Sonim Technologies, Inc. (SONM) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon. Welcome to the Sonim Technologies First Quarter 2021 Results Conference Call. My name is Gary and I will be your operator today. Joining us for today's call are Sonim CEO, Tom Wilkinson; CFO, Bob Tirva; and Investor Relations Advisor, Matt Kreps. Following the remarks we'll open the call for questions. I'd like to remind everyone that this call is being recorded and will be made available for replay via link available in the Investor Relations section of the Company's website at www.sonimtech.com Now, I would now like to turn the call over to Matt Kreps. Sir, please proceed.

Thank you, and welcome everyone to Sonim Technologies' results call for the first quarter ended March 31, 2021. 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, out coming product launches 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 Sonim's SEC filings, including is most recent quarterly report on Form 10-Q which we expect to file in the next few days and 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, May 11, 2021. 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. We're off to a good start on our transformed gear in 2021 as Sonim entered the rugged handhelds and tablet market with our platform in smart scanner products including the RS80 and newly available RS60. We expect to release our tablet the RS80 at the end of the second quarter. We're also pleased to report that we're on track for the launch of our next generation feature phones in Q3 of this year with major carriers in North America. In addition, we are poised to expand our presence in the large and attractive international market with our phones, scanner and tablet products. We are prioritizing our spending on R&D to focus on developing products that we believe will enable future revenue growth including a number of projects that will show their benefit in 2021 to both revenue upside and better overall margins. We commit sales of our RS80 smart scanner rugged tablets in mid-February. And so all of our initial quantities into distribution resulting in average $1 million of revenue for the first quarter. Customer feedback has been very good and we've seen meaningful future opportunities for this product with our channel partners. We continue to take orders as we scale up production of these devices. The RS80 is an 8-inch fully rugged android tablet with an integrated barcode scanner that features glove-friendly touch screen, high-capacity and multi-shift battery, resistance to water and dust and many other features specifically tailored to maximize this functionality on the job. These features truly matter as many customers have found in prior trials of consumer devices, cases and other solutions that simply do not work ending up costing more both in dollars and productivity to just buying well-designed rugged devices in the first place. The RS80 is specifically built to last and can lower the total cost of ownership compared to consumer tablets as a result of its proven durability while also improving the barcode scanning experience for frontline workers who must rapidly capture large amounts of data. We also announced full commercial availability of the RS60 rugged handheld which has one of the largest screens and longest lasting batteries in its class earlier this month. And the market response has been just as exciting. The RS60 provides a user friendly experience for frontline workers who must rapidly capture and consume large amounts of data on a highly portable device. It too is carefully tailored to meet the job including a large 8000 milliamp battery twice the capacity usually found in leading handheld scanners to ensure it all day performance. The RS60 is also compatible with an extensive line of rugged accessories includes our SonimWare suite of enterprise mobility software to increase efficiency, security, and device management by our customers. The device also features LTE connectivity for added flexibility. Our pipeline for the RS60 is building now and we expect great things for this product. In addition to entering the large and high margin rugged handheld market, we have been diligently expanding our distribution network that effect broader sales and revenue growth without incurring the cost of direct in-house sales hires. The management team at Sonim has worked with most of these distributors before and we know the customers they serve who want to take a closer look at our products. A good example is the recent agreement we announced with SYNNEX the distributor RS60 and RS80 rugged smart scanners and XP in our XP8 ultra rugged smartphone across North America. SYNNEX is a Fortune 200 corporation, one of the large providers of comprehensive distribution, systems design and integration services for the technology industry to a wide range of enterprises, in short they are great partners specifically for the devices we sell. We also added Energy Electronics as a distributor. Which is about the great business around corporate communication devices that has been growing at 50% per year has served with some of the biggest manufacturers in the business. And while continued expansion in North America is a great addition to our business. We're also looking at tapping into new markets for Sonim has not previously been sold especially Europe. Our smart scanners provide early access to these markets and our next generation mobile phones would start. I'll talk more about our phones in a moment. By adding rugged smart scanner devices as well as expanding into Europe, we'll increase our addressable market opportunities for by 4x by the end of 2021 versus where we started early 2020 pre-pandemic. In January, we announced the partnership with Syndico a specialist distributor of professional communications, body-worn video and drone solutions but where distribution Sonim's ultra-rugged mobility solutions throughout the United Kingdom. For the end markets, products that can stand up to the harshest conditions are an absolute necessity. Sonim's devices and accessories are engineered to meet that need. Specific to our opportunity, Syndico is supporting a notable increase in U.K. demand for cellular-based critical communication systems serving mission-critical roles. Now, I would like to talk about some of our new exciting phone products launching later this year which is the other key to Sonim's future growth alongside our rugged handheld devices. Feature phones are Sonim's highest volume products and deliver the ultra-rugged durability in simple and affective voice focus and push-to-talk communication capabilities that our customers value without the complexity of a full smartphone. We expect the first of our next generation of feature phones to ship in Q3 of this year and additional form factors that follow. These devices we utilize new processors for increased performance and provide expanded network support for additional and new carriers in the U.S. as well as in Europe and the rest of the world. Then it'll also include new features and support usability requirements based on feedback from our current customers. For example, our commercial customers leaving from radios to push-to-talk over cellular has responded very well to our devices. This include areas like transportation, security and industrial deployments. The move towards push-to-talk over cellular has projected a strong growth for a number of years at both North America and Europe. We're incorporating a number of customer-driven used features into the design as well particularly for our LMR to PTT users who are using certain network capabilities that we can incorporate into our devices serves to be even more competitive in that market. These devices are already seeing traction with customers including a $10 million pre-order with a new North American carrier customer who is excited to sell our new feature phones. We believe this is a good early example of the market opportunity with these new and highly differentiated devices. But we're only at the tip of the market iceberg that we can address with our next generation of phone devices. Let me stop here for a few minutes and ask Bob to cover our financial results.

