Sonim Technologies, Inc. (SONM) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Sonim Technologies Incorporated Third Quarter 2020 Results 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 Matt Kreps, Investor Relations. Please go ahead.

Thank you, Gary, and welcome everyone to today's Sonim Technologies' results call for the third quarter ended September 30, 2020. Sonim has just distributed a press release and filed the Form 8-K with the Securities and Exchange Commission. Those documents are available on the sonimtech.com website under the Investors link. Information from that press release includes historical financial results, some of which will also be discussed in the company's remarks on this call. 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 SEC filings, including our most recent quarterly report on Form 10-Q and the most recent annual report on Form 10-K. These forward-looking statements reflect management's belief, estimate and projections as of the date of this live broadcast, November 11, 2020, 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. Now, I would like to turn the call over to Tom Wilkinson.

Thanks, Matt, and hello to everyone joining us on the call and online. First, I would like to say Happy Veterans Day to all of our veterans and their families. On behalf of Sonim, we thank you for your service. This year has continued to be a period of rapid transformations we've communicated on prior quarterly calls. We at Sonim continue to implement changes that we believe will position our business for broader addressable market, revenue growth with improved control and visibility and leaner, more efficient operations. We've reduced our operating expenses and made our balance sheet more cash efficient. Our transformation into a low cost and more productive team has begun to pay off enabling us to respond to lumpy quarterly revenue, while delivering period-over-period improvements in our gross margin, reduce net loss and preservation of our cash resources. We have frequently pointed out how lumpy the rugged business can be in the forefront and the third quarter is a good example. Carriers had accelerated a number of orders into the second quarter, which came in well above forecast, and then adjusted delivery timing in the third quarter, as they had already taken in these additional orders. As we have also discussed previously, getting OpEx down to an appropriate level for a hardware business of our size has been a top priority. We managed to streamline and reduce our operating costs cutting OpEx by 20% year-over-year. In the fourth quarter, we have undertaken additional changes to cut another $2 million of annual run rate operating expenses with ideas for future efficiencies. We are not just focusing on OpEx efficiency. Our product development efforts reflect the same diligence on costs and cash efficiency as our operating performance. Our strong balance sheet allows us to focus on our business transformation. The strength in our business lies within the future product plan that will expand and build upon our well documented market strength and differentiation. First, our feature phones, the XP3 and XP5 have been our best selling products this year. Both exemplify our industry leading rugged design, and also our differentiated push to talk functionality. Our next generation feature phone products will also expand our range of supported carrier bands and play a key role in our growth outside of North America, particularly in Europe. These additional geographies present a robust and valuable market with nearly $1 billion of rugged cellphone demand. We believe, we can move quickly with these new phones to enter these expansive markets through various distributor relationships, where our management team has prior experience. We're also excited to announce that we've already received major carrier design win awards for our next generation XP3 and XP5 devices during the third quarter. We believe these design wins are a direct result of our differentiated capabilities. We have prioritized development of these new feature phones with a current timeline for delivery in mid-2021. Second, we expect to launch our smart scanner handheld computer and tablet device in the first quarter to allow us to begin to access a total addressable market of approximately $2 billion and add another product to our sales basket. These devices also tend to sell with more favorable gross margins to rugged subs. We have the first development units in hand and they're performing well. Third, our current smartphone product offerings LTE-based XP8, we are proud to announce that the XP8 has been upgraded to support Android 10, which extends the useful life into 2021 and beyond. When we ask our customers about what they value most from our rugged devices they tell -- what they tell us is that beyond being rugged, what they want is rugged is reliable connectivity and a long battery life. We understand the importance of 5G is that is the technology is deployed around the world. But at the moment, the primary advantage is faster download speeds. These faster speeds are far less important to our customers, and have not been effectively deployed yet. We will thoughtfully invest in 5G as it becomes more generally available from carriers and becomes a more important feature for our customers. By taking this approach, we believe that we can more specifically align our products to the dominant 5G technologies, as our customers will ultimately use and create a better overall value proposition. All of these initiatives are made possible by our strong balance sheet. We believe that given our improved operations to strong cash position, we have sufficient capital to build and launch these products as we execute our 2021 plan. Let me stop here for a few minutes and ask Bob to cover our financial results. Then I'll share more about our strategy ahead and the continued transformation of Sonim.

