Sonim Technologies, Inc. (SONM) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Sonim Technologies Third Quarter 2019 Earnings Conference Call. My name is Laura, and I will be your operator today. Joining us for today’s call are Sonim’s CEO, Tom Wilkinson; Interim CFO, Bob Tirva; and Investor Relations Consultant, Tom Colton. Following their remarks, we will open the call for questions. I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the company’s website at www.sonimtech.com. Now, I would like to turn the call over to Tom Colton. Sir, please proceed.

Thank you, Operator. Please note that certain information discussed on the call today will include forward-looking statements about future events, Sonim’s business strategy and its future financial and operating goals and plans. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in filings SEC filings, including its quarterly report on Form 10-Q for the quarter ended June 30, 2019. These forward-looking statements reflect management’s belief, estimate and protections as of the date of this live broadcast, October 30, 2019, and Sonim undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law. Additionally, Sonim has just distributed a press release and filed the Form 8-K with the Securities and Exchange Commission. Information from that press release includes historical financial results and GAAP to non-GAAP reconciliations. Some of which will also be discussed in the company’s remarks on this call. Now, I would like to turn the call over to Bob Tirva. Bob?

Thanks, Tom. Welcome everyone and thank you for joining us today. This morning we issued a press release announcing our results for the third quarter and nine months ended September 30, 2019, a copy of which is available in our Investor Relations section of our website. In a few moments, we will go through the details of our financial results, but first, I’d like to take a moment to address the change to our management team, which we announced in our earnings release this morning. As I’m sure many of you now know the Board of Directors has appointed Tom Wilkinson as Sonim’s new Chief Executive Officer. Tom, who is joining me on the call today and whom, I will turn the call over to in just a moment has replaced Bob last year CEO. Bob has been with Sonim since 2002 and he has served as the company’s CEO since 2005. Over the course of his many years here, he has been instrumental in growing this business. He led Sonim through its early years of development and helped guide the company’s transition to a publicly traded company in May of this year. And though he will no longer be serving as CEO, Bob will continue to play a part in the leadership team as a strategic advisor to the Board. On behalf of the management team, our Board of Directors and our entire organization, I would like to thank Bob for his many years of service and for his commitment to Sonim’s future endeavors. We are looking forward to a successful leadership transition as he passes the reins to Tom. Tom brings many years of successful leadership and highly relevant management experience to Sonim. Throughout his career he has held multiple C level positions including CEO and CFO of a NASDAQ listed company and CFO of Amherst Holdings, which is a privately held corporation. Perhaps most directly relevant to our organization, Tom was the CEO of Xplore Technologies, which formerly traded on the NASDAQ. Xplore was a maker of rugged tablet and handheld devices, which Tom successfully scale and sold to Zebra Technologies in August of 2018. After the successful sale of Xplore, Tom was appointed Chairman and Interim CFO -- CEO of Cipherloc Corporation. On October 15th of this year, Cipherloc move to retain a permanent CEO and we were fortunate to find time in the right place at the right time, not only available but eager to join the Sonim team. For those of you who are curious to learn about Tom’s full professional background, including his consulting firm focused on emerging growth pre-IPO and public companies, as well as his experience as a CPA. You can do so by reading his bio, which is now in the Investor Relations section of our website. But suffice it to say, Tom has a long track record of successfully leading technology companies that sell into both the government and commercial sectors. His prior experience is directly relevant to our business and we are confident that expertise he has developed over the course of his career will be integral to helping Sonim develop and implement a new growth strategy to take our business to the next level. And with that, I’d like to turn the call over to Tom to briefly say a few words. Tom?

