Thank you for holding. Good day, and welcome to the Smith Micro Third Quarter 2022 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 Mr. 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 our third quarter ended September 30, 2022. By now, you should have received a copy of the press release with the financial results. If you don’t 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'll hear during today's discussion consist of forward-looking statements, including without limitations, those regarding the company's future revenue and profitability, our future plans, new product development new and expanded market opportunities, future product deployment, migration and your growth by 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 position 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, 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 to our management's beliefs and assumptions only as the date they are made. I want to point out that in our 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. With 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 third quarter conference call. Since our last call, we’ve been extremely busy on many fronts, not only with our customers, but also with the strategic changes we began making as we outlined in our last call. After a long development process to migrate our Tier 1 customers to SafePath platform, we are finally nearing completion. Once the migration is complete, having all carriers on a feature-enhanced best of both platform will ensure a best-in-class digital family lifestyle experience for our carrier partners subscribers. Transitioning on to the SafePath platform also creates significant new market opportunities for SafePath Home, SafePath IoT and SafePath Drive for Smith Micro and our carrier partners. This really leads me to the point that this is just the beginning of our journey to deliver on our long-held vision of providing a single comprehensive digitally connected life experience for families around the world, keeping families safe in this ever-changing and evolving digital age through the SafePath platform. As we discussed during our Q2 conference call, another key benefit of nearing the completion of the migration development efforts was the capitalizing on the cost synergies that we had anticipated from the acquisition from [Evos]. Those cost rationalization efforts began in the third quarter, resulting in $1 million in sequential quarter-over-quarter reductions in operating costs. In addition, we've taken further actions thus far in fourth quarter to continue to execute on our plan to reduce quarterly operating expenses by over $3 million compared to the $14.1 million in operating expense that we reported in the second quarter of this year. Jim reviewed these activities in more detail in his remarks, but we believe that we have a very clear path to the achievement of our targeted operating expense level by the second quarter of 2023. We remain extremely focused on the very critical task at hand to bring the migration to a close and turn to focus on the building for the future. This next phase of the company is more exciting and larger than any opportunity I have seen at Smith Micro in our 40-year history. After Jim's remarks on our financials, I will provide some additional details about our customers and some new initiatives. So let's turn the call over to Jim. Jim?

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-to-date comparisons that I'll be covering today. I'll now begin our discussion on the financial details of the third quarter of 2022. For the third quarter, we posted revenue of $11.7 million compared to $16.4 million for the same quarter last year, a decrease of approximately 29% as a result of the decline in CommSuite revenues coupled with a decrease in family safety revenues when compared to the second quarter of 2022, revenue decreased by approximately $1 million or 8%. Year-to-date revenues through September 30, 2022, were $37.1 million versus $43.7 million through the third quarter of last year. The $6.6 million decrease is due to the decline in CommSuite revenues, partially offset by the increase in family safety revenues resulting from the acquisition from Avast in April 2021. During the third quarter of 2022, family safety revenue decreased by $2.3 million or 20% compared to the third 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 5% sequentially compared to the second quarter of 2022. During the third quarter of 2022, CommSuite revenue was $1.1 million, which decreased approximately $2.4 million compared to the $3.5 million in revenue produced in the third quarter of last year. Revenue from Colin Suite was down by approximately $400,000 sequentially compared to the prior quarter. This decrease is primarily attributable to the continued decline in legacy Sprint subscribers on the CommSuite platform as those subscribers transition off the Sprint network onto the T-Mobile network. This revenue stream has now been…

Thanks, Jim. Let's dive into the progress being made with our carrier partners. As you've probably heard, T-Mobile is driving very hard on their integration effort, and we've continued to partner with their team to assist in that endeavor by completing updates to the various family safety solutions. As Jim mentioned, the reduction in the legacy subscriber base continues, particularly with Safe & Found subscribers, which is directly driven by the T-Mobile acquisition of Sprint. Efforts are underway to stabilize this churn as customers migrate onto the T-Mobile network. Along those lines, we delivered several new releases to T-Mobile for FamilyMode, Family wear and Safe & Found since the second quarter with the overall goal of reducing churn by adding some new enhancements to the FamilyMode product. In addition to a billing integration effort, new messaging campaigns to subscribers has helped them navigate a better path onto the FamilyMode platform, while the T-Mobile integration efforts continue. I am also pleased to report that we are beginning to see some new activity on the marketing front. While I can't get into the details, we expect that these efforts will include a high-profile campaign in the near term that will promote FamilyMode and build momentum for this product as we head into the holiday season. Now let's talk about Verizon, where we have been quite busy with several different initiatives. On the last call, I drew attention to the fact that an additional new feature needed to be added to the code base, which resulted in pushing the Verizon migration to SafePath into 2023. We are still anticipating a handoff to Verizon in the first quarter of 2023 for their QA process and ultimately, the launch would soon to follow. I would also note that we were recently able to complete the…

