FiEE, Inc. (FIEE) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to Minim's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. James Carbonara from Hayden IR. Thank you. Please go ahead.

Thank you. And once again, welcome to Minim's Third Quarter 2021 Earnings Call. With me on the call are Gray Chynoweth, Chief Executive Officer; Nicole Zheng, President and Chief Marketing Officer; and Sean Doherty, Chief Financial Officer. As a reminder, all materials for today's live presentation are available on the company's Investor Relations Web site at ir.minim.com. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results or trends could materially differ from those contemplated by these forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see Risk Factors detailed in the company's annual report on Form 10-K, contained in subsequent filed reports on Form 10-Q, as well as in other reports that the company files from time-to-time with the Securities and Exchange Commission. Please note too, today's call may include the use of non-GAAP numbers that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP numbers to the most comparable GAAP measures is available in our most recent press release as well in our periodic filings with the SEC. Now, I would like to turn the call over to Gray Chynoweth, CEO of Minim. Gray, please proceed.

Thanks, James. Good morning, and welcome to Minim's Q3 2021 conference call. Let's jump right in. Given all the headwinds to performance in Q3, we're pleased with our execution against our business plan. We generated net revenue of $15 million, representing 25% year-over-year growth, up from $12 million in Q3 of 2020. This growth significantly outpaced the competitive landscape amidst what was the most challenging quarter in 2021 for consumer electronic sales, illustrated by a 3% decrease in sales according to leading analyst firm NPD Group. Our Q3 sales increase is more consistent with our first quarter, following a substantial Amazon Prime Day revenue bump in Q2. We've continued to increase our software services as a percentage of our revenue mix. Our ration of deferred software subscription revenue to recognized revenue increased to 8%, compared to 7% in the prior quarter, and just 2% in the first quarter. In just under one year, we've brought four intelligent networking products that carry recurring software revenue to market. We posted a net income of $1.7 million, which includes one-time income of approximately $4 million related to the sale of the Zoom trademark, compared to a net loss of $300,000 in Q3 of 2020. Our gross margins dipped by 234 basis points, to 29.9%, compared to Q3 of 2020, which was below expectations due to inflation and COVID-follow-on effects on component and transportation pricing. We're taking actions to mitigate the impacts of these effects on performance in Q4. Further on this point, persistent component inflationary pressures could accelerate end-of-life and product portfolio replacement cycles, which would impact FY'22 top line targets, as we focus on driving sustainable growth. As we work through these considerations, we will be transparent in their impact on financial performance. I'm pleased with our revenue outcome compared to our industry peers. Our performance reflects outsized growth and domestic market share for our products, given that consumer home network market data indicated a soft Q3. This achievement excites me for two reasons. First, leading analyst group, NPD, expects positive year-over-year growth in consumer electronics sales in Q4. Second, we're only scratching the surface of the international market and the higher-growth Wi-Fi 6 system segment. These significant short and long-term opportunities are ours to seize. Two strategies we have discussed in prior quarters are primarily responsible for our performance, optimizing inventory for online sales, and growing revenue per customer with higher ASP intelligent networking products that benefit from the value delivered by our software. Our efforts in inventory optimization, particularly for Amazon sales have been fruitful. In the DOCSIS cable product category, we increased our sales by 5% versus the prior quarter, growing our market share to an estimated 31%, and strengthening our position as the number two brand in the category. In addition to the Amazon [indiscernible], we saw strong sales in Best Buy, with 3% quarter-over-quarter. Our efforts in driving ASPs were reflected in a 22% year-over-year increase for Q3, driven by both intelligent connectivity and next-generation products. To support execution against these strategies, we closed two financing transactions in Q3. We raised $22.7 million in net proceeds from a secondary offering of our common stock, and completed the sale of Zoom-related trademark assets, netting cash proceeds of $4 million. In addition, subsequent to the end of the quarter, we have ended our revolving credit agreement with Silicon Valley Bank, increasing the line from $12 million to $25 million, and extending the maturity to November of 2023. We are using this liquidity selectively and with discipline to invest in opportunities that will result in achieving material profitability on an adjusted EBITDA basis in FY'22. Looking ahead, we're addressing inflation and component pricing pressures that have been felt across the industry, and are evidenced in our Q3 gross margin results. We now respond to this with strategies, including price changes that Nicole will discuss shortly. Of course, any upticks in price create headwinds to top line revenue, both in terms of new sales and the potential for de-stocking from retailers and distributors. We are monitoring sell-through rates and utilization of return reserves closely, and will make investment decisions consistent with our focus on sustainable growth. Turning to our global expansion efforts, the third quarter marked three major milestones; establishing a representative office in Vietnam, adding Africa's leading entertainment company, MultiChoice as a trial customer, and launching Motorola networking products in Amazon India and Flipkart.in for the first time. We're pleased with the local press and influence for coverage in India, and remain excited about our ability to build revenue momentum in that market. Lastly, during these dynamic times, I wanted to emphasize we're focused on building a business that both financially and operationally is resilient, agile, and ultimately self-sustaining. Our efforts on this to-date have minimized the impact of supply chain and logistical challenges to our operations. We have confidence that these mitigation strategies will continue to support our ability to meet the market demand for our products, and have no current information that suggest that these strategies will not continue to support our success on a go-forward basis. Up next, Nicole will give you a deeper glimpse into the product sales performance, pricing strategy, and a look ahead towards progress on software and intelligent product development in FY'22.