Thank you for that kind introduction, Bob. I will keep this relatively brief as I’m getting up to speed on the intricacies of the business. I was attracted to Sonim, because I believe the company is in a premier position to capitalize on a variety of trends that are driving robust growth in the rugged device market. We are unique juncture in the company’s history and I’m very much looking forward to helping the company navigate it’s critical stage in its development as a public company, while realizing its full potential as a leading provider of ultra rugged mobility solutions to drive long-term shareholder value. Over the next 90 days, the management team and I will formulate a refresh plan for 2020 and beyond. We will be considering our product offerings, our geographic markets, our target users, as well as our overall go-to-market strategy. We will emerge from that process as a company on a path to solidify its position as a leader in the rugged device market. While it’s -- while I was at Xplore I focused on running a lean and flexible organization. We worked hard to create a cost-efficient development and manufacturing capacity, and deliver products that were demanding by the market. My belief and expectation that the application of those guiding principles at Sonim will result in equally favorable results. We have a strong commitment to the customers who have gotten us at this point. Our current devices have been optimized for use by the first responder community and we don’t plan any change in that regard. Additionally, the support of our carrier partners has been crucial to our growth and we don’t plan any changes. However, beyond our core competency in providing devices for our first responder community, we have the technical expertise and infrastructure to do even more. Overall, what is most important is that we need to be lean and effective organization that delivers topline growth and bottomline profits. With that, I will now turn it back over to Bob. Bob?

Thank you, Tom. For the sake of brevity, I’m going to focus my discussion on our financial results for the third quarter of 2019, while still providing certain metrics for the first nine months of the year. Our complete financial results for the first nine months of 2019 were included in the earnings release we issued this morning, which is available in the Investor Relations section of our website. Now with that in mind, turning to the financial results for the third quarter. Net revenues for the third quarter of 2019 decreased 27% to $28.9 million from $39.5 million in Q3 of last year. The decrease in net revenues was primarily attributable to lower volumes for the XP8 smartphone and XP5 feature phone sold to U.S. carriers. Total unit sales in the third quarter of 2019 increased 2% to approximately 95,000 units, compared to approximately 93,000 units sold in Q3 of 2018. With the introduction of the higher volume XP3 in Q2 of 2019 feature phones represented about 79% of unit sales, compared to approximately 49% in Q3 of 2018, with smartphones, primarily the XP8 accounting for the remainder in both periods. Gross profit for the third quarter of 2019 decreased 48% to $7.2 million or 25% of net revenues from $14.1 million or 36% of net revenues in Q3 of last year. The decrease in gross profit percentage was primarily attributable to a one-time inventory reserve adjustment of $2.8 million related to the aging of materials and finished goods, as well as a different product mix compared to Q3 of 2018. Gross profit for the first nine months of 2019 increased 5% to $31.4 million or 32% of net revenues. Looking at our operating expenses, total operating expenses for the third quarter of 2019 were $13.5 million, compared to $10.8 million in Q3 of last year. On a non-GAAP basis, operating expenses were $12.1 million, a 19% increase over Q3 of last year. The increase was spread across all our departmental areas as we expanded our employee base commensurate with our revenue growth during the period. Turning now to our profitability metrics, net loss attributable to common shareholders for the third quarter of 2019 totaled $6.8 million or a loss of $0.33 per basic and diluted share. This compares to the net loss attributable to the common shareholders of $0.9 million or $0.91 per basic and diluted share in Q3 of last year. EPS calculations are based on 20.4 million shares for Q3 of 2019 and 1 million shares for Q3 of 2018. For the nine-month period, net loss attributable to common shareholders totaled $19.1 million or $1.05 per basic and diluted share, which is based on 18.1 million shares. Adjusted EBITDA, a non-GAAP metric for the third quarter of 2019 was a loss of $5.1 million, which compares to a gain of $3.9 million in the third quarter of 2018. The decrease in adjusted EBITDA was primarily due to an increase in net loss attributable to common shareholders of $5.8 million and one-time restructuring charges of $0.6 million. Adjusted EBITDA loss for the nine months of 2019 totaled $9 million. As for the balance sheet, at the end of the quarter, we had cash and cash equivalents of $16.3 million on hand. Our accounts receivable for the quarter was at $17.4 million, which is in line with our historical averages. As we indicated in our press release earlier today, the company has decided to suspend its practice of providing forward-looking financial guidance. As Tom mentioned, over the course of the next 90 days, the Board of Directors and the management team will devote our attention to formulating a new 2020 operating plan. While our planning efforts are progressing, we are continuing to drive carrier subsidization of Sonim phones and placement of the phones in retail locations and to address the previously disclosed technical issues. These and other issues along with the recent changes in our senior leadership team have impacted our ability to provide an accurate forecast of our near-term financial results. Thank you all for your time today. And we are now ready to open the line for questions. Operator?

