Phunware, Inc. (NASDAQ:PHUN) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to Phunware’s First Quarter 2023 Investor Conference Call. [Operator Instructions] Joining me today are Russ Buyse, Chief Executive Officer; Randall Crowder, Chief Operating Officer; and Matt Aune, Chief Financial Officer. The format today will include prepared remarks by Russ, Matt and Randall, followed by a question-and-answer session. As a reminder, today’s discussion will include forward-looking statements. These forward-looking statements reflect current views as of today and are based on various assumptions that are subject to risks and uncertainties disclosed in the Risk Factors section of our SEC filings. Actual results may differ materially, and undue reliance should not be placed on them.

Additionally, the matters being discussed today may include non-GAAP financial measures. Reconciliation of GAAP to non-GAAP financial information is set forth in the earnings press release, which is available on the Investor Relations section on Phunware’s website at investors.phunware.com. I further encourage you to visit investors.phunware.com to access not only the earnings press release, but also the current investor presentation, SEC filings and additional collateral font wear. At this time, I would like to turn things over to Phunware’s CEO, Russ Buyse. Sir, you may proceed.

Russell Buyse: Thank you very much, and welcome to our first quarter of 2023 investor conference call. Contextual engagement, how to interact with users where they are, when they are to enhance their experience and reach them in a potential buying moment. That is what Phunware is all about. We bring contextual engagement to brands trying to achieve just that. We made huge strides in Q1 in realizing this purpose. Starting with the product platform, we progressed both our mapping and engagement SDKs, which form the foundation for contextual engagement. We updated our SmartApp module, which underpins our industry solutions and creates a consumer-grade experience for our customers. And we updated our health care industry solution, our offering to enable health care providers to provide exceptional patient experience.

We also launched our Experience Optimizer, which streamlines the patient experience across different hospital buildings and curates unique experiences for sub-brands of large hospitality companies, all without requiring the download or management of multiple mobile applications. This flexibility is a boom to brands and users alike. And while we’re talking about product progress, the U.S. Patent Office has awarded Phunware a patent for geofence event prediction technology, a technical innovation that uses machine learning to predict what experiences will matter most to users based on their location, preferences and previous activity. All of these advances serve to enhance brand’s ability to delight their users with a more compelling experience and underscore the tremendous progress we’ve made as a company.

On the customer front, Phunware finished its deployment with Gaylord Hotels by Marriott the Opryland, Texan, Rockies, Palms and national properties are now fully operational. Our deployment teams finished this rollout both under budget and ahead of schedule. VHC Health also expanded their engagement with us, adding 250,000 square feet with their outpatient pavilion and a parking system integration Debut. We have several large opportunities at a late stage in the pipeline that we hope to announce soon. The current selling environment is pretty challenging with rising interest rates and nervousness around where the economy is headed, that has delayed decision-making with some prospects. Fortunately, we’ve been unaffected by the stresses seen on regional banks over the past quarter.

I’m also delighted to tell you, Funerwear has joined the Siemens Connect ecosystem, a network that brings together experts in software development, IT, cybersecurity, remote and digital services and business intelligence. This partnership brings the power of our Blue Dot wayfinding technology to optimize smart buildings. Our smart workplace and multi-dwelling unit solutions integrate seamlessly with Siemens platforms, including as building management system, GezagoCC, the Apigee automation system and related platforms. We look forward to working closely with Siemens and other Connect ecosystems network experts to deliver exceptional experiences to our customers as they journey towards smarter buildings and infrastructure. We see partners as an efficient and effective way to broaden our reach to target customers across markets, and we will be enlisting more of them to complement our direct sales force.

We are also strengthening our marketing effort and investments to drive more customer awareness, including publishing more thought leadership content and ROI studies, demonstrating the opportunity and imperative of adopting our industry solutions to reduce costs, gain efficiency and increase revenue alike. On the blockchain side, we continue to work on fund coin and fun token to facilitate the marketplace between brands and consumers, where brands can reward consumers for the right to engage them. As I mentioned last quarter, we’re taking a slow and steady approach on this, given the current crypto winter and continuing regulatory headwinds. This privacy preserving and fully compliant offering will include ads and offers to help brands reach audiences they want, and it will complement our industry solutions to give our customers greater power to reach their existing and prospective users.

