Q2 2023 Smith Micro Software Inc Earnings Call
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Good day and welcome to the Smith micro second quarter 'twenty to 'twenty three earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question.
Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Charles Messman, Vice President of marketing.
Please go ahead.
Thank you operator, and good afternoon, everybody. We appreciate you joining us today to discuss Smith Micro's financial results for the second quarter ended June 30th 2023.
By now you Should've received a copy of our press release with the financial results if.
If you do not have a copy would like one please visit the Investor Relations section of our website at Www Dot Smith micro Dot com.
On today's call, we until 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'll hear during today's discussion consist of forward 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 future.
Future product deployment migration and are grouped by new and existing customers.
Operating expenses and company cash reserves.
Forward looking statements involve risks and uncertainties.
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, and our subsequent filings on Form 10-Q.
Smith micro assumes no obligation to update any forward looking statements, which speak of our management's beliefs and assumptions only as the date they are made.
I wanted to point out that in our forthcoming prepared remarks, we'll refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures.
That said I'll now turn the call over to Bill Doyle.
Thanks, Charlie Good afternoon, and thank you for joining us today for our 2023 second quarter Conference call.
I am excited today.
By an update on our progress on several fronts.
All of which have trended very positively since our last earnings call.
First and foremost I am I am tremendously pleased to finally report that our development activities to add features from the acquired family safety platforms and prepare for migration to safe that are complete.
I recognize that this has been a lengthy effort covering approximately three years and required a significant number of resources. So I'm happy that this effort is now behind us.
Associated with the completion of these development activities, we anticipate AT&T to launch the new secure family in the near term and it had been partnering with them on marketing activities are aligned with the launch.
I will cover more on this subject later in the call.
Another positive is our progress toward the return of Smith micro to profitability through the rigorous methodical execution of our operating plans.
In addition to our quick and decisive responses to the unexpected headwinds described back in Q1, we have moved aggressively to strengthen our business.
Expense reduction as well as through accelerated execution on sales and customer deliveries.
We are making great progress and I want a snake Smith micro employees for their focus commitment and tenacity.
We have a clear path in which our confidence remains high and we are meeting or exceeding many of our interim targets along the way.
Well, Jim will be discussing our quarterly financial results in detail shortly I do want to highlight some key updates on our efforts to return Smith micros to profitability.
During Q2, we out performed the target is $4 million per quarter reduction in our non-GAAP expenses.
We announced earlier this year.
At the same time, we are forecasting revenue growth for Q3 over Q2.
We are also continuing to see progress on several fronts, where our sales team, which I'll touch on in more detail later in the presentation today.
We're improving our gross margins driving them to 75, 5% during the second quarter of this year versus 71.5% for the same quarter of 'twenty to 'twenty two.
We expect an additional improvement for gross margins in the third quarter.
Overall, and most importantly, each of these factors contributes to our confidence that we will return the company to cash flow positive operations and profitability on a non-GAAP basis in this current quarter Q3 of 2023.
I will pause here and let Jim runs through the numbers for the cooler in more detail and then I will share some information about some of our most important opportunities and relationships.
Jim.
Thanks, Bill good afternoon, everyone.
But the second quarter, we posted revenue of $10 3 million compared to $12 7 million for the same quarter of 2022, a decrease of approximately 18% as a result of a decline in revenues across all three product lines.
When compared to the first quarter of 2023 revenue decreased by approximately 600000 or 5%.
Year to date revenues through June 32023 were $21 3 million versus $25 4 million through the second quarter of last year.
The $4 $1 million decrease is primarily due to declines in safe and found family safety revenue related to continued attrition of legacy sprint subscribers driven by T Mobile's acquisition of sprint.
Coupled with a decline in comm suite revenues.
During the second quarter of 2023 family safety revenue decreased by approximately 1.4 million or 14% compared to the second quarter of the prior year, primarily as a result of the reduction of safe <unk> found revenue.
Family safety revenues declined by approximately 300000 compared to the first quarter of 2023.
During the second quarter of 2023 columns suite revenue was 700000.
Which decreased by approximately 700000 compared to the 1.4 million in revenue produced in the second quarter of 2022.
This decrease is primarily attributable to the attrition of legacy sprint subscribers off of the calm sweep platform over the past year.
Revenue related to sprint was negligible in the second quarter of 2023.
Revenue from <unk> was down by approximately $100000 sequentially compared to the prior quarter.
If you use spot revenue was approximately 900000 for the second quarter of 2000, and twenty-three which declined by approximately 200000 compared to both the second quarter of the prior year and compared to the first quarter of 2023.
The decrease in view spot revenues was due to a decline in the variable portion of those revenues, which is related to device and promotional campaigns and as such the timing and volume associated with that portion of the revenue is less predictable.
Yeah.
