Phunware, Inc. Q4 FY2020 Earnings Call

Good afternoon, everyone, and welcome to Phunware's 2020 Investor Conference Call. Joining me today are Alan Knitowski, President, Chief Executive Officer and Co-Founder; Randall Crowder, Chief Operating Officer; and Matt Aune, Chief Financial Officer. The format today will include prepared remarks from Alan, Matt, and Randall, followed by a question-and-answer session. Please note that this discussion will contain forward-looking statements that reflect our current views and are based on various assumptions subject to risks and uncertainties outlined in the Risk Factors section of our SEC filings. Actual results may differ significantly, and undue reliance should not be placed on these statements. Additionally, we may reference non-GAAP financial measures today. Reconciliation of GAAP to non-GAAP financial information can be found in the earnings press release available on the Investor Relations section of Phunware's website. I encourage you to visit our site to access the earnings press release, current investor presentation, SEC filings, and other materials. Now, I will turn it over to Phunware's CEO, Alan Knitowski. Alan, please proceed.

Thank you very much, and welcome to our full Year 2020 investor conference call. As a reminder, Phunware is a 12-year-old enterprise software company, focused on the intersection of mobile, cloud, and big data with business-to-business and business to government customers worldwide. Our mission is to provide everything you need to succeed on mobile by providing our customers with the products, solutions, data, and services for their digital transformation needs on Apple iOS and Google Android devices and applications. Central to this effort is our enterprise cloud platform for mobile called MaaS or Multiscreen-as-a-Service, which is available for licensing under a SaaS business model over 1 to 5-year contract periods worldwide. This past year was the genesis of an inflection point in our company's history as we shifted from a nonrecurring low-margin transaction business to a far stickier, more scalable, recurring and high-margin SaaS licensing business for our MaaS platform. In addition to continued enterprise interest in our MaaS Digital Front Door solution for health care and our MaaS Smart Workplace solution for corporations, we have resumed conversations with customers from sectors that were hit hard by the pandemic, including the hospitality and real estate verticals. In conjunction with our growing portfolio of direct customers, we intend to expand our footprint globally by amplifying our go-to-market strategy with indirect sales and channel partners, including an anchor distribution partner that will be formally announced during Q2. In parallel, we are excited about the completion of PhunWallet next month as we launch our blockchain ecosystem powered by PhunCoin and PhunToken. We are on schedule to commercialize, scale and monetize this part of our business and look forward to the accelerated global adoption of our blockchain-enabled MaaS Customer Data Platform and MaaS Mobile Loyalty Ecosystem alike. As with most businesses worldwide, our team at Phunware was materially affected by the COVID-19 pandemic and was in no way immune to the operational challenges that resulted from widespread domestic and international stay-at-home orders and lockdown. Many of our customers and partners were forced to operate remotely and are still in the process of reopening their venues, facilities, and offices as vaccines become more widely available and herd immunity is achieved throughout the balance of 2021 across cities, states, regions, and countries. In our case, we have seen specific examples of customers throughout North America that are still working actively to get back to a new state of normal. These include Mount Sinai in New York, which still has stringent travel restrictions and health protocols and requirements for their medical operations; Atlantis in the Bahamas, which just reopened the resort in the past 30 days after an extended closure; Norfolk Southern in Atlanta, which is still finalizing its return to work schedule for its corporate employees, contractors, and support staff; and PricewaterhouseCoopers in San Francisco, which is still finalizing its return to work schedule accompanying the grand opening of its new corporate headquarters for worldwide operations. We are completely focused on the future, and what a post-pandemic environment is going to look like for our business. But we also recognize and appreciate that 2020 represented a very interesting and unique