On the hardware side, our light business unit faced the same headwinds affecting the whole PC market in Q1. However, we managed to outperform the industry averages while maintaining discipline on customer acquisition and materials costs. And now our CFO, Matt Anne, will cover our financial performance.

Matt Aune: Thanks, Russ, and good afternoon, everyone. I’d like to thank you all for joining us today for a review of our first quarter 2023 financial performance and our progress on key strategic initiatives. For clarity, I’ll be discussing GAAP financial measures, unless otherwise specifically noted. Our press release, 8-K and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the first quarter of 2023 totaled $4.7 million, of which our platform revenue represented 28% of net revenues or $1.3 million. Our hardware revenue or light by fund wear, represented 72% of net revenues totaling $3.4 million. Gross margin was 7.6% compared to 26.1% last year. On a non-GAAP adjusted basis, gross margin was 12.9% compared to 26.8% last year.

Platform gross margin was 5.5% compared to 57.2% last year. On a non-GAAP adjusted basis, platform gross margin was 23.4% compared to 58.9% last year. The cause for the year-over-year drop can be primarily attributable to a mismatch of cost of goods sold and the revenue associated with it. As previously mentioned, we are extremely excited to have completed the Gayler deployment in Q1. However, GAAP revenue recognition for this project requires that the revenue will be taken over the 5-year life of the contract, which means all the costs associated with deploying the multiple locations in Q1 are not offset by revenue in Q1. If we were to be able to match the revenue, our non-GAAP gross margin for software would be much closer to last year. This will happen from time to time as we continue to build up a bigger base of SaaS revenue that ultimately will be able to absorb the shift in margins from a single project during the quarter.

Our hardware business life by Phunware continued to show operational improvement by terming the business unit’s adjusted EBITDA loss by 46% quarter-over-quarter with a target of reaching profitability in the next 1 to 2 quarters. Total operating expense was $7.6 million, up from $6.8 million last year. Other noncash operating expense items were stock-based compensation and amortization of intangibles, making it a combined $1.3 million this year compared to $0.7 million in the prior year. By excluding these noncash charges, adjusted operating expense was $6.3 million compared to $6.1 million last year. We are pleased to see that our non-GAAP operating expense was dropped quarter-over-quarter for the third consecutive quarter. Non-GAAP adjusted EBITDA loss was $5.6 million compared to $4.2 million last year.

Adjusted EBITDA loss was narrowed for the second consecutive quarter as we continue on the path to breakeven. We still have a ways to go to get to breakeven, but we are committed to showing improvement in this metric and look forward to sharing long-term breakeven plans in the future. Net loss was $4.3 million or $0.04 per share compared to $14.9 million net loss or $0.15 per share last year. Weighted average shares used to calculate earnings per share were $103.2 million versus $96.8 million last year. Backlog and deferred revenue at the end of the quarter totaled $5.7 million. As Russ mentioned, we have several large deals at a late stage in the pipeline and expect the Q1 backlog and deferred revenue number to be a low point for the year.

Moving to the balance sheet. We closed the quarter with $0.7 million in cash and $5.7 million in debt. We currently hold approximately $2.8 million of cash and digital assets based on today’s prices. We are actively evaluating various debt and equity options to fund operations as we continue to push towards cash neutrality. We will remain active with both financial conferences and investor meetings and our efforts to tell our story and further strengthen our corporate profile in the capital markets. The next major financial conference we will be attending is the 18th Annual Needham Technology and Media Conference May 16 through 18 and the 2023 Cancer Fitch Gerald Tech Conference on June 14 through the 15. We look forward to many one-on-one conversations and meetings with high-class institutional investors at those events and other financial conferences as opportunities present themselves.

With that, I would like to turn the call over to Randall.