Thanks, Gray. To expand upon our performance across our sales channels, our top three sellers were our highest ASP products, an impressive 20% of revenue came from the Motorola MG8702, a high-speed DOCSIS 3.1 and Wi-Fi device with our new motosync app. This bundle is a powerful all-in-one-package for consumers with small homes and apartments to save up to $168 per year on modem rental fees, while also gaining the sophisticated mobile app, which both enhanced security, ad block, parental controls and more. Our number two and number three sellers were our DOCSIS 3.1 high speed modems, the Motorola MB8600 and MB8611. Turning to pricing strategy, our Motorola home networking products are situated in the mid-range amongst their line competitors. This position has granted us broader buyer interest, and today it provides us the flexibility to address component price increases. This year, we've seen price increases across consumer electronics and in our category of approximately 7%. After considerable analysis, we have elected to increase prices at an average of 6% across 60% of our product portfolio. At the time of analysis, the pricing increases maintained our mid-range price position across each product's line competitors. The new pricing went to -- into effect in October and gives us greater flexibility to run competitive promotions. I would like to note that pricing strategy is just one tool we've employed to address product profitability. Optimizing across the entire portfolio we are also making changes to channel distribution for lower margin product skews, as well as taking a closer look at product life cycles and opportunities for higher margin replacements. Moving on to new product introductions, we were pleased to unveil the Motorola MH7603 WiFi 6 mesh system now available in Amazon. With the feature packed motosync app 1.8 gig maximum theoretical throughput speed up to 5,000 square foot of coverage and the intelligent Minim operating system, this solution can go toe to toe with Amazon's [indiscernible] at a more affordable price point. In the current inflation climate, we believe that consumers are not going to seek value pricing, but rather value in pricing. To that end, I am pleased to share that this month we will launch a unique motosync app feature called Issue Tracker. I believe this feature will more proactively and intelligently alert and guide the customer to improve network performance than our competitive solutions. As a part of our ongoing commitment to innovation in connectivity for everyone, we join the telecom and for project or tips in support of open WiFi. The open WiFi software system enables vendors like Minim to focus R&D efforts on service innovation rather than inventing WiFi plumbing. We are also excited for Minim to be considered a standard element in the open WiFi router firmware. If approved Minim software will be available on more hardware platforms, creating more opportunity to offer our WiFi as a service to device manufacturers and ISPs. As we look to the fourth quarter, we are preparing for the holiday season, NPD groups, consumer survey forecast a 2% uplift in consumer electronic sales year-over-year and 2020 was an impressive holiday season. Notably NPD also expects to see elevated interest in impactful hardware software combination products, as well as computer peripheral gift giving. Both of these predictions are good singles for our intelligent connectivity products. We are diligently working to a wider distribution of the Motorola MH7603 mesh system and bringing to market the rest of our WiFi 6 family, which brings powerful and low latency Motorola gateways for gamers and highly connected homes. The high speed Motorola MT8733 WiFi 6 gateway is right around the corner launching in time for Black Friday and I'm happy to report that we have just fulfilled pre-orders for this highly anticipated device. As we enter 2022, we have an ambitious set of next generation products that include paid motosync app feature upgrades, premium mesh systems, a segment with a positive growth outlook and modem products with upgraded specs and attractive industrial design. I'll now turn to Sean for a review of our financial results. Sean?

