Good day and welcome to the Smith Micro Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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. We appreciate you joining us today to discuss Smith Micro Software's financial results for second quarter ended June 30, 2022. By now you should have received a copy of the press release with the financial results. If you don't have one 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'll hear during today's discussion consist of forward-looking statements, including without limitation those regarding the company's future revenue and profitability, our future plans, new product development, new and expanded market opportunities, future product development, migration and growth by our new and existing customers, operating expenses, company cash reserves and the expected impact of last year's acquisition of Avast Family Safety Mobile Business, on our business strategy, operations and financial positions going forward. Forward-looking statements involve risks and uncertainties which could cause actual results or trends to differ materially from those expressed or implied by forward-looking statements. For more information, please refer to the risk factors included in our most recent filing 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 to out managers beliefs and assumptions only as the date they are made. I want to point out in forthcoming prepared remarks we'll refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. That said, I'll turn the call over to Bill. Bill?

Thanks, Charlie. Good afternoon and thank you for joining us today for our 2022 second quarter conference call. Over two years ago in February of 2020 Smith Micro embarked on a mission to takeover absolute industry leadership and the delivery of Digital Family Lifestyle solutions for wireless carriers around the world. The first step of this journey was the acquisition of Circle Media’s carrier business, through which we gained contracts with T-Mobile, US and Sky in the UK. A little over a year later, in April of 2021, we concluded the second acquisition. This time we acquired Avast Family Safety business securing additional contracts with Verizon, AT&T and Wind Tre, a Hutchison property in Italy, as well as additional business with T-Mobile US. While the additional contracts significantly expanded our business space, the acquisitions also provided significant intellectual properties which afforded us the opportunity to leapfrog our product offering to be the absolute best available. As we have discussed on prior investor conference calls, when we set out to consolidate the best features of the acquired technology into our SafePath Digital Family Lifestyle platform we had to significantly grow our engineering teams to meet that goal. The exciting news is that, we are quickly approaching the completion of our mission. In March of this year, we completed the integration of the best of the Circle code base which culminated in our launch of the first release of SafePath 7. We are now about to complete the integration of the best of the Avast code base into SafePath 7 as well. This has been a massive undertaking for our engineering teams and the successful completion will allow us to migrate all of our customers to the same SafePath platform going forward. The achievement of the migration will also result in another…

Thanks, Bill and good afternoon everyone. As a reminder, we acquired the Avast Family Safety mobile business in April of 2021, which impacts the period over period comparisons that I'll be covering today. Now I'll cover the financial details for the second quarter of 2012. For the second quarter, we posted revenue of $12.7 million compared to $15.9 million for the same quarter last year, a decrease of approximately 20% as a result of the decline in CommSuite revenues coupled with a decrease in Family Safety revenues. When compared to the first quarter of 2022, revenue was essentially flat. Year-to-date revenues through June 30, 2022 were $25.4 million versus $27.3 million during the second quarter of last year. The $1.9 million decrease is due to the decline in CommSuite revenues offset by the increase in Family Safety revenues resulting from the acquisition from Avast in April 2021. During the second quarter of 2022 Family Safety revenue decreased by about $1 million or 9% compared to the second quarter of last year, primarily as a result of the reduction of the legacy Safe & Found platform revenue related to the continued attrition of legacy Sprint subscribers driven by T-Mobile's acquisition of Sprint. Family Safety revenues decreased 2% sequentially compared to the first quarter of 2012. During the second quarter of 2022 CommSuite revenue was $1.4 million, which decreased approximately $2.5 million compared to $3.9 million in revenue produced in the second quarter of last year. Revenue from CommSuite was essentially flat sequentially compared to the prior quarter. As we've discussed on prior calls, the decline in legacy Sprint subscribers on the CommSuite platform is driven by those subscribers having the option to move from Sprint to the T-Mobile network for voice services. As more and more subscribers transition off to Sprint…

