Smith Micro Software, Inc. (NASDAQ:SMSI) Q1 2023 Earnings Call Transcript May 11, 2023

Smith Micro Software, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.04675.

Operator: Good day, and welcome to the Smith Micro First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Charles Messman, Vice President of Investor Relations and Corporate Development. Please go ahead.

Charles Messman: Thank you, operator, and good afternoon, everybody. We appreciate you joining us today to discuss Smith Micro’s financial results for our first quarter ended March 31, 2023. By now, you should have received a copy of our 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.smithmicro.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 discussion consists of forward-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, future product deployments, migrations and/or growth by new and existing customers, operating expenses, and the company’s cash reserves.

Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially 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 and in 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 of the date they are made. I want to point out that in the forthcoming prepared remarks, we will refer to non-specific financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. That said, I’ll turn the ball over to Bill.

Bill?

Bill Smith: Thanks, Charlie. Good afternoon, and thank you for joining us today for our 2023 first quarter conference call. As I look at the first quarter, I am quite pleased with the overall progress we made of some of the initiatives that we outlined and discussed during our fourth quarter conference call. 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. We intended to achieve those savings on an expedited basis. We took decisive measures across the entire organization in March to help us reach this goal. Taking actions that will result in the elimination of approximately 26% of our global workforce, as well as taking certain other measures that we anticipate will result in achieving our cost reduction goal in the second quarter.

This will bring our aggregate non-GAAP 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 and I am pleased that this alignment of the cost structure will position the company for a return to profitability. Another key initiative was the migration of the AT&T secure family application to the SafePath platform. I am happy to report that we expect to deliver the new build later this month to AT&T for their testing process, which we believe aligns well for a public launch during the third quarter. This is a significant milestone for the company and we’re looking forward to a successful launch. Lastly, I am very encouraged by the increase of new sales activities that I will talk about later in the call.

We overhauled our sales organization over the last year under the leadership of Von Cameron, 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. 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. We did see our non-GAAP gross margin tick-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 with our quarterly non-GAAP 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-GAAP net loss for the quarter of 3.5 million or a loss of $0.06 per share. Let’s now turn the call over to Jim for a more detailed analysis of our financial results. Jim?

Jim Kempton: Thanks Bill, and good afternoon everyone. I wanted to start my presentation today by calling on a change we’re making to our non-GAAP presentation. Starting this quarter, we are adjusting for depreciation as part of our non-GAAP presentation. With the thought being that this similar to our adjustment for amortization and is a non-cash item. In the numbers being discussed today, the prior period non-GAAP results have also been recast so that the results I’ll be discussing are on a consistent basis. As a frame of reference, depreciation was approximately 200,000 in the first quarter of 2023. With that, I’ll now cover the financial details of the first quarter 2023. For the first quarter, we posted revenue of 10.9 million, compared to 12.7 million for the same quarter of 2022.

A decrease of approximately 14% as a result of the decline in family safety revenues, coupled with a decrease in CommSuite revenues. 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 T-Mobile’s acquisition of Sprint. Family Safety revenues declined by approximately 600,000, compared to the fourth quarter of 2022. During the first quarter of 2023, CommSuite 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.

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. Revenue related to Sprint was negligible in the first quarter of 2023. Revenue from CommSuite was down approximately $100,000 sequentially, compared to the prior quarter. ViewSpot 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, ViewSpot 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, the revenue stream is less predictable. As there was a higher component of variable revenue in ViewSpot during the first quarter, we are anticipating ViewSpot revenues to decline in the second quarter. Primarily as a result of this decline, we expect consolidated revenue for the second quarter of 2023 to be flat to lower by 4%, 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. Gross margin was 70% for the first quarter, compared to 71.4% in the first quarter of 2022.

Non-GAAP gross margin for the first quarter of 2023, which excludes the 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 basis points 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 14.6 million, a decrease of 1.6 million or 10%, compared to the first quarter of 2022. This decrease was driven primarily by a decline in research and development expenses of 1.4 million, due to a decrease in personnel related costs and consulting as a result of nearing the completion of SafePath migration activities.

