Smith Micro Software, Inc. (NASDAQ:SMSI) Q4 2022 Earnings Call Transcript – Yahoo Finance

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Smith Micro Software, Inc. (NASDAQ:SMSI) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Good day, and welcome to the Smith Micro Fourth Quarter 2022 Earnings Conference Call. . I would now like to turn the conference over to Mr. Charles Messman. Please go ahead, sir.
Charles Messman: Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Smith Micro Software’s financial results for the fourth quarter and year ended December 31, 2022. By now, you should have received a copy of the 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 call consists 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 product deployments, migrations and/or growth by new and existing customers, operating expense 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 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’d like to point out that in the forthcoming prepared remarks, we will refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for that reconciliation of these non-GAAP financial measures. With that said, I’ll turn the ball over to Bill.
William Smith: Thanks, Charlie. Good afternoon, and thank you for joining us today for our 2022 fourth quarter and year-end conference call. I’m excited to share with you some important progress we’ve made on several fronts throughout the fiscal year. But as many of you know, we also recently experienced a setback. As noted in our February 27 press release, we received notice from one of our Tier 1 carrier customers that it has decided to terminate the Family Safety portion of our relationship. That termination takes effect on June 30, after which we will provide support during the transition period for up to 180 days, as specified by our contract. There are a few important points to note. While we no longer expect any growth from this partnership, we expect to continue to earn monthly revenue from this contract until the end of the transition period through the remainder of 2023.
While we were taken by surprise and certainly disappointed by this turn of events, it’s important to note that the commercial terms of this partnership were those that we inherited in our acquisition of the contract, and candidly, they were not very favorable. So although this news will have a negative impact on our top line revenue, it will yield an increase in our average revenue per subscriber. Additionally, as we eliminate the associated costs and reallocate others to more profitable relationships, we expect to see improvements to our gross margins as early as Q2 of 2023. With all of this said, we clearly understand the impact of what just happened, and our focus is on how we are going to deal with the challenge. The first step is to align our expenses with the new business reality.
Effective immediately, we will implement actions to reduce our expenses by $4 million per quarter. We have been able to immediately cease all migration activities for this carrier, which will allow us to significantly reduce personnel, both in terms of the number of resources we need to support product development and delivery efforts for the customer and in terms of back-office resources. In addition, certain nonpersonnel-related costs can be rationalized as a result of this action. Collectively, these factors give us confidence to achieve this level of cost savings in the near term. We believe the balance of our business is solid. I will discuss that viewpoint in more detail in the second part of my presentation after Jim has provided his financial overview.
With the immediate expense reductions, our goal will be to post breakeven or profitable results, perhaps as soon as Q2 of this year and not later than Q3, and to grow our profits during the remainder of the year. On that note, I will turn the call over to Jim Kempton, our Chief Financial Officer, who will provide you with more specifics on our financial results, after which, I will discuss our business case going forward. Jim?
James Kempton: Thanks, Bill, and good afternoon, everyone. As a reminder, we acquired the Avast Family Safety Mobile business in April of 2021, which impacts the year-over-year comparisons that I’ll be discussing today. I’ll now cover the financial details of the fourth quarter and full year 2022. For the fourth quarter, we posted revenue of $11.4 million compared to $14.7 million for the same quarter of 2021, a decrease of approximately 22%, as a result of the decline in CommSuite revenues, coupled with the decrease in Family Safety revenues. When compared to the third quarter of 2022, revenue decreased by approximately $300,000 or 3%. Revenue for 2022 was approximately $48.5 million versus $58.4 million last year. The $9.9 million decrease is due to a decline in CommSuite revenues, coupled with the decline in Family Safety revenues.
During the fourth quarter of 2022, Family Safety revenue decreased by $2 million or 17% compared to the fourth quarter of last year, primarily as a result of the reduction of the Safe & Found platform revenue related to the continued attrition of legacy Sprint subscribers, driven by T-Mobile’s acquisition of Sprint. Family Safety revenues were essentially flat compared to the third quarter of 2022. During the fourth quarter of 2022, CommSuite revenue was approximately $900,000, which decreased approximately $1.3 million compared to the $2.2 million in revenue produced in the fourth quarter of 2021. This decrease is primarily attributable to the decline in legacy Sprint subscribers on the CommSuite platform as those subscribers have transitioned off the Sprint network onto the T-Mobile network, which was fundamentally completed in 2022.
