Smith Micro Software Inc. Q1 2023 Earnings Call
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Speaker 2: Good day, and welcome to the Smith Micro first quarter 2023 earnings conference call. All participants will be in listen-only mode. All participants will be in listen-only mode.
Speaker 2: Should you need assistance, please signal a conference specialist by pressing the start key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question you may press star than one of your touch-tone sound.
Speaker 2: I would now like to turn the conference over to Charles Messman, Vice President of the Investor Relations and Corporate Development. Please go ahead.
Speaker 3: Thank you operator and good afternoon everybody. We appreciate you joining us today to discuss Smith-Micros financial results for our first quarter and March 31, 2023.
Speaker 3: By now you should have received a copy of our press release with the financial results.
Speaker 3: If you not have a copy and would like one, please visit the Investur Relations section of our website at www.snittmichro.com.
Speaker 3: 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.
Speaker 3: Please note that some of the information you would hear during today's discussion consists of void-looking statements, including without limitations, those regarding the company's future revenue and profitability, our plans and expectations, new product development, new and expanded market opportunities. Thank you.
Speaker 3: Future product deployments, migrations, and are growth by new and existing customers, operating expenses, and the company's cash reserves.
Speaker 3: Forward-looking statements involve risk and uncertainty, which could cause actual results or trends to differ materially from those expressed or implied by forward-looking statements.
Speaker 3: For more information, please refer to the risk factors included on our most recently filed Form 10K and in subsequent filings on Form 10Q.
Speaker 3: This microlet seems no obligation to update any forward-looking statements, which speak to our man's beliefs and assumptions only as a date they're made.
Speaker 3: I want to point out that in our forthcoming prepared remarks, we will refer to nonspecific financial measures. Please refer to our press release disseminated earlier today for reconciliation of these non-GAAP financial measures. That said, I'll now turn the call over to Bill. Bill?
Speaker 4: Thanks, Charlie. Good afternoon and thank you for joining us today for our 2023 First Quarter Conference call.
Speaker 4: As I look at the first quarter, I am quite pleased with the overall progress we made on some of the initiatives that we outlined and discussed during our fourth quarter conference call.
Speaker 4: First off, on our last earnings call, we reported that we had set a goal to reduce our expenses by $4 million per quarter during 2023 as compared to fourth quarter 2022.
Speaker 4: We intended to achieve those savings on an expedited basis.
Speaker 4: We took decisive measures across the entire organization in March to help us reach the goal, taking actions that will result in the elimination of approximately 26% of our global workforce as well as taking certain other measures.
Speaker 4: that we anticipate will result in achieving our cost reduction goal in the second quarter.
Speaker 4: This will bring our aggregate non-gap expenses to approximately $11 million compared to $14.3 million that we reported in the first quarter. Implementing our plan with such swift action was a challenging task.
Speaker 4: and I am pleased that this alignment of the cost structure will position the company for a return to profitability.
Speaker 4: Another key initiative was the migration of the AT&T Secure Family Application to the Safe Path Platform.
Speaker 4: I am happy to report that we expect to deliver the new bill later this month at M.T. for their testing process.
Speaker 4: which we believe aligns well for a public launch during the third quarter.
Speaker 4: This is a significant milestone for the company and we're looking forward to our successful launch.
Speaker 4: Lastly, I am very encouraged by the increase of new sales activities that I will talk about later in the call.
Speaker 4: We overhauled our sales organization over the last year under the leadership of on camera and our chief revenue officer and we are starting to see the benefits of these changes. Before Jim covers the financial results for the quarter, I want to cover a few highlights.
Speaker 4: The first quarter results came in line with our expectations with revenue for the first quarter of 10.9 million. Down from 11.4 million, we reported in the fourth quarter.
Speaker 4: We dizzy our non-GAP gross margin, check up to 72% this quarter, and upward trend, we anticipate continuing in the second quarter. In addition, we continue to drive down our operating expenses.
