Smith Micro Software (SMSI) Q1 2022 Earnings Call Transcript

Smith Micro Software (SMSI 2.36%)
Q1 2022 Earnings Call
May 04, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the first quarter 2022 earnings conference call of Smith Micro. [Operator instructions] I would now like to turn the conference over to Mr. Charles Messman. Thank you, and over to you, sir.

Charles Messman -- Vice President of Investor Relations and Corporate Development

Thank you, operator. Good afternoon, everyone. We appreciate you joining us today to discuss Smith Micro Software's financial results for 2022 first quarter ended March 31, 2022. By now, you should have received a copy of the press release with our financial results.

If you do not 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 revenues and profitability, our future plans, new product development, new and expanded market opportunities, future product deployments, migration and/or 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 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 recently filed Form 10-K. Smith Micro assumes no obligation to update any forward-looking statements, which speak to our management's beliefs and assumptions only as of date they are made. I want to point out that in the forthcoming prepared remarks, we'll refer to certain non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of those non-GAAP financial measures.

With that said, I'll turn the call over to Bill. Bill?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Thanks, Charlie. Good afternoon, and thank you for joining us today for our 2022 first-quarter conference call. Our first quarter has been extremely busy on many fronts as we continue down the path that we spoke about during our recent Q4 update. We are continuing to build on the momentum from the recent launch of SafePath 7.

This launch should commence the drive to enhance subscriber growth beginning in the late Q2 or early Q3. With the resumption of growth, we can return the company back to our historical model of delivering strong growth, earnings power and cash generation. We are also working diligently to get the other two U.S. Tier 1 carriers and our European customers on to the SafePath platform.

This activity will enhance the family safety applications at the carriers with an expanded feature set while allowing us to realize cost synergies as we consolidate to a single family safety platform. This critical initiative will bring the power of our SafePath platform to not only the mobile family safety space but opens an even larger market opportunity with the digital family lifestyle marketplace. Overall, I am pleased with where we are today as we are making great progress across the board with our carrier partners. Another interesting note that is very encouraging is that several of our carrier customers have begun to reopen their offices, a milestone that I truly hope continues as we work through how the pandemic has changed their lives and how we conduct business.

We believe that increased access to our customers is a critical and necessary step toward building deeper relationships throughout the different groups within the carriers. Another exciting recent announcement that I'm delighted to discuss is the expansion of our Board of Directors. Last month, we added two highly qualified individuals, Asha Keddy and Chetan Sharma, both who are recognized strategic leaders in the mobile technology arena. Their combined knowledge, contacts, and business acumen are a tremendous addition to Smith Micro, and I'm looking forward to seeing the positive impact they're going to have on our company.

Now let's turn the call over to Jim to discuss our first quarter 2022 results.

Jim Kempton -- Chief Financial Officer

Thanks, Bill, and good afternoon, everyone. As a reminder, we acquired the Avast family safety Mobile business in the second quarter of 2021, which impacts the period-over-period comparisons that I'll be covering today. As such, I'll also be highlighting the sequential changes as well to provide some additional context on our quarterly results. With that, let me cover the financial details for the first quarter of 2022.

For the first quarter, we posted revenue of $12.7 million, compared to $11.4 million for the same quarter last year, an increase of 12% as a result of an increase in family safety revenues, partially offset by a decline in CommSuite revenues. When compared to the fourth quarter of 2021, revenue was down approximately 13%, driven primarily by decreases in revenues associated with CommSuite and our legacy family safety product lives. During the first quarter of 2022, family safety revenue increased 64% to $10.4 million compared to the first quarter of last year as a result of the additional family safety customers obtained through our acquisition from Avast. Family safety revenues decreased 11% sequentially compared to the fourth quarter of 2021.

The primary reasons for the sequential decrease in family safety revenue was the continued reduction of the legacy safe and found platform revenue related to declining Sprint subscribers and the accelerated recognition of certain deferred revenue in the fourth quarter of 2021 due to a contract amendment executed with one of our Tier 1 carrier clients. During the first quarter of 2022, CommSuite revenue was $1.4 million, which declined $2.7 million compared to the $4.1 million in revenue produced in the first quarter of last year. Revenue from CommSuite decreased 35% sequentially compared to the fourth quarter of last year due to the continued decline in revenues related to the legacy Sprint subscribers. As I discussed on the last call, the decline in legacy Sprint subscribers 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 the Sprint network, CommSuite revenues will continue to decline. However, the timing of that decline in revenues is very difficult for us to predict as we do not have visibility to when customers switch over to a new SIM on the T-Mobile network. Boost, formerly owned by Sprint is now part of DISH. With the contract that we executed with DISH during the first quarter, we are expanding our relationship with DISH on the CommSuite platform with a goal to increase CommSuite subscribers over time.