Thanks, Tom. Our press release issued earlier today announced the results for the third quarter ended September 30, 2020. A copy of the release is available in the Investor Relations section of our website. Net revenues for the third quarter of 2020 decreased to $14.4 million. The sequential decrease in net revenues was primarily attributable to the timing of customer orders, including some sales that were accelerated into our $21.1 million second quarter. As Tom mentioned, revenue can be lumpy from quarter to quarter for this reason and the two quarters combined to an average of about $18 million. We have made good progress in our efforts to balance out our inventory for efficiency of working capital while maintaining readiness to ship in response to the changing order patterns from our customers. Gross profit for the third quarter of 2020 was $4.4 million, or approximately 30.6% of net revenues, which is up from 23.9% of net revenues in last year's third quarter. The increase in gross margin was primarily attributable to one-time inventory adjustments, which occurred in the third quarter of 2019, along with lower than expected customer discounts and rebates, which will require to sell our products in 2020. Sonim anticipates that margins will benefit from increased scale, as well as corporate plans that are undertaken to improve cost of goods sold in the future, beginning with the launch of higher gross margin scanner products in the first quarter of 2021. Looking at our operating expenses, total operating expenses for the third quarter came in at $10.5 million. This represents an improvement of $2.6 million from the $13.1 million of operating expenses in the year ago quarter. The decline in operating expenses reflects Sonim's commitment to maintaining a lean operating model while continuing to invest in sales, marketing and new product development in a more cost effective manner. OpEx also declined sequentially from the $11.5 million we experienced in the second quarter. We anticipate reinvesting a portion of our operating cost savings into R&D for our next generation products going forward. Net loss for the third quarter of 2020 totaled $6.5 million, compared to a net loss of $6.8 million in the third quarter of 2019 and compared to a net loss of $7.1 million in the second quarter of 2020. The sequential and year-over-year decline in net loss reflects improved operating model efficiencies that Sonim has implemented to-date. Turning to the balance sheet, we have used $879,000 in cash for operations year-to-date. Our cash balance at the end of September was $31.7 million and we are effectively debt free. As Tom mentioned, we believe that given our improved operations and strong balance sheet, we have sufficient capital to develop and launch our next generation of products as we execute our 2021 plan. As in previous quarters, we will not be providing specific guidance today. However, we anticipate continued progress on our strategic goals for the business through the end of the year. And we are now sufficiently capitalized to shift our focus to long-term growth initiatives. I'll now turn it back over to Tom for additional comments.

Thank you, Bob. As you can see, we have made important progress on the business model, positioning Sonim to perform well in both up and down revenue quarters while maintaining our ability to take the right steps for our long-term strategic goals. We believe Sonim offers the most rugged mobile devices in the market. But we're always looking to do better. We're bringing new devices to the market, both in our core mobile feature phones and smartphone categories, as well as entering new addressable markets such as handheld scanners. Our new smart scanner devices are set out to roll in Q1 of this year. We are bringing two devices to market built on the same chip and software platform. They will initially be released with Android 10. It will be upgraded to Android 11 at a later date. Our two devices will be an 8 inch screen tablet and a 6 inch screen handheld, both with integrated barcode scanners. These devices support multiple bands including those required for Europe. We expect our SmartScanners will deliver both better features and better pricing compared with larger competitors. Introduction of these devices will increase our addressable market and open new channels, both in North America and Europe. In addition to these devices, which provide an exciting market expansion platform, we've also received verbal or written design wins for all of the major North American carriers for our new feature phones. While many hardware verticals focus on just smartphones, our feature phones consistently outsell our smartphones, demonstrating that Sonim’s target market often just need a good, reliable and durable way to facilitate communications with their workforce. And we meet that demand extremely well. Our refresh offerings of the XP5 and XP3 will include design features and updates that are responsive to our end user customer requests, while opening new and exciting markets for our products. As important as our rugged hardware designs, we're also very focused on our SonimWare and Sonim Care offerings. We have proprietary SonimWare software on every device which allows our customers to manage their deployed devices centrally, and ensure that the devices are up-to-date and secure. This is particularly important for feature phones which cannot use the Google Play Store to download apps or update their own software. We have delivered a number of solutions in our SonimWare package and we'll continue to improve upon these offerings based on the feedback from end users. Sonim Care is our commitment to service. From our industry unique three year comprehensive warranty to deployment installation and training, Sonim has long been recognized for its superior ability to support end user organizations and keep critical personnel connected. As we approach each development as a platform instead of a product, we will more efficiently leverage our work and cost to bring out multiple products and open multiple new markets. While looking at the next generation is exciting, we're also taking steps in share Sonim’s current devices remain ahead of the curve for our users. Our current portfolio will soon be enhanced with the release of mission-critical push-to-talk on both the XP8 and XP5 products. Further, we're beginning work on z-axis technology, which will enable our most advanced devices to be located not just in a building, but on what floor of the building. This core expertise and our investment in advanced technology will help further differentiate Sonim products from the competition. We're also actively seeking out opportunities for our products in industrial and enterprise markets. Let me finish with an example of the value that Sonim brings to our customers in terms of capability and cost savings. Recently, a very large construction company performed a cost and performance evaluation of their existing rented LMR units against Sonim’s technology solutions. Their analysis showed that Sonim affords improved functionality and performance versus the company's current LMR devices, and Sonim has the ability to provide cost savings of more than 60% over a two year period. We are actively identifying similar use cases to expand our addressable markets and improve our visibility to revenues. We believe the story of Sonim's turnaround will become increasingly apparent as we progress through 2021. We are heads down with our existing products, preparing the new products for release and expanding our sales channel to facilitate new growth and new markets. As a final note on my excitement for our new products and their capabilities, I'm talking to you today from one of our RS60 prototypes, which in addition to being a smart scanner is a high quality voice communication device as well. With that, I will now turn it back to the operator and our Q&A session.

