Q3 2020 Sonim Technologies Inc Earnings Call
Thanks, Matt. And hello to everyone joining us on the call and online first. I would like to say happy Veterans Day to all of our veterans and their families on behalf of Sodom. We thank you for your service. This year has continued to be a period of Rapid Transformations. We've communicated on prior quarter recalls. We assign him continue to implement changes that we believe will position our business for broader addressable markets rather than wage growth with improved control and visibility and leaner more efficient operations. We've reduced our operating expenses and made our balance sheet more cash efficient our transformation into a low-cost and more production team has begun to pay off enabling us respond to lumpy quarterly Revenue while delivering. Over. Improvements and our gross margin produced net loss in preservation of our cash resources. We have frequently pointed out how lumpy the rugged business could be before and the third quarter is a good example carriers had accelerated the number of orders into the second quarter, which came in Thursday.
About forecast and then adjusted delivery timing in the third quarter if they had already taken in these additional orders as we have also discussed previously getting Optics down to an appropriate level for a home business of our size has been a top priority. We managed to streamline and reduce our operating costs cutting off X by 20% year-over-year in the fourth quarter. We have undertaken additional changes to cut another 2 million dollars of annual red rate operating expenses with ideas for future efficiencies. We are not just focussing on objects efficiency. Our product development efforts reflect the same diligence on costs and cashing should see that's our operating performance are strong balance sheet allows us to focus on our business transformation the strengthen our business lives within the future product plan will expand and build upon are well-off Market strengths and differentiation first our feature phones the xd3 and xp5 have been our best selling products which are both exemplify our industry-leading rugged design and birth.
so our differentiated push-to-talk function
You know our next Generation feature film products will also expand our range of supported carrier bands and play a key role in our growth outside of North America particularly in Europe. These additions geographies present a robust and valuable Market with nearly 1 billion dollars of rugged cell phone demand. We believe we can move quickly with these new phones to enter these expansive markets through various destroy the relationships where our management team has prior experience. We're also excited to announce that we've already received major carrier design ran towards for our next generation xb3 and xt5 devices off the third quarter. We believe these design wins are a direct result of our differentiated capabilities. We have prioritized development of these new feature phones with a current timeline for delivery and mid twenty twenty one second. We expect to launch our smart scanner handheld computer and tablet device the first quarter to allow us to begin to access a total addressable Market of approximately two billion dollars and add another project.
To our sales basket these devices also tend to sell with more favorable gross margins divided times. We have the first apartment units in hand and they're performing. Well third our current smartphone not offering the LT based expiate we are proud to announce that the X P has been upgraded to support Android ten, which extends the useful life into 2021 and Beyond when we add customers about what they value most of our rugged devices, they tell what they tell us is that Beyond a rugged what they want is rugged is reliable connectivity and a long battery life. We understand the importance of 5G is the is the technology is deployed around the world, but the moment the primary advantage is faster download speeds. These faster speeds are far less important to our customers and have not been effectively deployed yet.
Mustafa we invest in 5G as it becomes more generally available from carriers and becomes a more important feature for our customers by taking this approach. We believe that we can more specifically along our products to the dominant 5G Technologies, as our customers will ultimately use and create a better overall value proposition. All of these initiatives are made possible by our strong balance. We believe that given are approved operations too strong cash position. We have sufficient Capital to build and launch these products as we execute our 2021 plan. Let me stop here for a few minutes and ask them to cover our financial results. Then I'll share more about our strategy ahead and the continued transformation Assam.
Thanks, Tom. I'll press release issued earlier today announced the results for the third quarter ended September 30th, 2020. The copy of the release is available in the investor relations section of our website net revenues for the third quarter of 2020 decreased to fourteen point four million dollars. The sequential decrease in net revenues was primarily attributable to the timing of customer orders, including some sales that were accelerated into our twenty one point 1 million dollar second quarter. As Tom mentioned Revenue can be Lumpy from quarter-to-quarter for this reason and the 2/4 combined to an average of about $18. We've made good progress in our efforts to balance out our inventory for efficiency of working capital while maintaining Readiness to ship in response to the changing order patterns from our office gross profit for the third quarter of 2020 was four point four million dollars or approximately 30.6% of net revenues, which is up from 23.9 Bath.
I've net revenues in life.
Third quarter the increase in gross margin was primarily attributable to one-time inventory adjustments which occurred in the third quarter of 2019 along with lower-than-expected customer discounts and rebates which will require to sell our products in 2020 sonim anticipates that margins will benefit from increased scale as well as corporate clients undertaken to improve cost of goods sold the future beginning with the launch of higher gross margin standard products in the first quarter of 2021 looking in our operating expenses total operating expenses for the third quarter came in at ten point five million dollars this represents an improvement of two point six million dollars from the 13.1 million dollars of operating expenses in the year-ago quarter the decline an operating expenses reflects his commitment to maintaining a lean operating model while continuing to invest in sales marketing and new product development in a more cost-effective manner.