In the third quarter of 2023, we are expecting consolidated revenues to grow by approximately 4% to 8% compared to the second quarter of 2023.
Gross profit was $7 7 million in the second quarter of 2023 compared to the $9 1 million during the same period the prior year due to the period over period decline in revenue.
Gross margin was 75% for the second quarter compared to 71.5% in the second quarter of 2022.
The gross profit of $7 7 million in the second quarter increased by approximately $100000 comparative gross profit produced in the first quarter as a result of the increase in gross margins.
In the third quarter of 2023, we expect gross margins to increase by 50 to 100 basis points from the gross margin of 75% reported for the second quarter of 2023.
For the year to date period ended June 32023, gross profit was $15 4 million compared to $18 2 million during the corresponding period last year.
Gross margin was 72, 4% for the June 30th 2023 year to date period.
As we discussed on our last call we conducted a global reduction in force in March resulting in the elimination of personnel in the United States, Portugal in Serbia.
In addition, we announced the closure of ours, the leanest Labaki a development office effective June 32000, and twenty-three as a notice period for the personnel at that location was required due to statutory requirements.
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.
As a result of these and other cost reduction actions GAAP operating expenses for the second quarter of 2023 were $11 million.
A decrease of $6 4 million or <unk> 37 per cent compared to the second quarter of 2022.
Operating expenses for the year to date period ended June 30th 2023 were $25 6 million compared to $33 6 million in the prior year to date period, a decrease of $8 million or 24% compared last year.
non-GAAP operating expenses for the second quarter of 2023 were $8 3 million compared to $13 7 million in the second quarter of 2022, a decrease of approximately $5 5 million or 40%.
Sequentially non-GAAP operating expenses decreased by approximately $3 million or 27% from the first quarter of 2023, primarily due to the cost reduction activities undertaken in March.
With these results we did exceed our cost reduction goal of $4 million of savings from our aggregate total.
non-GAAP quarterly operating expenses and cost of sales for the fourth quarter of 2022, a $15 million.
We expect third quarter 2023, non-GAAP operating expenses to decrease by 2% to 5% compared to the second quarter of 2023.
non-GAAP operating expenses for the year to date period through June 30th 2023 were $19 5 million, a decrease of $7 3 million or 27% compared to last year.
The GAAP net loss for the second quarter of 2023 was $5 7 million or nine cents loss per share compared to a GAAP net loss of $8 5 million or 15 cents loss per share in the second quarter of 2022.
The non-GAAP net loss for the second quarter of 2023 was approximately $600000 or a one cent loss per share compared to a non-GAAP net loss of approximately $4 8 million or nine cents loss per share in the second quarter of 2022.
Within today's press release, we've provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric.
For the second quarter of 2023. The reconciliation includes adjustments for intangible asset amortization of $1 5 million.
Stock compensation expense of a million.
Note in stock offering amortization.
Of 1.9 million.
Changes to derivatives and warrants of approximately 300000 depreciation of approximately 100000.
In personnel severance and reorganization activities related costs of approximately 100000.
Yeah.
For the year to date period. The non-GAAP reconciliation includes adjustments for intangible asset amortization of $3 million stock compensation expense of 2 million.
Note in stock offering amortization of $4 1 million depreciation of 400000 cost related to personnel severance and reorganization activities of approximately 1 million, partially offset by changes to derivatives and warrants of $2 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 utilized a zero percent tax rate for 2023 and 2022.
The resulting non-GAAP tax expense reflects the actual income taxes expense during each period.
From a balance sheet perspective, we reported $6 4 million of cash and cash equivalents as of June 30th 2023.
This was driven in part due to some administrative issues related to certain receivables that we were working through with a couple of our customers, which resulted in our accounts receivable increasing from $10 5 million as of December 31st 2022 to $11 9 million as of June 32023, we expect.
Back to resolve these are issues and be cash flow positive during the third quarter.
This concludes my financial review now back to Bill.
Thanks, Jim.
I would now like to add some context and color about so several of our most important growth opportunities.
As I noted in my opening remarks, our development efforts to support At&t's migration to safe path are complete.
And we expect AT&T to launch the new safe path based version of a T. M C secure family during this quarter.
Our relationship with AT&T is strong and we are getting enthusiastic support from AT&T at all levels.
Our launch and growth plans across <unk>.
Most of the marketing channels will be a template for future safe path launches.
More specifically, we are collaborating with a T N G secure family marketing efforts with current promotional activity. We believe that will lay the groundwork for a successful launch driving subscriber growth.
As I noted in prior calls I'm very bullish on the opportunity for AT&T to significantly grow secure family from a largely untapped subscriber base.
On the T mobile front, our relationship continues to perform well.
During the second quarter, we successfully delivered several operating system and compliance based updates to T. Mobile's three family safety apps.
These were time consuming and tactically complex projects that required significant collaboration between the two companies.