ViewSpot revenue was approximately $900,000 for the first quarter of 2022, which was essentially flat compared to the first quarter of last year and up approximately 11% compared to the fourth quarter of 2021. ViewSpot revenue is comprised of both fixed and variable components. The fixed portion of the revenue is related to license fees and is generally the recurring component of the revenue. The variable portion of the revenue is related to device and promotional campaigns and the timing and volume associated with this portion of the revenue stream is less predictable.

With the recent launch of SafePath 7 at one of our Tier 1 U.S. wireless carriers and the expected migration of the other Tier 1 U.S. carriers to this platform later this year, we believe that we have a significant opportunity to grow the subscriber base at all three of our U.S. Tier 1 carrier customers in the coming quarters.

However, we expect that growth will be aligned with the timing of several marketing initiatives, which we anticipate will be initiated by our carrier customers in the second half of this year. As such, we expect consolidated revenue for the second quarter to be flat to lower by approximately 5% compared to the first quarter of 2022. For the first quarter, gross profit was $9.1 million compared to $9.8 million during the same period last year. Gross margin was 71% for the first quarter compared to 86% in the first quarter of last year.

In the second quarter, we expect gross margin to be flat to down slightly from the current run rate. Our longer-term goal for gross margin is to be back in the range of 80% to 90%. To achieve this goal, we will optimize third-party applications and service contracts used by the combined business upon the migration of our family safety carrier customers to a single family safety platform. Once we are able to fully transition all of the carriers off of the legacy Avast Ring platform onto our SafePath platform, we expect to be able to realize synergies that will help us drive our gross margins toward our targeted gross margin.

Given the time line of the migrations, we expect these synergies likely will not be fully realized until the first quarter of 2023. GAAP operating expenses for the first quarter were $16.1 million, an increase of $3 million or 23% compared to the first quarter of last year. The increase was primarily driven by compensation and employee-related expenses due to our acquisition of the Avast family safety Mobile business. Non-GAAP operating expenses for the first quarter were $13.4 million compared to $9.1 million for the first quarter of 2021, an increase of $4.3 million or 47% compared to last year.

Sequentially, non-GAAP operating expenses increased by 3% from $13 million in the fourth quarter of 2021, due in part to the increase in contractors related to the SafePath migrations. We expect second quarter 2022 non-GAAP operating expenses to increase from the first quarter by 2% to 4% as we continue to invest in our development resources to migrate our family safety carrier customers to the SafePath platform. The GAAP net loss for the first quarter was $7 million or $0.13 loss per share, compared to a GAAP net loss of $3.2 million or $0.07 loss per share in the first quarter of last year. The non-GAAP net loss for the first quarter was $4.3 million or $0.08 loss per share compared to a non-GAAP net income of $700,000 or $0.02 diluted earnings per share in the first quarter of last year.

Within today's press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the first quarter, the reconciliation includes adjustments for stock compensation expense of $1.1 million, and intangible asset amortization of $1.6 million. Due to our cumulative net losses over the past few years, our GAAP tax expense is primarily due to certain state and foreign income taxes. For non-GAAP purposes, we utilize a 0% tax rate for 2022 and 2021.

The resulting non-GAAP tax expense reflects the actual income taxes expensed during each period. From a balance sheet perspective, we reported $9.8 million of cash and cash equivalents as of March 31, 2022. This balance was lower than we had anticipated as a payment from one of the Tier 1 carriers came in on April 1 rather than within the quarter, resulting in only two months of payments from this customer instead of the typical three payments within the quarter. This cash received approximately $1.4 million.

I would like to highlight that we entered into a revolving credit facility with Wells Fargo on March 31, 2022. This line of credit provides the company with up to $7 million in funding capacity on attractive terms. We're pleased to have this facility in place and can leverage it as necessary as we work through the SafePath migrations. I also wanted to touch briefly on the shelf registration that we filed with the SEC earlier today.

