Q2 2020 Sonim Technologies Inc Earnings Call

Pardon me. This is the conference operator today's call will begin momentarily. Please continue to hold thank you very much for your patience.

[music].

Good afternoon, and welcome to some technologies second quarter 2020 words <unk> Conference call. My name is chat and I'll be your operator today, joining us for today's call our systems CEO Tom Wilkinson.

So Bob terrible and Investor Relations advisor Mcwraps following their remarks, well open the call for questions.

I would like to remind everyone that this call will be recorded and made available for replay filings available in the Investor Relations section of the company's website at Www Dot some tech dot com.

Now I would like to turn the call over to Mcwraps. Please proceed sir.

Thank you Chad and welcome everyone to today sound technologies so.

Second quarter ended June Thirtyth 2020.

Just distributed a press release Bobby form eight.

Securities Exchange Commission.

These documents are available on <unk> Dot com website, <unk> under investors information Freshworks, where its historical financial results some of which will also be discussed in the company's remarks on this call.

Please note that certain information discussed on the call. Today will include forward looking statements about future events Arnold's business strategy is future financial and operating coal plant.

These forward looking statements will make predictions are subject to risks uncertainties assumptions there are difficult to predict makes hard the actual results to differ materially stated.

State.

Certain of these risks and assumptions are discussed in how do you see filings.

<unk> most recent quarterly.

Report on form 10-Q, our most recent annual report.

Right.

These forward looking statements reflect management's beliefs estimates and projections and projection I love the day, it's like.

August 12 2020.

Undertakes no obligation to revise or update any forward looking statements to reflect that's where circumstances. After the date of this conference call except as required.

Now I'd like turn the call over to Tom Wilkinson.

Thanks, Matt Hello to everyone joining us on the call and online hope you're all staying safe and he is interesting times.

The bathroom lots have been a period of strong sequential growth persona.

Our transformation into a low cost and hyper productive team has paid dividends, enabling us to put revenue back on the right path to reduce our operating expenses generate cash and strengthen our balance sheet.

Previously reported that the first quarter would be the revenue trough for shot.

At $12.7 million due to what is normally a seasons seasonally slow period and as a reflection of par software quality issues.

Excited to report second quarter revenue just over $21 billion, which is 65.7% sequential increase in revenue due to the resolution of prior software shoes and improved carrier relationships as we continue to increase our market penetration.

This increase includes some orders that we were initially targeting for third quarter. They came to early which is why we are always mindful that enterprise sales to be consistent, whereas we often say lumpy from quarter to quarter.

We also benefited during the quarter firm wide range again rapidly evolving changes in the first responder healthcare education government markets as well as commercial customers that are increasingly exercising remote works connectivity and mobile data. These shifts depend upon mobile devices for success in a particular rugged devices such as ours as our customers increasingly.

They learn that mobile devices must be rugged to be used effectively.

We also made meaningful progress on our operating metrics, including increased gross margin settlement acquired letting shareholder litigation and reduced corporate Opex I'll pause here to ask Bob to cover our financial results and then I'll share some updates on our strategy had.

Thanks, Tom.

In our press release issued earlier today, we announced results for the second quarter ended June Thirtyth 2020, a copy of this press release is available in the Investor Relations section our website.

Net revenues for the second quarter 2020.

66% sequentially to $21.1 million the increase in net revenues was primarily attributable to continued sales of our smart phone devices plus increased sales of our X P. Three flip phone at a major U.S. carrier.

As we've discussed previously customer orders can often be unpredictable fluctuate from quarter to quarter, especially as carriers try to anticipate end customer demand, while keeping their inventory low.

As such we try to maintain flexibility to ship in response to changing order patterns.

So seeking to balance our inventory where deficiency of working capital.

Gross profits for the second quarter, 2020 increased $4.9 million or approximately 23%.

Net revenues to approximately 23% of net revenues from 17% of revenues last quarter. This increase in gross profit percentage was primarily attributable to increased sales activity over which to spread production costs as well as the absence of the temporary shutdown that affected our Shenzhen men.

He badgering facility in Q1, which negatively impacted gross margin in the quarter.