Speaker 4: with our quarterly non-gap operating expense down by about 2.5 million compared to second quarter of 2022 when we started our initial cost reduction campaign. This resulted in a non-gap net loss for the quarter of 3.5 million or a loss of six cents per share.
Speaker 4: Let's now turn the call over to Jim for a more detailed analysis of our financial results. Jim?
Speaker 5: Thanks, Bill, and good afternoon, everyone.
Speaker 5: I wanted to start my presentation today by calling out a change we're making to our non-gap presentation.
Speaker 5: Starting this quarter, we are adjusting for depreciation as part of our non-gap presentation.
Speaker 5: with the thought being that this is similar to our adjustment for amortization and is a non-cash item. In the numbers being discussed today, the prior period non-GAP results have also been recast so that the results I'll be discussing are on a consistent basis.
Speaker 5: As a frame of reference, the appreciation was approximately 200,000 in the first quarter of 2023.
Speaker 5: With that, I'll now cover the financial details of the first quarter of 2023. For the first quarter, we posted revenue of 10.9 million compared to 12.7 million for the same quarter of 2022.
Speaker 5: a decrease of approximately 14 percent as a result of the decline in family safety revenues.
Speaker 5: When compared to the fourth quarter of 2022, revenue decreased by approximately 500,000 or 4%. During the first quarter of 2023, family safety revenue decreased by 1.3 million or 12% compared to the first quarter of the prior year. Primarily as a result of the reduction of the legacy safe and found platform revenue related to the continued attrition of legacy sprint subscribers, driven by TMO's acquisition of sprint.
Speaker 5: Family safety revenues declined by approximately 600,000 compared to the fourth quarter of 2022.
Speaker 5: During the first quarter of 2023, ComSuite revenues was approximately $800,000, which decreased approximately 600,000 compared to the 1.4 million in revenue produced in the first quarter of 2022.
Speaker 5: This decrease is primarily attributable to an implementation fee of approximately $300,000, recognized in the first quarter of 2022, coupled with the attrition of legacy Sprint subscribers off of the CommSuite platform over the past year.
Speaker 5: Revenue related to Sprint was negligible in the first quarter of 2023.
Speaker 5: View Spot Revenue was approximately $1 million for the first quarter of 2023, which increased approximately $100,000 compared to the first quarter of prior year and $200,000 compared to the fourth quarter of 2022. As a reminder, View 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.
Speaker 5: Primarily as a result of this decline, we expect consolidated revenue for the second quarter of 2023 to be flat to lower by 4 percent compared to the first quarter of 2023. For the first quarter of 2023, gross profit was 7.6 million compared to 9.1 million in the same period in the prior year due to the period over period decline in revenue and approximately 200,000 of severance related costs incurred.
Speaker 5: non-GAAP gross margin for the first quarter of 2023, which excludes its severance, was 71.8%. The gross profit of $7.6 million in the first quarter declined by approximately $400,000 compared to the gross profit produced in the fourth quarter. In the second quarter of 2023, we expect gross margin to increase by approximately 150 to 250 basis points from the adjusted gross margin of 71.8% for the first quarter of 2023. GAAP operating expenses for the first quarter of 2023 were 14.7%.
Speaker 5: 14%
Speaker 5: Sequentially, non-GAAP operating expenses decreased by approximately 500,000, or 4%, from the fourth quarter of 2022, primarily due to decreases in personnel-related costs in contractor costs related to the Safe Path migration.
Speaker 5: We expect second quarter 2023 non-GAP operating expenses to decrease from the first quarter of 2023 by 25 to 30 percent due to the recent actions undertaken to reduce our cost structure.
Speaker 5: In March, we conducted a global reduction in force, resulting in the elimination of personnel in the United States, Portugal, and Serbia. In addition, we announced the closure of the Arizona Slovakia Development Office as of June 30, 2023. Similar to our closure of our Czech Republic Operations in the fourth quarter,
Speaker 5: Because of statutory requirements, the closure required a notice period for the personnel in that location.
