Smith Micro Software, Inc. (NASDAQ:SMSI) Q2 2023 Earnings Call Transcript

Smith Micro Software, Inc. (NASDAQ:SMSI) Q2 2023 Earnings Call Transcript August 9, 2023

Smith Micro Software, Inc. misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $0.02.

Operator: Good day, and welcome to the Smith Micro Second 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 Charles Messman, Vice President of Marketing. 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 second quarter ended June 30, 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 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 our forward-looking statement. For more information, please refer to the risk factors included in our most recent filed Form 10-K and in 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 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. With that said, I’ll turn the call over to Bill.

Bill.

Bill Smith: Thanks John. Good afternoon and thank you for joining us today for our 2023 second quarter conference call. I am excited today to provide 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 tremendously pleased to finally report that our development activities to add features from the acquired Family Safety platforms and prepare for migration to SafePath are complete. I recognize that this has been a lengthy effort covering approximately three years and required a significant number of resources, so I am 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 have been partnering with them on marketing activities 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, both through expense reduction, as well as through accelerated execution on sales and customer deliveries. We are making great progress, and I want to thank Smith Micro employees for their focus, commitment, and tenacity. We have a clear path in which our confidence remains high, and we are meeting and exceeding many of our interim targets along the way. While Jim will be discussing the quarterly financial results in detail shortly, I do want to highlight some key updates on our efforts to return Smith Micro to profitability.

During Q2, we outperformed the targeted $4 million per quarter reduction in our non-GAAP expenses that 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 for our sales team, which I’ll touch on in more detail later in the presentation today. We are improving our gross margins, driving them to 75% during the second quarter of this year versus 71.5% for the same quarter of 2022, and 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 run through the numbers for the quarter in more detail, and then I will share some information about some of our most important opportunities and relationships. Jim?

Jim Kempton : Thanks, Bill. Good afternoon, everyone. For 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 $600,000, or 5%. Year-to-date revenues through June 30, 2023 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 & 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 CommSuite 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 & Found revenue.

Family Safety revenues declined by approximately $300,000 compared to the first quarter of 2023. During the second quarter of 2023, CommSuite revenue was $700,000, which decreased by approximately $700,000 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 CommSuite platform over the past year. Revenue related to Sprint was negligible in the second quarter of 2023. Revenue from CommSuite was down by approximately $100,000 sequentially compared to the prior quarter. ViewSpot revenue was approximately $900,000 for the second quarter of 2023, which declined by approximately $200,000 compared to both the second quarter of the prior year and compared to the first quarter of 2023.

The decrease in ViewSpot 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. 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 of 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 $100,000 compared to the 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 30, 2023, 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 30, 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 and Serbia. In addition, we announced the closure of our Zilina, Slovakia Development Office effective June 30, 2023, 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 37% compared to the second quarter of 2022. GAAP operating expenses for the year-to-date period ended June 30, 2023 were $25.6 million compared to the $33.6 million in the prior year-to-date period, a decrease of $8 million or 24% compared to last year. Non-GAAP operating expenses for the second quarter of 2023 were $8.3 million compared to the $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 quarter’s 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. 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 30, 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 $0.09 loss per share compared to a GAAP net loss of $8.5 million or $0.15 loss per share in the second quarter of 2022.

The non-GAAP net loss for the second quarter of 2023 was approximately $600,000 or $0.01 loss per share compared to a non-GAAP net loss of approximately $4.8 million or $0.09 loss per share in the second 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 second quarter of 2023, the reconciliation includes adjustments for intangible asset amortization of $1.5 million, stock compensation expense of $1 million, note in stock offering amortization of $1.9 million, changes to derivatives and warrants of approximately $300,000, depreciation of approximately $100,000, and personnel severance and reorganization activities related costs of approximately $100,000.

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 $400,000, costs 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 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 $6.4 million of cash and cash equivalents as of June 30, 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 31, 2022, to $11.9 million as of June 30, 2023. We expect to resolve these ARR issues and be cash flow positive during the third quarter. This concludes my financial review. Now back to Bill.

