Q3 2019 Earnings Call
Good day, everyone and welcome to the Smith Micro third quarter 2018 earnings Conference call.
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This time I like to turn the call whatsoever to Charles Messman, Vice President of Investor Relations Corporate development. So please go ahead.
Thank you operator, good afternoon, everyone. We appreciate your joining us today for Smith Micro's financial results for the third quarter of our fiscal year of 2019 ended September Thirtyth.
By now you should have received a copy of the press release with the financial result, if you do not have a copy it would like one please visit the Investor Relations section of our website at Www Dot Smith micro Dot com.
Today's call we have no Smith chairman of the Board, President and Chief Executive Officer, Smith, Micro and Tim Hoffmeyer, Our Chief Financial Officer.
Please note that somebody information you were here during our discussion today will consist of forward looking statements, including without limitation those regarding the company's future revenue and profitability, new product development and new market opportunities.
Operating expenses and company cash reserves.
Forward looking statements involve risk and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by forward looking statement.
For more information please refer to the risk factors included our most recently filed 10-K.
Smith micro assumes no obligation to update any forward looking statement.
So to speak to our managements beliefs and assumption.
Only as of the data they they are made.
I want to point out that into forthcoming prepared remarks, well refer to certain non-GAAP financial measure.
Please refer back to our press release disseminated earlier today for a reconciliation of non-GAAP financial measure.
But that Doug I'll now turn the call over to Bill Bill.
Thanks, Charlie Good afternoon, everyone and thank you for joining us today for our 2019 third quarter earnings Conference call.
Hi, I'm very happy with the overall results for the third quarter building on the momentum we achieved in the first half of this fiscal year I am pleased to report we delivered solid revenue growth profitability and free cash flow looking at the results total revenues from operations increased 81.
Yourself over last year, and 9% sequentially to $11.8 million for the quarter.
non-GAAP net income from operations was up significantly for the quarter to 3.2 million or eight cents per share that compared to non-GAAP net income of $241000 or one cents per share for the third quarter up 2018.
Gross profit for the third quarter was 10.8 million compared to 5.5 million in the third quarter of last year.
Gross margins remained strong at 91% showing the leverage we haven't place with our current business case.
During the quarter, we delivered strong free cash flow, a 5.9 million and ended the quarter with a strong cash balance of approximately 24 million or nearly doubled compared to last year.
The topline revenue growth was driven by our safe path platform that increased nearly five times over the third quarter of last year up 38% from second quarter of this year, which contributed $5.2 million in revenue for the quarter exceeding our third quarter expect.
Station by 26% looking that constantly we had expected the low single digit growth for the quarter, but instead of instead, we saw a slight slowdown in subscribers. We believe this is directly related to the launch of the new I phones in September and some of the strong marketing initiatives.
Around their launch.
Revenue related to our view spot platform came in line with our expectations as expected annual growth for this product had already been delivered in the first half.
Revenue from the view spot variable professional services component associated with new device launches and other retail store promotional campaigns is proving difficult to forecast. This is now the second full quarter that we've had views spot integrated and we are learning that we.
You may expect some fluctuations with this variable revenue stream.
Best way to guard against this fluctuation is to expand our installed base and I will discuss this more in the back half of my prepared remarks.
Before I turn the call over to Tim I want to briefly mentioned my latest thoughts on the proposed merger of T mobile and sprint.
It remains true that there's always risk with M&A activities due to a variety of unknowns and things out of our control.
However, we also see an equally great opportunity for growth and expansion of our business case as well.
Clearly gaining access to the full T mobile base. In addition to sprint base is exciting Additionally, gaining access to a new tier one carrier and dish networks is also an appealing proposition.
We will simply need to let this merger take it scores and react to the final outcome.
Preparation, we have developed plans to handle a variety of possible outcomes.
It would appear at this point to be a 2020 events.
Based on publicly available information being reported but we have no way of knowing in which quarter. It will happen and at this stage, we still cannot be certain that the merger will in fact be completed.
So with that said, let's turn the call over to Tim to review the financials in greater detail.
Thanks, Bill let me start my remarks by summarizing certain cash and equity activity for the third quarter.
During the third quarter of 2019 cash flow from operations was 6.4 million and free cash flow was 5.9 million.
