Q1 2022 Smith Micro Software Inc Earnings Call
Good afternoon, and welcome to the first quarter 2022 earnings conference call.
Smith micro.
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Yeah.
I would now like to turn the conference over to Mr. Charles Messman.
Thank you and what you use us.
Thank you operator, good afternoon, everyone. We appreciate you joining us today to discuss Smith micro software financial results for 2022 first quarter ended March 31 2022.
By now you should have received a copy of the press release with our financial results. If you don't have a copy and would like one please visit the Investor Relations section of our website at Www Dot Smith micro Dot com.
On today's call we have Bill Smith, our chairman of the Board, President and Chief Executive Officer, and Jim <unk>, Our Chief Financial Officer.
Please note that some of the information you'll hear during today's discussion consists of forward looking statements, including without limitation those regarding the company's future revenues and profitability our future.
New product development, new and expanded market opportunities future product deployment migration and our growth by new and existing customers operating expenses company cash reserves and the expected impact of last year's acquisition of bass family safety mobile business on our business strategy operations and financial position going forward.
Forward looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by our forward looking statements.
For more information please refer to risk factors included in our most recently filed Form 10-K.
Smith micro assumes no obligation to update any forward looking statements, which speak to our management's beliefs and assumptions only as of date there made.
I want to point out that in the forthcoming prepared remarks, we'll refer to certain non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of non-GAAP financial measures.
With that I'll turn the call over to Bill Bill.
Thanks, Charlie Good afternoon, and thank you for joining us today for our 2022 first quarter conference call.
Our first quarter has been extremely busy on many fronts as we continue down the path that we spoke about during our recent Q4 update.
We are continuing to build on the momentum from the recent launch of save past seven.
This launch should commence the drive to enhance subscriber growth beginning in the late Q2 or early Q3.
With the resumption of growth.
You can return the company back to our historical model of delivering strong growth, earning.
Earnings power and cash generation.
We are also working diligently to get the other two U S tier one carriers and our European customers onto the <unk> platform.
This activity will enhance the family safety applications at the carriers with an expanded feature set well, allowing us to realize cost synergies as we consolidate to a single family safety platform.
This critical initiative will bring the power of our safe path platform to not only the mobile family safety space that opens an even larger market opportunity with the digital family lifestyle marketplace.
Overall I am pleased with where we are today as we are making great progress across the board with our carrier partners.
Another interesting note that is very encouraging is that several of our carrier customers have begun to reopen their offices a milestone that I truly hope continues as we work through how the pandemic has changed their lives and how we conduct business.
We believe the increased access to our customers is a critical and necessary step towards building deeper relationships throughout the different groups within the carriers.
Another exciting recent announcement that I'm delighted to discuss is the expansion of our board of directors.
Last month, we added two highly qualified individuals Asher Carey and Chetan Sharma, both who are recognized strategic leaders in the mobile technology Arena.
Their combined knowledge contacts and business acumen are a tremendous addition to Smith micro.
I'm looking forward to seeing the positive impact theyre going to have on our company.
Now, let's turn the call over to Jim to discuss our first quarter 2022 results.
Thanks, Bill and good afternoon, everyone.
As a reminder, we acquired Neovasc family safety mobile business in the second quarter of 2021, which impacts the period over period comparisons that I'll be covering today.
As such all.
Also be highlighting the sequential changes as well to provide some additional context on our quarterly results.
Let me cover the financial details of the first quarter of 2022.
For the first quarter, we posted revenue of $12 7 million compared to $11 4 million for the same quarter last year, an increase of 12% as a result of an increase in family safety revenues, partially offset by a decline in comp fleet revenues.
When compared to the fourth quarter of 2021 revenue was down approximately 13%.
Driven primarily by decreases in revenues associated with comp suite, and our legacy family safety product lines.
During the first quarter of 2022 family safety revenue increased 64% to $10 4 million compared to the first quarter of last year as a result of the additional family safety customers obtained through our acquisition from a boss.
Family safety revenues decreased 11% sequentially compared to the fourth quarter of 2021.
The primary reasons for the sequential decrease in family safety revenue was the continued reduction of the legacy safe <unk> found platform revenue related to declining sprint subscribers and the accelerated recognition of certain deferred revenue in the fourth quarter of 2021 due to a contract amendment execute.