Thank, Tom. Our press release issued earlier today announced the results for the first quarter ended March 31, 2021. A copy of the release is available in the Investor Relation section of our website. Net revenues for the first quarter of 2021 were $12.2 million compared with $12.7 million in the first quarter of 2020. The change in net revenue reflected the expected decline in sales of our legacy products partially offset by the introduction of the RS80 late in Q1 and a shipment of over $1 million of that product during the period. Gross profit for the first quarter of 2021 increased 14% to $2.5 million or 20.1% of net revenues from $2.2 million or 17.0% of net revenues in the first quarter of 2020. The increase in gross profit and gross margin included the addition of relatively higher gross margin scanner sales in the first quarter and the recovery from the inefficiencies in the first quarter of 2020 caused by our factory and supply chain shutdown due to the global COVID-19 pandemic. Offsetting this benefit to a certain extent both the unit cost were negatively impacted by rising component prices for our legacy products as they approach end-of-life. Sonim anticipates that margins will improve later in the year as our mix shifts to next generation devices which take advantage of our cost effective outsourcing partnerships for both manufacturing and software development. Operating expenses for the first quarter were $11.5 million compared with a $11.2 million in the first quarter of 2020. The increase in operating expenses was driven by $2.4 million in legal expenses pertaining to a previously disclosed an ongoing SEC investigation. A somewhat elevated level of legal spending is likely to continue until this matter is resolved. A portion of our legal expenses may be covered by our corporate insurance policy in the future once certain deductible levels are met. Setting aside these legal costs, general and administrative expenses declined by 12% year-over-year and sales and marketing declined by 30% year-over-year. Meanwhile, research and development increased 18% as Sonim continue to invest to bring additional new handset products to market in the second half of 2021 Net loss for the first quarter of 2021 totaled $9.3 million or $0.14 per basic and diluted share compared to a net loss of $10 million in the first quarter of 2020 or $0.48 per basic and diluted share. Turning to the balance sheet. Our cash balance at the end of March was $13.9 million and we remain effectively debt free. The decline in our cash balance was primarily attributable to our net loss for the quarter which was driven by lower margins on legacy products as well as the higher-than-anticipated legal expenses I previously mentioned. Given the gap between our legacy products winding down and our next generation products ramping as well the uncertainty around legal expenses in the near term, we feel that it makes sense to explore accessing the equity or debt capital markets in the near term. Our goal is to further strengthen our balance sheet to better protect the company against uncertainties in the next few quarters. As in previous quarters, we will not be providing specific guidance today. We look forward to continuing the successful launches of our next generation products as we move through 2021 and see strong opportunities in the second half as these products hit the market. The initial $10 million preorder we received is a good indication of the enthusiasm our carrier partners have for our rugged mobile devices which we believe so an important customer need in the market. With that, I will now turn it back to Tom for some additional comments.

Thanks, Bob. In conjunction with the work we're doing to bridge our capital needs, we are pleased to announce that we've retained B. Riley as our investment bank to explore capital market financing ideas as well as strategic alternatives for our company including those buy and sale side opportunities. Our management team and board expects to work closely with the bankers to chart a path forward. With that, I will now turn it back to the operator for our Q&A session.

[Operator Instructions] Our first question comes from Martin Yang with Oppenheimer. Please go ahead.

Hi, thank you for taking my question on. So first question I wanted to get a sense of when you see the good feedbacks on your tablet products, does that change your view on the long-term road map for you or at the overall company when you look at the reasons to your product portfolio in the next two years. And then, the follow-up question regarding tablet is, what can you share with us what art the typical life cycle are for those rugged tablets?

Good question. So I think that the good feedback and demand will add for these phones reinforces the plan that we already had it to some of our expectations for the future. It certainly becomes more when we actually starts selling products like we have, it becomes more a reality instead of projection at that point. It is going to help us focus on expanding our products yes sort of in the same way in the future by bringing out more rugged mobility products down the line. And this is a -- what was the second part of your question?

The life cycle on those rugged products.

Well, I think these are rugged products. So I think that we should expect our customers and new customers to use them for two to three years before recycling them -- before cycling them.

And do you have like a training program to facilitate the upgrade?