I'll text also declined sequentially from the eleven point five million dollars. We experienced in the second quarter. We anticipate reinvesting a portion of our operating cost savings into R&D for our next Generation products going forward.
Net loss for the third quarter of 2020 totaled six point five million dollars compared to a net loss of 6.8 million dollars in the third quarter of 2019 and compared to a net loss of 7.1 million dollars in the second quarter of 2020 in sequential and year-over-year decline in net loss reflects improved operating model efficiencies that Saddam has implemented to date.
Turning to the balance sheet. We have used $879,000 in cash for operations year-to-date our cash balance at the end of September was 31.7 Million month and we are effectively debt-free as Tom mentioned. We believe that given our improved operations and strong balance sheet. We have sufficient Capital to develop and launch our next generation of products as we execute our 2251 plan.
As in previous quarters, we will not be providing specific guidance today. However, we anticipate continued progress on our strategic goals for the business through the end of the year and we are now sufficiently capitalized to change the focus too long term growth initiatives. Well now turn it back over the top for additional comments.
Thank you Bob. As you can see we have made important progress on the business model positioning solemn to perform. Well both up and down Revenue quarters, while maintaining our ability to take steps for our long-term strategic goals We Believe saint of offers the most rugged mobile devices in the market, but we are always looking to do better. We are bringing new devices to the market both in our faith in our Court Mobile feature phones and smartphones categories as well as entering entering new address will markets such as hand-held scanners are new smart standard devices are set out to Roland cube out of this year. We are bringing two devices to Market built on the same chip and software platform. They will initially be released with Android 10 and will be upgraded to Android 11:00 at a later date are two devices that will be an 8-inch screen tablet and a six inch screen handheld both with integrated barcode scanners these devices support multiple bands including those required for Europe. We expect our smart scanners dead.
will deliver both
Better features and better pricing compared with larger competitors introduction of these devices will increase our addressable market and open new channels both in North America and Europe in addition to these devices which provide an exciting Market expansion platform. We have also received verbal or written design and for all of the major North American carriers for our new featured folks while many Hardware verticals focus on just suck. Our feature phones consistently outside our smartphones demonstrating the Psalms target market often just need a good reliable and durable way to facilitate Communications with their Workforce and we meet that demand extremely well. I'll refresh offerings of the xt5 xb3 will include design features and updates that are responsive to our end user customer request while opening new and exciting job markets for our products.
As important as our rugged Hardware Designs, we're also very focused on our somwhere and Sodom care offerings. We have proprietary software on every device which allows our customers took manage their deployed devices centrally and ensure that the devices are up-to-date and secure. This is particularly important for feature phones. We cannot which cannot use the Google Play Store to download apps or update their own sauce. We have delivered a number of solutions in our Saint Amour package and will continue to improve upon these offerings based on the feedback from users. There is a commitment to service from are in a unique 3-year comprehensive warranty to deployment installation and training saint has long recognized for its Superior ability to support India's organizations and keep critical Personnel connected long as we approached each development as a platform instead of a product. We were more efficiently leverage our work and cost to bring out multiple products and open multiple markets while looking at the next Generations exciting job.
We're also also taking steps in shared silence current devices were made ahead of the curve for our users. Our current portfolio will soon be enhanced with the release of mission-critical push to talk on both the XP 8 and Samsung products further. We're beginning work on Z access technology, which will enable our most advanced devices to be located not just in a building but on what floor of the building this core expertise in our village investec Knology will help further differentiates on a products from the competition. We are also actively seeking out opportunities for our products and Industrial Enterprise markets. Let me finish with an example value that sort of brings to the customer to our customers in terms of capability and cost-savings recently a very large Construction Company performed a costly performance evaluation of their existing Ridge elem arguments against sodom's Technology Solutions, their analysis showed that saint of affords improved functionality and performance versus the company's current elementary devices in Sodom has the ability to predict
Cost savings and more than 60% over two year. We are actively identifying similar use cases the expand our address will markets and improve our visibility to revenues we believe the storage systems turnaround will become increasingly apparent as we progress the 20 21, we our heads down with the
Existing products preparing the new product release and expanding our sales channel to facilitate new growth and new markets as a final note on my excitement for our new products and their capabilities. I'm talking to you today ma'am, one of our asset rs.60 prototypes, which in addition to being a smart scanner is a high-quality voice communication device as well with that. I'll turn it back to the operator and our Q&A session month. We will now begin the question-and-answer session for covering analysts to ask a question. You may press * then one on your telephone keypad. If you were using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question comes from Jason Schmitt with Lake Street, please go ahead.
Hey guys. Thanks for taking my questions. I'm just want to get your thoughts on your visibility into inventory levels at the carriers. Just given birth how they always tightly managed it here at work here and how should we think about that for Q4? It's a great question. We have a great deal of visibility into the inventory levels home, you know, we believe that that our you know, our carrier partners are are you know, they're responding to the current environment and their responsibility to their own investors and and and Shaq balance sheet. So, you know, our expectation is that they will try and hit the end of the year with the minimal amount of inventory as possible and then start being able to buy up after that.