<unk> with one of our tier one carrier clients.
During the first quarter of 2022 comp suite revenue was $1 4 million, which declined $2 7 million compared to the $4 1 million in revenue produced in the first quarter of last year.
Revenue from comps, we decreased 35% sequentially compared to the fourth quarter of last year due to the continued decline in revenues related to the legacy sprint subscribers.
As I discussed on the last call the decline in legacy sprint subscribers was driven by those subscribers, having the option to move from sprint to the T Mobile network for voice services.
As more and more subscribers transition off the sprint network concrete revenues will continue to decline. However, the timing of that decline in revenues is very difficult for us to predict as we do not have visibility to when customers switch over to a new Sim on the T Mobile network.
Boost formerly owned by Sprint is now part of dish.
With the contract that we executed with this during the first quarter, we are expanding our relationship with dish on the <unk> platform with a goal to increase comps we subscribers over time.
These spot revenue was approximately 900000 for the first quarter of 2022, which was essentially flat compared to the first quarter of last year and up approximately 11% compared to the fourth quarter of 2021.
Few spot revenue is comprised of both fixed and variable components.
The fixed portion of the revenue is related to license fees and is generally the recurring component of the revenue.
The variable portion of the revenue is related to device and promotional campaigns and the timing and volume associated with this portion of the revenue stream is less predictable.
With the recent launch of <unk> seven at one of our tier one U S wireless carriers and the expected migration of the other tier one U S carriers to this platform later this year.
We believe that we have a significant opportunity to grow the subscriber basis at all three of our U S tier one carrier customers in the coming quarters.
However, we expect that growth will be aligned with the timing of several marketing initiatives, which we anticipate will be initiatives initiated by our carrier customers in the second half of this year.
As such we expect consolidated revenue for the second quarter to be flat to lower by approximately 5% compared to the first quarter of 2022.
For the first quarter gross profit was $9 1 million compared to $9 $8 million during the same period last year.
Gross margin was 71% for the first quarter compared to 86% in the first quarter of last year.
In the second quarter, we expect gross margin to be flat to down slightly from the current run rate.
Our longer term goal for gross margin is to be back in the range of 80% to 90%.
To achieve this goal, we will optimize third party applications and service contracts used by the combined business upon the migration of our family safety carrier customers to a single family safety platform.
Once we are able to fully transition all of the carriers off of the legacy Avast ring platform onto our safe.
Path platform, we expect to be able to realize synergies that will help us drive our gross margins towards our targeted gross margin.
Given the timeline of the migrations, we expect these synergies likely will not be fully realized until the first quarter of 2023.
GAAP operating expenses for the first quarter were $16 1 million, an increase of $3 million or 23% compared to the first quarter of last year.
The increase was primarily driven by compensation and employee related expenses due to our acquisition of the <unk> family safety mobile business.
non-GAAP operating expenses for the first quarter were $13 4 million compared to $9 1 million for the first quarter of 2021, an increase of $4 3 million or <unk>, 47% compared to last year.
Sequentially non-GAAP operating expenses increased by 3% from $13 million in the fourth quarter of 2021 due in part to the increase in contractors related to the safe path migrations.
We expect second quarter 2022, non-GAAP operating expenses to increase from the first quarter by 2% to 4% as we continue to invest in our development resources to migrate our family safety carrier customers to the safe path platform.
The GAAP net loss for the first quarter was $7 million or <unk> <unk> loss per share compared to a GAAP net loss of $3 2 million or <unk> <unk> loss per share in the first quarter of last year.
The non-GAAP net loss for the first quarter was $4 3 million or <unk> <unk> loss per share compared to a non-GAAP net income of 700000 or <unk> <unk> diluted earnings per share in the first quarter of last year.
Within today's press release, we have provided a reconciliation of our non-GAAP metrics the most comparable GAAP metric.
For the first quarter. The reconciliation includes adjustments for stock compensation expense of $1 1 million and intangible asset amortization of $1 6 million.
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 utilize a zero percent tax rate for 2022 and 2021 the.
The resulting non-GAAP tax expense reflects the actual income taxes expense during each period.
