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00:05 Good afternoon, and welcome to the First Quarter 2022 Earnings Conference Call of Smith Micro. All participants will be in a 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.

00:45 I would now like to turn the conference over to Mr. Charles Messman. Thank you and over to you, sir..

00:54 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, Chief Financial Officer.

01:26 Please note that some of the information you will hear today during our discussion consist of forward-looking statements, including, without limitations, those regarding the company's future revenue and profitability, our future plans, new product development, new and expanded market opportunities, future product deployments, migrations, and/or growth by new and existing customers, operating expense, company cash reserves, and the expected impact of last year's acquisition of Avast's Family Safety Mobile Business and our business strategy, operations, and financial positions going forward.

01:56 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.

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. 02:20 I'd like to point out that in the forthcoming prepared remarks, we will 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. 02:31 With that said, I'll turn the call over to Bill.

Bill?.

02:33 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. 03:20 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 as 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.

04:14 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 towards building deeper relationships throughout the different groups within the carriers. 04:46 Another exciting recent announcement that I am 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.

05:22 Now let's turn the call over to Jim to discuss our first quarter 2022 results..

05:30 Thanks, Bill and good afternoon, everyone. As a reminder, we acquired Avast's 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 will also be highlighting the sequential changes as well to provide some additional context on our quarterly results.

05:54 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. 06:32 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 & 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.

07:20 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. 08:18 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.

08:55 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.

09:36 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.

10:02 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.

10:44 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 towards our targeted gross margin.

Given the timeline of the migrations, we expect these synergies likely will not be fully realized until the first quarter of 2023. 11:11 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 with Mobile business. 11:30 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 contractor 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.

12:25 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. 12:57 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 in 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 utilized a zero percent tax rate for 2022 and 2021. The resulting non-GAAP tax expense reflects the actual income taxes expense during each period. 13:41 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.

14:10 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.

14:34 I also wanted to touch briefly on the shelf registration that we filed with the SEC earlier today. We 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.

15:09 This concludes my financial review. Now back to Bill..

15:14 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 roadmap 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.

16:06 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. 16:40 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 apps 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.

17:16 A good example is the launch of our pilot ViewSpot initiative underway throughout Verizon corporate-owned retail stores. There has been a great new avenue to build awareness for the Smart Family products, particularly with the sales reps who are at the front line and getting our app into customers' hands.

We are entering Phase 2 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.

17:58 We have also delivered several new awareness and training campaigns that were targeted to the entire Verizon organization, a critical step in our multi-channel marketing approach. On the integration side, we remain on track.

We are very focused and confident that by delivering this significantly improved Smart Family applications with this enhanced customer experience, we will be able to drive an increased ROI with this key carrier customers.

18:33 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 towards 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.

19:22 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 AB 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'm very excited that we are part of that mission today and will continue to be in the coming quarters. 20:21 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, 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.

21:14 In addition, ViewSpot gives us unique opportunity to further promote our Family Safety applications in the retail environment, as I touched on earlier, with the Verizon program, engaging and relevant content allows consumers to explore our Family Safety products and sign up without the need for 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. 21:51 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 voicemail and voice detect services for boost those, 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 (ph), 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. 22:53 In conclusion, I'm 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 up 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.

23:34 I remain confident in our path forward, which I believe will result in revenue growth in the back half of this year and we like -- 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 roadmap 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. 24:21 With that said, I will open the call to questions.

Operator?.

24:29 Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Josh Nichols with B. Riley, FBR. Please go ahead..

25:12 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 the making, and the team put a lot of effort into that.

Could you dive into a little bit about where T-Mobile is terms of the marketing and training initiatives, has that begun to be rolled out of 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?.

25:48 Yeah, Josh. I guess the way to kind of look at, first off, that's the question you're really going to have to ask of 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 that you're going to have -- to ask them..

26:15 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've 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 run off over the next couple of quarters?.

26:45 We would anticipate like roughly in the second quarter, maybe a third of the revenue would be related to the Sprint, T-Mobile portion..

26:57 Thanks. So then if I'm just looking for AT&T (ph) and Verizon. You mentioned before and reaffirming that you expect to migrate both those customers over the SafePath platform by the end of this year.

Fair to assume that, that would require a new contract signing, given 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?.

27:29 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..

27:39 Fair enough. I'll hop back in the queue. Thanks, guys..

27:47 Thank you. The next question comes from Jim McIlree with Dawson James. Please go ahead..

27:56 Yeah. Thank you. Good afternoon.

You talked about increased costs for contractors for the migration and 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 cost just get redeployed into something else that is, are these contractor costs permanent, but they just might get spent on something else?.

28:32 So, the contractor costs are not permanent, a lot of 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 on contractors in that way at the end -- 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. 29:09 For your first question, I would point back to the guidance to where we believe that the operating expenses in the second quarter will increase to 2% to 4% off of our first quarter and that's going to be largely driven by those contractor costs..

29:29 Okay. That's helpful.

And then as far as Q2 goes, it sounds like -- it sounds like ViewSpot is flat to up CommSuite is down, and SafePath is flat to flat, is that directionally where we are?.

29:56 Thank you. That's pretty, pretty much it. I think the good part is that much of the CommSuite revenue by the end of the year, almost all of it will be coming from ongoing business with DISH Wireless and their prepaid brands boost. And so I think that will end that drama and we would look to continue to regrow our CommSuite revenue going forward..

30:27 Got it, got it. And the risks to the SafePath growth, how would you rank that, is that mostly the customers staying on track.

Is that migration issue that is in your control, how do you rank the risks to achieving your SafePath goals for the year?.

30:56 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 risks 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 will do everything in our power to make sure that we meet our schedules, because we really want to get this migration complete.

31:37 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 that 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. It's really all about the execution of the marketing plans. We are deeply involved in this, with all of our carriers. But in that final, you -- it does fall upon the carrier to execute the plan.

32:30 Again, from a financial standpoint, there is 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, but you also do need to recognize that there still are risks and we will work our way through..

33:03 All right. That's very helpful, Bill. Thanks a lot. I'll yield the floor. Take care, guys..

33:14 Thank you. [Operator Instructions] The next question comes from Bruce Goldfarb with Lake Street Capital Markets. Please go ahead..

33:27 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?.

33:40 Well, the 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..

34:22 Okay. And I think you've 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?.

34:35 Well, again, we are not at a point where we can talk about that. So I really can't answer that question..

34:44 Okay. And then lastly, how are the -- how is the integration synergies tracking since the AFS acquisition..

34:54 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 towards the, by the end of the year to have all those migrations complete and that will allow us to realize those synergies in the first quarter of 2023..

35:22 Great. Thank you. That's all my that’s -- that’s all are the questions and congrats again on all your progress..

35:32 Thank you..

35:39 Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Charles Messman for any closing remarks..

35:48 Well, thanks 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. Thanks again and have a great afternoon..

36:06 Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..