Thanks, Jim. So I started out by talking about how we are progressing on our plans to consolidate the very best of our acquired technologies into our SafePath platform and the resultant streamlining of operations to reduce our overall operating expenses. Our drive to profitability requires both cost containment, as well as customer revenue growth. Now let's focus in on how we can plan to grow our revenues going forward. Industry data indicates that all three Tier 1 carriers in the US had between $15 million and $20 million multi-line family plan subscribers. While there are thousands of other subscribers at each carrier's universe that are interested in digital family solution, let's just focus in on the multi-line users first. Since we believe this group represents the most likely source for SafePath subscribers. Based on our customer discovery efforts, we believe that SafePath subscriber population in the range of 3 million to 5 million subscribers seems to be attainable for each of our three Tier 1 customers by 2025. To achieve this ambitious goal we have built out a strong marketing team at Smith Micro to develop best practices for promoting safe path. This team works with our carrier customers to develop coordinated marketing campaigns that are multi-faceted by design to grow each customer's SafePath user base. We see this as a very important service that we provide to our customers. It also feeds the enabling engine to meet our goals. Additionally, we have developed a strong product roadmap designed to deliver new innovative capabilities to the SafePath platform going forward. Much like SafePath Drive and SafePath Home, these new features will deliver new platform services to an already best of class solution. The SafePath platform today and extending into the future supplies a group of turnkey family offerings that…

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Josh Nichols with B Riley. Please go ahead.

Yes, thanks for taking my question and elaborating on the status for all the different carriers. In your comments, you did mention that you were pretty optimistic that you're going to see a nice bump back to growth in the fourth quarter, any visibility you could provide into what's going on in terms of the marketing campaigns, specifically at T-Mobile and what gives you confidence that that company is going to flip back to growth before the end of this year?

Actually it's a combination of both T-Mobile and the efforts going on at AT&T. So it's not a single carrier driven event. I would say that we are working closely with both carriers, there are some strong plans in place and we believe they will be successful. As I said in my prepared remarks, the result already on ongoing marketing efforts underway at Verizon, and we also expect those to bear fruit going forward as well. So that's basically how [indiscernible].

And then last question. So I think kind of hit on the topline and the opportunities there. On the OpEx side, so the company is going into cost reduction mode, now that most of the development work is done. Could you kind of just elaborate a little bit on the timing? I think you said like $3 million or something by mid next years, like, is that $3 million a quarter that you're expecting to reduce operating expense from the 2Q run rate or how much is OpEx can come down over the next 12 months?

Yeah. Again in my prepared comments, everything is in excess of $3 million off of the OpEx run rate that we have for Q2. And it would be fully in effect we believe by the end of Q1, 2023.

Got it. Thank you. And then last question, just as it was mentioned in the press release. I think you've talked about the three US carriers a lot, but you did also kind of hit on Tier 1 operators in Europe as well, any updates on that front?

There's a lot of that activity as soon as we have something done, we will be -- we will raise to the market as you know, but nothing we can talk about today.

Great, thanks.

Thanks, Josh.

The next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead. Q - Unidentified Participant Hey, this is Kevin on for Eric. Thanks for taking my question. Kind of piggybacking off Josh's question. I know these Tier 1 guys have big marketing push in the second half. Could you kind of help us to better understand the timing around that as that kind of a maybe a Black Friday thing. And then overall, maybe just generally, what are you hearing from these carriers in terms of the health of the consumer and the appetite for family plan given inflation and whatever else they're battling right now?

It's a great question. But I'm not sure how I can answer it. It really is a question you should be asking to carrier, but let me try to give some color. I would say that our approach to marketing for SafePath going forward is a multifaceted approach. In other words, we wanted to see activity in the stores, in the care organizations, online, digital, et cetera. So it's a multi-pronged overall approach. And this is really based on history, we've seen this in the past, it was a techniques that we saw developed during this very successful growth of the Sprint business a few years ago and we believe it will work very, very well going forward. As far as the overall state of the industry, all the carriers have reported their earnings and all – I’ve pretty much to talk to that. So I don't know that I can add anything to your question there.

Okay. Sounds good. I guess I'll leave it at that. Thanks.

The next question comes from Jim McIlree with Dawson James. Please go ahead.

Thank you. Good afternoon. In times past you've talked about the carriers in Q4 focusing on subscriber additions rather than signing customers up for new services. So just wondering if you could talk about that dynamic relative to the AT&T launch, as well as getting more aggressive with T-Mobile in Q4?

That's a good question, Jim. And I will say this, that the primary focus of the carriers, especially at the retail point is focused on customer acquisition and the selling of new plants and new handsets. That said, we still believe that there is a lot of work that can be done now on selling value-added services like what we're talking about with SafePath. When we now talk about -- and I've given you some numbers for the first time, where we're looking at a installed base of 3 million to 5 million subs per carrier for the big three here in the US. You're now reaching a very meaningful number, if you look at the Street price for the SafePath offering, it's about $10 per month recurring, you add in other add-on services like home and drive that goes on top as well as IoT. So we're not talking about a small amount of money, you can run the numbers yourself. If you're sitting with 5 million subs times $10 bucks, times $12, this is a meaningful number for any one of our three Tier 1 carriers. So this is something to stay focused on.