Thank you. Before we open the call to questions, I'm just going to turn the call over to Mr. Jim Kempton for a few remarks.

Thank you. First, we wanted to apologize for the delay in the press release today. We had some technical issues in getting the release out. Also, I misspoke with regards to year-to-date non-GAAP operating expenses, which were $40.6 million for the nine months ended September 30, 2022, resulting in a non-GAAP net loss of $14.6 million or a $0.26 loss per share on a non-GAAP basis. Please refer to the press release for the details of our non-GAAP results, including the reconciliation to the reported GAAP numbers. I'll now turn it back over to the operator for our question-and-answer session. Operator?

[Operator Instructions] Your first question comes from Scott Searle at Roth Capital.

Just real quickly, I wanted to make sure I had a clarification on a couple of numbers during the call. The $3 million reduction in OpEx, Bill, I think you said you'd be below $11 million in the second quarter of next year. I want to confirm if that's the number for the entire quarter or you hit that run rate, so going into third quarter? And second, from a gross margin standpoint, I think you're looking for a recovery into the middle of 2023. It sounds like it's flattish initially here in the fourth quarter. Is that expected to show that recovery as we get into the middle of '23 as well? And then I've got a couple of follow-ups.

Scott, this is Jim. First off, on the $11 million, that would be the expectation for the second quarter. So we expect to have those fully -- those cost reductions fully baked by the second quarter. So we would be at $11 million in operating expenses we're under. And with regards to the gross margins, we do expect those to rebound in 2023 as the year progresses.

Great. And maybe to follow up on the Sprint comment as well, continuing to be a little bit of a melting ice cube here, but the integration is done and just waiting for them to really push the marketing button. Just want to clarify then that Sprint is hitting essentially its meter from a revenue standpoint in the fourth quarter. And then collectively, as we're going into the first quarter of next year, is that when we first start to see some growth in the overall SafePath suite?

Yes. I guess that's a reasonable approach to take. I think that the migration efforts that are ongoing to T-Mobile as far as getting back to a single network. And are well underway and the progress is being made. Safe & Found today is actually branded to T-Mobile, not to Sprint any longer. So we also have been making those same transitions and trying to keep up with their efforts.

Okay. And Bill, I think you've been talking about the middle of next year, all three major carriers are up in some form of launch. I just want to clarify your comments with AT&T. Is that still the expectation by the middle of next year that we should have T-Mobile, Verizon and AT&T all pushing for new subscribers in that direction. And I was wondering if you could frame for us as well, how we should be thinking about growth in 2023? I know it's early. I know there's a lot of marketing efforts that are not within your control, but specifically around SafePath, how we should be thinking about that growth in '23? And lastly, if I could, Bill. The carriers are marched to their own timelines. But once we get past the holiday season, it feels like the decks are cleared in 2023. It sounds like you're increasingly confident that they're going to start pushing more aggressively and it sounds like all of them. I guess what makes you feel comfortable and confident that we're finally going to start to see that inflection?

Yes. I think the best way to answer that is we've had over a year now with all three Tier 1 carriers. We've built really strong relationships with the working groups and with the executives above them. So that I think we have some -- we have a cost flow of very meaningful dialogue. And the result is I can now see a very clear path for growth. And it's -- yes, you're right. Carriers all especially large Tier 1s, they set their own schedules. But I think we're starting to see a lot more clarity as to how they view the product, and how they view the opportunity going forward. I talked about what we thought the total addressable market was on the last quarterly conference call, nothing's changed. It's a huge opportunity going forward. And I just believe that we are fast approaching the time where this is all going to come to pass.

Your next question comes from Josh Nichols at B. Riley.

Just a follow-up on AT&T. I understand that there's a little bit of a push out there. But any color you could provide on exactly when you're going to be able to secure this deliverable. Is that something that you expect to do in the first quarter of '23. And then I have a follow-up after that.