Bill Smith : Thanks, Jim. I would now like to add some context and color about several of our most important growth opportunities. As I noted in my opening remarks, our development efforts to support AT&T’s migration to SafePath are complete, and we expect AT&T to launch the new SafePath based version of AT&T 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 multiple marketing channels will be a template for future SafePath launches. More specifically, we are collaborating with AT&T 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 technically 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 of which will include enhancements to the current feature set on Family Mode, 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 CommSuite perspective, we are excited about our partnership with DISH, as they continue to work through the complexities of standing up their network. I’m pleased to tell you that we were able to successfully work together on migrating boost premium visual voicemail subscribers from the legacy Sprint billing system to DISH during the second quarter. Our working relationships, both at the executive level and at the working level, are collaborative, and we are delighted to continue adding value to DISH’s business. We believe our partnership has upside potential, and we are excited to deliver mutually beneficial value to DISH and its subscribers in the coming quarter. Turning to ViewSpot, I am pleased to announce that we added a new ViewSpot 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 ViewSpot can be accomplished quickly, so we expect a solution to roll out 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 an indicator of our ongoing value and health of our ViewSpot solution, as well as our field sales teams’ increasing ability to identify and close deals with new and existing customers. These opportunities span all three of our product lines, and encompass not only North American targets, but also 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 have seen in many years. While we must stay focused to ensure the pipeline’s conversion to revenue is realized, we are confident that our value proposition resonates with European operators, and that we’re building the team and infrastructure to convert those prospects to customers this year and 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 the fourth quarter of 2022. This expense reduction effort crossed all parts of our organization and drove an optimization of our organizational structure, especially now that the development efforts associated with the SafePath 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 consolidating our costs to further enhance our gross margins and align our team’s focus to only SafePath 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 the call for questions.

Q&A Session

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

Scott Searle : Hi. Good afternoon and 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 what you are looking for sequentially from a unit perspective or an end market perspective, I would expect I guess the new customer in ViewSpot, there is growth there, but do we start to see an uptick on the SafePath side of the equation given the timing of AT&T?

Bill Smith: Yes Scott, this is Bill. Look I think we feel very bullish about what’s going on at AT&T. We look for a very strong launch and rollout and the result of that, we are definitely looking for some very strong sub count growth there as well. So everything is looking the way we would like it to look.

Scott Searle : Okay. Very good. And Bill, to follow up on the AT&T front, congratulations on that nice to see it actually moving into commercial launch. I wonder if you could put some parameters around it. Is it going to be a basic SafePath offering? Is it going to include drive or are there going to be some different plans around it? And how are you going to define success here? It is obviously a huge base to sell into; I believe there are 30 million plus accounts within AT&T. What’s success when you look out over the next 12 or 18 months and how quickly should we expect adoption or any other color you can provide related to marketing dollars, etc.?

Bill Smith: Yes. Well look, I always try to point to prior history, and so I would ask you to maybe look back at how the rollout worked at Sprint. Sprint is half the size or was half the size of what AT&T is to today. It was a remarkable growth activity. We saw a big number of growth quarter-over-quarter. And frankly, that’s what I’m looking for here too.

Scott Searle : Okay. Great. And 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 Sprint deactivations are done at this point in time. And then couple that with T-Mobile, what are your expectations over the course of this year? Do you expect the launch to formally happen? Should we start to see some additions, subscriber additions on that front? Thanks.

Bill Smith: Yes, I guess I was saying that first off, yes. The decommissioning of the CommSuite activity at Sprint/T-Mobile is over. All revenue going forward for CommSuite for the near term will come from DISH. And we’re very bullish about what we see there as well. We do have other sales activity for CommSuite, I’m pleased to report. So hopefully we’ll be able to add another logo to that list. But, as far as our activities at T-Mobile, they are very cordial and collaborative. They are working with us and we continue to see some growth in their subscriber base. And we hope to see that accelerate.

