Yahoo Finance Smith Micro Software, Inc. (NASDAQ:SMSI) Q4 2023 Earnings Call Transcript
Smith Micro Software, Inc. (NASDAQ:SMSI) Q4 2023 Earnings Call Transcript February 22, 2024
Smith Micro Software, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Smith Micro Software Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would like to turn the conference over to Charles Messman. Please go ahead.
Charles Messman: Thank you, operator, and good afternoon everyone. We appreciate you joining us today to discuss Smith Micro financial results for the fourth quarter and the fiscal year ended December 31, 2023. By now you should have received a copy of our press release with the 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 will hear during today's discussion consists of forward-looking statements, including without limitations, those regarding the company's future revenue and profitability, our plans and expectations, new product development, new and expanded market opportunities, future product deployments, migrations and/or growth by new and existing customers, operating expenses, and company cash reserves.
Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by our forward-looking statements. For more information, please refer to the risk factors included in our most recently filed Form 10-K and in our subsequent filings on Form 10-Q. Smith Micro assumes no obligation to update any forward-looking statements, which speak to our management's beliefs and assumptions only as of the date they are made. I want to point out that in our forthcoming prepared remarks, we will refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. With that said, I'll turn the call over to Bill.
Bill?
Bill Smith: Thanks, Charlie. Good afternoon, and thank you for joining us today for our 2023 fourth quarter and year end conference call. We appreciate your interest. Reflecting on last year, we certainly faced some challenges, which initiated several decisive changes to build a new path forward for the company, and I believe we have found that path. The termination of a large customer contract earlier in the year came as a surprise, causing us to quickly pivot and implement necessary changes to better align our resources. It was a large undertaking and difficult task, but I am proud how our team worked collectively to rise to the occasion and accomplish several critical objectives that we absolutely needed to achieve despite this challenge.
The most impactful of those achievements was the successful launch of AT&T Secure Family on the SafePath platform. While there were some challenges along the way, we got it across the finish line and now have a fantastic opportunity to significantly expand subscriber growth in fiscal 2024. With the migration efforts finished, we now have the flexibility to further develop and expand our roadmap, delivering meaningful, innovative enhancements to the SafePath platform that will launch this year, which I expect to broaden our market reach and enable us to add new revenue streams. I will cover several of these enhancements in more detail later in the call, but one innovation where I do want to add a bit of color now is SafePath OS. As you may have seen in our earlier press release announcing SafePath OS, it will bring yet another new market opportunity to Smith Micro by delivering a unique solution to our MNO partners that build on their strong relationships with handset manufacturers.
SafePath OS is a pure software solution that will allow our partners to promote a safe and secure child's phone or tablet. This product will be fully functional and set up right out of the box with preloaded software pre-configured for Android devices to control the functionality of the phone itself to set digital parameters for safe use by the child. This new initiative for kids' devices will deliver substantial flexibility to our partners for new go-to-market strategies. In addition, SafePath OS will provide enhanced capability for parents and guardians to adjust features and functionality as their children enter new age groups, allowing them to grow through their digital journey. This is just one of the new initiatives underway for Smith Micro as we enter 2024 full speed ahead.
Our core vision continues to be the creation of safe and healthy digital experiences for families while allowing operators around the world to add new lines to family accounts, enabling them to build closer and more valuable relationships with their subscribers over time. Now let's turn the call over to Jim for more detail on the financial results. Jim?
Jim Kempton: Thanks, Bill. Good afternoon, everyone. I'll now be covering the financial details of the fourth quarter and full year 2023. For the fourth quarter, we posted revenue of $8.6 million compared to $11.4 million for the same quarter of 2022, a decrease of approximately 25%, primarily attributable to a decline in Family Safety revenues period-over-period. As anticipated, when compared to the third quarter of 2023, revenue decreased by $2.4 million, or 22%, primarily as a result of the conclusion of the Verizon Family Safety post-termination transition period, with no revenue recognized in December 2023 related to this contract. Revenues for 2023 were approximately $40.9 million versus $48.5 million produced last year.