Speaker 5: In addition, we reduced the base salaries of our executive officers and the cash fees paid to our board of directors by 10% and suspended our quarterly bonus program.
Speaker 5: As a result of these and other cost reduction actions, we anticipate that our cost reduction goal 4 million of savings from our aggregate total non-gap quarterly operating expenses and cost of sales for the fourth quarter of 2022 of 15 million will be achieved in the second quarter.
Speaker 5: In other words, in the second quarter, we anticipate our aggregate non-gap cost of sales and non-gap operating expenses will be reduced to approximately 11 million compared to the 14.3 million reported in the first quarter. The GapNet loss for the first quarter of 2000-
Speaker 5: was $3.6 million, or $0.06 loss per share, compared to a non-GAAP net loss of $3.9 million, or $0.07 loss per share in the first quarter of 2022.
Speaker 5: Within today's press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric.
Speaker 5: For the first quarter of 2023, the reconciliation includes adjustments for a reasonable asset amortization of 1.5 million.
Speaker 5: stock compensation expense of 900,000, convertible note in stock offering fees in the
Speaker 5: partially offset by fair value adjustments of 2.4 million. Due to our cumulative net losses over the past few years, our gap tax expense is primarily due to certain state-informed income taxes. For non-gap purposes, we utilized a 0% tax rate for 2023 and 2022. The resulting non-gap tax expense reflects the actual income taxes expense during each period.
Speaker 5: From a Valenci perspective, we reported 8.7 million of cash and cash equivalents as of March 31, 2023.
Speaker 4: This concludes my financial review. Now I'll turn it back to Bill. Thanks, Jim. Let's first look at AT&T and the progress made on the migration efforts for secure family. As I mentioned earlier, we remain on track for delivery of our SafePath-based version during the second quarter, when AT&T can begin their final testing efforts, which we believe will set the stage for a public launch sometime during the third quarter. These migration efforts have been a long journey for Smith Micro, and completing this effort will be a big achievement for the company.
Speaker 4: I want to note in addition to creating a best-of-breed product that incorporates select features of the former of OS platform into SafeFab. Another critical, yet time-intensive aspect of this effort was our investment in...
development that will allow us to maintain existing subscribers' user experience without interruption. Preventing extensive migration-driven churn among the existing subscribers is an important goal as we seek a user-friendly process that seamlessly moves the user.
resources to new customer activities and enable the expansion of our safe path road now going forward.
Beyond migration focused activities, our teams continue to collaborate with the AT&T team on a series of growth marketing initiatives across different distribution channels, some of which have already started as we begin building momentum going into the launch.
Our partnership with T-Mobile continues to progress well. We had several new releases so far this year across their various family safety offerings to support T-Mobile in executing on several strategic and operational initiatives. Our internal team remains focused on and committed to both vertical and horizontal expansion of our working relationships with key T-Mobile stakeholders, which we believe will lead to additional marketing opportunities to drive subscriber growth.
We continue to help DISH launch its COM suite driven visual voicemail as one of the first value added services on the DISH wireless network.
as well as on the migration of boost-mobile premium visual voicemail subscribers over from the legacy T-mobile billing system to the new dish wireless billing system.
This has been a very complex project and we believe that our efforts have strengthened our partnership with DISH. This could provide us with an opportunity to collaborate with them on offering other value added services to their subscriber base in the future periods.
and grow wood dish as it expands its footprint in the wireless space.
perhaps both in North America as well as in the media region. Perspective customers are recognizing the value that view spot can add with its analytics and content, filtering capabilities. Our existing view spot business remains stable with a recent extension of one of our existing contracts being executed in March. Beyond our view spot opportunities, I remain very optimistic as our sales team has driven an expansion of our sales pipeline over the past several months.
and it's positioned us to close a portion of these opportunities over the next several quarters.