Thanks, Nicole. A friendly reminder that the financials I will cover are depicted in the earning presentation that has been posted on ir.minm.com. Third quarter net sales increased 25% year-over-year to $15.0 million, with a continued shift in our mix towards intelligent networking products, notably and as Nicole discussed, our average sales price continue to tread up on increasing volumes to approximately $118 in the third quarter, which compares to just under $97 in the third quarter of 2020. On a year-to-date basis, our net sales total of $44.9 million which is up just over 31% over the prior year period, as we head into the fourth quarter. Our gross margin was 29.9%, which compares to 30.1% in the prior quarter and 32.2% in the year ago quarter. Gross margin was impacted by increased component pricing, which rose by high single digits in the third quarter. We are closely monitoring the cost of sales and expect component pricing increases to be fairly sticky for the next several quarters. As Nicole discussed, we are aligning our pricing strategy with this reality while also developing new higher margin products. Over the long-term, as we execute our software driven product strategy, we expect our gross margin to expand despite any near term quarter-to-quarter fluctuation. Revenue bookings for the third quarter were $ 15.2 million, which includes the net increase in our deferred revenue of $174,000 or 17% from the prior quarter. As a reminder, revenue bookings is a non-GAAP metric that we believe is helpful in understanding the drivers and mix of our business, as we manage towards increasing our software subscription business. Deferred revenue on our balance sheet with $1.2 million as of the end of the third quarter, representing software service sales that we expect to recognize ratably over the next 36 months. This Q3 ending deferred revenue figure represents a 17% increase quarter-over-quarter. Turning to a look at our profitability, for the third quarter of 2021, we've posted an operating profit of $1.8 million, which compares with an operating loss of $0.3 million in the third quarter of 2020. Sequentially, this compares to an operating loss of $1.4 million in the second quarter of 2021, driving this result with the one-time Zoom trademark sale of approximately $4 million, which was partially offset by investments in marketing programs for the launch in India, R&D resources to bring firmware development and testing in-house, as well as both the settlement of two nuisance value lawsuits and the write-down certification costs related to end-of-life products within the quarter. Below the line net interest and other income was negative $0.1 million, which when combined with our operating results led to net income of $1.7 million or $0.04 per basic and diluted share for the third quarter of 2021. This compares to the net loss of $0.3 million or negative $0.01 for basic and diluted share in the third quarter of 2020. On a quarter-over-quarter basis, third quarter 2021 adjusted EBITDA was negative $1.4 million, which compares with negative $0.3 million in Q2. Now for a look at the balance sheet, at the end of the third quarter, we had cash and cash equivalents of $19.4 million, an increase of $17.8 million compared to the $1.5 million as of the prior period end. The increase in cash was due primarily to capital that we raised in a secondary public offering, which netted approximately $22.7 million in proceeds and approximately $4 million from the sale of the Zoom trademark. Cash deployed in the quarter was consistent with the rationale around why we raised capital, namely to invest in inventory on hand and stored at Amazon to ensure that we have appropriate levels of inventory available as we look forward to the holiday shopping season in Q4, and to mitigate the risk of shortages, as well as to optimize for continued sales growth through the Amazon sales channel. Inventories were $23.2 million at the end of the third quarter, representing an increase of $3.7 million compared to the prior quarter and due to our investment in inventory to meet both projected demand and to hedge against industry-wide chipset shortages that continue to persist. As of September 30, 2021, we had outstanding debt of $7.1 million, which was comprised of $60,000 related to a PPP loan and $7 million drawn on the company's $12 million line of credit. This compares the $7.3 million in outstanding debt as of June 30, 2021, which was comprised of $60,000 related to the PPP loan and $7.2 million drawn on the company's credit lines. Subsequent to quarter end, we amended the line of credit with our primary lenders Silicon Valley Bank to increase the credit limit from $12 million to $25 million. Our third quarter financial results reflect the steps we have taken to reach adjusted EBITDA profitability. These steps have us on a path to achieving consistent and material adjusted EBITDA profitability in 2022 and beyond. With that operator, we can open the call for questions.

[Operator Instructions] Your first question comes from the line of Josh Nichols.

Yes, thanks for taking my question. And good to see you've brought up the inventory levels, and ahead of what we hope is a pretty strong 4Q holiday shopping season. Is there any more inventory build that you kind of think you need to do or is this a level where you feel pretty confident at, and should we expect some work-down as we move through 4Q and think about potential cash flow generation on that front?