Revenue from CommSuite was down approximately $200,000 sequentially compared to the prior quarter. ViewSpot revenue was approximately $800,000 for the fourth quarter of 2022, which was essentially flat compared to the fourth quarter of 2021, and decreased approximately $200,000 compared to the third 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, and the timing and volume associated with this portion of the revenue stream is less predictable. While we are seeing increased levels of marketing for our Family Safety products for certain carriers, we are not expecting a significant increase in subscribers in the first quarter of 2023 given the activity to date.
While we do expect revenue to increase for certain of our carrier customers quarter-over-quarter, we don’t anticipate enough of an increase to offset the projected decline in revenues for certain of our legacy product lines in the current quarter, including Safe & Found. As such, we expect consolidated revenue for the first quarter of 2023 to be lower by 2% to 5% compared to the fourth quarter of 2022. For the fourth quarter of 2022, gross profit was $8.1 million compared to $10.6 million during the same period in 2021. Gross margin was 70.8% for the fourth quarter of 2022 compared to 72% for the fourth quarter of 2021. The gross profit of $8.1 million for the fourth quarter of 2022 was flat compared to the gross profit produced in the third quarter.
In the first quarter of 2023, we would expect gross margins to be relatively in line with the current run rate. For the year ended December 31, 2022, gross profit was $34.3 million compared to $45.7 million during the prior year. Gross margin was 70.7% for the December 31, 2022, year-to-date period. GAAP operating expenses for the fourth quarter of 2022 were $15.2 million, an increase of approximately $700,000 or 5% compared to the fourth quarter of 2021. This increase was caused by an increase in amortization expenses of approximately $1.4 million due to the onetime adjustments related to the finalization of the Avast acquisition purchase accounting recorded in the fourth quarter of 2021. Note that the amortization expense of $1.5 million in the fourth quarter of 2022 was in line with the amortization expense reported in the third quarter.
GAAP operating expenses for the year ended December 31, 2022, was $65.2 million, a decrease of $11.4 million or 15% compared to the prior year. Non-GAAP operating expenses for the fourth quarter of 2022 were $12 million versus $13 million in the fourth quarter of 2021, a decrease of approximately $1 million or 8%. Sequentially, non-GAAP operating expenses decreased by approximately $1.1 million or 9% from the third quarter of 2022, primarily due to decreases in personnel-related costs and in contractor costs related to the SafePath migrations. We expect first quarter 2023 non-GAAP operating expenses to decrease from the fourth quarter of 2022 by 4% to 8% due to the continued actions to reduce our cost structure, including the closure of our Prague, Czech Republic operations as of December 31, 2022.
As Bill mentioned in his remarks, we are taking additional actions to significantly reduce our costs even further and anticipate that these actions will result in over $4 million of quarterly savings from our aggregate total non-GAAP operating expenses and cost of sales for the fourth quarter of $15.3 million. In other words, out of the $3.3 million in cost of sales and the $12 million in non-GAAP operating expenses reported for the fourth quarter of 2022, we will be eliminating $4 million in quarterly costs by no later than the third quarter of 2023. We are also very confident that we will achieve at least $3 million of these savings in the second quarter of 2023. As some of these savings will be derived from our cost of sales, we are expecting to see an expansion in our gross margins beginning in the second quarter as well.
Circling back to the results for 2022, non-GAAP operating expenses for the year ended December 31, 2022, was $52.5 million, an increase of $4.7 million or 10% compared to 2021, primarily driven by the full year impact of the addition of the Avast business in April 2021. The GAAP net loss for the fourth quarter of 2022 was $8 million or $0.14 loss per share compared to a GAAP net loss of $4 million or a $0.07 loss per share in the fourth quarter of 2021. The GAAP net loss for 2022 was $29.3 million, a $0.53 loss per share compared to a GAAP net loss of $31 million or a $0.61 loss per share in 2021. The non-GAAP net loss for the fourth quarter of 2022 was $4.3 million or $0.08 loss per share compared to a non-GAAP net loss of approximately $2.4 million or a $0.04 loss per share in the fourth quarter of 2021.