The approximate $7.6 million decrease was primarily due to a decline in legacy Safe & Found Family Safety revenue related to the continued attrition of legacy Sprint subscribers driven by T-Mobile's acquisition of Sprint and the conclusion of the Verizon contract, coupled with a decline in CommSuite revenues. During the fourth quarter of 2023, Family Safety revenue decreased by approximately $2.1 million or 22% compared to the fourth quarter of prior year, primarily due to the decline in Verizon Family Safety revenues in the fourth quarter of 2023, as the post-termination transition period for that contract concluded, and the continued decline in legacy Sprint Safe & Found revenues. Family Safety revenues decreased by approximately $1.7 million or 18%, compared to the third quarter of 2023.
During the fourth quarter of 2023, CommSuite revenue was $500,000, which decreased by approximately $400,000 compared to the fourth quarter of 2022. This decrease is attributable to a decline in DISH revenue, coupled with a period-over-period decline in revenue generated from the legacy Sprint deployment, which generated no CommSuite revenue in the fourth quarter of 2023. Revenue from CommSuite decreased by approximately $200,000 compared to the third quarter of 2023. I would note that in December, we were able to expand our premium visual voicemail offering more broadly across the DISH network, and did see an increase in subscribers in that offering post-expansion. We are expecting a further expansion of the [PVBM] offering across the DISH network in the first half of 2024, which we anticipate will yield additional growth in subscribers.
ViewSpot revenue was approximately $600,000 for the fourth quarter of 2023, which declined by approximately $300,000 compared to the fourth quarter of prior year, and decreased by approximately a $0.5 million compared to the third quarter of 2023. The decline in ViewSpot revenues was in line with our expectations. In the first quarter of 2024, we are expecting consolidated revenues to decrease by 32% to 36% or $2.7 million to $3.1 million, compared to the fourth quarter of 2023, driven primarily by no further Verizon Family Safety revenues being recognized in the first quarter, as the post-termination transition period for that contract concluded in the fourth quarter of 2023. For the fourth quarter of 2023, gross profit was $6.4 million compared to $8.1 million during the same period of the prior year, a decrease of approximately $1.7 million.
While gross profit declined for the fourth quarter of 2023 versus the same period of 2022, gross margin was higher at 74.9% for the fourth quarter of 2023, compared to 70.8% realized in the fourth quarter of 2022. The gross profit of $6.4 million in the fourth quarter of 2023 decreased sequentially by approximately $2 million compared to the gross profit produced in the third quarter of 2023, driven primarily by the sequential decline in revenues quarter-over-quarter. In the first quarter of 2024, we expect gross margins to be in the range of 64% to 68%. For the year-to-date period ended December 31, 2023, gross profit was $30.3 million compared to $34.3 million during 2022. Gross margin was 74.2% for the year ended December 31, 2023, versus a gross margin of 70.7% produced in 2022, an improvement of approximately 350 basis points.
GAAP operating expenses for the fourth quarter of 2023 were $12.1 million, a decrease of $3.1 million or 20% compared to the fourth quarter of 2022. GAAP operating expenses for the year ended December 31, 2023 were $48.4 million, a decrease of $16.9 million or 26% compared to the prior year. non-GAAP operating expenses for the fourth quarter of 2023 were $8 million compared to $11.7 million in the fourth quarter of 2022, a decrease of approximately $3.8 million or 32%. Sequentially, non-GAAP operating expenses increased by approximately $200,000 or 3% from the third quarter of 2023. We expect first quarter 2024 non-GAAP operating expenses to increase by 1% to 4% compared to the fourth quarter of 2023, partially attributable to an increase in marketing and event activities, including Mobile World Congress, our largest trade show event of the year.
Non-GAAP operating expenses for the year ended December 31, 2023 was $35.3 million, a decrease of $16.2 million or 31% compared to last year. The GAAP net loss for the fourth quarter of 2023 was $6.7 million or $0.09 loss per share compared to a GAAP net loss of $8 million or $0.14 loss per share in the fourth quarter of 2022. The GAAP net loss for 2023 was $24.4 million or a $0.38 loss per share compared to a GAAP net loss of $29.3 million or a $0.53 loss per share in 2022. The non-GAAP net loss for the fourth quarter of 2023 was $1.7 million or a $0.02 loss per share compared to a non-GAAP net loss of approximately $4 million or a $0.07 loss per share in the fourth quarter of 2022. The non-GAAP net loss for 2023 was $5.3 million or an $0.08 loss per share compared to a non-GAAP net loss of approximately $17.6 million or a $0.32 loss per share in 2022.