challenge for all of us. We saw multiple months without strong bookings in the middle of last year during the heart of the pandemic, as many of our customers and partners simply shut down their in-person operations and shifted to either remote-centric or remote-only environments. Going forward, however, and especially in light of the scale of vaccinations being delivered right now globally, we are assuming that each month and each quarter for the balance of 2021 will have the world beginning to accelerate to a more normal and predictable operating environment. Fundamentally, we do not expect to have to face such a problem again for the foreseeable future and are extremely comforted by our operating performance during this difficult period. We not only made the most of the opportunity by streamlining our cost structure, but we also enhanced our MaaS product and solution offerings, capitalized on the needs of the health care sector, facilitated enterprise customers getting back to work more safely and supported the 2020 presidential election on mobile. While we saw a decline in annual revenue recognition associated with these initiatives when looking backward at 2020, we expect to see a rebound here in 2021, as the operational downtime provided by COVID-19 allowed us more time to foster and improve our existing relationships while also establishing and bolstering brand-new indirect sales channels and partnerships in parallel. As always, we will continue our core go-to-market strategy, centered on direct and indirect agreements and contracts with Fortune 5000 customers, especially in the Fortune 100 size range and governments ranging from local and county to state and federal. Importantly, and independent of the pandemic, we are extremely excited by a number of developments that have occurred over the past several quarters during lockdown and even more excited by what we see coming in the coming quarters ahead. First, we were able to complete 3 core customer and partner portals for scaling our business through indirect channels. These included a MaaS software repository on GitHub at www.github.com/phunware, a MaaS documentation [email protected], and a MaaS training and Phunware Phenom certification [email protected]. Second, we were able to add to our MaaS bookings, backlog and deferred revenues for future revenue recognition over 1 to 5-year contract periods that will ultimately provide SaaS revenue recognition over the coming 12 to 60 months rolling forward. While these efforts do not provide instant or near-term gratification on revenue recognition for our P&L, they importantly demonstrate the ongoing health and expansion of our business and will be broken down in further detail by our CFO, Matt Aune, in his section of the earnings broadcast. As a reminder, and with our MaaS sales cycles typically representing 2 to 4 months on average, recent and pending customer wins will start appearing on our P&L in the coming reporting periods ahead. Third, we have expanded our installed base of Phunware IDs on MaaS to more than 15 billion devices worldwide, including MaaS platform scalability capable of supporting up to 5 billion transactions per day, 500,000 transactions per second and 1 billion unique devices per month. With more than 1 petabyte of data, typically growing at more than 5 terabytes per day. Our MaaS platform now provides a robust customer data platform inclusive of both the detailed data ontology and a comprehensive knowledge graph for one-to-one interactions and engagements. And fourth, we will commercially launch our PhunWallet mobile applications on Apple iOS and Google Android next month, in conjunction with our new MaaS blockchain ecosystem, all powered by our PhunCoin and PhunToken cryptocurrencies. Importantly, while PhunCoin security tokens will not necessarily appear in our financials when live, PhunToken utility tokens will actually flow transactionally through our P&L as net new and virtually 100% gross margin revenue. As an analogy rolling forward, please consider our core MaaS licensing activities akin to Amazon, which is what we are reporting today, while considering our new MaaS blockchain activities akin to Amazon AWS, which is what we will begin reporting incrementally rolling forward, beginning with our 10-Q for Q2 2021 in mid-August. At this time, our CFO, Matt Aune, will go deeper into our 2020 financial performance as reported and also highlight the dramatic improvement made to our balance sheet throughout the first quarter of 2021, including our recently announced institutional financing of more than $25 million. Matt?