Additionally, during the third quarter 5.3 million warrants were exercised resulting in cash proceeds of $11.4 million.
The combination of these two events were the primary drivers for the $17.3 million increase in the cash balance from $6.6 million at the end of the second quarter of 2019.
23.9 million at the end of the third quarter of 2019.
We're very pleased with this cash reserve balance in the short term, we will invest this excess cash to preserve capital.
In the mid to longer term range. The company will continue to evaluate strategic alternatives for utilization of capital to maximize shareholder return.
Based on the terms of the series B preferred stock agreement on August 28, the company elected to force. The conversion of the then outstanding series B preferred stock to common stock.
This forced conversion and the related voluntary conversions during the quarter resulted in an additional 1.2 million shares of common stock outstanding.
The conversion eliminated any future dividend obligations under the term of the series B preferred stock agreement.
The combination of the exercise warrants and the preferred stock conversion were the primary drivers for an increase of 6.4 million shares, resulting in 38.5 million shares outstanding at the end of the third quarter.
The company has an additional 5.8 million warrants outstanding at the end of the third quarter, which if exercised have a potential cash value of approximately $12.7 million.
Now, let's talk about the quarter and year to date financial results.
For the third quarter, we posted revenue of 11.8 million compared to 6.5 million for the same quarter last year, an increase of 81%.
The wireless segment reported quarterly revenue of 11.6 million compared to 6.3 million last year, an increase of 85%.
Hi graphics segment reported quarterly revenue of 168000 compared to 242000 last year.
For the third quarter year to date revenue was 31.1 million compared to 18.9 million last year, an increase of 64%.
The increase in the wireless revenues was primarily a result of revenue growth in the safe path family platform.
During the third quarter of 2019 revenue from safe that family grew by 38% sequentially.
Resulting in safe Pat family revenues of 5.2 million.
During the last earnings conference call. We indicated our then visible safe path family quarterly run rate was approximately 30%.
We are pleased with the additional quarterly growth.
We expect Safepath revenue growth to continue based on recent unexpected marketing activity, which includes continued retail and call center promotions.
These actions are dependent on sprint execution, we continue to support efforts as requested.
Based on recent safe path run rates and the experience with seasonality of selling value added services during the fourth quarter holiday season last year.
We expect the fourth quarter safe path revenue to grow approximately 10% to 20% sequentially.
During the third quarter of 2019 comps suite VTG subscribers and revenue decreased sequentially by approximately 7% as Bill mentioned, we believe this decrease was directly related to the launch of new iOS devices and related promotions, reducing the number.
We are up subscribers using the Android based BTT service.
Several new Android devices are set to launch during the fourth quarter and we remain optimistic we can regain subscribers at that time.
Revenue for calm suite advertising during the third quarter was approximately 300000, which was the midpoint of our previous Lee provided guidance.
This is a variable revenue stream and dependent on third party activities.
We expect the fourth quarter revenue to be between 200 and 400000.
You spot revenue was 1.3 million for the quarter and inline with expectations.
The sequential decline was directly related to a decrease in device and promotional campaigns from our existing U.S. tier one contracts.
As a reminder, we.
Separate view spot revenue into two categories fixed and variable to fixed portion of the revenue is related to license fees and is generally the recurring component of the revenue.
The variable portion of the revenues related to device and promotional campaigns, which are short burst of activities.
Resulting in revenue.
And the volume is less predictable.
As previously discussed we continue to expect tend to 20% annual growth in 2019 for view spot.
For the third quarter gross profit was.
10.8 million compared to 5.5 million during the same period last year.
Gross margin was 91% for the third quarter compared to 85% last year.
The increase in gross margin is a direct result of higher wireless revenue.
For the third quarter year to date gross profit was 28.2 million compared to 15.5 million during the same period last year.
Gross margin was 91% for the third quarter year to date compared to 82% last year.
Operating expense for the third quarter was seven point Threemillion, an increase of 1.8 million or 33% compared to last year.
Operating expense for the third quarter year to date was 21.7 million, an increase of 4.3 million or 25% compared to last year.
The increase in operating expense is primarily related to an increase in the expenses for the view spot business, an increase in compensation and related expenses for current and additional resources.