From a balance sheet perspective, we reported $9 8 million of cash and cash equivalents as of March 31 2022.
This balance was lower than we had anticipated as a payment from one of the tier one carriers came in on April one rather than within the quarter.
<unk> only two months of payments from this customer instead of the typical prepayments within the quarter.
This cash receipt approximated $1 4 million.
I would like to highlight that we entered into a revolving credit facility with Wells Fargo on March 31 2022.
This line of credit provides the company with up to $7 million and funding capacity on attractive terms.
We're pleased to have this facility in place and can leverage it as necessary as we work through the safe Pat migrations.
I also wanted to touch briefly on the shelf registration that we filed with the SEC earlier today.
We had utilized the vast majority of the capacity under our existing shelf registration last year for the acquisition from Avast.
As such we've determined it would be prudent to establish a new shelf registration with the three year term as a matter of good corporate governance.
We would not anticipate any equity offerings in the near term, but wanted to have the shelf in place to leverage for future needs, if an attractive opportunity would present itself.
This concludes my financial review now back to Bill.
Thanks, Jim.
Now, let's take a closer look at our product platforms.
We are very focused on continuing the migration of our carrier customers in both North America, and Europe to the new safe past seven platform.
We are adding features found in the acquired our baas platform to safe fast setup.
The result will be an even more robust safe path offering going forward.
Being the market leader means providing a constant flow of new features.
This expanded roadmap of new features and functionality allow our carrier customers to better utilize the same paas platform as.
As well as offering expanded capabilities, such as safe TACE home safe test drive and safe TACE Iot.
I believe the market is right for the inclusion of safe at home and carrier provided five G routers as carriers driven by the rollout of five G gained relevance in the home broadband market.
With the emergence of safe at home, we can deliver on the family digital lifestyle mantra of safeguarding the family, both when mobile and at home.
Save past seven was expected to launch at T mobile in the weeks following our last earnings presentation.
As we announced in late March.
That launch occurred as anticipated and the new application has been very well received in the market.
This sets us up extremely well for the next phase of growing new subscribers as we continue to gauge the apps performance to ensure all its working well with the application.
From a Verizon perspective progress is being made on several fronts as efforts continue to bear for the switch to the safe TACE platform.
A good example is the launch of our pilot do you spot initiatives underway throughout horizon corporate owned retail stores that has been a great New Avenue to build awareness for the smart family product.
Particularly with the sales reps, who are at the front line and getting our app into customers' hands.
We are entering.
Phase III in the coming months, when we will enhance the smart family promotional content to capitalize on the launch of a new retail sales incentive program as well as some new marketing initiatives for the stores.
We have also delivered several new awareness and training campaigns that were targeted to the entire Verizon organization, a critical step in our multichannel marketing approach.
On the integration side, we remain on track, we are very focused and confident that by delivering this significantly improves smart family application with this enhanced customer experience, we will be able to drive increased ROI with this key carrier customer.
Moving over to AT&T, we are bullish about the opportunity for us as we continue to work together on plans to launch on the safe test platform before the end of the year.
The progress to date on the migration has been tracking with our expectations and AT&T continues to work with us towards a successful launch.
As is the approach with our other carrier partners, a strong and continued awareness campaign across several key areas of the organization are ongoing with.
With an emphasis on the customer care and retail divisions, which clearly have a significant amount of contacts with potential subscribers for our product.
These efforts should drive awareness of the features and benefits.
The app among AT&T employees, so they can better so this service to their customers.
We also have expanded our digital advertising pilot employing a far more targeted approach with several ongoing AB testing cycles to maximize our cost per acquisition and more importantly, our lifetime value of subscribers.
As I stated on the last call, we see immense potential with AT&T as we build up from a relatively smaller base.
The family safety space is critically important for AT&T on many fronts and I am very excited that we are part of that mission today, and we will continue to be in the coming quarters.
Next let's briefly discuss few spot.
Our innovative view Sparks studio product is rolling out at both Verizon and cricket, which is a great accomplishment for our team.
The move to the studio platform has been very well received by our customers delivering a much better experience with agile capabilities.
A much faster deployment cycle for new campaigns and a significant upgrade in analytics with the addition of more real time capabilities.