Thanks, Alan, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our full year 2020 financial performance and our progress on key strategic initiatives. For clarity, I'll be discussing GAAP financial measures, unless otherwise specifically noted. Our press release, 8-K and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the full year 2020 totaled $10 million, of which Platform Subscriptions and Services Revenue was $9.1 million. Our focus continues to be on higher-margin, longer-term software customers, and we are pleased to have continued to follow this strategy in 2020, with over 91% of our net revenues derived from our MaaS Platform Subscriptions and Services Customers. Gross margin was 66.4% compared to 52.9% last year. On a non-GAAP adjusted basis, gross margin was 69.4% compared to 53.8% in the previous year. That is more than a 1,500 basis point improvement year-over-year on a non-GAAP adjusted basis. This result continues to validate the decisions we made to focus on higher-margin software and data deals, and away from lower-margin legacy application transactions and give Phunware a launching pad for more profitable and predictable revenues in the future. Total operating expense was $24.1 million, up from $22.4 million last year. As mentioned on our previous earnings call, operating expenses for 2020 include a $4.5 million legal settlement that we view as onetime in nature. Other noncash operating expense items were stock-based compensation and amortization of intangibles, making up $4.3 million this year compared to $1.9 million in the prior year. By excluding these onetime and noncash charges, full year 2020 adjusted operating expense was $15.3 million, down from $20.6 million last year or a 26% improvement year-over-year. As we continue to navigate through the ongoing COVID-19 pandemic, we have made a priority to improve operational efficiency by cutting back operating expenses without sacrificing our ability to deliver to our customers and grow in the future. Non-GAAP adjusted EBITDA loss was $8.4 million compared to $10.2 million last year. I'm pleased with the progress we've made year-over-year despite the challenges we faced in the midst of the global pandemic. Our strategic focus on profitable behaviors to increase margins and manage operating expenses has continued to show its effects. Net loss for the year was $22.2 million or $0.50 per share compared to $12.9 million or $0.35 per share last year. I'd like to remind everyone that this loss is inclusive of a $0.10 net loss per share from the extraordinary expense for legal settlements previously mentioned. Moving to the balance sheet. Ending cash for the year was $3.9 million with just under $11 million used in cash from operations. In Q1 2021, we raised an additional $29.8 million, with $5.1 million from our aftermarket offering and $24.7 million from our underwritten public offering. These 2021 capital raising events have put us in a position to control our own destiny without the need to raise additional capital and removed any doubt as to whether or not we carry a going concern designation. That being said, we are always looking for ways to opportunistically raise debt and/or equity, if it will help accelerate growth and help us to achieve our objectives faster. As we look at our debt obligations, we now have the ability to initiate a payoff of our 2020 convertible notes should we decide to do so prior to the December 31, 2021 maturity date. We intend on applying for partial forgiveness of our PPP loan that is allowable under SBA guidelines in coming months and anticipate starting making monthly payments later this year. We are also working to reduce our accrued expenses and accounts payable balances, which will be reflected in our Q1 2021 and Q2 2021 results. Backlog and deferred revenue at the end of the year totaled $9.1 million. This is an encouraging sign as a growing backlog means several things for our business, including: one, business is coming back from the closures caused by the pandemic; two, this is the first quarter backlog has grown since being a public company; and three, is a key indicator for our future revenues and predictability. Closing out the year and in the beginning of 2021, we have attended several financial conferences and met with many accredited institutional investors in our efforts to further strengthen our corporate profile in the capital markets. We will continue to tell our story and build a strong base of investors that will join us on the Phunware journey.