An increase in noncash amortization expense and an increase in noncash stock compensation expense.
We continue to aggressively recruit and high resources in all of our markets. We will continue to invest in additional resources to focus on view spot customer delivery and product development.
And resources to enhance the safe path family product.
This additional headcount will result in a higher quarterly operating expense run rate in future quarters.
The non-GAAP pre tax income for the third quarter was 4.2 million compared to a non-GAAP pretax income of 317000 last year.
The non-GAAP pre tax income for the third quarter year to date was 8.5 million compared to a non-GAAP pre tax loss of 1.3 million last year.
The non-GAAP net income for the third quarter was 3.2 million or eight cents diluted earnings per share compared to a non-GAAP net income of 241000 or one cents earnings per share last year.
The non-GAAP net income for the third quarter year to date was 6.5 million or 18 cents diluted earnings per share compared to a non-GAAP net loss of 1 million or five cents loss per share last year.
Within the Rich recently issued press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric.
For the third quarter. The reconciliation includes the following adjustments.
Stock compensation expense of 351000, intangible amortization of 240000 and preferred stock dividends of 52000, some of which are non cash related items.
For the third quarter year to date. The reconciliation includes the following adjustments stock compensation expense of 1.1 million.
Intangible amortization of 705000.
Poser transaction gain of 483000 acquisition costs of 76000.
And preferred stock dividends of 119000, some of which are noncash items.
Due to our cumulative net losses over the past few years, our GAAP tax expense is primarily due to foreign income taxes for the non-GAAP purposes.
We utilize a 24% tax rate for 2019.
The resulting third quarter non-GAAP tax expense was $1 million and the third quarter you year to date non-GAAP tax expense was $2 million.
This concludes my financial review now.
Now back to you Bill.
Thanks, Tim that lets talk further about our three core product suites and provide additional color.
Let's start with you spot, which delivered another good quarter inline with our expectations.
We made strong strides on the product roadmap development during the quarter by expanding the functionality abuse spot to fit the different needs of our addressable markets. This includes evolving our approach to targeting different types of customer services.
Our current customers have sought a high degree of professional services, but new customer prospects are indicating.
Hey requirement for a more highly automated process. Many of these potential customers are looking for a different value proposition that includes faster deployments accelerated content changes and dynamic pricing, thus reducing professional services.
The differentiation of this product suite will allow customers update their own content via web portal speeding up to the delivery of content changes, while allowing for dynamic pricing to be update in real time.
We believe this function will expand our market opportunity and drive new sales in doing so our dependency on professional services and the revenue fluctuations inherent with professional services should these significantly reduced.
I've spoken to last call about coming upgrades to the view spot analytics platforms, such as real time data flow as dance fleet monitoring AI, driven anomaly detection and new improved dashboards.
We continue to make progress to product ties these capabilities to fit different needs of our customers opening up potential new revenue streams in the process.
The sales side, our pipeline remains very strong several proof of concept trials underway around the world.
Looking at calm suite, which I spoke of earlier, we saw a slight decline sequentially, which we believe is directly related launch of the new I phones and spreads promotion with this launch.
That said, we remain excited by the progress, we're making toward closing commsuite business with new carrier customers. We think the timing is perfect to grow our customer base.
Okay, let's look at Safepath growth.
Driven primarily by the safe and found deployment that sprint, which delivered growth ahead of our expectations. The growth of new subscribers continues to be directly attributable to the ongoing marketing efforts of sprint as.
As well as our continued investment in enhancing the safe path application.
We mentioned on the last earnings call. The launch of our first say fab Aiotv device a tracker powered by our safe path platform has positioned Smith micro to expand our addressable market, while bringing significant upsell potential to a much larger customer group to date.
We have been very pleased with tractor sales to both new subscribers and existing safe path platform subscribers, who have chosen to upgrade their subscriptions.
Also sprint recently included a new campaign, the bundles, the tracker with safe and sound full functionality.
This is a good example of massive go to market strategy that carrier can use to increase sell through and create expanses cross selling opportunities.
We expect to see acceleration of other consumer aiotv devices being launched in the coming quarters as the technology improvement curve catches up with demand.