Looking at operating expenses total operating expenses for the second quarter 2020 increased sequentially by <unk> point $3 million to $11.5 million, but declined by 39% from the prior year.

Second quarter GAAP operating expenses included a one time charge of $2 million for the proposed settlement prior shareholder lawsuits and associated legal expenses.

Nothing point $4 million, we would not expect those items to be included in our operating expenses on a go forward basis.

Both research and development and sales and marketing expenses declined sequentially at some seeks to maximize efficiency of its operating costs consistent with its goal to optimize operations under its new business model.

We do anticipate reinvesting a portion of our operating cost savings into R&D for our next generation products going forward starting in the third quarter.

Net loss attributable to common shareholders for the second quarter.

Totaled $7.1 million or a loss of 22 cents per basic and diluted share.

That is down from a loss of $10 million or 48 cents per share in first quarter, reflecting both improved operating results and a slightly higher share count as a result of our recent equity offering.

And that's a good bridge to move to the balance sheet.

We have now generated $5.7 million and positive cash from operating activities. During the first half of this year. This was largely due to improved operations and better balance sheet efficiency.

Our cash balance at the end of June was $38.1 million, which was the highest in company history.

This included the benefit of $27.6 million in gross proceeds raised through our public offering in June.

Secondly, we eliminated more than $10.2 million in debt and accrued interest through a combined payment of cash and stock.

This effectively renders Saddam debt free other than a few low interest rate payment schedules for which for our corporate insurance program and our past royalty agreements, which you have retained.

We also further de risks the company through the proposed settlement of a shareholder lawsuit for $2 million subject to definitive documentation in court approval, creating a path for us to focus on our operating and growth strategy that.

Consistent with the previous few quarters, we will not be providing specific guidance today.

This is primarily due to the continued uncertainty that exists as the cobot 19 endemic persist in the United States globally. However, we anticipate continued progress on our strategic goals for the business through the end of the year and we are now fully capitalized which enables us to shift our focus to long term growth initiatives.

I'll now turn it over to Tom for some additional comp.

Thanks, Bob.

As you can see we've made important progress on improving revenue, increasing gross margin bring opex well down from a year ago and even the prior quarter.

With further gains still to be seen in coming quarters, bringing the operating model into balance was an important step from day, one of the turnaround and I'm pleased with the progress we've made.

With the progress achieved to date Sonum is also in position to fund investment our next generation of devices into a more cost efficient manner to that Ed we're making changes to how we will develop our next generation products, including efforts to reduce saddams upfront costs, while bringing the most cutting edge capabilities to our devices.

Expect to be on this process in the third quarter and look forward to the benefits we can incorporate for our customers.

Unlike other rugged mobile devices in the market many of which may just be consumer devices that are supposedly tough enough in some manner Saddams mobile handsets are designed rugged from the frame up. This includes not just choosing different components with higher durability, but also working closely with customers to really understand the needs of the field. Our feature sets are crafted not just to.

Meet those needs, but to blow them out of the water. That's why our screens are fully sunlight readable wire speakers are among the loudest in the industry. So feel workers can here over the commotion environments and wire batteries last longer than the competition. So workers can get a full shift when the use of our son of devices. It's also why we craft our attachment points for back.

Ability for use with truly rugged design ruggedly design peripherals, rather than re purpose commercial peripherals that don't really get the job done.

Looking at how we take that boards in the next generation of our devices. We're now prepared to develop to rugged platforms. One will be based on next generation microprocessors, enabling fiveg voice and data communications, while maintaining the unique rugged mobility durability and performance sought by our end user the second will be a refreshing improvement of our feature pump platform.

Which is our largest source of volume and revenue.

As we develop these platforms our plan remains to further apply the platform concept to two additional low cost product expansion.

In fact, I'm pleased to report that we already have a key design win for our next generation XP three product and a major carrier customer who is excited about the in pre features and expand advance this carriers assets perform a software upgrades of existing gatsby three so that we can maintain sales continuity through the period running up to the refresh 63 release.

We're also enhancing the ecosystem around our products, including streamlining the ability to deploy sort of devices to large diverse and distributed feel workforces. A. Good example of this is the new software enterprise mobility software, we recently announced.

