Q4 2022 Smith Micro Software Inc Earnings Call
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After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Charles Messman. Please go ahead, sir. Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Smith Micro Software's financial results for the fourth quarter and year ended December 31, 2022.
By now you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit the investor relations section of our website at www.smithmicra.com. On today's call, we have Bill Smith, our Chairman of the Board, President and Chief Executive Officer and Jim Kempton, our Chief Financial Officer. Please note that some of the information you will hear during today's call consists of good-looking statements, including without limitation...
Those regarding the company's future revenue and profitability, our plans and expectations, new product development, new and expanded market opportunities, and new and expanded market opportunities.
future product deployments, migrations,
and or growth by new and existing customers.
operating expense, and the company's cash desserts.
Forward-looking statements involve risk and uncertainties, which could cause actual results or trends to differ maturely from those expressed or implied by a forward-looking statement.
For more information, please refer to the risk factors included in our most recent filed Form 10-K in our subsequent filings on Form 10-Q .
This micro-assume no obligation to update any forward-looking statements which speak of our managers' beliefs and assumptions only as the date they are made.
I'd like to point out that in the forthcoming prepared remarks, we will refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for that reconciliation of these non-GAAP financial measures. With that said, I'll turn the ball over to Phil. Phil? Phil, thank you so much for joining us today.
Thanks, Charlie. Good afternoon and thank you for joining us today for our 2022 fourth quarter and year end conference call. I'm excited to share with you some important progress we've made on several fronts throughout the fiscal year. But as many of you know, we've
We also recently experienced a setback.
As noted in our February 27 press release, we received
Notice from one of our Tier 1 Carrier customers.
that it has decided to terminate the family safety portion of our relationship. That termination takes effect on June 30, after which we will provide support during the transition period up to 180 days as specified by our contract. There are a few important points to note.
While we no longer expect any growth from this partnership,
If we expect to continue to earn monthly revenue from this contract until the end of the transition period through the remainder of 2023.
While we were taken by surprise and certainly disappointed by this turn of events, it's important to note that the commercial terms of this partnership were those that we inherited in our acquisition of the contract and candidly.
they were not very favorable. So although this news will have a negative impact on our top line revenue, it will yield an increase in our average revenue per subscriber.
Additionally, as we eliminate the associated costs and reallocate others to more profitable relationships, we expect to see improvements to our gross margins as early as Q2 of 2023.
Additionally, as we eliminate the associated costs and reallocate others to more profitable relationships, we expect to see improvements to our gross margins as early as Q2 of 2023. With all of this said,
We clearly understand the impact of what just happened.
And our focus is on how we are going to deal with the challenge.
The first step is to align our expenses
effective immediately.
We will implement actions to reduce our expenses by four million dollars per quarter.
We have been able to immediately cease all migration activities for this carrier, which will allow us to significantly reduce personnel, both in terms of the number of resources we need to support product development and delivery efforts.
for the customer and in terms of back office resources. In addition, certain non-personnel related costs can be rationalized as a result of this action.
Collectively, these factors give us confidence to achieve this level of cost savings in the near term.
We believe the balance of our business is solid.
I will discuss that viewpoint in more detail in the second part of my presentation after Jim has provided his financial overview.
With the immediate expense reductions, our goal will be to post break even or profitable results perhaps as soon as Q2 of this year and not later than Q3 and to grow our profits during the remainder of the year.
On that note, I will turn the call over to Jim Kempton, our Chief Financial Officer, who will provide you with more specifics on our financial results, after which I will discuss our business case going forward.
Jim?
Thanks, Bill. And good afternoon, everyone. As a reminder, we acquired the Avas Family Safety Mobile business in April 2021, which impacts the year-over-year comparisons that I'll be discussing today.
I will now cover the financial details of the fourth quarter in full year 2022.
For the fourth quarter, we posted revenue of $11.4 million compared to $14.7 million for the same quarter of 2021.
a decrease of approximately 22% as a result of the decline in Calm Suite revenues coupled with a decrease in family safety revenues.