This presents a great greenfield opportunity strengthened our vision for the best connected lies experience for the family under a single pane of glass with a comment application experience.
We believe our go to market strategy of having three different in inroads to our platform of states that family Safepath Aiotv and safe have home is unique in the market.
I would encourage you to closely follow the evolution assays have home as we enter 2020 ended deployment of Fiveg.
This is the newest member of the safe path lineup and as a result, the least exploited.
Carrier plans for Fiveg deployment include a distribution fiveg routers to enable and expansion of the family digital lifestyle in the home.
Seth Safepath home expands family safety, the home devices similar to what states path family provided to mobile devices.
This enhanced safety offering will reside in the home Fiveg router.
Family Safety is a number one subject whether you are home or on the road whether family members are using Pcs or mobile devices or if devices are attached to the home network or consumer I would see devices operating wireless sleep.
The safe path lineup is a powerful offering for families in the 20 Onest century.
With several ongoing dialogues with potential carriers for all three safepath offerings.
I am, especially enthusiastic with where we are in the evolution of both our sales and marketing strategies and product growth opportunities.
In closing this is an exciting time for us at Smith micro.
We have had an excellent first nine months of our fiscal 2019 as operating revenues increased 64% compared to the first three quarters of 28 team.
Our bottom line has grown significantly and cash in the bank has doubled we look to finish out the year very strong and answer twentys wanting stronger than ever.
With that said operator, we can open the call for questions.
Ladies and gentlemen, we'll now open the floor for a question answer session to ask a question you May Press Star. One then why don't you touched on phones.
Are you seeing a speaker phone we do ask you. Please pick up your handset before question the keys.
So with all your questions you May press star into once again, not a style and then one to ask a question.
Our first question today comes from Josh Nichols from B. Riley FBR. Please go ahead with your question.
Yes, Thanks for taking my question and great to see that the say past revenues coming in and tracking ahead of expectations for the quarter could you talk a little bit about traction that you're seeing not just with sprint, but but also with boost and then more broadly with the new tracker solution, what the company's plans to further expand into that.
Space.
Okay, Josh I think.
Now, let's first the comment on boost obviously.
This is a very challenging time for the boost folks they're trying to get their plans to together figure out.
How they're going to be moving forward post merger, assuming that the merger happens.
So there is there's just a lot on on on on that on the table the kind of work with.
The growth of safe path is is moving forward is not as robust as we'd like to see but I think it will get there.
I think that.
You will see boost also focusing on consumer I O T devices as as as we go forward as well so I feel very very positive about it I just think it's a little early as far as from the standpoint of.
Yes, new newsworthy devices, there are a number of a for.
We just had.
The mobile World Congress loss, Los Angeles This week.
There's lot of lot of meetings that took place there.
Are you looking and things like.
Trackers.
Sjogrens.
Watches.
Yes elderly watches.
Just a number of different devices devices that can go in cars to monitor how.
Family members are driving where they are all that kind of stuff. So I think you're going to see a full line up of consumer I O T devices coming in 2020.
That's a that's great to hear Bill and.
Could you talk a bit again, I know you mentioned it before but what really the market, what's the market opportunity with sprint to excluding any other potential carriers is that number you think that's still could be in a high hundreds of thousands or even low millions.
Absolutely I think that yes.
For all parties, whether you're talking to.
Matt management, a spread or or or to those of us here at Smith micro we entered this this this game with the idea that we're looking for millions of subs.
I think we all still can continue with that we are obviously.
You can do your own math, you can see see what the as the growth of the revenue clearly is being driven by a very growing size of the installed base and so we're we're pretty pretty pleased with what we're seeing.
Great and then last question for me that I'll jump back.
Into Q barring any.
New significant carrier wins could you talk about.
What are hiring expectations over the next quarter or two and how long until you get to a level, where where you feel comfortable that you're able to continue to expand the platform and prepare the company for additional growth.
Yeah Josh.
Thanks for the question.
Our hiring expectations, we closed the quarter at about a 184 employees. We have about 20 open racks that we're aggressively.
Trying to fill around the world. So I would see at least a that 20 and possibly more.
As as we get that hired and we get to the 200 Mark.
You know, we'll pause there as we get into some 2020 planning.
