrease our receivables by $3,600,000 during the Q1 of 2024 and as a result reported $6,200,000 of cash and cash equivalents as of March 31, 2024. This concludes my financial review. Now back to Bill.

Speaker 2

Thanks, Jim. Okay, let's start out with the cost reduction actions that Jim mentioned in his prepared remarks. We plan to cut overall expense within a range of 1,000,000 dollars to $1,300,000 by Q3 2024. Our unwavering commitment to profitability and efficiency drives these cost reductions and will be achieved by rightsizing resources and optimizing our operational processes. By doing so, we will streamline our workflows and maximize resource utilization across all facets of our business.

Speaker 2

SafePath Global is evolving as a preferred launch option that does not require extensive resources and time to launch as is now being proven with DISH. These concerted efforts will enable us to achieve our targeted savings, while maintaining the highest quality and service delivery standards. Moving forward, we remain dedicated to fostering a culture of continuous improvement and sustainability, driving value for our shareholders and other stakeholders. As we all know, these types of activities can be challenging, but we understand that the need to build a stronger business case to get us to profitability as quickly as possible. We are balancing these cost reduction actions with maintaining the resources we need to ensure we can continue to provide premium service to our customers and deliver on our roadmap and other contracted initiatives underway.

Speaker 2

The other component of the equation in achieving profitability and cash generation is a return to revenue growth. Key elements of our plan to drive revenue growth are several new marketing initiatives that we will be rolling out through this year. I am pleased with the recent launch of our affiliate influencer program and with the upcoming launch of our retail store ambassador program. These turnkey programs are maintained by Smith Micro for our partners and offer additional ways to build awareness of and drive subscriber growth for our customers' branded offerings of SafePath based solutions. With the affiliate influencer program, participating influencers will promote the solutions through their online and social media networks.

Speaker 2

This is a new marketing tactic for our partners' promotion of their SafePath based solutions, and we believe it will be a fruitful marketing channel as many consumers begin their product journeys online, finding reputable recommendations that inspire a level of trust and motivation to purchase products. This program will also generate PR activity that will create a path for our carrier branded solutions to compete more directly with the direct to consumer apps in the market today with the power of well known carrier brands backing our family safety solutions. We have recently launched 1 of our Tier 1 carrier partners on the influencer program and are seeing tremendous demand among influencers to participate. We are also beginning to see the effect of this initiative in terms of new subscriber trials, which lead to subscriber growth. I am also pleased with the creation of our retail ambassador program as an avenue to bring product promotion directly to consumers in stores.

Speaker 2

This program is available for our carrier customers' authorized retailers and corporate owned stores, allowing retail employees to become in store ambassadors for our carrier branded family safety offerings and incentivizing them to promote and sell the products by compensating them for successful app sign ups. This is a full service adaptable program that could be modified to meet each partner's goals. We will also provide the marketing collateral, training and support as we roll out this program. We expect our first launch of the ambassador program with a U. S.

Speaker 2

Partner shortly. We see great potential for the ambassador program as it brings a unique twist to incentivizing retail employees and will be a very visible avenue of promotion for our partners' family safety brands. Driving subscriber growth in key accounts and the successful launch of new accounts remains key to our revenue growth objectives. We are optimistic about the opportunity for subscriber growth at AT and T, including Cricket, where our partnership remains very strong. The migration to SafePath was fully completed during the Q1, along with expanding our support to Cricket Wireless Families.

Speaker 2

While we can't get into specifics, we expect to see several new marketing initiatives launched throughout the remainder of this year. We will continue our shared efforts to expand awareness of AT and T Secure Family as we also pursue new avenues of growth with the platform. We believe that AT and T has a tremendous opportunity to grow subscribers on AT and T Secure Family, and we are actively partnering with them to create additional paths to drive consumer awareness of this app in the near term. As I mentioned earlier regarding T Mobile, we are seeing some signs of increasing momentum and renewed interest in our expanded roadmap, which we believe could help springboard new marketing activities to drive subscriber growth. Our sales and marketing teams are working collaboratively to further our progress with this key customer.

Speaker 2

In Europe, as I mentioned earlier, we expect to launch our Tier 1 carrier partner there in the back half of this year. This family safety solution will be a unique go to market approach for SafePath, which we think will drive demand, opening the door for new contracts with other carriers throughout the world. I look forward to providing you with additional insight on this contract later this year. There's much more to come regarding this carrier and the approach that they're taking to digital family safety. Finally, as I discussed in my opening remarks, we are thrilled to be partnering with DISH for our first delivery of SafePath Global.

Speaker 2

We believe that the robust go to market strategies for this product will position us to see meaningful revenue growth in the near term. There is excellent alignment with DISH on all the different channels available to promote the solution. We also have enormous flexibility to conduct multiple marketing and feature enrichment activities, which is part of the design of SafePath Global. This gives us the latitude to move rapidly on numerous fronts. Some examples being the ability to test new pricing models, accelerating updates to the app, new AV testing initiatives and the ability to deliver a fast app store roadmap as we add new features and functionality.

Speaker 2

We also believe that there is a strong demand for this type of deployment of family safety solutions via SafePath Global throughout the world, particularly as we see more and more global demand for children's online safety. Our pipeline remains robust, not just for SafePath global opportunities, but across the entire product suite. We have already announced 2 new carrier wins for SafePath and we believe more will follow throughout 2024. We have trial programs currently underway as well as in the planning stages at multiple carriers. With new innovative product development initiatives we are planning to deploy this year, we will bring new technological advancements to the SafePath platform from SafePath Premium, an AI driven tool that will add cyberbullying and social media monitoring to our SafePath family functionality, while also providing physical location intelligence that opens a new market for us to SafePath OS, which will offer another unique go to market strategy building from our strong relationships with OEM partners and device teams at carriers around the world.

Speaker 2

These enhancements to the SafePath platform reflect a new era of innovation and ingenuity as Smith Micro, which will build a great foundation for 2024 and beyond, while offering a path to higher ARPUs for our partners and will provide access to exciting new features to our existing customer base. Additionally, these pioneering products will provide our sales team with broader portfolio to sell into new and existing customers with a modular deployment strategy to better fit the specific needs of these carriers. We believe we are driving toward a meaningful subscriber growth across multiple carrier customers in the back half of the year. Success should lead to profitability and cash generation in Q4. We realize there has been a lot packed into our remarks today, including the additional color on our recent customer wins, such as the DISH SafePath Global deployment.

Speaker 2

In addition to the abundance of sales and marketing activities underway, including recently launched affiliate influencer program to align the company on a growth trajectory and to return to profitability. The team at Smith Micro is extremely dedicated and motivated to the mission to bring new innovative solutions to the market and delivering the technology necessary to keep families safe in the world we live in today. We have a plan in place and we'll continue to drive forward to achieve these goals. With that, operator, we can open the call for questions.

Operator

We will now begin the question and answer This concludes our question and answer session. I would like to turn the conference back over to Charles Messman for any closing remarks.

Speaker 1

Thanks everybody for joining. Should you have further questions, please feel free to reach out to us here, and we'll look forward to speaking to you on another call. Thanks, everybody.

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Earnings Conference Call
Smith Micro Software Q1 2024
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