When compared to the third quarter of 2022, revenue decreased by approximately 300,000 or 3%.
Revenue for 2022 was approximately $48.5 million versus $58.4 million last year.
The $9.9 million decrease is due to a decline in calm sweet revenues coupled with a decline in family safety revenues.
During the fourth quarter of 2022, family safety revenue decreased by $2 million for 17% compared to the fourth quarter of last year.
primarily as a result of the reduction of the safe and found platform revenue related to the continued attrition of legacy Sprint subscribers driven by T-Mobile's acquisition of Sprint.
Family safety revenues were essentially flat compared to the third quarter of 2022.
During the fourth quarter of 2022, ComSuite Revenue was approximately 900,000, which decreased approximately 1.3 million compared to the 2.2 million revenue produced in the fourth quarter of 2021. This decrease is primarily attributable to the decline in legacy sprint subscribers.
the prior quarter. ViewSpot revenue was approximately $800,000 for the fourth quarter of 2022, which was essentially flat compared to the fourth quarter of 2021 and decreased approximately $200,000 compared to the third quarter of 2022.
As a reminder, FuseBot 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. In the timing and volume associated with this portion of the revenue stream is less predictable. While we are seeing increased levels of marketing for our family safety products for certain carriers, we are not expecting a significant increase in subscribers in the first quarter of 2023 given the activity the day.
While we do expect revenue to increase for certain of our carrier customers quarter over quarter, we don't anticipate enough of an increase to offset the projected decline in revenues for certain of our legacy product lines in the current quarter, including safe and found.
As such, we expect consolidated revenue for the first quarter of 2023 to be lower by 2 to 5% compared to the fourth quarter of 2022.
For the fourth quarter of 2022, Gro's profit was $8.1 billion, compared to $10.6 million during the same period in 2021.
Gross margin was 70.8% for the fourth quarter of 2022 compared to 72% for the fourth quarter of 2021.
The gross profit of $8.1 million for the fourth quarter of 2022 was flat compared to the gross profit produced in the third quarter.
In the first quarter of 2023, we would expect gross margins to be relatively in line with the current run rate.
For the year ended December 31, 2022, gross profit was $34.3 million compared to $45.7 million during the prior year. Gross margin was 70.7% for the December 31, 2022 year-to-date period.
Yeah, operating expenses for the fourth quarter of 2022 were $15.2 million, an increase of approximately $700,000 or 5% compared to the fourth quarter of 2021.
This increase was caused by an increase in amortization expenses of approximately 1.4 million due to the one-time adjustments related to the finalization of the Avast acquisition purchase accounting recorded in the fourth quarter of 2021. Note that the amortization expense of the Avast acquisition purchase accounting is
of $1.5 million in the fourth quarter of 2022 was in line with the immunization expense reported in the third quarter.
YAP operating expenses for the year ended December 31, 2022 was $65.2 million, a decrease of $11.4 million, or 15%, compared to the prior year.
non-GAAP operating expenses for the fourth quarter of 2022 were $12 million versus $13 million in the fourth quarter of 2021, a decrease of approximately $1 million, or 8%.
Sequentially, non-GAAP operating expenses decreased by approximately 1.1 million, or 9%, from the third quarter of 2022, primarily due to decreases in personnel-related cost and in contractor costs related to the safe path migrations.
We expect first quarter 2023 non-GAAP operating expenses to decrease from the fourth quarter of 2022 by 4 to 8 percent due to continued actions to reduce our cost structure, including the closure of our Prague, Czech Republic operations as of December 31, 2022.
As Bill mentioned in his remarks, we are taking additional actions to significantly reduce our costs even further and anticipate that these actions will result in over $4 million of quarterly savings from our aggregate total non-GAAP operating expenses and cost of sales for the fourth quarter of 2015.
costs by no later than the third quarter of 2023.