The feedback from our sales prospects, both in the US and high R2 markets across Europe , has been very positive.
despite the typically long sales cycle in our business.
including our go-to-market strategies and the way in which we sell our products. We need to close these opportunities, but I am bullish about our prospects and hope to be discussing new clients for both the use spot and safe map with you over the coming quarters. As we announced on the last quarterly call, we have established a goal of achieving $4 million in savings from the total non-GAAP expenses that we reported in fourth quarter of 2022. To that end, I am pleased to report.
and are ahead of the schedule as we expect to achieve this target during the second quarter. This expense reduction effort crosses all parts of our organization and is an ongoing effort to optimize the organization as we near the completion of the AT&T migration. Looking ahead, once we completely decommissioned the legacy ring application and reduce expenses associated with maintaining two different platforms,
we will be able to reduce third-party costs associated with that product, thereby consolidating our costs to further enhance our gross margins and align our team's focus to only safe path going forward. Collectively, these actions position us to be safe and effective.
on a direct path to return the company to growth and profitability.
As you all know, we have encountered some headwinds in our business over the past few months.
Some of those are common across many sectors of the software industry.
But fortunately most of the challenges are within our own scope of control. And we are meaning these challenges had on.
That leaves us empowered and enthusiastic as we chart our course forward.
In conclusion, with the latest technologies,
We've acquired and the migration efforts complete. We can now put our effort on the acceleration of our road them to increase market opportunities.
We continue to operate our business based on sound strategy and remain confident that we have the right people, products, and processes to execute against that strategy.
We have already started seeing significant progress in curtailing the expense side of the business.
where we were able to make rapid changes and are now seeing early indications of progress on the revenue side. Yes, it has been challenging, but we believe that these challenges have been and will be met, leading to a very exciting time at Smith Micro. With that, operator, we can now open the call for questions.
Our first question comes from Scott Shear with Ross MKM. Please go ahead.
I'm sorry to belabor the point on OPEX, but I just wanted to clarify, Jim, in terms of the $4 million reduction, is that purely in OPEX or is it OPEX in COGS, just for that clarification? And then moving over to the revenue front, Bill, what gives you the confidence now at it?
you know that AT&T is going to ramp in the third quarter. It sounds like your tone on that front has certainly improved. You know, what's really driving that increased confidence?
is encompasses both COGS and OFF-X. So the aggregate expenses, we are from 2-4 of this past year, 2022, we are reducing by 4 million, and that would encompass both COGS as well as OFF-X.
Does that make sense?
Yep, absolutely. Just wanted to clarify. Yep. And then Scott, as we get ready for the launch of the Safe Path based product at AT&T, we are seeing very heavy activity from our customer. They are very engaged. They are very excited.
It reminds me of something I've seen before, and it was a time when we saw some impressive growth at Spritz with a similar product. So, I'm pretty bullish.
Okay, and then real quickly going back to T-Mobile, it sounds like more of the dialogue was focused on AT&T, but T-Mobile is certainly a key customer where you've had success in the Sprint base in the past. What are the last remaining milestones that you have to hit here to start to see an inflection? And lastly, it sounds like there's some incremental opportunities with ViewSpot.
sounds like there's some opportunities internationally, but I'm wondering if there are some numbers in terms of wins that you're looking for within 2023, both review spot and safe pass that are non-AT&T and T-Mobile. Thanks. Yeah, I'm looking. I'm not going to name...
business so I think that the new sales organization led by by Von Cameron is executing very nicely and yes we should see you know wins both in North America and in Europe so then I feel strongly about it.
As far as for the T-Mobile SID, we are seeing some organic growth already. We do believe that this product will perform very nicely there and we just have to continue to work with our customer and support our customer in the support of their users.
And that's something that we're very much focused on. And if we do a good job on that, I'm sure you'll see some nice growth going forward.
Thank you. Our next question comes from Griffin Boss with Be Riley.
is going forward or any more color on that will be helpful.
At this point, we're still committed on the profitability in the third quarter.