We will now begin the question-and-answer session for covering analysts. [Operator Instructions]. The first question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Tom, just want to get your thoughts on your visibility into sort of inventory levels at the carriers, just given how they always tightly manage it here towards year end? How should we think about that for Q4?

It's a great question. We have a great deal of visibility into the inventory levels. We believe that our carrier partners are -- they're responding to the current environment in their responsibility to their own investors and showing a derisked balance sheet. So, our expectation is that they will try and hit the end of the year with the minimal amount of inventory as possible, and then start being able to pile-up after that.

Okay, that's helpful. And looking at the new scanner products, just curious if this was something that your customers were asking for, if you just thought it would be a natural extension from the product portfolio, especially with your history at Xplore? And I guess, relatedly, is this just going to be a hardware sale? Or is there any recurring revenue component, along with outstanding feature?

Sure. So it is both an identified need in the market that the management team brought in to the company, an unfilled need as well as a natural extension of our experience in technology. The unique thing about Sonim is with our SonimWare and Sonam Care deliverables, we can layer that into anything that operates off a Android. So we'll be very similar across all of our devices, whether they be phones or scanners and that way. The same thing with our commitment to service, we'll be able to bring that out. But we definitely see a need in the market, we know of opportunity. And to your question of whether this is a device play, we are looking at ways to expand our reach to the market, within our capabilities and abilities beyond hardware. But at the moment, I really -- I'm focused on just getting these hardware devices off to market.

Okay, that makes sense. And then just the last one for me and I'll jump back into queue. Bob, on gross margin, you noted some of the year-over-year increase was due to less discounts and rebates. Should we conclude then that sort of this 30% plus level is sort of a new norm here in the near-term?

I wouldn't really call it a good norm, it's a good question. I think, this reflects our experience with particularly one carrier that's been growing for us, and they have a rebate program that is funded both by Sonim, but could also be funded through other various programs within the carrier. So the carrier could use an unrelated discount to the customer that wouldn't dip into rebates that we would then have to give. And so we lack that little bit of visibility, so we are conservative in our forecasting, assuming that a high percentage of the sales would be done with the rebate applied, and then when the carrier does do the sale, they send us an invoice for the rebates earned and it's come in below what we forecast. So, I believe that it will continue to come in below what we have forecast but there's no way to know that for sure.

[Operator Instructions] The next question is from Zack Silver with B. Riley.

The first one is just around the distribution channels, whether you have any thoughts about changing the typical carrier led distribution model into 2021? And then relatedly how the distribution of the SmartScanner product and international mobile sales differs from what you're doing here in the U.S. now?

So, I think the way to think of this is the right products for the right channels in the right geographies, and the answer is different wherever you go. Our rugged cellphones will sell through carriers in North America. We're making our rugged cell phones available for distribution as well and we're actually seeing some activity there. But we're not going to move away from our carriers in that sense in North America. We're also not going to be selling SmartScanners through carriers in North America. It's not something they naturally would sell. They're enabled, they work on LTE and they'll be certified. So they're functioned quite well with the carriers, but they're not a stock product. Now, when you turn to other geographies, the model flips. There is not quite the dominance of carrier players in other parts of the world. Therefore, they're on the same kind of footing that distributors are on. But what I like about our products in working through distribution in Europe, or even the distributors that we're going to bring in United States is that distributors are often working on more of a solution sale with us. They're bringing together not just their voice communication devices. But other aspects of let's say, kind of imagine all of the technology that's inside of a police car, inside of an ambulance. It's the distributors, value-added resellers, who are bringing all of that together. And we really look forward to working with them, increasingly to be part of that delivered solution.

The next one is just around with sort of the cash burn and with sort of the aging of the older devices, and some time in investment and upgrade into the newer devices. Just wondering if you can help us think about the cash burn and really what gives you the confidence that liquidity runway at this point is adequate?

Bob, that sounds like your territory to talk about forward cash burn and the fact that we don't talk about forward numbers. But do you want to take?

Sure. I'll just reiterate that, we're not giving guidance. But certainly we have modeled in the sunset of our existing portfolio of products. As Tom mentioned, we're getting to end of life for several devices. We've also extended the life of the XT8 through an Android 10 upgrade. So that should sell well into the next year and potentially beyond. And we are ramping our new scanners and feature phones through the first half of 2021. So we have carefully looked at the transition between the old products and the new, adjusted our burn rate through cost savings and just having especially lean operations at the company in order to bridge that gap with the cash that we have. And I think we've judiciously looked at the balance sheet where we can. We've reduced our inventory levels. We have managed payables and receivables as much as possible. And we believe that we can weather a period of burn to get to the new products, which will then start generating cash as we move forward.

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

Thank you for joining us on today's call. I really appreciate the questions. And I really appreciate the interest you all have in our company. We'll be participating in a number of investor conference events to the year-end and will announce those by press releases as they occur. If you would like to arrange a call with management, please reach out to Matt Kreps with Darrow Associates. His contact information is listed on our press releases, and we'll be happy to arrange a call if needed.

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