Yes, thanks, Josh. Good to hear your voice this morning. I would say just kind of couple things. One is there's kind of two types of inventory that I'm actually starting to think about. One is chipset inventory, which we brought -- we kind of talked about in the past. And we actually did, in Q3 for the first time, which is to purchase chips directly, and hold them as part of our mitigation strategy towards supply chain shortages. And the second one is, as you point out, around just kind of general product inventory. We expect that those will stay pretty even going forward, as we continue to manage through and burn through the inventory that we have. Although I will say it is a very dynamic environment that we have for inventory. And if we foresee that there's bigger risks kind of coming down the pike, it could be the kind of thing that we hedge against. I think we were very -- I think we were pleased with the fact that we're in the inventory position we're in, and that's because we've been very proactive about it, starting in January of last year. And so, we're -- it's a dynamic environment, but I think we can continue to say that it's going to be pretty steady going forward.

Yes. And then you talked a bit about -- I mean, clearly I think everyone was expecting some gross margin pressure for this quarter, given the commentary that we heard more broadly, and that went on from the Street, but you said -- and it seems like you're doing a good job of transitioning to a lot more higher-margin, higher ASP products. How is potentially going to impact the gross margin line on -- in 4Q? Is it expected to rebound somewhat sequentially?

I'll pass that to Sean.

Sure, thanks, Gray, and thanks, Josh. Good morning to you. So, for Q4, we're planning on maintaining fairly steady gross margin. Obviously, as Nicole mentioned, we've managed to push through some price increases which are going to offset a lot of those downward pressures that we're feeling from the component price increases. So, conservatively, we're going to look to manage it through right around where it is, right around 30% for Q4. And certainly, we're going to have a focus on making sure that we're pushing, with our marketing efforts, our higher margin skews through our higher-margin sales channels.

And then, good to hear you expect to generate significant EBITDA profitability next year. I think you'd previously said that you're kind of targeting to kind of be breakeven or slightly positive EBITDA this year. So, is that still the case or what's the timeline for that transition?

Yes, we certainly are targeting material EBITDA profitability for next year. I believe you've put out in a report you've got us at about $5 million, which seems like a fair estimate for FY 2022. I think we're going to be close to that adjusted EBITDA profitability margin for the year. Clearly, as we bring more and more of these intelligent products to market, part of what is going to that adjusted EBITDA is our -- the revenue bookings that are going to deferred revenue. So, with two more intelligent products coming on in Q4, we're expecting to see a nice pop in deferred revenue, which is obviously going to help our adjusted EBITDA for Q4, so. I'm sorry, Nicole, did you answer that?

Sure, just long-term outlook, I would like to add that we are in the throes of developing upgrade features that will be launched next year, and that will be a pure software play in the mobile app. So, expect those in the second-half of 2022.

And those will, obviously, have some positive pressure on margins.

Thanks. And then last question from me. Good to see the Mesh Wi-Fi system available on Amazon. Any color? I think you mentioned at least one or the two additional gateways that I think were going to be coming out as part of the Wi-Fi 6 product launch would be available for Black Friday timing for the other two releases.

Nicole, you want to talk about that?

Sure. So, yes, we have launched the MH7603 to market, so very excited about that, and scaling up our markets efforts in time for the holidays, that's the Mesh system. As far as the gateways go, we expect the MT8733 to hit before Black Friday, so that's the high-performance gateway with Wi-Fi 6, and also incredibly powerful Wi-Fi. It also is -- has a telephone line in it for Comcast customers. And then as far as the second gateway that will be hitting, we're still targeting, by end of the year, that is the Motorola MG8725.

And those are the ones with the low-latency certification, is that right, Nicole?

The MG8725 was the first, the low-latency certification by CableLabs.

Okay, thanks. I'll hope back in the queue.

Thanks, Josh.

[Operator Instructions] Your next question comes from [Tim Savago] [Ph].

Hi, good morning. And you kind of touched on it a little bit, but maybe I'll maybe hit on it again, which we did see a slower pace of deferred revenue growth in the quarter. I don't know if you want to kind of touch on what might've driven that or any comments on the sales of the current Mesh product you have in the market, I think the 7020 that was contributing last quarter. And what sort of a magnitude of increase you might expect in deferred revenue, here in Q4, given the launch that you just described and the one upcoming, might that be something like what we saw earlier in the year? And I'll follow-up.