So I guess along the same line, I was so curious to give you an additional color on margins in the back half of the year. I know you've got it too cute. Is there anything you could talk to there or is it a little too early to tell?
We don't give guidance beyond the next quarter. What I would just leave you with is that we're expecting the margins off of the adjusted gross margin for this quarter to be up 150 to 250 basis points.
and to at least maintain that or perhaps better as the year goes on.
all? Can those opportunities be quantified at all at this point?
Any additional color? Be helpful. Yeah, hi. I'm giving a status chart. Yeah, I mean, there's been a lot of different activities that are going on. I would call them preliminary type of things. So you've seen some digital marketing. We've run some tests. We've done some training, particularly with some of the different channels.
And I think you'll start to see they have a newsletter. So it's a building process because we want to build momentum into the launch, where you'll start to see a lot more activity. Does that help? It does, yeah. Thank you, Charles. Appreciate it. Alright, that's it for me. Thanks for the time.
Great. Thanks, Chris. Thank you. Our next question comes from Jim McCleary with Dawson James. Please go ahead. Thank you. Bill in your commentary regarding GISH.
If you talked about additional value added services and growing with them, were you referring just to view spot or were you referring to the entire portfolio of services that Smith offers to discuss this? Look, I think we have a...
very positive relationship at dish from the top down.
It would not surprise me to see somebody like dish offering multiple products from us. So we have three of them. One of them is well underway and there's two more so we'll just wait and see.
Okay, thank you. And regarding the AC&T launch in Q3, I was hoping you could...
expand a little bit on how that interacts with the carriers usual
focus on subscriber additions. Can you just discuss a little bit how that might interact with the launch in Q3 with that typical pullback in support?
Yeah, that, the pullback that you're speaking to usually happens, uh, you know,
many months between that point in late November where they can start to grow their base at a good clip. So I think we have time. And I think in this case, time is going to work out. So we'll just wait and see. All right. Thank you. The last one is
Jim, you talked about, I think,
about I think some cost cutting
that needed to be announced to the employees in Europe before it could occur. Has that notification taken place and if not when will it take place?
Yes, that notification did take place because of the statutory requirements in Slovakia. We can announce it, but then it takes a number of months until that can be effectively shut down. So that has already been communicated. That was communicated back in March.
but because the timing requirements around that, that's not going to be effectively shut down until June 30th.
Got it. So the full impact of the 4 million off XCOG cost production, we will see in Q3.
We would expect to achieve the full 4 million reduction in Q2.
Right, but if the headcount reduction in Slovakia doesn't take place until the end of Q2...
you're not going to see the full impact until Q3. That's my question. You won't see the impact of that until Q3, but there's other.
there's other costs that are coming up. So for example, the quarterly bonus program has been suspended for Q2, so things of that nature. So we are going to achieve the 4 million of savings in Q2.
Okay, very good. Thank you. That's it for me. Certainly.
Our next question comes from Harry with Benchmark. Thank you. It feels like unfortunately in this environment, family safety product is almost poker table stakes so to speak for a mobile operator. I was curious if you were seeing a lot more demand.
in-house to try to replicate that capability. Are you kind of seeing a lot of just natural demand? Are you seeing more competition either from other SaaS companies or from the in-house development efforts of carriers who necessarily need to have an offering? Thank you. Yeah, OK, let me try to tackle that. And I guess the way I would say it is this. We're seeing a lot of activity.
from names that will be new in North America, as well as a little broader activity in Europe . There hasn't been a lot of installed base for family safety in Europe , and some of those areas are very high ARPU markets.
You know, it really takes place in both geos that we really focus on. So I think your comment that it is necessary, especially in North America, for carriers to have a family safety offering, I think you're probably right there.
As far as carriers that are doing their own thing, there's only one that we've talked about and that's the only one that we're really aware of at the present time.
Thank you and thanks everybody for joining us today. We appreciate you taking the time. Should you have any further questions, please feel free to give us a call and we'll look forward talking to you on our next earnings call at the second quarter. Thanks everybody. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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