We had utilized the vast majority of the capacity under our existing shelf registration last year for the acquisition from Avast. As such, we've determined it would be prudent to establish a new shelf registration with a three-year term as a matter of good corporate governance. We would not anticipate any equity offerings in the near term, but wanted to have the shelf in place to leverage for future needs if an attractive opportunity would present itself. This concludes my financial review.

Now back to Bill.

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Thanks, Jim. Now let's take a closer look at our product platforms. We are very focused on continuing the migration of our carrier customers in both North America and Europe to the new SafePath 7 platform. We are adding features found in the acquired Avast platform to SafePath 7.

The result will be an even more robust SafePath offering going forward. Being the market leader means providing a constant flow of new features. This expanded road map of new features and functionality allow our carrier customers to better utilize the SafePath platform as well as offering expanded capabilities such as SafePath Home, SafePath Drive and SafePath IoT. I believe the market is ripe for the inclusion of SafePath Home in carrier-provided 5G routers as carriers, driven by the rollout of 5G gain relevance in the home broadband market.

With the emergence of SafePath Home, we can deliver on the family digital lifestyle mantra of safeguarding the family, both when mobile and at home. SafePath 7 was expected to launch at T-Mobile in the weeks following our last earnings presentation. As we announced in late March, that launch occurred as anticipated and the new application has been very well received in the market. This sets us up extremely well for the next phase of growing new subscribers as we continue to gauge the app's performance to ensure all is working well with the application.

From a Verizon perspective, progress is being made on several fronts as efforts continue to prepare for the switch to the SafePath platform. A good example is the launch of our pilot ViewSpot initiative underway throughout Verizon corporate-owned retail stores that has been a great new avenue to build awareness for the Smart Family product, particularly with the sales reps who are at the front line and getting our app into customers' hands. We are entering phase two in the coming months when we will enhance the smart family promotional content to capitalize on the launch of a new retail sales incentive program as well as some new marketing initiatives for the stores. We have also delivered several new awareness and training campaigns that were targeted to the entire Verizon organization, a critical step in our multichannel marketing approach.

On the integration side, we remain on track. We are very focused and confident that by delivering this significantly improved smart family application with its enhanced customer experience, we will be able to drive increased ROI with this key carrier customer. Moving over to AT&T. We are bullish about the opportunity for us as we continue to work together on plans to launch on the SafePath platform before the end of the year.

The progress to date on the migration has been tracking with our expectations, and AT&T continues to work with us toward a successful launch. As is the approach with our other carrier partners, a strong and continued awareness campaign across several key areas of the organization are ongoing with an emphasis on the customer care and retail divisions, which clearly have a significant amount of contact with potential subscribers for our product. These efforts should drive awareness of the features and benefits of the app among AT&T employees so they can better sell this service to their customers. We also have expanded our digital advertising pilot, employing a far more targeted approach with several ongoing A/B testing cycles to maximize our cost per acquisition and more importantly, our lifetime value of subscribers.

As I stated on the last call, we see immense potential with AT&T as we build up from a relatively smaller base. The family safety space is critically important for AT&T on many fronts, and I am very excited that we are part of that mission today and will continue to be in the coming quarters. Next, let's briefly discuss ViewSpot. Our innovative ViewSpot studio product is rolling out at both Verizon and Cricket, which is a great accomplishment for our team.

The move to the studio platform has been very well received by our customers, delivering a much better experience with agile capabilities, a much faster deployment cycle for new campaigns, and a significant upgrade in analytics with the addition of more real-time capabilities. We have also upgraded and improved integration capabilities for Studio, which is allowing us to explore new partnerships that make it more strategic for our customers and broaden the total addressable market for us to attack. In addition, ViewSpot gives us a unique opportunity to further promote our family safety applications in the retail environment, as I touched on earlier with the Verizon program. Engaging in relevant content allows consumers to explore our family safety products and sign up without the need for -- of a sales rep or allows the sales rep to step in and continue the conversation and close the sale.

