Smith Micro Software Reports Q4 Revenue Decline

Smith Micro Software Reports Q4 Revenue Decline Due to Customer Contract End

Smith Micro Software Inc. reported a decrease in both fourth-quarter and fiscal year 2023 revenues primarily due to the end of a significant customer contract and a drop in legacy Safe & Found Family Safety revenue. Despite the decline, the company launched AT&T Secure Family on the SafePath platform and introduced new products like SafePath OS. The gross profit stood at $6.4 million for the quarter and $30.3 million for the fiscal year. Smith Micro also reported a GAAP net loss of $6.7 million for the quarter and $24.4 million for the year. Looking ahead, the company anticipates a challenging first quarter of 2024 but remains focused on expanding its SafePath product portfolio and securing new carrier partnerships, especially in Europe where they are set to launch with a Tier 1 carrier.

Key Takeaways

• Smith Micro Software experienced a decrease in revenue for the fourth quarter and fiscal year 2023.
• The company reported a gross profit of $6.4 million for Q4 and $30.3 million for the fiscal year.
• GAAP net loss was $6.7 million for the quarter and $24.4 million for the year.
• A reverse stock split is planned to meet NASDAQ’s minimum bid price requirement.
• The company launched AT&T Secure Family on the SafePath platform and is focusing on revenue growth through new products and partnerships.
• Smith Micro is preparing to launch a unique family safety app with a Tier 1 carrier in Europe in the second half of the year.

Company Outlook

• Smith Micro anticipates a challenging start to the year due to the discontinuation of Verizon Family Safety revenue.
• The company is confident in its growth prospects, emphasizing expansion of the SafePath product line.
• New contracts with major Tier 1 carriers in Europe are expected to contribute to future growth.

Bearish Highlights

• Revenue decline was significant due to the end of a large customer contract and decreased Safe & Found Family Safety revenue.
• The company faces a difficult first quarter ahead, with the loss of Verizon Family Safety revenue impacting earnings.

Bullish Highlights

• Smith Micro launched AT&T Secure Family on the SafePath platform, signaling product expansion and innovation.
• The company has secured new contracts with major carriers in Europe, indicating potential for increased market presence and revenue.
• Smith Micro is the only serious player in the European market marketing directly to carriers, suggesting a competitive advantage.

Misses

• Non-GAAP net loss for Q4 2023 was approximately $5.3 million, or an $0.08 loss per share.
• For the fiscal year 2023, the non-GAAP net loss was $5.3 million, or an $0.08 loss per share, compared to a non-GAAP net loss of $17.6 million, or a $0.32 loss per share in 2022.

Q&A Highlights

• The company discussed plans for a reverse stock split to address NASDAQ’s minimum bid price requirement.
• Smith Micro is expanding its SafePath product offerings, including SafePath Premium and SafePath Global, to drive growth.
• The company addressed the importance of privacy and compliance with European privacy laws in their product development.
• Expectations for a meaningful inflection in business with AT&T were expressed, anticipating further announcements in the first quarter.

In conclusion, Smith Micro Software is navigating through a period of transition, marked by revenue challenges but also by strategic moves to position itself for future growth. The company’s focus on product innovation and expansion into the European market, paired with a strategic approach to carrier partnerships, suggests a roadmap aimed at long-term success.

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InvestingPro Insights

Smith Micro Software, Inc. (SMSI) is currently experiencing a critical phase in its business cycle, as indicated by recent financial data and analyst insights. Here are some key metrics and tips from InvestingPro that provide a deeper understanding of the company’s current financial health and future prospects:

• Market Cap (Adjusted): $34.52M USD, reflecting the company’s current valuation in the market.
• Revenue Growth (Quarterly) for Q1 2023: -5.97%, which underscores the decline mentioned in the article.
• P/E Ratio (Adjusted) for the last twelve months as of Q3 2023: -2.55, indicating that the company is not currently generating positive earnings per share.

For investors seeking a more comprehensive analysis and additional insights, InvestingPro offers a suite of tips, including the company’s cash burn rate, valuation implications on free cash flow yield, and its debt levels. As of now, there are 12 additional InvestingPro Tips available for Smith Micro Software, Inc. at https://www.investing.com/pro/SMSI. Users can take advantage of these insights and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, enriching their investment strategy with valuable data and expert analysis.

Full Transcript – Smith Micro Software (SMSI) Q4 2023

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 the 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 the 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 the last earnings call, we