Okay, thank you. And secondly on -- you talked a lot about migrating the technology all to one platform. But you still have separate marketing and revenue contracts with the carriers, do those need to be renegotiated as well as part of that technology migration, or is that completely separate discussion?

These are conversations that are on ongoing with all of our customers. As we start to move forward and as we have now expanded out some of our service offerings, like all the added marketing service for best practices and things like that, there is an opportunity to look for additional revenue growth there as well. This is a process that will be on ongoing. I don't think that anything that I've talked about as far as the growth of revenue in Q4 or in the beginning parts of 2023 are really dependent upon that. The revenue growth in these earlier periods are going to be driven off the fact that we now have all the customers on a much better product offering with SafePath 7 that gives them a lot more to sell to their customers and we've already seen the response from customers at T-Mobile, they love the new products. So it's just a matter now of getting the marketing efforts to go along with all the positives.

Okay. And my last one. Jim, can you clarify what you said about CommSuite revenues? I thought you said that they go to zero in Q4, but don’t you still have Boost revenues from CommSuite?

No, I was speaking specifically about the legacy Sprint, T-Mobile revenue stream. So based on where we saw the run rates, especially coming out of June. We're expecting that to ramp down in Q3 and be very nominal if anything in Q4, just -- that's specific to the T-Mobile, Sprint revenue stream. The DISH side, we feel that's going to continue at its current rate and we anticipate that in future periods we will have an opportunity to actually grow that revenue streams.

Got it. Great. Thank you. I appreciate it. That's it for me.

Thanks, Jim.

The next question comes from Scott Searle with Roth Capital. Please go ahead.

Hey, good afternoon and thanks for taking my questions. Hey, maybe Jim just to quickly follow up on Jim's question. As it relates to comp suite. So, T-Mobile and Sprint coming out of the equation, but how big was that in the second quarter. Just help us calibrate what that baseline number is. I thought we were kind of getting close to it in the past couple of quarters as it was. And then Bill, clarification on the 3 million to 5 million number or figure that you gave per carrier, was that account was that subscribers that you thought were addressed. I just want to clarify that it was accounts for subscribers or adjustable with each carrier?

Yeah, why don’t you go first and I'll follow.

Okay. I'm going to answer it this way, Scott, in terms of what we saw is the exit run rate in June for this legacy, Sprint, T-Mobile was under $100,000. So that gives you a pretty good sense of the decline that we were seeing coming out of the quarter. And again, we expect that to be down to nothing or next to nothing by the fourth quarter.

Got you.

Okay. Then Scott -- restate your question –

I'm sorry, I just wanted to clarify, Bill, when you're talking about the opportunity of 3 million to 5 million per carrier that's accounts or is that subscribers. I was assuming it was accounts, but I wasn't sure.

Yeah, the way we look at it is a family is a subscription. So when we are talking about million 3 to 5 million, we're looking at family coverage on a go on a go-forward basis. And quickly let me add, as I stated, we think this is attainable by 2025. So we're going to go into a gross growth spurt as we go through ‘23 and ‘24 to get to that, so it doesn't happen all at once.

Got you. Perfect. And if I could, I'm not sure if I missed this, but in terms of a little bit of a pickup into the fourth quarter, did you give any idea as to the magnitude of how you expect that to pick up in terms of SafePath revenues as we go from September to December.

I will try to talk about that more as we get closer to the fourth quarter.

Got you. And then lastly if I could. Jim, in terms of the OpEx coming down, that's $3 million per quarter given where you're expecting gross margins to respond to. I just want to make sure I'm thinking about this correctly that your breakeven then from an operating basis is in the $13 to $14 million range and you're expecting them to generate positive free cash flow in 2023. So a ramp above and beyond that as we get into the second half of next year, is that the right way to be thinking about this?

Yes. [indiscernible]

Okay, perfect. All right, thanks guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Charles Messman for any closing remarks.

Thank you, operator and thanks everybody for joining today. We look forward to speaking to you on our next call. If you have any questions, please feel free to reach out to us at Smith Micro. Hope everyone has a great day. Thanks again.

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