Within today's press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the fourth quarter of 2023, the reconciliation includes adjustments for intangible asset amortization of $2.4 million, stock compensation expense of $1.5 million, note in stock offering amortization of $600,000, changes to derivatives and warrants of $300,000, costs related to severance and reorganization activities of approximately $100,000, and depreciation of approximately $100,000. For the year-to-date period, the non-GAAP reconciliation includes adjustments for intangible asset amortization of $6.8 million, stock compensation expense of $4.8 million, note in stock offering amortization of $6 million, changes to derivatives and warrants of approximately $200,000, depreciation of approximately $600,000, and costs related to severance and reorganization activities of approximately $1.1 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 utilized a 0% tax rate for 2023 and 2022. The resulting non-GAAP tax expense reflects the actual income taxes expense during each period. From a balance sheet perspective, we reported $7.1 million of cash and cash equivalents as of December 31, 2023. During the fourth quarter, use of cash and operating activities amounted to $1 million. I would also note that at the end of 2023, our senior secure convertible notes were retired in maturity. This concludes my financial review. Now, back to Bill.
Bill Smith: Thanks, Jim. Okay, I want to get back to the first quarter guidance that Jim provided. But first, let me start out by addressing the preliminary proxy statement that we filed earlier today. It relates to a special shareholder meeting to give our Board the discretion to effectuate a reverse stock split. As we described in the preliminary proxy statement, there are several reasons why we feel that this is the prudent approach for the company at this point. But our primary goal with the reverse stock split is to increase the per share market price of our common stock to meet NASDAQ's minimum bid price requirement. Given the current price of the stock, as we have been trading under a dollar since last earnings call, we expect this action would sufficiently increase our share price to help us regain compliance.
Additionally, we believe it will create increased flexibility, which we believe positions the company to be opportunistic on any strategic opportunities that we identify, including M&A. We feel strongly that this approach is the appropriate go-forward strategy for the company and our shareholders to ensure the long-term success of the company. Now let me circle back to our guidance for the first quarter. We've indicated for some time now that the first quarter would be challenging as the Verizon Family Safety revenue will no longer be contributing to our revenue during 2024. We reacted quickly to the termination of the contract last year and significantly adjusted our cost structure in anticipation of this decline in revenues. We have been focused on efforts to grow our revenues to fill the gap, including through the expansion of our SafePath product portfolio to drive growth, selling our solutions to additional MNOs and MVNOs, and working to grow subscriber bases with our existing customers.
I'll cover the expansion of both our customer and product portfolio shortly, providing a bit more color on our contract with a major Tier 1 carrier in Europe that we announced in December. But first, I wanted to address our efforts with our current customers in a little bit more detail. With regard to AT&T, as we previously announced, we have successfully launched AT&T Secure Family on the SafePath platform and are winding down the Legacy of Us platform. Since launch, we have released new updates to continue to improve the product and have expanded our addressable market with a launch of AT&T Secure Family to subscribers of Cricket, owned by AT&T. We are currently partnering with AT&T for the next phase of marketing activities, including the launch of new initiatives that build on awareness programs, digital campaigns, and maximizing the unique sales channels that AT&T has today.
Experience has shown us that it sometimes takes longer to get things rolling with large carrier customers, but we believe we've turned the corner on the marketing front, a big step in the progress of the continued rollout of AT&T Secure Family. We see the excitement building at AT&T and believe there is a significant opportunity to drive new subscriber growth as we look to the remainder of the year. On the T-Mobile front, since the last call, we've released updates to Family Mode to continue to enhance subscriber satisfaction. In addition, we're collaborating with the T-Mobile team, exploring new ways to expand our overall reach. I would characterize our relationship as solid, and we continue working to identify areas where we can expand the subscriber base.