So in our case, this would be the first time they're using our first barcode scanner products. So we do have training materials and marketing materials to help our distribution partners get the products out and get them in the hands and being used. Really gets to the point of next generation in these type of products. We would certainly put in some other kind of materials at that time.

And my next question is on the coming feature phones. It looks like feature phones, rugged feature phones is plays really well in the particular market. And do you think there will be more similar preorders coming from other carriers and what are the typical rationales for large pre-orders like that?

Well, every carrier works differently. In this case we've got RPO's deliver to us on a large amount and upfront. I think that -- I think it's logical for each share to resist it or pursue businesses they see if that's their risks and their needs. We don’t typically get as far out of RPO as we've been able to get in this one. The motivation though should be to make sure that they flock into the supply that they would like to have on new products. And in particularly for this customer, they're working with us and these PO's are going to make them first-to-market for our product.

Yes, makes sense. Can you give us a sense of how much time will it take for that pre-order to be fully executed?

Those -- the PO's that we received are for Q3 and Q4.

Got it, thanks. I'll jump back in the queue.

Next question is from Mike Crawford with B. Riley Securities. Please go ahead.

Tom, Bob, what level of capital be desired to get across ODM transition finish line?

We don’t. We're not really expressing it quite at the moment. I think that we'll be able to communicate that in a short period of time. And but for the most part, what we're really focused on here is showing up our balance sheet to cover for the unexpected but not unlimited legal cost that we've been having to incur lately. There's a point-in-time in the near future where a large amount of admitting legal cost that we would be continuing to spend would be covered by insurance. We're just not there yet. Bob's got a few thoughts on this as well.

Yes. I think as Tom mentioned, definitely the legal expenses for an unforeseen at least at the level that we've experienced unforeseen in the past quarter. But at the end of the day the way to look at this is that we have the profit generation products, the legacy products which are coming to an end, the next generation products which are ramping and those don’t align perfectly and there is risk there in terms of making sure we get the new products off the ground and there is a little bit of risk in terms of what the tail is on the legacy products. And so, we just want to make sure that we are covered our eventualities that might impact our cash balances. It's still pretty healthy and this is more of a precautionary measure in our view with the short-term.

And your 10-K, that was really only mentioned of one new derivate suite in Delaware and but are you talking about D&O insurance and what are the deductibles and how much more do you have until you get there?

That is what we're talking about D&O insurance but specifically it's the SEC matter and not the law suites, the shareholder law suites have been settled. So in that sense those are behind us. It's more of the SEC work that goes on. And the SEC doesn’t give estimates as to when they will conclude their work. And so we really are just waiting to see their feedback.

And D&O did that deductible or limit everyone until you get there?

Yes. We had a -- I mean, on deductible $7.5 million. I don’t have at my finger tips exactly where we cross the threshold on that. But we've incurred significant amounts to-date towards that number.

Okay. And then just switching gears, one last one. Just on your new channel distribution strategy. Is this the case where with partners like SYNNEX were, will you be recognizing revenue upon shipment into the channel as opposed to when they sell it through and where are we in that process?

So under the new accounting guidance we would recognize revenue based on shipping to the distributor and developing a reserve for returns. And we're just getting started that obviously we've shipped a $1 million plus, we don’t really have experience with returns yet but we've estimated an amount -- a modest amount and booked that. But that would be the process going forward.

And okay, thank you very much.

Okay.

The last question is from Jaeson Schmidt with Lake Street. Please go ahead.

Hi guys, thanks for taking my questions. Just curious if you've seen any supply constraints or supply chain challenges?

So our only challenges have been really with the legacy products that we have, some of the components are older and they're reaching end-of-life. So our suppliers are [EOL'ing] certain components that go into our products. Those have become a little bit more expensive as the quantities drop and those have phased out for next generation type of products that we're using on new devices. So that's really all we've seen. I mean, if you're talking about COVID related, we had that a year ago but that is not seen to be an issue today.

Thanks.

Yes. We'll be able to build to all of the demand that we have and have a very good [handheld] on what our total life cycle is. But as Bob mentioned, cost start to shift over time, not available.

Okay. Then I mean based on the new order for these next gen feature phones. I assume sort of we're on the cusp of a replenishment cycle but do you have a sense of inventory levels over all like carriers in regards to your legacy products?

Yes. There are still little bit inventory on the smartphone and AT&T. But by-and-large, our carrier partners don’t carry large amounts of inventory other than that with smart phone agency.

Okay. And then, just last one from me and I'll jump back into queue. Just to clarify on that $10 million order. Is that for multiple skews or a single skew?

It's actually two skews; there is a camera and a non-camera version of that feature phone. But it's all for one carrier.

Okay. Thanks a lot guys.

Okay.

Thank you. At this time, this concludes the question and answer session. 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'll be participating in Oppenheimer conference call tomorrow. If any of you would like to arrange a call with management, please reach out to Matt Kreps and Darrow Associates, his contact information is listed on our press releases. We would be happy to arrange a phone call if needed. Thank you.

Thank you for joining us today for Sonim Technologies first quarter 2021 earnings conference call. You may now disconnect.