Sure. Morning, Tim. So, I think there's two things kind of impacting the 17% growth in deferred revenue for Q3 over Q2. As you recall, in Q2, we actually had a couple of really large load-in orders, those were both for the EMG8702 and the MH7020 series, so really strong sales activity there which obviously drove that, I believe, it was $700,000 increase in Q2 over Q1. The second thing that was impacting Q3 was the delayed launch of the 7600 Mesh systems that we are now happy to celebrate is available on Amazon now. Originally, we were planning on having that onboard and out for sale in Q3, but as we mentioned on the call, it's just come available, in October. So, on the backs of that and the other two products that Nicole mentioned coming out in Q4, I certainly am expecting a bigger increase in deferred revenue for Q4 over Q3 than what we experienced in Q3 here over Q2. And let me just -- one moment here. Yes, and I would say that the growth that we are expecting to see in Q4 in deferred revenue is certainly going to eclipse what we saw here in Q3, and I would think it would be more in line with growth that we saw for Q2 over Q1.

Great, thanks very much. And I wanted to also follow-up, and I think you've mentioned a couple of times software-only solutions or maybe paired with third-party hardware. But coming out of the wireless ISP show, in October, I wonder if you have any further thoughts or anything incremental with regard to your opportunities in the ISP space, either as a software or hardware provider as you look into next year?

Nicole, do you want to talk a little bit about the product mix there?

Yes, so, we actually are in the midst of evaluating a new package for ISPs that we're quite excited about. Essentially, we are finding a way to motivate ISPs to purchase the full Minim solution, from hardware to software, and in a lower-touch fashion, so, giving them the tools to signup and set up and grow their subscriber base a whole lot faster, with more functionality by using the full Minim solutions. So, that is expected to be rolled out this year. And we're pretty excited about that to sort of lower friction for ISPs in setting up, and also give them some savings when they choose to buy the end-to-end Minim solution.

Yes, the only addition I would add to that is I think it's exciting for us to think, as we go into next year, about having those two opportunities for ISPs to purchase from us, which has always been part of the strategy from the beginning. We wanted to be able to sell software-only solutions; we wanted to be able to sell a great piece of hardware in addition to our software. And with that, we're going to be able to have a great platform to deliver those value-added services that Nicole talked about. So for us, our North Star is how many accounts are under management and how can we deliver services to them incrementally. So that hopefully gives you the color you're looking for. Q – Unidentified Analyst: Well, then the last question for me, let me follow-up on that, I know you've had some recent traction internationally on the ISP side as you look at kind of the U.S. rural broadband market in particular, when you talk about this kind of new package targeted at ISP. Should we assume that's where you're focused or are there other areas where you're looking to bring that to market?

Yes. I would say thinking globally we definitely have some opportunities and we're excited about what's happening at multitask in Africa. We're also really excited about the relationship we've developed with tip by Facebook. It's a really fantastic platform for us to be built in a kind of out of the gate to a lot of different hardware models. And we see great opportunities in Africa, in Asia, really all over the place that, that could really change the game for us in terms of our ability to get software out in very wide way, because of that standard kind of built in nature. When it comes to the U.S., I would say we think of those rural deployments, some of them are going to be fixed wireless. Some are going to be -- they're going to be fiber to the home. There's going to be a lot of different deployments and actually just generally in between 5G and satellite architectures, all these different things that's why we think the our ability to deploy mesh systems and great WiFi is so important for us, because we really don't have to expect to only have one horse manure to lease a bunch of different complicated products to allow us to become get our software attached to those networks by having great WiFi and a great app that improves that visibility into the home network and the consumer experience. We're going to be able to take advantage of all of those trends as they drive people to learn, live and earn from home and use our app to get the safety and support that they're interested in. Nicole, did you want to add to that?

Yes. I'd like to add some specific color on our competitive differentiation when it comes to going international. So what do you take a look at managed WiFi providers internationally? Of course, we go up against Plume and Plume's offering is great. It is more geared towards high-end WiFi solutions that focus on providing the CSR, the Customer Service Rep within the organization and the marketing team with a tool. Minim takes the a different approach, which really starts with the consumer experience and empowering the consumer to avoid, having to make that phone call to the CSR by having a great solution. In addition, we are -- our platform is architected such that we are able to work on very low cost routers, which is why TIP really played well within our story. It allows us to get distributed as part of the TIP solution onto low costs routers and high cost routers. But that allows us to enter and serve emerging markets in a way that our competitors currently cannot. So we do see that as a long-term growth strategy for Minim.

Okay. Thanks very much.

At this time, there are no additional questions. I would like to turn it back over to management.

Thanks very much everyone. We appreciate your time, and I look forward to speaking with you in coming quarters.

Thank you. This concludes today's conference call. You may now disconnect. Speakers please hold the line.