SurgePays, Inc. (NASDAQ:SURG) Q1 2023 Earnings Call Transcript May 11, 2023

SurgePays, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $-0.03.

Operator: Welcome to the SurgePays First Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to, Brian Prenoveau. Please go ahead, sir.

Brian M. Prenoveau: Thank you, operator, and good afternoon, everyone. Welcome to the SurgePays first quarter 2023 earnings webcast and conference call. Today’s date is May 11, 2023. And on the call today from SurgePays are Brian Cox, President and Chief Executive Officer; and Tony Evers, Chief Financial Officer. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to a certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see SurgePays’ most recent filings with the SEC.

All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statement to reflect the events that occur after this call. Also, during the course of today’s call, the Company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon. Copies of today’s press release are accessible on SurgePays’ Investor Relations website at ir.surgepays.com. In addition, SurgePays’ Form 10-Q for the quarter ended March 31, 2023 will also available on SurgePays’ Investor Relations website. And now I’d like to turn the call over to President and Chief Executive Officer, Brian Cox.

Brian Cox: Thanks, Brian. First of all, I’d like to thank our shareholders and those interested in SurgePays for joining the call. As we have expanded and are continuing to expand our audience, I’d like to give a brief overview of who we are, what we do and our target market. SurgePays brings financial and telecom products to the underbanked and underserved populations of the United States where they live and where they shop. Our goal is to build the largest direct distribution network of underbanked products and services in the country. The underbanked do the majority of their financial transactions at their trusted local convenience store that closest to their home. SurgePays utilizes these stores as the points of distribution into these communities.

As we onboard stores to fintech software platform, we enable the Clerk at that store to perform transactions such as prepaid wireless activation and payments, along with reloading debit cards and other financially enabling services to improve the daily lives of those without traditional access to banks, credit, and checking accounts. One of the really great things is that our revenue is directly tied to how many essential services we provide to those who need it most. The Affordable Connectivity Program or ACP has been the revenue driver for SurgePays growth over the last two years, taking us from a Company with $50 million in revenue in 2021, to $121 million in 2022 with roughly breakeven profitability. In 2023, we are guiding to $190 million of sales with positive cash flow.

The ACP offers a federal subsidy for a tablet device and a monthly cellular broadband Internet service to the recipients of any other income-based government benefit such as Medicaid, veterans pension, Section 8, and most notably, the program historically called food stamps or EBT, but now goes by the name SNAP. There are several wireless companies out there with licenses to offer the ACP program to the public. However, we are uniquely positioned as the only ACP Company that owns its own customer relationship management software platform, that’s integrated with the FCC’s database and also AT&T and T-Mobile. Further, we’re the only ACP Company that owns one of the few prepaid transaction platforms that has a nationwide network of convenience stores.

This trifecta competitive advantage paves the way for us to be the only ACT Company able to do brick and mortar sign-ups inside convenience stores, which means store owners can earn revenue by helping those and their underserved community get connected. We are utilizing this great ACP program as the enticing catalyst to build what is now over 25,000 stores to be on-boarded with a staging target of less than 12 months. In some areas, more than 30% of the transactions at convenience stores and supermarkets are using a SNAP card, which is the government benefit. Every customer who pulls out that card in the store is eligible for ACP. What’s even more exciting is that, ACP is limited to one per household, and through our surveys, we know that each household has three to four smartphones on another prepaid wireless Company.

With our presence in these stores where these customers shop, and the ability for these customers to pay their monthly prepaid wireless bills at the same store, it’s a fantastic launching pad for our non-ACP prepaid wireless subscriber push later this year. Another exciting facet of our business is now the store owner is making money directly in partnership with helping his community, and we’re the Company enabling this. Directly because of this, I’ve never seen a warmer reception to upselling and distributing other products to a store. Not only does our software platform have a navigation interface similar to a website for doing these transactions, it also has a wholesale marketplace back-office where store owners can order high margin products that are in-demand directly from the manufacturer.