We also gained significant analytical data that will help us improve the marketing campaigns. Let's briefly discuss CommSuite. As I touched on in our last call, during the first quarter, we signed our contract with DISH Wireless to deliver our CommSuite powered premium visual voice mail and voice detect services for both Boost, the carriers prepaid brand, and for DISH's postpaid service, including the much anticipated launch of its 5G offering. Although it will take time to build a strong base, CommSuite is very complementary to DISH's long-term strategy and will extend the life of our CommSuite platform.

As our legacy Visual Voicemail deployment at Sprint, which Jim spoke about, continues to wind down. I am a firm believer that the DISH and Boost Wireless offers upside in stability to the CommSuite revenue stream in the longer term. In conclusion, I am pleased with what we achieved during our first quarter. The launch of SafePath 7 was a significant milestone for Smith Micro and expected catalysts for growth in the coming quarters.

Our focus for the remainder of the year is migrating our other two North American Tier 1 carriers as well as our European clients to the SafePath platform, while executing on the marketing, training and awareness initiatives with their carrier partners to drive subscriber growth for our family safety applications. I remain confident in our path forward, which I believe will result in revenue growth in the back half of this year and related to our historic high gross margins of 80% to 90% range, coupled with strong free cash flow. We are both proud and motivated by being the clear leader in the family safety wireless carrier space with the best product on the market and a well-planned road map that offers even larger market opportunity for us with SafePath Home, SafePath Drive, and SafePath IoT. The opportunity for Smith Micro is better than it has ever been in our four years.

With that said, I will open the call to questions. Operator?

Questions & Answers:

Operator

[Operator instructions] The first question comes from Josh Nichols with B. Riley FBR. Please go ahead.

Josh Nichols -- B. Riley Financial -- Analyst

Yeah. Thanks for taking my question, and good to see everything with T-Mobile get launched here. I know that's been a long time in making and the team put a lot of effort into that. Could you dive into a little bit about where T-Mobile is in terms of the marketing and training initiatives? Has that begun to be rolled out? Are there spiffs that have been put in place to begin to ramp this and your kind of expectation for what you may do, whether it's trading or help with digital marketing initiatives?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Yes, Josh. I guess the way to kind of look at it, first off, that's a question you're really going to have to ask T-Mobile. We can't really directly answer that. It's really something that's confidential to them.

So we're working hard with them. We are focused with them. They are focused. So everything is positive, but you're going to have to ask them.

Josh Nichols -- B. Riley Financial -- Analyst

Fair enough. And then just looking at the trajectory here, you mentioned that you're expecting to see a ramp in revenue in the second half, which you kind of mentioned before and with revenue kind of flattish for 2Q. Just curious like how much of the revenue left in CommSuite is related to like the legacy Sprint stuff if we're trying to figure out how much of that may be due to the potential runoff over the next couple of quarters?

Jim Kempton -- Chief Financial Officer

We would anticipate like roughly in the second quarter, maybe a third of the revenue would be related to the Sprint T-Mobile portion.

Josh Nichols -- B. Riley Financial -- Analyst

And then if I'm just looking for AT&T and Verizon, you mentioned before and reaffirming that you expect to migrate both those customers over to SafePath platform by the end of this year. Fair to assume that, that would require a new contract signing, given that the economics of the old agreement are probably not reflective of the value that you bring. And when do you think that we might see some type of update contract agreement, if that is the case?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

When we have a contract done and we have approval from our customer, we'll come to the Street and talk about it. But at this time, we can't.

Josh Nichols -- B. Riley Financial -- Analyst

Thanks, guys.

Operator

The next question comes from Jim McIlree with Dawson James.

Jim McIlree -- Dawson James Securities -- Analyst

Yeah. Thank you. Good afternoon. You talked about increased cost for contractors for the migration.

I was hoping you could size how big that's going to get in dollars? And then secondly, do those costs go away when the migration is done? Or do the costs just get redeployed into something else that is -- are these contractor costs permanent, but they just might get spent on something else?

Jim Kempton -- Chief Financial Officer

So the contractor costs are not permanent. A lot of the thought behind bringing on these contractors is the fact that we're very focused on getting the two carriers migrated this year. And we felt the most effective way to do that would be to bring in contractors in that way at the -- and as we get to the migrations, we'll be able to eliminate those costs with no real tail. So we would expect those to be eliminated when we are migrated.