We are also very confident that we will achieve at least 3 million of these savings in the second quarter of 2023.
As some of these savings will be derived from our cost of sales, we are expecting to see an expansion in our gross margins beginning in the second quarter as well. Circling back to the results for 2022, non-GAP operating expenses for the year ended December 31st, 2022, was 52.5 million.
an increase of $4.7 million, or 10%, compared to 2021, primarily driven by the four-year impact of the addition of the Avas business in April 2021.
The gap net loss for the fourth quarter of 2022 was $8 million, or 14 cents loss per share, compared to a gap net loss of $4 million, or a 7 cent loss per share in the fourth quarter of 2021.
The gap net loss for 2022 was $29.3 million, a 53 cent loss per share, compared to a gap net loss of $31 million, or a 61 cent loss per share in 2021.
The non-GAAP net loss for the fourth quarter of 2022 was $4.3 million, or 8 cents loss per share, compared to a non-GAAP net loss of approximately $2.4 million, or 4 cents loss per share in the fourth quarter of 2021.
The non-gap net loss for the year ended December 31, 2022 was 18.8 million or 34 cent loss per share compared to a non-gap net loss of approximately 2.2 million or 4 cent loss per share in 2021. Within today's press release,
We have provided a reconciliation of our non-gap metrics to the most comparable gap metric.
Stock compensation expense of $1.1 million, convertible note in stock offering fees and amortization of $1.7 million, and severance related costs of approximately 600,000, partially offset by fair value adjustments of $1.2 million. For the year-to-date period, the reconciliation includes adjustments for intangible asset amortization of $6.3 million, stock compensation expense of $4.4 million, convertible note in stock offering fees and amortization of $3.1 million, and severance related costs of approximately 1.4 million, partially offset by fair value adjustments of $4.7 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 the 0% tax rate for 2022 and 2021.
The resulting non-GAAP tax expense reflects the actual income taxes expense during each period.
and we expect it to launch into the market in Q3. Our Q2 delivery will also complete the process of extracting select functionality from the former Avast platform and incorporate it into the SafePath version that AT&T will launch, thereby ensuring we roll out a best-of-both solution going forward. This will also conclude all of our customer migration efforts.
In addition to the operational and expense-related benefits of moving AT&T to SafePath, we also believe that the newest versions of SafePath represent a far superior product with greater value to AT&T,
It's multi-line consumer subscribers and a Smith micro compared to the incumbent version.
This also now creates opportunities for us to upsell additional services on our platform such as SafePath Home, Drive, and IoT.
It will also allow for substantial growth of the Family Safety User Base at AT&T.
T-Mobile is already deployed on the SafePath 7 platform, and with the completion of the integration of the best features of the Avast code base into SafePath, we can also offer these extensions to T-Mobile. We believe this enhanced offering will provide new excitement around the Family Mode product and offer a new opportunity to grow the family safety subscriber base. We are working with T-Mobile.
We believe that these efforts have strengthened our relationship with DISH and they lead to other opportunities down the road. Our existing ViewSpot business continues to remain stable. I hope you saw our press release last week around ViewSpot's expanded data capabilities. We believe that.
ViewSpot data can help our customers correlate their consumers in-store use of retail display devices to the retailer's sales, thereby increasing the value and relevance ViewSpot provides.
This is an exciting part of our efforts to make ViewSpot a more important part of the customer's data-driven intelligence and retail success. On another front, we just completed a very successful Mobile World Congress in Barcelona.
With our completely rebuilt European sales team, we believe that there are strong opportunities for growth in this market. We believe that both SafePath and ViewSpot have robust applicability and opportunity in Europe . We particularly see untapped potential in the European market, both among Tier 1 carriers and European sales teams.
as well as their regional operating companies in higher ARPU markets, each of which often selects vendor partners
We met with dozens of European carriers in Barcelona focusing on both the SafePath and ViewSpot product offerings and received very positive reactions.
to our presentations. In conclusion, we made significant progress during Fiscal 2022 on one of our primary objectives.
the unification of our digital family lifestyle business to a best of single platform.