Randall Crowder: Thanks, Matt. During the quarter, we took great strides to streamline how we price, contract and bundle our core offerings. For a simple annual license, any enterprise can launch a branded mobile application that is configurable, scalable and capable of any number of integrations with third-party point solutions to include our very own best-in-class location-based services that delivers real-time blue dot and advanced way finding, a fund where we can now take care of everything from any required hardware to professional services to maintenance, so our customers are only responsible for a straightforward software license. This is actually an important change that has been very well received by our prospects. In the past, we still sold like a custom development shop that resulted in overly complicated contracts and sometimes sticker shock, but now we are offering simplified SaaS pricing, we believe, will drastically improve our sales cycle and close rate.

Enterprise customers don’t need to settle for low-code templated apps that will not scale and are limited in both features and functionality. They can now launch an enterprise-grade mobile application on our proven platform for less than $5,000 a month. Our platform approach is important because our customers benefit from all the product improvements we are making. For example, we successfully tested our configurable location-based services solution at Gaylord Opryland Resort and Convention Center in Nashville. This is something that many vendors have tried but failed to deliver and with something of a unicorn in the conference industry. However, Phunware has made the impossible possible. Our platform can finally help event attendees optimize their time and route to the right exhibits while giving organizers the ability to personalize attendee engagement conference organizers and venues can seamlessly reconfigure convention center space and our routes will adjust to account for any new layouts without additional hardware or fingerprinting.

We are thrilled to be working closely with several strategic partners who will be reviewing our solution live next month. These partners are able to open significant doors across the hospitality industry, both locally and abroad. Speaking of conferences, we were thrilled to partner with TD Senex at HIMS in Chicago this year and showcase our digital front door to numerous health care prospects. We also made great connections at Vive in Nashville and next month will be at Vitec in Las Vegas for casino resorts as well as High-Tech in Toronto, which remains the premier hospitality conference each year where we’ll be showcasing our amazing work for Atlanta Tahamas and Gaylord Hotels by Marriott. Regarding blockchain, we are still on track to issue approximately 25% of Fun coin’s maximum supply to securitize this summer with regulated trading to follow thereafter.

At this time, we are working to ensure all rightful holders have been notified and given time to properly set up their accounts. With the successful test to fund blocks via fun wallet, we are also looking at new ways to drive fun token utility and leverage its functionality within third-party applications. Switching gears to light, we are excited to announce our new workstation line will be available this summer as well, which will increase the size of our serviceable market and take advantage of our growing brand awareness despite headwinds in the industry due to macroeconomic trends. For closing remarks, I’d like to turn things back over to Russ.

Russell Buyse: Thanks, Randall. To conclude, I am very happy with the progress we’ve made this past quarter and the changes we’ve made to extend our reach and deepen our contacts with customers in our target markets. You can expect more developments on these fronts from us going forward as we invest more time and energy into sales and marketing. We’re all about market growth, meeting customer needs with our market-leading solution focused on contextual engagement. Expect to see bookings growth and spending discipline to control our OpEx. At the same time, our strategic transactions committee is actively looking for opportunities to grow the business through inorganic transactions. And one last thing; we are no longer using the term multiscreen as a service or MAS as it fails to capture the range and significance of the investments we’ve made in our software platform.

We call it our location-based platform, which is about more than just a screen and whose capabilities any enterprise can activate almost immediately. We deliver everything you need to engage anyone anywhere in a mobile-first world where context matters. I would like to open up the call now for questions to the operator. Operator, please go ahead.

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Darren Aftahi with ROTH MKM.

Operator: Our next question is coming from Scott Buck with H.C. Wainwright.

Operator: Our next question is coming from Howard Halpern with Taglich Brothers.

Operator: Our next question is coming from Ed Woo with Ascendiant Capital.

Operator: Thank you. We have reached the end of our question-and-answer session. So, I will now turn the call back over to management for any closing remarks.

Russell Buyse: Well, I have nothing further to add. I think our comments really kind of covered everything. I’d like to thank you all for your time. I do think this is still, despite kind of the economic environment, still a very good time to have the product we do that does what it does in contextual engagement using our location-based platform and being able to really help brands improve the quality of their guest experience, their patient experience as well as reduce their costs and enhance their revenue; so there is no season where that is not attractive [ph].

Operator: Thank you. This does conclude today’s conference, and you may disconnect your lines at this time, and we thank you for your participation.