Smith Micro Software, Inc. (SMSI) Q1 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Smith Micro First Quarter 2019 Earnings Conference Call. All participants will be in a 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 Investor Relations and Corporate Development. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks for joining us today to discuss Smith Micro's financial results for the first quarter of our fiscal year of 2019 ended March 31, 2019. By now, you should have 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, Chairman of the Board, President and Chief Executive Officer of Smith Micro; and Tim Huffmyer, Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of Forward-Looking Statements, including, without limitation, those regarding the Company’s future revenue and profitability, new product development and new market opportunities, operating expenses and Company 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 statements. For more information, please refer to the risk factors discussed in Smith Micro’s most recently filed 10-K. Smith Micro assumes no obligation to update any forward-looking statements, which speak to our management’s belief and assumption only as of the date they are made. I want to point out that in the forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures. With all that said, I will now turn the call over to Bill. Bill.

Thank you, Charlie. Good afternoon, everyone and thank you for joining us today for our 2019 first quarter earnings conference call. As you were recall from our last earnings conference call just a couple of months ago, this is a very exciting time from Smith Micro as we continue to build off a significant strides made throughout fiscal 2018. I am pleased to report another very solid quarter for the company. Looking at the first quarter results, total revenues came in at $4.5 million, up 54% from the first quarter of last year and non-GAAP net income was approximately$600,000 or $0.02 per share, significantly up over the prior year. We continue to make great progress as we march further into 2019. This includes the success of our Smart Retail acquisition that we branded ViewSpot that closed in early January. We also delivered accelerated growth with the SafePath platform as revenues increase to approximately $2.1 million during the first quarter. We're also pleased to have signed a significant new strategic partnership with Gryphon Online Safety that expands the SafePath platform into the home to bolster parental controls and enhance security protection. The sales pipeline continues to grow with a larger geographical reach and a greater number of opportunities than we have seen in many years. More importantly, pipeline growth is reflected across all three of our core wireless solutions. SafePath, CommSuite and ViewSpot. We're off to a strong start to fiscal year 2019 and we plan to leverage and build upon that momentum. Before we dive deeper, let's turn the call over to Tim to discuss our financial results in more detail. Tim?

Thanks Bill. Let me start with a summary of the previously announced acquisition of the Smart Retail division of ISM Connect which we completed on January 9th. As part of this acquisition, we issued approximately 2.7 million shares of common stock and used $4 million of cash. The transaction purchase agreement also included certain registration requirements, which we have completed. The acquisition resulted in an increase of intangible assets of $5.2 million and goodwill of $4.1 million. As previously mentioned, the company has branded the acquire product as ViewSpot. Now let's review the numbers for the first quarter of 2019. For the first quarter, we reported revenue of $8.4 million compared to $5.5 million for the same quarter last year, an increase of 54%. Excluding the acquisition revenue increased 35%. The wireless segment reported quarterly revenue of $8.2 million compared to $4.8 million last year, an increase of 70%. Excluding the acquisition, wireless revenue increased 48%. Our graphic segment reported quarterly revenue of $260,000 compared to $647,000 last year. The increase in wireless revenue was a result of revenue growth in the SafePath family platform. During the first quarter of 2019, revenue from Sprint SafePath family grew by 75%, compared to the fourth quarter of 2018. We expect revenue growth to continue based on recent and expected Sprint actions, which include continued retail promotions. These actions are completely dependent on Sprint execution, we continue to support efforts as needed and required. As a reminder, Sprint has an existing base of subscribers using a similar legacy product to SafePath. The legacy product was originally due to sunset in the first quarter of 2018, but was delayed. This change was based on Sprint operational decision. We continue to support Sprint on a new sunset date. During the first quarter of 2019, we again experienced subscriber growth related to the CommSuite product. However, as discussed during the last earnings call, the CommSuite advertising revenue earned was lower compared to the fourth quarter of 2018 due to uncertainty around advertising on the platform. Revenue from our newly acquired ViewSpot product line was $1.1 million for the quarter. For the first quarter, gross profit was $7.5 million compared to $4.2 million during the same period last year. Gross margin was 89% for the first quarter compared to 76% last year. The increase in gross margin is directly related to the higher Wireless revenue and mix of both wireless and graphics revenue. Operating expense for the first quarter was $7.5 million, an increase of $1.3 million or 21% compared to last year. This increase is primarily related to an increase in cash operating expenses for ViewSpot, an increase in non-cash amortization expense for ViewSpot; an increase in fixed and variable cash compensation related expenses and an increase in non-cash stock compensation expense. Operating expenses for the fourth quarter of last year was $5.7 million or an increase of $1.7 million for the first quarter. This increase is primarily related to an increase of cash operating expenses for ViewSpot. An increase in non-cash amortization expense for ViewSpot, marketing expenses related to Mobile World Congress and CES trade show attendance. An increase in fixed and variable cash compensation expenses and an increase in non-cash stock compensation expense. The non-GAAP pre-tax income for the first quarter was $780,000 thousand compared to a non-GAAP pre-tax loss of $1.9 million last year. The non-GAAP net income for the first quarter was $593,000 or $0.02 earnings per share compared to a non-GAAP net loss of $1.5 million or $0.10 loss per share last year. Within the recently issued press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the first quarter, the reconciliation includes the following adjustments. Stock compensation expense of $456,000. Intangible amortization of $196,000; acquisition cost of $76,000 and preferred stock dividends of $34,000, some of which are non-cash items. Due to our accumulated net losses over the past few years, our GAAP tax expense is primarily due to foreign income taxes. For non-GAAP purposes, we utilize a 24% tax rate for 2019. The resulting first quarter non-GAAP tax expense was $187,000. This concludes my financial review. And back to you Bill.