Thank you. [Operator Instructions] Well, our first question will come from Zack Silver from B. Riley FBR. Your line is now live.

Okay. Great. Thanks for taking the question. One, for Tom, first of all, congrats on the new role. Looking at the share price of Xplore when you assumed CEO role, it was trading around $1.75 a share versus the Zebra ultimate acquisition they bought the company for $6 a share. Just wondering if you see similar opportunity here, similar upside? Thanks.

Of course, I have never speak to any predictions or promises about stock prices. What I do know is that to develop value there is -- there are certain things you should do, deliver excellent products, deliver products that the market wants at a reasonable price and operate a lean organization. And those approaches have always worked for me in creating value and in creating specifically shareholder value. So, I guess, that’s the best way for me to answer that question.

Okay. And then, one more if I could, just on, I think, the three major buckets have headwinds, with carrier subsidy, retail store placement, and then also, technical issues of some of the devices. Can you guys break down for us, which of these do you think are fixable in the immediate term or have already been fixed, which of these are going to take a little bit longer and which if any of these issues might be permanent headwinds for the business?

So I think that the best way to answer that is sort of answer the very end of it is, whether any of these are permanent headwinds, and I don’t think there are anything as a permanent headwind. I really don’t want to -- I’m not just, it’s a little too early in the game for me to answer anything with regard to timing. But I assure you that we are confident in solutions to all of the things that you have listed. I think I will be able to -- once I settled in and spend more time, I think, I will be able to answer that question with more detail next time we speak.

Got it. And then, I think one more, just on T-Mobile, they recently announced, I think, last week that they were deepening their exposure into public safety and just wondering if you can comment, I recognize there some noise around the T-Mobile-Sprint merger and Sprint is already a carrier customer of yours. But any sort of comments you can make around the opportunity with T-Mobile?

Yeah. I mean, typically where we are prohibited from discussing, especially by name any of our customers and our interactions with them, so I can’t really speak to that. Obviously, our device is not only optimize. It’s truly the strongest offering in this space for public safety. So it would be natural for anybody who is taking public safety seriously to be focused on our phones.

Got it. Thank you very much.

Thank you. [Operator Instructions] Your next question will come from the line of Jason Smith from Lake Street. Please proceed.

Hey, guys. Thanks for you taking my questions. I just want to follow up on one of the previous questions regarding the subsidy issue, retail store replacement issue and the technical issues. Just need clarification, if there has been any progress or improvement on any of those issues, and believe was seven weeks ago when they first came to light or if these all still need to be addressed?

No. There has been a great deal of progress and I can leave it -- I kind of leave it at that. I can’t really express anything regarding timing. But there has been a great deal of progress in all areas.

Okay. No. That’s helpful. And then, just wondering if you could comment, if you have seen any significant changes in the competitive landscape with some of the challenges you faced here in the near-term?

You mean in terms of other people entering the market or existing makers change their devices or which aspect of the market…

Both of you can comment on?