The non-GAAP net loss for the year ended December 31, 2022, was $18.8 million or $0.34 loss per share compared to a non-GAAP net loss of approximately $2.2 million or a $0.04 loss per share in 2021. Within today’s press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the fourth quarter of 2022, that reconciliation includes adjustments for intangible asset amortization of $1.5 million, stock compensation expense of $1.1 million, convertible note and stock offering fees and amortization of $1.7 million and severance-related costs of approximately $600,000, partially offset by fair value adjustments of $1.2 million. For the year-to-date period, the reconciliation includes adjustments for intangible asset amortization of $6.3 million, stock compensation expense of $4.4 million, convertible note and stock offering fees and amortization of $3.1 million and severance-related costs of approximately $1.4 million, partially offset by fair value adjustments of $4.7 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 utilize a 0% tax rate for 2022 and 2021. The resulting non-GAAP tax expense reflects the actual income taxes expensed during each period. From a balance sheet perspective, we reported $14 million of cash and cash equivalents as of December 31, 2022. This concludes my financial review. Now back to Bill.
William Smith: Thanks, Jim. Let’s now touch on some specific areas of our business as we look ahead. Let’s start by looking at our 2 Tier 1 Family Safety customers here in the U.S. We plan on delivering the SafePath-based solution to AT&T during Q2, and we expect it to launch into the market in Q3. Our Q2 delivery will also complete the process of extracting select functionality from the former Avast platform and incorporate it into the SafePath version that AT&T will launch, thereby ensuring we roll out a best-of-both solution going forward. This will also conclude all of our customer migration efforts. In addition to the operational and expense-related benefits of moving AT&T to SafePath, we also believe that the newest versions of SafePath represent a far superior product with greater value to AT&T, its multiline consumer subscribers and to Smith Micro compared to the incumbent version.
This also now creates opportunities for us to upsell additional services on our platform, such as SafePath Home, Drive and IoT. It will also allow for substantial growth of the Family Safety user base at AT&T. We believe that our relationship at AT&T is strong. AT&T shares our enthusiasm and confidence that their deployment of our solution, AT&T Secure Family, will grow meaningfully once the SafePath-based version rolls out. In conjunction with AT&T, we have put in place a broad go-to-market marketing plan and have begun training activities across different groups within the AT&T organization. We also believe that our T-Mobile relationship is also solid. T-Mobile is already deployed on the SafePath 7 platform. And with the completion of the integration of the best features of the Avast code base into SafePath, we can also offer these extensions to T-Mobile.
We believe this enhanced offering will provide new excitement around the family mode product and offer a new opportunity to grow the Family Safety subscriber base. We are working with T-Mobile to develop an exciting marketing campaign for Family Safety, much like we have done with AT&T. Growth of the subscriber base is our primary focus with this customer. We remain focused on helping DISH launch the CommSuite-driven visual voicemail as one of the first value-added services on the DISH wireless network. We’re also working closely with DISH 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. We believe that these efforts have strengthened our relationship with DISH, and they lead to other opportunities down the road.
Our existing ViewSpot business continues to remain stable. I hope you saw our press release last week on ViewSpot’s expanded data capabilities. We believe that ViewSpot data can help our customers correlate their consumers’ in-store use of retail display devices to the retailers’ sales, thereby increasing the value and relevance ViewSpot provides. This is an exciting part of our efforts to make ViewSpot a more important part of the customers’ data-driven intelligence and retail success. On another front, we just completed a very successful Mobile World Congress in Barcelona. With our completely rebuilt European sales team, we believe that there are strong opportunities for growth in this market. We believe that both SafePath and ViewSpot have robust applicability and opportunity in Europe.
We particularly see untapped potential in the European market, both among Tier 1 carriers as well as their regional operating companies in higher ARPU markets, each of which often selects vendor partners independently. We met with dozens of European carriers in Barcelona, focusing on both the SafePath and ViewSpot product offerings, and received very positive reactions to our presentations. In conclusion, we made significant progress during fiscal 2022 on one of our primary objectives, the unification of our digital family lifestyle business to a best-of-single platform. We are confident that the outcomes of increased operational efficiencies, cost savings and a vastly improved product affirm the value of this hard work and provide a strong base from which we can grow.
With the significant cost reductions discussed earlier, we see a clear path to profitability, potentially as early as Q2 of this year. We remain bullish on our future and focused on returning to growth, profitability and free cash flow. With that, I will open the call for questions.
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