Okay, that's helpful and looking at the new scanner products. Just curious if this was something that your customers were asking for. If you just thought it would be a natural extension from the product portfolio, especially with your history at Explorer and I guess relatedly is this just going to be a hardware sales or is there any recurring Revenue component off with that standing feature? So it is it is it is both an identified need in the market that the management team brought in to the company until need as well as a natural extension of our experience and Technology, you know, the neat thing about Sana is with our somewhere and Sonicare deliverables. We can layer them into anything that operates off an Android so will be will be you know, very similar across all of our devices whether they be thugs or scanners and that way the same thing with our commitment to service will be dead.
To bring that out, but we we definitely we definitely see any of the market we know of opportunity and um, uh to your question of whether this is a device play. We're we are we are looking at ways to expand, you know, our reach to the Market within within our capabilities and abilities Beyond Hardware, but took the moment. I really am focused on just getting these Hardware devices off the market.
Okay.
That makes sense. And then just the last one for me and I'll jump back in EQ Bob on gross margin you noted. Some of the increase was due to less discounts or rebates. Should we conclude them that sort of this 30% plus level was sort of a new dorm here in the near-term.
I wouldn't really call it a good moment. It's a good question. I think you know this this reflects our experience with with particularly one carrier that's rolling for us and they have a rebate program that is funded both by Sodom but could also be funded through other various programs within the care package. So the carrier could use a an unrelated discount to the customer that wouldn't dip into uh-uh rebates that we would then have to give em. So we we like that little bit of visibility. So we are conservative in our forecasting assuming that a high percentage of the sales would be done with with the rebate applied. And then when the carrier does do the sale dates, they send us an invoice for the rebates earned and it's come in below below what we both have so I believe Thursday
It will continue to come in below what we have forecasts, but there's no way to know that for sure.
Okay, I appreciate that color. Thanks a lot guys.
Again, excuse me. Again. If you have a question, please press * then 1 the next question is from Zack silver would be Riley, please go ahead.
Okay, great. Thanks for calling question. The first one is just around the distribution channels, whether you have any thoughts about changing the the typical carrier light distribution model in the 2021 and then related the how the distribution of the Sparks that our product and international Mobile sales differs from what we're doing here in the US.
I think I think the way to think of this is the right products for the right channels in the right geographies, and the answer is different wherever you guys are rugged cell phones.
We'll sell through carriers in North America. We're making our rugged cell phones available for distribution as well. And we're actually seeing some activity there, but we're not going to we're not going to move away from our characters in a sense of North America. We're going to we're also not going to be selling smart scanners through calories in North America because it's not something they naturally they naturally would would sell off their enabled they work on LTE and and it'll be certified. So they'll function quite well with the carriers, but they're not a stock product. Now when you turn the page on these the the model flips there is not quite the dominance of of carrier players in other parts of the world. Therefore. I am on the same kind of footing that uh, Distributors aren't but what I liked about our products and working through distribution in Europe or even the Distributors that we're in,
To bring it in the United States. Who's the Distributors are often working on on more of a
We should sail with us. They're bringing together. Not just their voice communication devices, but other other aspects of let's say, you know, you kind of Imagine a all of the technology that's inside the police car inside of an ambulance. It's the Distributors of value-added resellers who are bringing all of that together and we really look forward to working with them increasingly to be part of that solution.
Got it. That's really helpful. The next one is just around with sort of the the the cash burn and sort of the Aging of the older devices and you know, sometime and Ambassador in upgrading to the newer devices. Just wondering if you can help us think about the cash burn and what gives you the confidence that real quickly run. Their this board is on page Bob sounds like your territory though to talk about the dashboard and the fact that we don't talk about four numbers, but
Yeah, sure. I'll just reiterate that we're not giving guidance. But certainly we have modeled in the sunset of our existing portfolio products as Tom mentioned that we're getting to end of life for several devices. We've also ugh extended the life of the xt-8 or Android tenth grade. So that should sell well into the next year and and potentially Beyond and we are ramping our new scanners and feature phones through the first half of 21. So we have, you know, carefully looked at the transition between the old products and the new adjusted our burn rate through Costco and just having especially lean operations of the company in order to bridge that Gap with the cash that we have and I think we've judiciously looked at the balance sheet.
Where we can we've uh reduced our inventory levels. We have managed payables and receivables as much as possible. And we believe that we can whether a. Of burn to get to the new products which will run start generating cash as we move forward.
Okay, that makes sense. Thanks, Bob. 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 today's call. I really appreciate the questions, and I really appreciate the interest you all have in. Our company will be participating. In fact of investor conference events near the year-end and roll analysis by press releases. They occur if any of you would like to arrange a call from a call of management. Please reach out to Matt cracks and Associates with his contact information is listed on our press releases, and we'd be happy to arrange a call if needed.
the conference is
Now concluded thank you for attending today's presentation. You may now disconnect.