For your first question, I would flip back to the guidance to where we believe that the operating expenses in the second quarter will increase 2% to 4% off of our first quarter, and that's going to be largely driven by those contractor costs.

Jim McIlree -- Dawson James Securities -- Analyst

OK. That's helpful. And then as far as Q2 goes, it sounds like it sounds like ViewSpot is flat to up, CommSuite down and SafePath is flat to flat. Is that directionally where we are?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

That's pretty much it. I think the good part is that much of the CommSuite revenue by the end of the year, almost all will be coming from ongoing business with DISH Wireless and their prepaid brand Boost. And so I think that will end that drama and we would look to continue to regrow our CommSuite revenue going forward.

Jim McIlree -- Dawson James Securities -- Analyst

Got it. And the risks to the SafePath growth, I mean how would you rank that? Is that mostly the customers staying on track? Is that a migration issue that is in your control? How do you rank the risks to achieving your SafePath goals for the year?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

That's a great question. I would view it in two different ways. First off, if you look at it from a migration standpoint, clearly, we have to perform and deliver the final software. But once that's done, a lot of the risk then goes over to our customers' hands because they have to deploy it and get it up and running.

So I mean there is a certain amount of risk. I can sincerely say that we would do everything in our power to make sure that we meet our schedules because we really want to get this migration complete. I also believe that our customers will do everything in their power to deploy because this new product will have significant upgrades and improvements over the product. They're currently selling whether it's old SafePath or whether it's the old Ring -- the old Avast Ring product.

So there's plenty of motivation for both parties to get things done on time. The next part of it where there is some risk is really all about the execution of the marketing plans. We are deeply involved in this with all of our carriers. But in the final, you -- it does fall upon the carrier to execute the plan.

Again, from a financial standpoint, there's incredibly strong motivation for all parties to execute this sharply. So there's plenty of reasons to feel that the risks are reasonable and that we can deal with it. But you also do need to recognize that there still are risks, and we will work our way through it.

Jim McIlree -- Dawson James Securities -- Analyst

All right. That's very helpful, Bill. Thanks a lot.

Operator

[Operator instructions] The next question comes from Bruce Goldfarb with Lake Street Capital Markets. Please go ahead.

Bruce Goldfarb -- Lake Street Capital Markets -- Analyst

Jim and Bill, congratulations on all your progress, and thank you for taking my questions. When do you expect material revenue from the T-Mobile account?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Well, there's material revenue now. So the first step was to get SafePath 7 in the marketplace. As I said in the prepared comments, we're now going through a period of continued assessment to make sure that everything in the new product is functioning properly. And when the customer is happy with those results, then they can start really focusing on executing the growth strategy.

So it's meaningful now, and we hope that it becomes even more meaningful as the growth starts.

Bruce Goldfarb -- Lake Street Capital Markets -- Analyst

OK. And I think you probably answered this earlier, but are you seeing signs of activity in retail T-Mobile stores? It sounded like you said earlier, you didn't have visibility to that.

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Well, again, we are not at a point where we can talk about that. So I really can't answer that question.

Bruce Goldfarb -- Lake Street Capital Markets -- Analyst

OK. And then lastly, how has the integration synergies tracking since the AFS acquisition?

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

It's really -- the real synergies that we'll be able to obtain will occur once we're able to transition to the SafePath platform on for all the carriers. We really are trying to push toward the -- by the end of the year to have all those migrations complete, and that will allow us to realize all those synergies in the first quarter of 2023.

Bruce Goldfarb -- Lake Street Capital Markets -- Analyst

Great. That's all my -- that's all our questions. And congrats again on all your progress.

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Thank you.

Operator

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

Charles Messman -- Vice President of Investor Relations and Corporate Development

I want to thank everybody for joining us. I know it's a very busy time. We appreciate that. If you have any further questions, please feel free to give us a call.

And thanks again. Have a great afternoon.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Charles Messman -- Vice President of Investor Relations and Corporate Development

Bill Smith -- Chairman of the Board, President, and Chief Executive Officer

Jim Kempton -- Chief Financial Officer

Josh Nichols -- B. Riley Financial -- Analyst

Jim McIlree -- Dawson James Securities -- Analyst

Bruce Goldfarb -- Lake Street Capital Markets -- Analyst

More SMSI analysis

All earnings call transcripts