Non-GAAP operating expenses for the first quarter of 2023 were 11.3 million, compared to 13.1 million for the first quarter of 2022, a decrease of approximately 1.8 million or 14%. 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 the contractor costs related to the SafePath migration. We expect second quarter 2023 non-GAAP operating expenses to decrease from the first quarter of 2023 by 25% to 30%, due to the recent actions undertaken to reduce our cost structure. 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 our [Selena] [ph] Slovakia development office as of June 30, 2023.

Similarly, our closure of our Czech Republic operations in the fourth quarter because of statutory requirements, the closure required a notice period for the personnel in that location. In addition, we reduced the base salaries of our executive officers in 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, we anticipate that 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 of 15 million will be achieved in the second quarter. In other words, in the second quarter, we anticipate our aggregate non-GAAP cost of sales and non-GAAP operating expenses will be reduced to approximately 11 million, compared to the 14.3 million reported in the first quarter.

The GAAP net loss for the first quarter of 2023 was 6.9 million or $0.11 loss per share, compared to a GAAP net loss of 7 million or $0.13 loss per share in the first quarter of 2022. The non-GAAP net loss for the first quarter of 2023 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. Within today’s press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the first quarter of 2023, the reconciliation includes adjustments for intangible asset amortization of 1.5 million, stock compensation expense of 900,000, convertible note and stock offering fees and amortization of 2.1 million, severance-related costs of approximately 900,000 and depreciation of 200,000, partially offset by fair value adjustments of 2.4 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 0% 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 8.7 million of cash and cash equivalents as of March 31, 2023. I would note that the cash balance was favorably impacted by the timing of the receipt of certain of our receivables, similar to the first quarter of last year. This concludes my financial review. Now, I’ll turn it back to Bill.

Bill Smith: 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 base 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. I want to note in addition to creating a best of breed product that incorporates select features of the former Avast platform into SafePath, 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 from the old Avast platform to SafePath.

I would like to add that when AT&T secure family on SafePath goes live, it will conclude our migration efforts. This will allow us to reallocate resources to new customer activities and enable the expansion of our SafePath road map 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. I’ll close my comments on AT&T by saying that we are very excited and optimistic for the pending launch of Secure Family, powered by the SafePath platform. 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 CommSuite-driven visual voicemail as one of the first value-added services on the DISH wireless network, as well as on the migration of the 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 with DISH as it expands its footprint in the wireless space.

Now, let’s talk about ViewSpot. We are seeing a significant opportunity to expand our ViewSpot business and anticipate that our business development efforts will yield additional customers in the near-term. Perhaps both in North America, as well as in the EMEA region. Prospective customers are recognizing the value that ViewSpot can add with its analytics and content filtering capabilities. Our existing ViewSpot business remains stable, with a recent extension of one of our existing contracts being executed in March. Beyond our ViewSpot opportunities, I remain very optimistic as our sales team has driven an expansion of our sales pipeline over the past several months, and has positioned us to close a portion of these opportunities over the next several quarters.

The feedback from our sales prospects both in the U.S. and high ARPU markets across Europe has been very positive. Despite the typically long sales cycle in our business, we are seeing the leading indicators of success from the improvements that our Chief Revenue Officer has made within our sales organization, 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 ViewSpot and SafePath 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 that we have already made significant and favorable progress in achieving our goal 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 can completely decommission the legacy Sprint 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 SafePath going forward. Collectively, these actions position us 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 meeting these challenges head 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 roadmap 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Scott Searle with ROTH MKM. Please go ahead.

Operator: Our next question comes from Griffin Boss with B. Riley.

Operator: Our next question comes from James McIlree with Dawson James. Please go ahead.

Operator: Our next question comes from Matthew Harrigan with Benchmark.

Operator: [Operator Instructions] There are no questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Charles Messman for closing remarks.

Charles Messman : 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 look forward talking to you on our next earnings call for the second quarter. Thanks everybody.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.