Thanks, Matt. I don't think anyone expected a year like 2020. But with disruption comes opportunity. At Phunware, our opportunity is to do for mobile engagement what Amazon did for cloud computing. By standardizing on our platform, enterprises can seamlessly drive digital transformation in a mobile-first world that's quickly becoming mobile-only. And COVID-19 has only accelerated both the need for and the adoption of technology like ours. In fact, the recent McKinsey & Company report how COVID-19 has pushed companies over the technology tipping point and transformed business forever found that companies have accelerated the digitization of their customer interactions and of their internal operations by 3 to 4 years. Although we specifically designed our MaaS platform to be industry agnostic, it excels in industries that struggle to manage complex customer journeys, such as health care, hospitality, and property management. However, 2020 has generated increased interest in our cutting-edge MaaS Smart Workplace solution for corporations returning to work and our MaaS Advocacy Solution for politicians seeking to better engage their constituencies. Regardless of industry, a critical aspect of engagement and a competitive advantage for Phunware is being able to identify and locate your target audience in real time. While some customers were forced to temporarily delay software deployments, others took the opportunity to invest in true digital transformation. Over the next few years, we expect this financial commitment to accelerate. In fact, the same McKinsey & Company report found that 80% fewer executives now rank cost savings as one of the most important priorities for the digital strategies, as more than half say they're investing in technology for competitive advantage or refocusing their entire business around digital technologies. To ensure our customers achieve a competitive advantage by licensing our MaaS software, we have made considerable progress across not only our products and solutions but also our data and blockchain offerings. For example, we launched our modular application framework in 2020 to support the kind of rapid deployment of feature-rich mobile application portfolios that makes it easier for our indirect channel partners to sell MaaS offerings through our global reseller network. One of our most compelling solutions that has been gaining traction through our network of partners is our MaaS Digital Front Door to tech-enable the patient experience. It has always been a challenge to navigate the continuum of care, but COVID-19 has made the patient journey even more complex as patients became reluctant to visit hospitals for the types of elective procedures that drive critical revenue streams. Our MaaS Digital Front Door cannot only provide reassuring on-site navigation capabilities and seamless access to health records, bill pay and testing but also virtual care, if a patient is not yet ready to visit a health care facility in person. Our most recent deployments of our cutting-edge platform include Greater Baltimore Medical Center and Virginia Hospital Center. The tech-enabled employee experience also became a pressing issue for corporations in 2020 as they wrestle without a plan a safe return to work. Our MaaS Smart Workplace solution allows corporations to not only manage a safer return to the office with critical features like contactless check-in, contact tracing, and density management but also improves operational efficiency with mobile room booking, parking management, and campus-wide navigation. We were thrilled to announce that Norfolk Southern is deploying this comprehensive solution to drive true digital transformation at its new headquarters in Atlanta. We also announced that our Smart Residential solution was deployed by property management group for Society Las Olas in Fort Lauderdale, which is the largest co-living development in the United States. Luxury residents have grown to expect the kind of features our solution delivers out of the box, including keyless entry, payments, guest access control, thermostat monitoring, and delivery management all through their mobile devices. Lastly, we established a new vertical by designing, developing, and deploying the official Trump 2020 mobile application portfolio and setting a new standard for constituency engagement on mobile. Our MaaS Advocacy Solution is now available to politicians, both domestically and abroad, with one of the key features of this new political vertical being the ability to support live rallies, which takes advantage of our proprietary MaaS location-based services and MaaS mobile engagement software. As I've said in the past, you can't monetize what you can't engage. And you can't engage what you can't locate. MaaS LBS software is a key competitive advantage for us because we have to do more than just static wave finding to drive true digital transformation. Our software enables high-precision indoor positioning, and that's why it now covers 6 million square feet at Baptist Health South Florida and over 22 million square feet across Dignity Health Network with our latest deployment at Yavapai Regional Medical Center in Arizona. Of note, both of these latest LBS deployments were delivered through our partner network, which is critical to our success. Indirect channel sales will allow us to scale faster and more efficiently in 2021 because our MaaS offerings are such an accretive upsell opportunity for channel partners, including hardware vendors, system integrators, software providers, and carriers to enhance mobile engagement. A key strategic initiative for us is to get our software bundled into offerings that are already being deployed by our channel partners. Before I wrap up, I want to highlight the importance of data because identification is an important aspect of engagement that provides important contextual information when LBS software is being used. Data is another competitive advantage for Phunware as we've not only generated over a petabyte of data and 15 billion Phunware IDs, but also developed a knowledge graph that curates actionable data from approximately 1 billion active devices a month at scale. In 2020, we were thrilled to announce the launch of our MaaS Customer Data Platform to further commercialize our persistent, unified customer databases and help brands engage the right consumer in the right place at the right time with the right content. Leveraging information in the virtual world to inform real-world experiences is the future of mobile engagement, and it's a future we are well positioned to dominate. To further enhance our position in the market, we are officially launching our blockchain ecosystem next quarter, which will not only help address the value of a consumer's digital identity but also the value of a consumer's engagement with the brand. For more on that, I'd like to turn things back over to Alan.