At DISH, we have continued to enhance CommSuite to meet the needs for Android-based visual voicemail service. We enjoy a very strong relationship with DISH and believe that our business case with DISH Wireless will continue to expand throughout 2024 as they grow their business and we expand our reach. Turning to the European market, we were pleased to announce the new contract in Europe in the fourth quarter, in line with the expectations that we had outlined on prior calls. Activity under the new contract is well underway, and we are very excited about the upcoming launch of SafePath with this Tier 1 carrier, which is slated to be in the early second half of the year. Our development efforts related to this project remain on track, which brings a truly unique and interesting go-to-market approach that I will be excited to share more about after the launch.
As you can tell from my comments, our customer relationships are very positive, but now let's focus on something that really gets me excited. I'm very energized by the growth of our sales pipeline and the impact of this activity on the forward-looking success of our business in 2024. We see great momentum in the pipeline in both of our targeted geographies of North America and Europe. As a result, I believe we will deliver new business from both current and new carrier customers in 2024 and that there will be multiple announcements to be made. Our efforts over the last three years to establish Smith Micro as the premier provider of Family Safety software appears to have positioned us well. With all the turmoil around the world today, we see both governmental and societal pressures coming to bear to provide for both the digital and physical safety of our loved ones.
And as a result, we are seeing strong interest in our SafePath platform. We will be attending the upcoming 2024 Mobile World Congress in Barcelona, one of the largest wireless trade shows in the world, and have lined up a great schedule of meetings. Our participation in Mobile World Congress is aligned with our goal of growing the awareness of Smith Micro as a provider of solutions that are sorely needed in the EMEA region. I am pleased to share the announcement from earlier this week of Smith Micro winning the Gold Barrett Award in the Tech for Good category for Telecom and Wireless at Mobile World Congress for our industry-leading SafePath Family Safety platform. This award further solidifies our position as the premier provider of Family Safety solutions.
From a product perspective, we have expanded our portfolio to drive opportunities for revenue growth. On the last call, we spoke about a few new offerings coming to the market this year. Let me touch on those products again briefly. SafePath Premium broadens our SafePath portfolio, adding new, unique functionality that we believe is responsive to current market demand. It is well known that significant risks are not just prevalent, but are expanding in frequency and sophistication in both the digital and physical worlds. SafePath Premium will bring AI-driven experiences that will enable users to manage risks associated with cyberbullying and inappropriate content on existing social media platforms and other digital communications channels. Additionally, this solution brings improved physical location intelligence and safety features to the application.
We see great potential with this upgrade and expect this product to be available for launch in the second half of the fiscal year. We're already receiving great feedback from both existing customers and new prospects in the field regarding SafePath Premium, which has been very positive, creating a new value proposition while expanding our market opportunity. We also announced SafePath Global, a new streamlined deployment model, which we have targeted to be available for launch in the next few months. SafePath Global delivers a quick-to-market SafePath solution with very low dependency on IT resources and other integration efforts from our carrier partners. This product provides an expedited path to revenues via SafePath for both our customers and Smith Micro, while quickly delivering a Family Safety solution to that operator's subscribers.
We believe this offering will expand our brand while providing significant flexibility in launching new instances of SafePath. This SafePath deployment model will also reach a much larger untapped market, including not only Tier 1 MNOs, but also Tier 2 and Tier 3 carriers, as well as the ever-expanding market of MVNOs around the world. I'm pleased to say that we already have a good idea as to where the first deployments of both Premium and Global will be. A great start in 2024 for Smith Micro. SafePath Global and SafePath Premium, coupled with our newly announced SafePath OS solution, will provide our company with a significant opportunity to expand our relationships with our existing customers and to develop new customers with this broader suite of digital family lifestyle offerings.
We will continue the expansion of our product portfolio with innovative functionality as we align with our MNO and MVNO partners, creating new distribution methods for a broader reach around the world, all based on the SafePath platform. In closing, I'm as excited as ever with our path forward as we continue expanding our vision for Family Safety. As we move into 2024, I remain both excited and confident about the new chapter we are writing for our company, our partners, and our shareholders. With that, operator, let's open the call for questions.
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