Bottom, where helps customers deploy mobile devices faster than management support users in the field to increase productivity can improve safety. This free solution only requires a mobile data or Wi Fi connection and a free Saddam cloud account in order to be able to fully developed.

And then will fall device provisioning management support.

It provides a guide for advanced control capabilities on our XP three XP 5000, expiate devices. It facilitates productivity for our customers such as enabling enterprises to customize an optimized by screens keeping simple for users and allow access to only those apps, which are for work or for which are which are for productivity related.

Among an array of other features and benefits tailored to our customers.

While looking at the next generation exciting. We're also taking steps to ensure saddam's current devices remain at the top of their games, where users. Our current portfolio will soon be enhanced with the release of Android 10 on our XT eight and mission critical push to talk and see PTT on both the expiate and execute bike products. These software advances should further.

Increase the usability an appeal of our existing product lines as we prepare for the next generation.

Taking all of this account I think it's clear that our shift towards a more proactive diversified end market driven model is going up going forward is put sort of back on the path to success enables us to expand our addressable market opportunity, bringing it all together, we're pleased with our ability to deliver sequential quarterly growth improved gross.

Margin reduced operating expenses improved the balance sheet and close out our prior debt and litigation overhangs. Saddam is now a leaner more focused company ready to move into the next stage of our evolution. The work, we're doing with our customers and partners continues to open new opportunities in a market, including exciting prospects for the rest of this year.

The continuing global pandemic.

Continues to put the benefits of breaking mobility more front and center than ever and we're working hard to capitalize on these trends for the long term. We continue to believe that saw them is on track to realizing its full potential as a leading provider of rugged mobility solutions and it's.

And.

Providing <unk>.

Sequential.

Substantial.

Substantially driving long term bear shareholder value.

I look forward to building on that progress said, well before we shipped to the Q and I'd like to share a fund story.

About one of our customers it illustrates the use of our products. It really how rugged they are one of our customers is a beach patrol division for South, Florida Fire and rescue District. This is a great job that provides critical safety and first responder services to Beachgoers covering a 26 miles beach with about 10 full time at up to 80 seasonal stuff they need.

The device with the smartphone GPS PTT high volume at alert features do it also survive in the salt water and sand Sammy environment, where they operate they tried out many of our competitor devices, where they're unable to keep a mobile device functional from more than just a few months.

That's where we came up.

They now have used the expiate for to pull seasons, we know complications the expiate <unk>. The experts feature rich solutions have increased the be safety divisions productivity and help them continue to focus on the safety of Beachgoers, but it gets even better a tourist recently fish to sort of device out of the water that been loss of Jetski patrol in mid 2019, they drive the device.

Charged it and turned it on to find that fully functional after an entire year under saltwater now that it's sort of Oregon.

With that I'll now turn it back to the operator for our QNX session.

Thank you Sir we will now begin the question and answer session to ask a question in a press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset well pressing the keys to withdraw your question. Please press Star then to.

At this time, we will pause momentarily to assemble a roster.

And the first question will come from Jason Schmidt with Lake Street. Please go ahead.

Yes, thanks for taking my questions. Tom I know you mentioned that yeah. There were some orders that came in early from Q3, but do you think there were any significant collins into Q2.

No we were really focus on.

Delivering delivering our products.

The pace at which are cuss, our carrier customers can consume them and get them out to the.

After the end users, we did not put any efforts into pulling in revenue.

Okay. That's helpful and it did Q2 was Q2 impacted at all by any component shortages or supply constraints.

No no not at all I mean, I think things have changed in the supply chain.

We.

You know because we do control our supply chain, we were able to planned for and react.

We actually had a substantial number of parts on hand, we're ready.

[music].

Some of the probably the the longer answer to your short question is as we keep an eye on these things really the only supply chain effect is a lengthening of lead times for certain components and we're in we're reacting accordingly.

Okay and the last one from me and I'll jump back into queue. Obviously are really strong sequential improvement in gross margin should we be thinking about that sort of low to mid twentys as being the new normal going forward.

So hey, it's Bob I'll I'll take that one I think it depends on the mix our mix.

Shifting to and we mentioned a little bit Uh huh.