We have also upgraded and improved integration capabilities for studio, which is allowing us to explore new partners.
They're making it more strategic for our customers and broadened total addressable market for us to attack.
In addition, <unk> gives us unique opportunities to further promote our family safety applications in the retail environment as I touched on earlier with the Verizon program.
Engaging and relevant content allows consumers to explore our family safety products and sign up without the need for <unk>.
Sales rep or allows a sales rep to step in and continue the conversation and close the sale.
Also gained significant analytical data that will help us improve the marketing campaigns.
Let's briefly discuss comp suite.
As I touched on in our last call during the first quarter, we signed our contract with dish wireless to deliver our comps leap powered premium visual voicemail and voice to text services for both boost the carriers prepaid brand and for dishes postpaid Service Inc.
Clearly the much anticipated launch of its <unk> offering.
Although it will take time to build a strong base comp suite is very complementary to dish as long term strategy and will extend the life of our comp suite platform.
As our legacy visual voicemail deployment at sprint, which Jim spoke about continues to wind down.
I am a firm believer that the dish and boost wireless offers upside and stability to the comp suite revenue stream in the longer term.
In conclusion, I am pleased with what we achieved during our first quarter.
The launch of safe past seven was a significant milestone for Smith micro and expected catalysts for growth in the coming quarters.
Our focus for the remainder of the year is up by grading our other two north American tier one carriers as well as our European clients to the <unk> platform, while executing on the marketing training and awareness initiatives with our carrier partners to drive subscriber growth.
Those are our family safety applications.
I remain confident in our path forward, which I believe will result in revenue growth in the back half of this year and relied path to our historic high gross margins of 80% to 90% range, coupled with strong free cash flow.
We are both proud and motivated by being the clear leader in the family safety wireless carrier space with.
With the best product on the market and are well planned roadmap.
Even larger market opportunity for us with safe at home Safe path drive safe Pat Iot.
The opportunity for Smith micro is better than it has ever.
Are yours.
That said I will open the call to questions operator.
Okay.
Thank you.
We will now begin the question and answer session.
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At this time.
We'll pause momentarily to assemble our roster.
Yeah.
Your first question comes from Josh Nichols.
B Riley FBR. Please go ahead.
Yes, Thanks for taking my question and good to see everything with T mobile.
Get launched here I know thats been a long time in the making and the team put a lot of effort in.
So that.
Could you dive into a little bit about where T. Mobile is terms of marketing and training initiatives has that begun to be rolled out to there.
That had been put in place to begin to ramp. This in your kind of expectation for what you may do whether it's trading or help with digital marketing initiatives.
Yes, Josh I guess, the way to kind of look at it first off.
That's a question you are really going to have to ask of cheap T. Mobile, we cant really directly answer that.
It's really something this comp confidential to them. So we're working hard with them. We are focused with them. They are focused so everything is positive, but that youre going to have to ask them.
Fair enough and then just looking at the trajectory here, you mentioned that youre expecting to see a ramp in revenue.
In the second half.
Could you kind of mentioned before and with revenue kind of flattish for <unk>.
Just curious like how much of the revenue lift in comp suite is related to like the legacy sprint stuff. If we're trying to.
Figure out how much of that may be due to the potential runoff over the next couple of quarters.
We would anticipate like roughly in the second quarter, maybe a third of the revenue would be related to the sprint T mobile portion.
Yeah.
So then if.
If I'm just looking for AT&T and Verizon.
You mentioned before and reaffirming that you expect to migrate those customers over to safe path platform by the end of this year.
Fair to assume that that would require a new contract signing and given that the economics of the old agreement is probably not reflective of the value that you bring in.
When do you think that we might see some type of update contract agreement if that is the case.
You know when we have a contract done and we have approval from our customer will come to the street and talk about it but at this time we can't.
Fair enough I'll hop back in the queue. Thanks, guys.
Thank you.
The next question comes from Jim Missouri.
James Please go ahead.
Yes. Thank you good afternoon.
You talked you talked about <unk>.
Increased costs for contractors for the migration I was hoping you could.
Hi, how big that's going to get in dollars and then secondly.
Do those costs go away when the migration is done or did the costs just get redeployed into something else that is or are these contracts are cost permanent.