We expect to deliver a number of releases over the back half of the year. Some move which will include enhancements to the current feature set on family meals to continue to improve the customer experience with the app.
We also continue to explore ways, where we may be able to partner with them to drive subscriber growth.
From a comps we perspective, we are excited about our partnership with dish as they continued to work through the complexities of standing up their network.
I am pleased to tell you that we were able to successfully worked together on migrating boost premium visual voicemail subscribers.
From the legacy sprint billing system to dish during the second quarter.
Our working relations ships, both at the executive level and as the working well our collaborative and we are delighted to continue adding value dishes business.
We believe our partnership has upside potential and we are excited to deliver mutually beneficial value to dish and as subscribers in the coming quarter.
Turning to view slot I am pleased to announce that we added a new abuse spot customer to our portfolio of carrier customers.
While we cannot disclose the details this significant north American cable operator represents a new logo in the Smith micro family.
The launch on view spot can be accomplished quickly. So we expect this solution to rollout during the current quarter.
As such we also are anticipating revenue from this new customer this quarter as well.
I believe this is the first of several new contracts that we will be discussing over the coming quarters and consider the completion of this deal and indicator of our ongoing value and health of our abuse spot solution as well as our field sales teams increased.
<unk> ability to identify and close deals with new and existing customers.
These opportunities span all three of our product lines.
And then accomplished not only north American targets, but also the European and middle Eastern prospects.
As we mentioned in prior calls late last year, we overhauled our Europe based sales team and that investment is beginning to pay dividends.
Our pipeline in Europe , and the Middle East is as strong as we've seen in many years.
While we must stay focused to ensure the pipelines conversion to revenue is realized we are confident that our value proposition resonates with European operators and then we're building the team and infrastructure to convert those prospects to customers. This.
Your next.
Shifting back to our second quarter operating results I am pleased that the company exceeded our target of $4 million in savings from the total non-GAAP expenses reported in fourth quarter of 2022.
This expense reduction effort across all parts of our organization and Jerome and optimization of our organizational structure.
Especially now that the development efforts associated with the St path migration are complete.
Looking ahead over the next several quarters, we expect to completely decommission the legacy ring application and reduce expenses associated with maintaining two different platforms.
Thereby consolidator in our cost to further enhance our gross margins and our line our team's focus to only safe path going forward.
Collectively these actions will position us on a direct path to return the company to growth and profitability.
These combined improvements are part of our overall operating plan to restore the company's long term financial health.
We are moving in the right direction to achieve our goals.
While some challenges remain I remain encouraged by our team's resolve focus and progress in the recent months.
As I reflect on the significant accomplishments that the company has made this year and the opportunities that we have positioned ourselves for in the months ahead.
I am very bullish about our company's future.
With that said operator, we can open up the call for questions.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speaker phone. Please pick up your handset before pressing the keys to.
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This time, we will pause momentarily to assemble our roster.
The first question comes from Scott Searle with Roth and please go ahead.
Hi, good afternoon, thanks for taking my questions.
Nice job on the cost side and nice to see a return to growth.
Looking out into the third quarter.
Maybe on that front to start.
If you could give us some idea of what youre looking for sequentially from a unit perspective, or an end market perspective, I would expect I guess, the new customer in view spot there was growth there, but do we start to see an uptick on the Saint Pat's side of the equation given the timing of AT&T.
Yes, Scott this is bill.
Yeah look I I I think we feel very very bullish about what's going on in the eight TNT, we look for a very strong.
Launch and rollout and the result of that I, Yeah, we're definitely looking for some some very strong sub sub count growth there as well. So yeah everything is working the way we would like it to look.
Okay, very good and bill to follow up on the AT&T one congratulations on the nice to see it actually moving into commercial launch I'm.
I'm wondering if you could put some parameters around it is it going to be a basic Saint Pat's offering is it going to include drive or there can be some different plans around it and.
And how are you going to define success here, it's obviously a huge base to sell them to our I believe the 30 million plus accounts within AT&T what success. When you look out over the next 12 or 18 months and how quickly should we would expect adoption or any other color you can provide related to marketing dollars et cetera.
Yeah, well look I I always try to point to a prior history and so I would ask you to maybe to look back at.
How the rollout worked at sprint sprint is half the size or was half the size of what AT&T years to today. It was a very.
Remarkable growth activity, we saw big number growth quarter over quarter.
And frankly, that's what I'm looking for here too.
Okay, Great and then lastly, if I could.
On the sprint front I, just want to make sure I heard that correctly. It sounds like basically the headwinds in terms of our sprint D. Activations are done at this point in time, and then couple that with T. Mobile what what are your expectations over the course of this year do you expect the launch to formally happened and when should we start to see some additions subs subscriber additions on that front.
Thanks.
Yes, I guess I would say that first off yes, the the dike.