Thanks Tim. Now let's take a deeper dive into our three core product suites and provide some additional color. Let's start with SafePath. As expected, we saw significant growth in new subscribers during the quarter, as revenue was nearly 7x that of Q1, 2018, and increase 75% over Q4, 2018/ Thinking about SafePath, we are aware of news reports that Apple has notified some direct-to-consumer parental control app developers that they are in violation of Apple guidelines related to the use of Mobile Device Management, MDM technology and remove these apps from the Apple App Store. Smith Micro has not received any such notice nor has our mobile operator customers who white label the SafePath iOS app. Smith Micro does use MDM technology in our SafePath product and we are monitoring this action by Apple. We have a plan to replace our use of MDM technology in connection with SafePath iOS parental controls. We have prioritized this activity within our product roadmap for the SafePath product and look forward to rendering this a non-issue. Our new exclusive partnership with Griffon online safety provides an exciting opportunity to build sales and expand still further the total addressable market for the SafePath platform. Named SafePath home and branded to the mobile operator, SafePath automatically secures connected devices through a router and provides remote monitoring control with one easy-to-use app. So from smartphones to non cellular devices such as gaming systems, SafePath enables families to manage all their connected devices wherever they are and wherever their devices go. Some SafePath features include but are not limited to parental controls that enable parents to set app restrictions such as for YouTube and Facebook including age level restrictions for each device. Monitor video game usage, pause the Internet and set homework and bedtimes, apply content filtering with Safe Search. It should be noted that these parental controls remain active even when the child's device is outside of the home. Additional features included in SafePath home are network protection that provides your Wi-Fi network with an artificial intelligence engine that is consistently adapting to new threats such as phishing attacks or computer viruses. The software not only detects the attack but enables families to quarantine the device and isolate the device from the home network, so it doesn't cause damage to additional devices. Device fingerprinting which shows all devices connected to your network and categorized by user and type. That is like laptops, phones, watches et cetera. And mesh Wi-Fi network management designed to maximize speeds throughout the home. We see strong demand for this solution as it integrates the mobile world and the home. The market for smart home technologies is anticipated to reach $53 billion by 2022. And as Millennials enter the housing market, we can expect very large growth and market demand. This is a generation who grew up with technology and the convenience and connectivity it provides. Therefore as the consumer IoT market expands, we are nicely positioned to capitalize on the opportunity ahead. I look forward to updating you as we see new continued progress. Looking at safe and sound with Sprint we launched several initiatives on the marketing front during the quarter to maximize our success in 2019. Particularly with the retail stores, as well as much broader training initiatives across several Sprint call centers throughout the US to better equip call center reps to speak with consumers about safe and sound. Now that we have reached a sizable subscriber base and increase consumer awareness, our 2019 initiatives will also promote increased app's engagement and user retention. Our initiatives will rely on deep linking to identify areas inside app and resulting messaging will encourage a direct action such as prompting users to set up geofencing or parental controls. These app engagements promotions will increase the lifetime value of the subscriber by encouraging them to try new features in the app, and in turn increasing user satisfaction. We are excited about our progress and believe we are just getting going at Sprint. As we have several new things coming down the line in 2019 and beyond. Okay. Now let's discuss ViewSpot. As we mentioned on the last earnings call, we close the transaction in early January and during the past few months have been working diligently to integrate the teams and technology into Smith Micro, all while accelerating sales efforts and building off the very solid base of the two largest tier one carriers in North America. I am very pleased on all fronts. From an R&D, product and marketing standpoint, we have significantly strengthened our internal efforts. First, we restructured our ViewSpot product team, enlisted veteran team members who were previously working on our legacy products and have added new recruiting efforts as well. These were necessary steps to support the growth and demand we expect to see for the remainder of the fiscal year. We have also been incorporating feature enhancements and building up a strong product roadmap. A few examples of these enhancements are our dynamic digital pricing mechanism, which provides our customers with a powerful tool to update product pricing at a moment's notice. This gives carriers flexibility to remotely push updated pricing to all retail locations or to only select regions or locations. Another example of the products we made around the broadening of the analytics engine capabilities within the platform to better deliver actionable data for the carrier's resulting in the ability to make real-time business decisions such as customer engagement activity, device diagnostics and geographical and store level performance. Our in-store analytics provides carriers with a better overall view and understanding of the customer's in-store journey, store operations and the success of different promotional campaigns. I am pleased overall with the team's progress on this front. On the sales front, the ViewSpot pipeline continues to grow rapidly. We have several proof-of-concept trials underway in the field with a variety of carriers around the world. We believe that the ViewSpot sales cycle is shorter than our other wireless products. I look forward to sharing new customer wins with you in the coming quarters, as we continue to build out this new revenue stream for the company. Looking at CommSuite, our voice messaging platform, I was pleased to see we achieved our sixth quarter of consecutive subscriber base revenue growth. Throughout 2019, we will be adding new innovative ways to expand the platform, offering mobile operators new, unique functionality to maximize premium services for all their customers. We see demand increasing in the market and believe our platform is gaining traction with other carriers. So, in closing, we are off to a good start for fiscal 2019 and will continue a keen focus on delivering growth and profitability throughout the remainder of the year. With that said, I will open the call for questions. Operator?