Permanent, but they just might get.
Spent on something else.
So the contractor costs are not permanent.
Lot of the thought behind bringing on these contractors is the fact that we're very focused on getting.
The two carriers migrated.
This year.
And we felt the most effective way to do that would be to bring on contractors in that way at the end as we get to the migrations will be able to eliminate those costs with no real real tail. So we would expect those to be eliminated.
When when we are migrated.
For your first question.
Back to the guidance, where we believe that the operating expenses.
The second quarter will increase 2% to 4% off of our first quarter and that's going to be largely driven by those contractor costs.
Yeah.
Okay.
That's helpful.
And then as far as Q2 goes.
It sounds like.
<unk>.
It sounds like do you spot is flat to up Tom suites down and safe path is.
Flat.
Flat to flat is that is that directionally, where we are.
Thank you that's pretty pretty much it I think.
The good the good part is that much of the comp suite revenue by the end of the year almost all of them will be coming from.
Ongoing business with dish wireless and their prepaid bands brands boost and so I think that will and that drama and we would look to continue to to re grow our comp comps constantly revenue going forward.
Got it got it and the risks too.
The state path growth.
How would you rank that is that mostly the customers.
Staying on track is that it.
Is that.
Our migration issue.
That is in your control.
How do you how do you rank the risks to achieving your safe path goals for the year.
That's a great question.
View it.
In two different ways.
First off if you look at it from a migration STAM standpoint, clearly we have to perform and deliver the final saw software, but once that's done.
A lot of the risks then goes over to our customers' hands, because they have to deploy it and get it up and running so there is a certain amount of risk.
I can sincerely say that.
We will do everything in our power to make sure that we meet our schedules.
Because we really want to get this migration complete.
I also believe that our customers will do everything in their power to deploy.
This new product will have significant upgrades and improvements over the product, they're currently selling whether it's old safe path or whether it's the old ring.
The deal of <unk> ring product so.
There is plenty of motivation for both parties to get things done on time.
The next part of it where there is some some risk is really all about the execution of the marketing plans. We are you know.
Deeply.
<unk> involved in this with all of our carriers.
But in the final.
<unk> you.
Does fall upon the carrier to execute the plan.
Yeah.
From a financial staff standpoint, there is incredibly strong motivation for all parties to execute this sharply.
So there's plenty of reasons to feel that the risks are are reasonable.
And that we can deal with it.
But.
You also do need to recognize there are still a risk and.
And we will work our way through it.
Alright, that's very helpful. Bill Thanks, a lot I'll.
I'll yield the floor take care guys.
Thank you.
Ladies and gentlemen, if you have a question. Please press star one.
The next question comes from Bruce Goldfarb with.
Lake Street capital markets. Please go ahead.
Kevin and Bill Congratulations on all your progress.
And thank you for taking my questions.
When do you expect material revenue from the T mobile account.
Well there is the.
Material revenue now so.
The first step was to get safe past seven in the marketplace.
As I said in the pre prepared.
We're now going through a period of.
Continued assessment to make sure that everything in the new product is functioning properly.
When the customer is happy with.
Those results then they can start really focusing on executing the growth strategy. So.
It's meaningful and we hope that it becomes even more meaningful as the growth starts.
Okay.
You've probably answered this earlier, but are you seeing signs of activity.
And till T mobile stores. It sounded like you said earlier, you didn't have visibility to that.
Well again, we are.
Not at a point, where we can talk about that so.
I really can't answer that question.
Okay. Okay.
And then lastly.
Lastly, how are those how is the integration synergies tracking since the <unk> acquisition.
<unk>.
It's really the real synergies that we'll be able to obtain will occur once we're able to transition to.
On the same path platform on all for all the carriers.
Yes.
We really are trying to push towards the <unk>.
By the end of the year and to have all this migration is complete and that will allow us to realize all those synergies.
In the first quarter of 2023.
Great. Thank you.
All my that's all our questions and congrats again on all your progress.
Thank you.
Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Mr. Charles Messman for any closing remarks.
Well, thanks, everybody for joining us I know, it's a very busy time. We appreciate that if you have further questions. Please feel free to give us a call and thanks again.
Hello.
Yeah.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.