The mission of the suite activity at spring Slash T. T mobile is over all revenue going forward for car Com suite of.
For the near term will will come from dish and we're very very bullish about what we see there as well we do have other sales activity for Comcast Sweet I'm pleased to report so hopefully we'll be able to add another logo to that to that list, but you.
As far as.
Our activities at at T. Mobile they are very cordial and collaborative they are working with us.
We continue to see some sort of some growth in their subscriber base and we hope to see that accelerate.
Yeah.
Great. Thank you.
The next question is from Josh Nichols with B Riley FBR. Please go ahead.
Yeah. Thanks for taking my question and.
Just to touch on it a little bit great to see the company expects to be up sequentially quarter over quarter for the top line in <unk>.
Any indication you could give us at a high level for.
How that breaks out between the segments I know you have a view spot customer that's going to be ramping up how much of that growth is related to that customer versus maybe the other areas of the business.
Hey, Josh it's Jim.
I would say that it's most of the Grove well, we do expect that.
You're spot AD to help with that the growth that we're projecting.
And that we're seeing coming from the family safety side of the house.
That's a good set of effectively revenue that you expect coming in from the anticipated <unk> launch with ATT fair to say.
That's a portion of it yes, yep, great and then very significant progress on the gross margin front as well another 50 to 100 bps of expansion expected.
In three Q.
When are you going to be able to complete the migration to a single software platform and how long do you think it would take to get the company back to that 75% plus gross margin hurdle rate that you've talked about previously.
Well, we're at the 75% now and you know what.
We're expecting to exceed that as we go into Q Q3 here.
Beyond that.
We're expecting.
Next year to really fully realize some of the third party cost savings associated with the decommissioning of the <unk> platform.
Mhm.
Thanks, and then last question for me I I realize it's relatively early days, so hard to say too much about it but.
Any comments you could have about what's going on with the marketing efforts at ATT of what's expected.
Specifically are there going to be.
A material amount of space that are usually used to incentivize the employees at the carrier stores as historically has been a big determinant of how successful these launches are.
Hey, Josh it's Charlie.
I will tell you I'm not going to get into specifics, but I will tell you that we're we've been working very closely with them across the board on sample different channels.
And I think that.
Following the blueprint that we've got in the past is probably a good way to look at it.
And so I can't tell you we're much further along than we've ever been and it's very collaborative and I think.
You can kind of see things that are already happening.
A press release that went out from AT&T.
AT&T regarding back to school, which is promoting it.
There's a lot of cross collaboration efforts underway and I think that.
I'm I'm actually quite excited about the launch and there's been a lot of work that's been going in the background.
Well, it's great to hear and great to see the company is on track for our growth and profitability in the back half of this year. Thanks.
Thanks.
The next question is from Jim Nickel Ray with Dawson James. Please go ahead.
Yeah. Thanks, a lot good evening.
Jim you talked about that are going up and.
In the quarter.
So can you quantify how much.
This particular issue that you identified contributed to that increase.
Oh, well was there were a couple of issues and I.
I would equate to roughly the increase in the E. R that I mentioned in my in my prepared remarks.
Okay. So it's reasonable to expect that it comes back down to the low of $11 million or is it more than that in Q3.
I would yeah, I would say, even perhaps below that would be the expectation.
Okay.
Great and then some of the cost cutting measures that you've taken.
Yes.
<unk> are probably going to be temporary like bonuses exact pay things like that can you talk about when you think.
You might unwind some of those things not necessarily a quarter, but you know what what events are you looking for are you looking for certain.
Gross margin level that certain cash flow from operations level something along those lines.
Yes, it's a fair question, Jim I would say that from.
From the standpoint of the exact team and the board are.
We are looking for suit should sustain re re returned to profitability and growth and.
Those will be the actions that would trigger a return to more normal conditions.
And in the meantime.
Okay.
Is there are there other areas, where you could be.
Increasing the cost reduction programs.
I know that we are constantly.
Yeah no we.
We are constantly looking at our cost structure.
We're looking for ways to streamline the business to be more cost effective.
And to service our customers.
Better so.
To that extent, if there are opportunities to reduce expenses.
The obvious one with the deep <unk>.
<unk> of the ring platform that is going to take.
Some some costs out of our out of our model for <unk> for sure.
Then when we did mention on the call.
But that we expect it to decrease our Opex did decrease another 2% to 5%.
In Q3, so I would no doubt as well Jim.
Right right no that got that thank you alright, that's it for me Thanks, a lot guys.
Thank you.
If there are any follow up questions. At this time. Please press Star then one.
Well. This concludes the question and answer session I would like to turn the conference back over to Charles Messman for any closing remarks.
Thanks, everyone I want.
Thank you for joining us today I will look forward to talking to you on our next earnings conference call should you have further comments questions. Please feel free to reach out to us here at Smith micro and have an awesome day. Thanks, everybody.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.