And reevaluate as we entered the new year based on the pipeline, but we had been hiring a pretty aggressively all year, we'll close out the year strong and then we'll.
We'll take a pause and look into the New York.
Sounds great. Thank you.
Our next question comes from Scott So from Roth Capital. Please proceed with your question.
Hey, good afternoon. Thanks for taking my question, a nice quarter, Hey, Tim just a quick housekeeping question on the Opex front, you gave an indication that it would be at higher levels I'm not sure. If I heard a range on that front could you just clarify and then then I had some questions.
Yes, I did not give a range, but you can or you can assume a.
A couple of hundred thousand a increase here for the fourth quarter. So the same cadence that you saw from the second to the third assume that from the third to the fourth.
Gotcha, and then on that front clearly a nice quarter.
Could you provide a little bit more color in terms of some of the legacy existing cells that are out there. If you have some visibility that theres never been that cut over date, that's been announced but presumably sullivan coming over but my sense is been more new subscribers rather than conversions to kind of give us an idea on that front how important bundling.
Has been through the process as well tractor with family plan seems like it's been doing pretty well any color you provided that from would be helpful.
Sure Scott.
So from a legacy standpoint these.
These accounts that we see the growth is all new accounts. So we're not seeing a conversion is basically at this current point and we don't have visibility to the actual a installed base there at sprint.
We are adding and very a very excited about all the new accounts that we are receiving though on a on the existing platform.
From a bundling standpoint, I think it was early September sprint launch the bundle.
And we've seen a consistent growth from a pre bundle to a two the actual bundle. So we didnt, we didnt see a interruption. If you will have in that are in that growth stream in that period of time.
Great. Thanks, and lastly, if I could the fiveg, rather opportunity, which you referenced earlier in the call.
Really emerging I think is a pretty big opportunity on a global basis, and really highlighted at mobile World Congress seeing a number of different.
OEM vendors are the operators talking about it becoming a real opportunity for them to gain a foothold in markets that they didn't have before so I was wondering if you could provide a little bit more color in terms of what's the level of interest that you're seeing on that front. When we would expect that to ramp up it seems like a lot of this.
Well, I guess kind of targeted more towards 2020, but clearly a big opportunity and is that a real trigger and to be able to engage.
Shifted dialogue and get pulled into new operator recounts thanks.
Yeah, I think that it's an opportunity to expand the size of our customer base clearly with other mobile operators around the world.
It is an exciting.
Our opportunity for for them as they.
Play a bigger role in the home they've always been a major player obviously in the mobile environment, but I think this is the this is a.
Way for the mobile carriers to.
Enter in to the home in a very meaningful way.
Clearly family safety is everywhere I mean, you know you want to keep your family members safe, whether they're out of them are in.
And you you want to be able to as apparent.
Set up your your rules for how what what's your children can can see.
You want to do it once you want that to those rules to to work everywhere.
Whether there.
Using mobile devices are where they are using Pcs or game Gamekult councils. It's all the same and so I think the real power of what we have created here Smith micro that makes us very different than anybody else in the marketplace is we do all of this within a single.
Within a single pair paradigm and I think that speaks very well for us. It is clearly an area. We have invested heavily that's why we're growing our head to head count the way we are.
We are really moving forward, we're pushing the envelope is everybody else who has to try to catch up that that is not the place you want to be you want to be the leader and not the follower and I think that's where we are.
Okay. Thanks, Phil and just I mean, it sounds like it's it's clearly a big step it's a big push to open operator dialogue and really differentiate what you guys are doing and pull safe happen as well, but just just one last question I was wondering if there any early thoughts to where pricing would be other than incremental to where you are today. Thanks nice quarter.
No, we're not really ready to talk about pricing yet that's something that we are talking to carriers about and trying to work out what kind of levels actually will will work. So I think you're gonna have to wait for a little bit more clarity and.
We will hopefully be able to tell you more about it.
Great. Thanks.
Our next question comes from Jim Mcilree from Chardan Capital. Please go ahead with your question.
Yeah, Thanks, and good afternoon.
If my math is right those safe path expectation is up about 600000 quarter to quarter at least at the midpoint of your guidance.