Yes, this is something that we're working diligently on, and this is something we are working with the partner really is a joint effort, and there's responsibilities on both sides. So -- this is a process that's underway, and it is a little fluid right now. We had to work through some technical issues that we hadn't expected. And we haven't seen, let's say, in some of the other efforts that we've done. So there's a little bit of additional work that needs to be done before I can really answer your question.

Fair enough. And then just thinking more broadly. So you've already been doing a lot of work with like ATT and even more so. It seems like with Verizon. What's the potential trajectory? Historically, whenever you launch with a new carrier, it could take at least two to four quarters before there is a material upswing in subscribers. Is that expected to be the case here? Or do you think the fact that you've already been working with them for some time that you could see an accelerated ramp and maybe in the second half of next year that you could see subs start to pick up?

Definitely, I think you'll see an accelerated ramp because we have such a strong working relationship and we already have presence with their user base. So I don't see any reason to think that it's going to take two to four quarters like maybe a brand-new greenfield opportunity, it might take.

And I guess like what's your stance, I guess, hard to say right now. But things have been pushed out a little bit about the commitment to reducing operating expenses and what's the company willing to do to achieve free cash flow profitability next year given that the ramp of T-Mobile is likely to be a little bit slower than maybe people thought over the last quarter? Is there more OpEx cuts that you could integrate -- or what's the thoughts because you do have some debt maturities to think about for next year?

Yes. Look, the OpEx cuts were the direct result of moving from two platforms down to one platform, that being SafePath for family safety. All the heavy lifting is virtually done from a coding standpoint. It's now really a quality and other integration tasks that have to be performed -- so it still takes time, but it doesn't take a large-standing workforce for both platforms. So our efforts that we started in Q3, we are continuing in Q4 and that we hope to finish -- we will finish in Q1 of 2023 to get down to that $11 million or less number for OpEx are all well underway and well planned for. There is a plan in place, and we're executing against that plan. So as far as -- if there were any other issues that came up, of course, -- we always have options, but we have a plan, and we're executing against that plan. And I look for a successful outcome and the generation of profitability and free cash flow in 2023.

Your next question comes from Jim McIlree from Dawson James.

It sounds like you might be hitting the market with all three carriers at the same time. It sounds like that's possible, whereas previously, it seemed like they were going to be more spaced out. And so I was hoping you could address one, whether that's a reasonable scenario. And two, if it is, do you have the human resources, the technical resources to help carriers all three carriers launched simultaneously.

Yes. I guess, Jim, if indeed, it didn't come to pass that all three were launching in exactly the same time. We are staffed to handle that and that wouldn't be an issue. I think, first off, T-Mobile has been on the safest platform for some time now. They are going through the conclusion of their merger activities. And I think that's been a major task for them. And it really has an impact on not only family safety, but probably a lot of other programs that we're working on. So that part, I think, is well in hand. From the AT&T and the Verizon stamp standpoint, they have their own approaches to the business. I can actually make an argument that if all three were to push hard at the same time, the efforts by one would be a benefit to the others. And so they may actually help create a bigger wave if it did come to past that they're all doing at the same time.

Okay. Great. Yes, that's helpful. And then obviously, the Fed rate increases are starting to have an impact on the economy. And I'm just wondering if you could address how you think that might impact your business next year?

We all operate in the same economic environment. And clearly, there is pressure being put on the consumers and that could have some negative effects on business growth in '23. I think we have one thing, however, that separates us from many other product offerings. And that is we're talking about the safety of your family and your friends, your loved ones. And sometimes, I think when you're talking about something so basic, so fundamental, the price isn't necessarily always going to be the driver. It's the fact that you really do care and you really do want to keep people safe. And I think that separates us from a lot of other consumer-driven offerings. And I think that's an important fact to note.

That concludes our question-and-answer session for today. I would now like to turn the conference back to Mr. Charles Messman for closing remarks.

Thank you. I want to thank everyone for joining us today. Should you have further questions, please feel free to reach out to us. And we'll look forward to speaking with you on our next conference call. If those that are attending Roth, we'll be attending Roth next week in New York. Thanks again. Have a great day, everybody. Thank you.

Thank you. The conference has now concluded. And thank you all for attending. You may now disconnect your lines.