…or all of that. Okay. Well, I mean, I’d -- it seems that there has been some entries in the market at a ruggedness level lower than what we are working to achieve and certainly devices that are, I would say, are not particularly focused at all on the first responder community. There was a broad range when it comes to ruggedness and the new entrants seem to be focused on more of a consumer rugged and then try I guess an effort to up-sell that into tougher environments and see if they can make that happen. Most of them don’t feature push-to-talk, for example, some of them do have Band-14 for FirstNet, some of them do. But a lot of the people that are entering into our market are also coming in with prices when they do reach a comparable nature to our device. The prices they are bringing our astoundingly higher. And so, therefore, I don’t really consider them competition to us, where we are operating on a different plane. They also don’t seem to be focused on working through the carriers to reach the market, which make them part of the different competitive structure. So -- and then...

Okay.

The one thing I would -- here is one thing I -- let me put a little more color on it. I think it’s tremendous that everyone’s using the rugged word as much as they can, regardless of whether their device is truly hold up, because it’s an indication of how important this sector is. It’s a large market. And it wasn’t that long ago before when people running around the yellow pad or paper trying to do their work. And now we are talking about computerization of that work as a first attempt to create a better work environment which necessitates rugged. It’s something that’s proven out time and time again. So the more and more people are coming to rugged, I think, it’s just further verifies how important this market is and what opportunity there is for us.

Okay. That’s helpful. And the last one from me and I will jump back into queue. I know the company has previously talked about the opportunity for incorporating software and solutions into the broader product portfolio. Tom, with you just coming in, curious how you view that opportunity in that market?

Yeah. I have definitely got a lot to do as far as catching up on that opportunity. So I think I will defer my opinion on that at this point, because I’m just -- I have really got to get into it and see what optionality there is, what we can do to be successful in that area.

Okay. Thanks a lot guys.

Thank you. Your next question will come from Matthew Galinko from National Securities. Please proceed.

Hey. Good afternoon and thanks for taking my question. I was -- I didn’t hear in the prepared remarks, but did tariffs have any material impact on Q3 results. And can you also update us on any progress on expanding your manufacturing outside of Mainland China? Thanks.

So, this is Bob. I will comment on the tariffs side. There hasn’t been an impact to us. Sonim has produced enough products before the tariffs initiation date to make it through Q3 and Q4. And so there’s really no impact to the tariffs and I will let Tom comment on the manufacturing relates more to next year. Tom?

Yeah. I mean this is yet another one of the big things that I need to figure out, now that I have come into the company. It’s a big world and the options are always out there. But we want to be very careful about making long-term decisions related to things like tariffs, which can come and go. I think that we need to -- we need overall to build our products in a quality manner, in a place that we can consistently get supply chain, support and quality labor. So I think if we start with that, so that we can do a good job in producing our devices, we can then layer in things like tariffs to figure out the best way to get this done going forward.

Got it. Thank you. And then, Tom, maybe just general question, but did you know in your time at Xplore ever come up against Sonim head-to-head or did you have an impression of the company kind of in your prior life?

We never competed. Xplore was first and foremost the tablet company. We had introduced a 6-inch device, which at that time was not exactly at all our competitor against, I mean, it wasn’t at all a competitor against Sonim. It was not a carrier certified device and it was something that was going kind of made for Wi-Fi use in the United States and possibly in Europe. So we never bid against Sonim. I was aware of the company. And -- but we had no relationships all of it. So -- and I guess, I said, I didn’t really form any particular opinions, just I did have a great deal of interest in any kind of rugged device companies that existed. I mean, clearly, I was aware at that time that Sonim was able to participate in what -- in 2017 was a $2.2 billion worldwide rugged cell phone business and I wasn’t in that business. At Xplore we were working in a $600 million worldwide market. So it was always intriguing to me an opportunity to get into that space. So hopefully that answers your question.

Thank you.

Thank you. At this time this concludes the question-and-answer session. If your question was not taken, you may contact Sonim’s Investor Relations team at sonm@gatewayir.com. I would now like to turn the call back over to Mr. Wilkinson for his closing remarks.

Thank you for joining us on today’s call. We want to thank our employees, our customers, our partners and our investors for supporting us through this transition. Operator?

Thank you for joining us today for Sonim Technologies third quarter 2019 earnings conference call. You may now disconnect.