We are confident that the outcomes of increased operational efficiencies, cost savings, and a vastly improved product affirm the value of this hard work and provide a strong base from which we can grow.
With the significant cost reductions discussed earlier, we see a clear path to profitability, potentially as early as Q2 of this year. We remain bullish on our future and focus on returning to growth.
profitability, and free cash flow.
With that, I will open the call for questions. Thank you. We will now begin the question and answer session.
To ask a question, you may press star then one on your touch tone phone.
If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Scott Seril with Roth and KM. Please go ahead. Yeah.
And the first question will come from Scott Cyril with Roth and KM. Please go ahead. Hey, good afternoon. Thanks for taking my questions.
Hey Bill, maybe just to jump in quickly on T-Mobile, it seems like that account is stabilized there. You've got the Safe Path integration done. You are waiting for the marketing campaign to begin. When do you expect that to return to sequential growth? Is that something that we should expect in the second quarter, or is that the second half of this year?
I would think to be conservative I would look at the second half but we may be able to get some growth in the second quarter. We'll have to wait and see.
And maybe shifting over to AT&T, I think you announced earlier in the year that pricing renegotiations had been completed. When does that kick in? Does that kick in with new subscribers? Is there a timeline where all the existing subscribers are repricing? How should we think about that in terms of when it's going to start to...
in that direction.
Okay, well first off, the AT&T contract, the terms took effect when we signed the contract. So they are already in effect. As far as from the standpoint of growth, the AT&T contract is still in effect.
of the installed base. There is extreme excitement within the customer and they
really for the first time, so many different areas and strengths that AT&T has. In the past it was always fairly well handled by a working team, but it's much broader now. And I think that is the positive side of things. And I feel very confident.
looking for some real strong and extreme growth going forward out of this customer.
Gotcha. And lastly, if I could, and then I'll get back in the queue, just to follow up on Mobile World Congress. It sounds like there was a lot of dialogue, a lot of positive activity. What are your assumptions for this year or goals? Did you expect to close a couple of deals? Do you think it's more likely to see tier 1s, tier 2s? How should we be thinking about that opportunity?
both in 23 and 24. Thanks. Okay, I would say first off in Europe , our primary focus will be around the tier one large groups. Now each group has operating companies in each country.
And so it usually gets rolled out one country at a time. As far as do we think we can close business in Europe ? The answer is absolutely yes. And we are bullish on what we've seen. We have rebuilt our team. We think our team is very strong now. They are experienced people and selling to wireless carriers.
They've done this before and they're just very anxious to get busy. That showed at Mobile World Congress and we feel very very bullish about that.
done this before and they're just very anxious to get busy. And that showed at the at Mobile World Congress. And we feel very, very, very bullish about that. Thank you.
The next question will come from Josh Nichols with B Riley SPR. Please go ahead. Yeah, thanks for taking my question. Just as a follow-up on ATT and T-Mobile, maybe you get to growth in T-Mobile and 2Q, maybe it's the second half, is there any timeline for when the new marketing campaigns are going to be released?
It's across the board. We like to call it our multi-channel. I can't really get into specifics on timing because it's really more around T-Mobile and AT&T. I can tell you that specifically with AT&T, it will be at launch. That is part of our game plan as we stand today. But it is also, you know, it's all of the above. It's digital.
It's retail, it's customer support, etc., etc. Thanks. And then if you could just provide a little bit more color on the expectation for gross margin. I know you're taking out $4 million of quarterly costs. Part of that's in the COGS line. Once you move ATT over the new platform in the second half, what's the expectation for the margin profile for gross margins in the back?
we will be able to eliminate some of the legacy ring costs. But candidly, until all the carriers are off, we're not going to be able to eliminate all of those costs related to the legacy product. But again, some of the cost reduction activities that we're taking will impact the cost of goods sold.