[Operator Instructions] Our first question comes from Scott Searle of Roth Capital Partners. Please go ahead.

Hey, good afternoon. Thanks for taking my question. Nice, quarter guys. I just want to clarify a couple of things quickly on SafePath, make sure I had the numbers right. It was $2.1 million in the quarter and did you give a subscriber number? It looks like the math kind of works out roughly in to 2.20 - 2.30 range but did you provide any numbers on that front?

We did not provide any numbers on that, Scott, but the 2.1 number that you said is correct.

Okay and just to follow up, in terms of the composition of that base, it seems like more and more has been new subscribers as opposed to conversion of existing location lab subs. Could you give us an update on that front? It sounds like last quarter you started to see the 30-day free trial presumably based on the revenue ramp, a lot of that has been converting. So can you give us some idea of what that conversion looks like? And maybe what you're thinking about an exit rate for the end of this year with SafePath?

Yes, okay. Scott, let's see. Obviously, we've grown the base of substantially. Clearly, we're very thankful for all the work that Sprint has done, as well as our other carriers but so it's all very, very positive. As far as where we see the growth continuing, we do expect continued growth throughout the balance of 2019. We really -- I don't really want to give a number for the exit at this point. I think there are a lot of opportunities and I just see it all is a very positive thing.

And then Scott I think on your composition, it is the majority of new subscribers. I think that's a fair way to look at it. And then as far as retention, that's a metric that we closely, closely monitor and it's getting better as we look at the numbers, but we're not giving out that number at this point.

Got you. And if I could just follow quickly with Griffin now and bringing SafePath into the home. How are you thinking about the pricing on that solution to drive? Is it basically just an add-on feature right now? Do you think you get incremental pricing there as a result of those features, which are pretty extensive in terms of what they're bringing to the overall solution? And if you could maybe give us an update on some of the ecosystem partners as well. You've been adding, got through there, what are you up to in terms of number of devices or otherwise in that full suite of partners that you could walk into a carrier with? And I'm not sure if I heard a timeline or an expectation for additional carriers for SafePath this year. Thank you.

Let's start last one first. Clearly, we have a very exciting pipeline underway frankly for all of our products. I think the way to view it is that the sales pipeline, the funnel itself is getting wider and wider. So while we have been in the past talking more and more about trying to add the next carrier for SafePath, we are still heavily focused on that but we are actually focused on doing much more than that. We're looking at adding multiple carriers across all three of our offerings. And I think --I really think that's the metric that we're most focused on. There's obviously a lot going on and we do feel very positive about our chances moving forward.

Okay and then just on Griffin, so I think you can think of it as an add-on. That's a good way to look at it on to the SafePath platform. And then as far as the ecosystem, we are expanding the ecosystem. We have, I think you could look at all the major big ones as the ones that we actually currently have integrated, but we're not actually putting out specifics because that's really tied to the carrier itself. Is that helps?

Our next question comes from Joe McIlree of Chardan. Please go ahead.