Scott Searle : Great, thank you.

Operator: The next question is from Josh Nichols with B. Riley FBR. Please go ahead.

Josh Nichols: Yes, thanks for taking my question. And just to touch on a little bit. Great to see the company expects to be up sequentially quarter-over-quarter for the top line in 3Q. Any indication you could give us at a high level for how that breaks out between the segments? I know you have a ViewSpot 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?

Jim Kempton: Hey Josh, it’s Jim. I would say that it’s most of the growth, while we do expect that ViewSpot ad to help with that, the growth that we’re projecting, most of it we’re seeing coming from the Family Safety side of the house.

Josh Nichols: That’s good. So effectively, revenue that you expect coming in from the anticipated 3Q launch with AT&T, fair to say?

Jim Kempton: That’s a portion of it, yes.

Josh Nichols: Great. And then very significant progress on the gross margin front as well. Another 50 to 100 bps of expansion expected in 3Q. 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 talked about previously?

Jim Kempton: Well, we’re at the 75% now, and we’re expecting to exceed that as we go into 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 Ring platform.

Josh Nichols: Thanks. And then, last question for me. 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 AT&T or what’s expected? Specifically, are there going to be material amounts of SPFs that are usually used to incentivize the employees at the carrier stores, as historically it has been a big determinant of how successful these launches are?

Charles Messman : Hey, Josh. It’s Charlie. I will tell you, I’m not going to get into specifics, but I will tell you that we’ve been working very closely with them across the board on several different channels, and I think that following the blueprint that we’ve done 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. It’s very collaborative, and I think you can kind of see things that are already happening. There’s a press release that went out from 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 actually quite excited about the launch, and there’s been a lot of work that’s been going in the background.

Josh Nichols: Well, it’s great to hear, and great to see the company is on track for growth and profitability in the back half of this year. Thanks.

Bill Smith: Thanks.

Operator: The next question is from Jim McIlree with Dawson James. Please go ahead.

Jim McIlree: Yes, thanks a lot. Good evening. Jim, you talked about the AR going up in the quarter. Can you quantify how much this particular issue that you identified contributed to that increase?

Jim Kempton: Well, there were a couple of issues, and I’d equate it to roughly the increase in the AR that I mentioned in my prepared remarks.

Jim McIlree: Okay. So, it’s reasonable to expect that AR comes back down to the low $11 million or is it something more than that in Q3?

Jim Kempton: I would — yeah. I would say even perhaps below that would be the expectation.

Jim McIlree: Okay, great. And then some of the cost-cutting measures that you’ve taken are probably going to be temporary, like bonuses, exec pay, things like that. Can you talk about when you think you might unwind some of those things? Not necessarily a quarter, but what events are you looking for? Are you looking for a certain gross margin level, a certain cash flow from operations level, something along those lines.

Bill Smith: Yes, that’s a fair question Jim. I’d say that from the standpoint of the exec team and the board, we are looking for sustained return to profitability and growth, and those will be the actions that would trigger a return to more normal conditions.

Jim McIlree: And in the meantime, is there – are there other areas where you could be increasing the cost-reduction programs? I know that you’ve… [Cross Talk]

Bill Smith: Yes. No, 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, other than the obvious one with the decommissioning of the Ring platform, that is going to take some costs out of our model for sure.

Jim Kempton: And then we did mention on the call that we expected to decrease our OpEx to decrease another 2% to 5% in Q3, so I would note that as well, Jim.

Jim McIlree: Right, right, noted. Got that. Thank you. All right, that’s it from me. Thanks a lot guys.

Jim Kempton: Thank you.

Operator: [Operator Instructions]. Well, this concludes the question-and-answer session. I would like to turn the conference back over to Charles Messman for any closing remarks.

Charles Messman : Thanks, everyone. I want to thank you for joining us today. We 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.

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