And as a result, we would expect some uptick from where we currently are in the gross margins. Thanks. And then the last question for me, I know with the surprise contract termination here, that the company is a little bit on a tighter time frame. Fortunately, you have two carriers that are looking.
I'm just curious what you could do to help accelerate that and get the company back to sequential growth in a more meaningful fashion later this year. Yeah, Josh, I think the number one is as soon as the notice was given to us, we ceased all activity for the canceling customer.
really the lowest possible profit of any of them. So if you had to pick one to lose, this was the one to lose. And we've moved forward from that. By moving a number of people now over to AT&T and working on different projects for T-Mobile and for working through the roadmap development efforts, we've accelerated all those efforts. And hopefully we'll be able to move things even faster. Thanks, Bill. I appreciate it. The next question will come from Jim McElroy.
you have to let us take the action and then we can talk more about it.
we are going to take that fourth quarter number and you're going to see four million eliminated from those total costs. So that is the new line in the sand. Yeah, and I can add to that, you know, when we announced that we were going to be reducing our expenses in the second quarter of 22, we took that action and you saw our OpEx drop in Q2, Q3, and also in Q4 of 22. So this is a continuation, obviously a big step towards returning to profitability. Got it.
And as far as the cessation of the work that you've been doing for this Tier 1 customer, as well as the whatever reductions you're taking.
I'm assuming that there's going to be some combination of cash and non-cash charges in Q1 and Q2. Is that right?
be some combination of cash and non-cash charges in Q1 and Q2? Is that right? Yes.
That would be accurate. Great. And I'll just assume that
would be accurate. Great. And I'll just assume that you're going to make me wait for those as well.
Yes, sir. All right. Okay. That's it for me. Thanks, guys. Thanks, Jim. The next question will come from Matthew Harrigan with the benchmark. Please go ahead and excuse me. Good.
Thank you. Two questions, actually one on safe path and one on the D spot. Firstly, I know you're not going to comment on how the mystery tier one mobile carrier is going to replace your product but clearly family safety is a priority for their business.
But can you comment on how you feel about your IP stack? I know there's a lot of code that has to be written. It seems like it's almost pretty inefficient to bump you, especially if they had a particularly advantageous contract. I know that there's sort of fixation with.
having things in house, but even so, it's a bit of a surprise to me. And then secondly, on G-Spot, I mean, clearly in marketing and advertising, attribution and purchase decisions is really the holy grail that everyone's worked on for decades, and a lot of that is getting closer to fruition now. But do you feel like you're under marketing that product and there could be a lot more?
The first part is we do not believe, based on what they've told us, that they are using a competitive product from a third party software developer like us. We do believe that they are developing this internally.
All the points you make, the fact that they were, you know.
all that cost. Yes, there's lots of reasons to pause and wonder, but you know what? I have to run a business and we have to get profitable and we have to start growing and we gotta get our stock price up. So I can't labor on that anymore. I am totally focused on making AT&T and Teva will deliriously happy with the products that they have.
And my goal is to make sure that both AT&T and T-Mobile dominate the space with Tier 1 carriers here in the U.S.
And that's what it's all about. As far as the marketing stuff, Charlie, you want to take a shot at that? Sure. Thanks, Matti. I think it's fair to say that we actually do have quite an aggressive marketing campaign going on with ViewSpot. It actually is the same team.
a broader market with vSpot. We're not just going after the carriers now, we're going after the retail settings and vSpot has opened that up and we'll continue down that path. We've got a really good pipeline right now and you know we're really excited about vSpot so I don't see it as pulling one from the other. I think it's both the same going forward if that makes sense.
Two great answers. Thank you. Again, if you have a question, please press star, then 1.
This will conclude our question and answer session. I would like to turn the conference back over to Mr. Charles Messman for any closing remarks. Please go ahead, sir. I just want to thank everyone for joining us today. We appreciate it.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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