These products are the impulse consumables by the register that maybe store owners in rural areas especially have difficulty obtaining or the minimum orders from their local distributors are just too high. Using ACP to add stores to our network by the tens of thousands grows our ACP subscriber base, our prepaid top-up and payment revenue, and gives us points of distribution for selling other third party products into these communities nationwide. This is the mindset or the driving force for parlaying the success of the ACP program into exponential revenue growth in our other verticals. We are piggybacking this hot reception by store owners to have access to this offering. Even with the majority of our team’s energy focused on this longer term growth model, I’m pleased to announce that the first quarter of 2023 continues the profitability trend we began to see at the end of 2022, delivering net income of $4.5 million and EBITDA over $5 million.

With our funding in-place, we’ve secured a consistent supply of tablets at a significantly lower cost and in the meantime, we’ve built out the infrastructure to distribute them in the most efficient means possible. We should no longer see periods of throttling growth due to running out of devices. We expect revenue to ramp higher in future quarters. As I mentioned in the last quarter’s call, the key metric is new stores on our platform going forward. More stores on our platform means more ACP sign-ups, more prepaid wireless subscribers, more products on the shelf, more transactions over our fintech platform and more sales per individual store. As always, we’re focused on managing our cash, and our cash flow while deploying that cash to maximize growth.

We expected first quarter revenues to align with fourth quarter 2022 revenues, and has precisely what happened, but with strong positive cash flow. We anticipate the full benefit of our lending facility to be realized toward the end of the second quarter with growth accelerating quickly, and continuing into the second half of the year. We still expect 13,000 stores to operate on the SurgePays network by the end of the year, and see positive operating cash flow during the year and only looking to raise capital for a defined opportunistic purpose. I don’t normally enjoy preparing for these calls but stopping for a minute to see the fruits of your labor has changed my mind a bit, considering how the fruit looks now. I think our next couple of calls will continue elevating my smile, as we’re able to continue shifting gears upward.

Until then, thanks go out to the SurgePays team for pushing forward and delivering on a daily basis. I’ll turn the call over to Tony, to review our financial results briefly before summarizing today’s call. Tony?

Anthony Evers: Thank you, Brian, and good afternoon, everyone. I will begin my overview of the first quarter’s financial results. For the quarter, we reported revenues $34.8 million compared to $21.1 million in the first quarter of 2022, representing an increase of 64%. The increased sales for the quarter were primarily attributable to subscriber growth in our mobile broadband business. Gross profit increased 192% in the first quarter, to $7.7 million compared to $2.6 million in the year ago period. First quarter gross margin also showed significant improvement up to 22.1% versus the 12.5% in the first quarter last year. SG&A expenses decreased by 22% year-over-year, this was primarily driven by a decrease in compensation expense of $875,000 from Q1 2022 to Q1 2023.

Income from operations was positive for the quarter at $4.7 million compared to a loss of $1 million for the year ago period. Net income for the quarter was $4.5 million or a gain of $0.32 per basic share, compared to a net loss of $1.2 million or a loss of $0.10 per basic share in 2022 Q1. Of the $4.5 million gain in the first quarter 2022, 2023 showed an increase of gross margin of 13% over Q1 of 2022. Other income included a 33% gain on our investment in Centrecom. Turning to the balance sheet liquidity and cash flow. Our cash balance as of March 31 was $8.9 million compared to $7 million at the end of — year-end 2022. Accounts receivable have increased by $400,000 from year-end 2022 to $9.7 million. The receivable is from the U.S. government for the mobile broadband subsidy.

Payment usually occurs in the last day of the month, following the verification of a new customer with USAC. Given our strengthen in financial position, higher cash balance and capital structure, our cash allocation priorities focus on investing in the business, and maintaining ample liquidity for future growth. I’ll now pass the call back to Brian, for some closing remarks. Brian?

Brian Cox: Thanks, Tony. Hopefully, it’s clear what we are building here at SurgePays. We’ve succeeded and continue to succeed in making significant advances in the financial profile of the Company while doing our best to protect shareholder interest. We are poised to create one of the largest direct distribution networks of underbanked products and services in the country, and a vast market with tremendous growth potential awaits. These results have proven we can do that while delivering positive cash flow. Thank you so much for your time today. We will now open up the call to questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question today will come from Ed Woo with Ascendiant Capital.

Operator: Your next question will come from Adam Waldo with Lismore Partners.

Operator: [Operator Instructions]. And our next question will come from Michael Diana with Maxim Group.

Operator: And there are no further questions at this time. We will now conclude today’s conference. Thank you for joining, and have a pleasant day.