Is that a reasonable expectation for at least the next few quarters or is there something that would impact that.
Positively or negatively including seasonality the dimunition of promotions or.
Let's call it hitting a different part of the growth curve that that would suggest that that that increases is significantly different pass that Q4 increase.
Yeah, Hi, Jim or.
The guidance that I provided was EUR, 10% to 20% in the fourth quarter growth.
Not that takes into account or the seasonality factor that we experienced a last year last fourth quarter and also the visibility of a the run rate that I have a through a yesterday.
So so I think thats. The dollar amount that you said is within that range that 10% to 20%. There are reasonably close to that and then and I've been given a quarterly viewpoints here, So I I'll reserve or any comments related to the first first.
Quarter next year, but we're starting to see a trend here of of or multiple oh percentages of growth here sequentially right. So we're we're starting to build some history a around that that should be helpful. For you.
I'll, let me try in a different way is can you characterize seasonality for the product or Q4 versus the other quarters or however, you want to.
Characterize it either a noticeable seasonality yet.
Well there was last last year, Jim and that's why we're you know we're sort of baking. It is for this year, what we tend to see during the holiday season is the carriers tend to focus on selling.
Good news, new subs knew more handsets that kind of thing versus focusing on that value added services. So we think we have to sort of take backseat, a little bit in Q O Q4, because of that and that's why we're being a little bit more conservative, though I would expect it would continue.
Year to grow at a rapid rate after Q Q4, So we'll just have to wait and see.
We don't have multiple years of experience in this marketplace, yet and so we're we're basing it on what we saw last last year and we kinda understood what was going on them. So let's see if it holds true for this year as well.
Okay, that's helpful and as far as the Io T I understand that you're pleased with the progress that you're making just.
We'd like to understand if there's.
If it has a meaningful impact on the financials, yet or at least or or that's something that that we'll probably see.
Have a big impact on say path revenues in 2020.
I think it will continue to grow into 2020, what the the way I view, whether you're looking at save a family say fab T or say that.
We have three different ways that we can approach a carrier we can talk about family safety with one year mobile and that's safe family. We can talk about how they can play a meaningful role in the Io t. marketplace for consumers and how they can utilize.
Safe path as the Glu the Glu all this to two together. So we can talk to carriers, who baby aren't necessarily focus just on family safety, but they are.
Focused on on washing consumer I had two and now with with safe at home.
You can now look at.
What the carrier wants to do with five GE and Fiveg routers that they know they will be placing into their their customers' homes and how all this is just a different approach for us to gain access to a carrier and then grow out.
The full power of safe safe path over over a period of time.
Does that help.
Yeah that does that does thank you and my last one is bill you talked about.
Changes in view spots or some product changes I was just wondering.
That has an appreciable impact.
On development costs going forward I'm, assuming it's already and in Tim's guidance for Opex next quarter, but it's at a one quarter thing a couple of quarter thing and then second round that Bill you mentioned that professional services would have an impact I'm just wondering.
Yeah, offset by what's happening with the products or is that the is that just a net negative with professional services being impacted.
Professional services is not my most favored business model you know I liked to sell product and have read recurring revenue streams that are pretty predictable and that's where we're trying to drive the product.
Yes, we have in invested and.
No more more and engineering talent and product talent for view via spot that's pretty much baked in a Tim is already kind of given you some thoughts about what to look for acute Q4, that's all part of it.
We have done everything now that we think we need to to do the really start growing out and building a much stronger customer base for.
You view spot and hopefully doing that in a mode that we can provide professional service.
What is needed, but by and large it won't always be needed and that's where we really want to be we want to be in a very recurring.
Yeah, you out of service model and I think that's where you'll see the biggest bet the benefit of the product in our lineup.
That's great. Thanks, a lot guys and congrats on the results.
Thanks.
And ladies and gentlemen at this time will conclude today's question and answer session I'd like to turn the conference call back over to Charles Messman for any closing remarks.
Thanks, everybody for joining us today as always please feel free to reach out to us directly and we'll look forward to talking to you on our next conference call and I will say, if those going to see yes. Please reach out because we love this like so the product thanks guys.
Ladies and gentlemen, the conference has concluded we thank you for attending you may now disconnect your lines.