Narrative towards our feature phones, specifically the X P. Three which has been doing really well add a couple of customers and thats grown a lot in one significant customer.

And those are just a little bit lower margin then be expiate smartphones, so I think that.

There is that impact there's a little bit of lingering overhang from the the shutdown of the factory that took place in Shenzhen in Q1, the additional safety measures and protocols that had been put in place in order to reopen safely and keep our workers they're in good shape and I think those are.

Kind of cost that should say a little bit. So I think margins will be positively impacted by the efficiency of our operations and.

A.

Little bit negatively impacted by the mix.

Okay, and sorry, just to clarify I mean, it looks like feature phones were.

66% of revenue in Q2, I mean, obviously, you mentioned strong XP theory, but going forward I mean, Q twos level should be the floor is pace, even a feature phones continued to be strong in the back half of this here.

I would say without giving guidance. So that's a that's a fair statement.

Okay.

Thanks, guys.

Yeah.

Once again as a reminder, if you'd like to ask a question. Please press Star then one.

Next question will come from Zacks Silver with B. Riley FBR. Please go ahead.

Okay, great. Thanks figuring the question. The first one I fully appreciate you guys are not giving guidance but.

Wise I figured I may as I tried I'd just ask you how activities ban in July and I'm more broadly what we I'm sure what kind of demand Kobe guys potentially stimulated a that you weren't seeing before the pandemic for your device.

Yes of course, a like Bob said definitely not giving guidance I don't really want to talk about.

What's what's been going all the quarter, but but I will address kind of the back half a question what is covered doing to me doing to demand.

There was just like we talked about last quarter. There's a small portion of our sales that were flowing out through retail or you know retails getting back up and going but it's not.

The traffic isn't there like it was in the past and I think for that small portion of the market. There's still some there's still some caution.

On the on the other side.

To the extent any of our enterprise customers had been has had needed to hold back or go on pause you know, we're showing we're showing that activity.

Starting up again, so heavy testing of our devices.

You said the field moving forward with larger projects, that's that seems to be.

No but were brought back in business on that.

[noise], Yeah got it that's helpful.

Second one is just.

You guys are I'd say about you embark on is somewhat of an R&D cycle to develop the fiveg devices, you heard 18 to talk about.

Rolling out Fiveg on first now that I'm sure that other enterprise Kerry carriers are going to utilize fiveg and their plans going forward.

Just wondering how you ensure that you're going to get a good ROI on developing the five devices and what sort of demand you think there as for upgrade stuff from the carriers you as they launch fiveg over their enterprise networks.

Yes.

So.

You know, we're we're deeply involved with with all the carriers and Fiveg, what that's going to me what what in particular, what the what the market will bear we had been very clear and opened with them on what it cost and what the deposit.

What's the difference is in R&D for Fiveg or even for the two different types of side, you know because there's millimeter wave and there's sub six and it's all in and it's all different and.

And certainly the R&D and the components required will will result in a more expensive phone.

And we are defending our what we would consider to be a premium margin for that for those filings when adopted we'd be releasing new technology.

Brand new products, you kind of return to the top of the.

Return at the top the gross margin percentage when you do that.

We're we're we're very focused on it we are we're almost consultative to them in a way to talk about where.

Which features really should be included in which phones.

So that we can make sure that we in something does that the market can bear, but then also still delivers on their promises for.

For Fiveg in the future.

Got it and then one more quick one just around T mobile any update there on talks with and then are you confident that you can I began to do business for them at some point.

We're confident that we can you get your business for them, but we're not allowed to actually ever.

Announce any any.

Business look any of the carriers by name of course.

But were caught we're confident that are we are.

Extremely confident that we have a relationship with T mobile.

Okay. That's helpful. Thanks, Tom.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Tom Wilkinson for any closing remarks.

Thank you for joining us on todays call.

Well, who participate in a number of virtual investor conferences throughout the year and.

Well, let you know about those by press releases they occur if you like to arrange a call. It management. Please reach out to Matt Craps Darrow Associates is contact information is included in our press release and we'd be of course happy to arrange a follow up call if needed a great questions. Today. Thank you all very much.

Thank you Sir.

France has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

<unk>.

[music].