Yes. Thanks. Good afternoon. So Scott had asked if there was --if you could give a timeframe for additional carriers on the SafePath platform. And I just like to ask that one again. It's your timeframe.

Well, we've always said that our goal was to get another carrier on in this first half. And that's where we're at and that's what we're focused on. But, candidly, as we look at things now, we're looking at how we can expand all three of our business propositions and with new carriers across the board. So I think it's a much bigger effort than what you're questioning.

Okay, all right. And I'm wondering is there anything of one-time-ish nature in the SafePath revenues for this quarter? Or is that significant quarter and quarter jump in revenues solely due to the organic increase in subscribers?

Hey, Jim. It's organic growth and the subscribers.

All right. And I know that we're expecting continued growth in the SafePath revenues but I hesitate to expect that you're going to have a continued growth at that same quarterly rate. Is that too optimistic or not?

I think it would be safer to see there may be spikes during the year, but I think it will continue to move forward, whether we can do it at the rate we did this quarter, that seems like a reach but we'll see.

All right. And just two more if you don't mind. It sounds like the CommSuite revenue was down quarter-to-quarter. Am I interpreting your language correctly?

Correct. In total, right, so the ad revenue was down quarter-to-quarter. The core subscriber base revenue was actually up because we've added subscribers. So our core revenue related to CommSuite is up.

And so is the ad revenue within CommSuite at a low enough level that as long as we get subscriber growth, we should see an increase in CommSuite revenue quarter-to-quarter in Q2?

We'll see -- we're working to be flat and maybe we can get on top of that, but with -- it just depends on the subscriber growth and offsetting where revenues come into play. We had guided last quarter that our goal this year was flat CommSuite and we knew we expected maybe that revenue would decrease. And we're hoping to get on top of that with the additional subscribers. So we'll continue to work hard at that but for now I think probably a flattish view would be reasonable.

All right. And while I have you, Tim, is this $7.4 million, $7.5 million of quarterly OpEx, is that a good run rate going forward or is there a reason to think it goes up from these levels?

So in the first quarter, we do have extra expenses, which I tried to call out. So specific to some trade show activities, we had some compensation type items fixed and variable. So I think it's safe to say and seasonally our first quarter is higher than you typically see the rest of the year. So I would expect that to come down, Jim.

Our next question comes from Mark Gomes from Pipeline Data. Please go ahead.

Hey, congrats for the good progress, gentlemen. Most of my questions have been answered but I'm wondering on the CommSuite ad revenue, is it safe to assume that the ad revenue is kind of your compensation for the premium version of the product? And if so, what do you guys have in the works to replace that?

Well, so we do have the benefit of running those ads across the platform. We don't necessarily see that as being our base compensation, Mark. So I don't think we internally look at it like that. I mean the ad revenue is nice and will continue to take that as long as it's out there. But really it's all about subscriber growth on the premium service and that's what we look to continue to promote and continue to push that number higher and higher.

And I think the other thing is our customer Sprint also wants to see more revenue, so they will be active in trying to build the ad revenue back up. As you may recall, the fall off is because Brent they've invested pin site media which was a part of Sprint that was responsible for booking ads. And that divestiture was impacted the ad revenue and nothing else.

Right, yes. And I was aware of that from the last call. Just wondering if there are alternatives being discussed that can bring those bridges back onto the table.

Yes. I can tell you there are several things that we are working on with roadmap that we think can help accelerate which is I think was what you're referring to. Is that correct, Mark? And I can just say we know that. [Multiple Speakers] We have several, I think you'll see this throughout the year. We have several different initiatives underway with CommSuite so, we will announce them as they come forth.

Our next question comes from Erin Warwick of ES Capital. Please go ahead.

Hi, guys. Thanks for taking my call. Great quarter. Most of my questions have been answered as Mark indicated. Most of his were as well, but I did have a question going back to the third quarter of 2018 when you guys had mention an IoT device that would be released with the carrier by the end of the first quarter of 2019. And we haven't heard any more about that on the call. So I was just wondering what the status of that is.

The status is moving forward nicely. It is somewhat delayed. I think you will see it launch during Q2 and other than that it looks good, it seems to be working well. And we're anxious to see it ship. End of Q&A

We have no other questions at this time. So I'd like to turn the conference back over to Charles Messman for any closing remarks.

Well, that was the last one. Thanks everybody for joining us today. Again, if you have further questions, please feel free to reach out to us directly. We're very excited here at Smith Micro. We got a lot going on. I'd say keep an eye out on some of these events that will be up and coming and attending here in the near future. And we'll look forward to calling you and chatting with everyone on the next quarter call. Thanks everybody. Have a great day.

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