Thanks, Randall. As highlighted throughout today's call, we are all extremely excited by the pending commercial launch of our MaaS blockchain ecosystem. What it means to me is that our decade-plus of MaaS platform building across mobile, cloud, and big data, accompanied by our years of researching the benefits of blockchain and cryptocurrencies has resulted in the culmination and convergence of massive global addressable markets and trends that can act as wind at our backs and accelerate growth. We expect this ecosystem to complement and supplement our core MaaS offerings as we offer our enterprise customers additional capabilities to identify and engage their target audiences. While many corporations and individuals are newly familiar with blockchain and cryptocurrencies, both Phunware and our executives have a long and distinguished history within the global digital asset community. As such, we expect to be a trusted bridge for Fortune 500 corporations and governments looking to leverage blockchain. Please look for additional announcements in the coming weeks and months ahead, as we enable consumers to not only regain control of their data with PhunCoin but also reward them for their engagement with PhunToken. In parallel, and as we have suggested previously and would again reiterate here, we intend to complement and supplement our core organic growth activities through direct and indirect channels worldwide with opportunistic inorganic mergers and acquisitions. While we have nothing yet to formally announce on this front, we expect to focus our merger and acquisition activity on accretive deals in areas that will provide more customers, more partnerships, and more distribution for our MaaS platform especially in international markets such as Europe, Asia and South America. Finally, and importantly, rolling forward, we fully expect to maintain a laser-focus on our core operating and financial model, which includes top line growth of 30% or more year-over-year and blended gross margins of 75% or greater. With that, and in conjunction with a sincere thank you for your ongoing interest and support in all of our activities on behalf of the entire Phunware family worldwide, I would now like to open up the call for questions through the operator. Go ahead, please.

The first question is coming from Austin Maldo.

Can you put into context how meaningful an expansion is with a current customer like Baptist Health South Florida versus signing a new customer?

Yes, I'd be happy to do that. So when we actually see these, there's usually 2 types of engagements we see with the health care companies that focus on patient experiences. Typically, the initial engagement will be something that will be mid-6 digits in size that will be typically tied not to their whole health system as step 1, but usually, they do a tiered rollout. So what we often see, which has been the case in places like Baptist Health, Dignity Health Care, Mount Sinai, Greater Baltimore, many of the other ones that we've been announcing recently. Typically, you could see something ranging in the $400,000 to $600,000 and usually about a 3-year contract period. So you're kind of talking about $20,000 to $30,000 per month of MaaS licensing. And then typically, as they expand it to their other facilities and expand it to more square footage, we typically arrive at the low 7 digits, and then it expands up from there.

Okay. Great. And can you just sort of speak to your channel partner pipeline for 2021 a little more?

Yes, absolutely. And great question. For the most part, leading up to the pandemic, we did mostly all direct selling. Digital transformation was still net new. There wasn't always that compelling reason for governments, especially and even large corporations, which we sell to, to accelerate their digital transformation initiatives and needs. As it turned out for us what the pandemic did is it forced companies to relook at how they operated, both on-site and remote. And they realize that digital transformation and especially the way in which they engaged on-mobile became a matter of survival. What we've seen is, as you might expect, a lot of 2020 was showcased by health care engagements because, pandemic or no pandemic, health care was essential. It just got broken into that, which supported COVID and that which supported elective surgeries and all of the other normal care. They initially started diving into remote telehealth. That became critical for them to be able to focus on triage and actually focusing on what they wanted to do remote versus who they wanted to show up and then how to separate COVID and non-COVID patients. So when we see this going forward as it relates to channels, the channels we have are in 4 areas. We have hardware companies that typically take our software as a mobile activation layer. They'll bundle it with their routers, their switches or access points, and they'll provide a package to a venue or an office where they can get not just faster WiFi and more interactivity, but they have all the software they need to be able to tie those into those mobile applications for their employees, their partners, or their consumers. In the area of our second partnerships that you'll expect to see will be in the service provider domain, where they're bundling voice, video and data with our software to again give venues activation for digital transformation on those mobile applications. The final two are very traditional for software companies. They are software channels and they're system integrator channels. And in both of those cases, they're trying to provide digital transformation solutions to their customers and they're licensing the Phunware's software to help them engage, manage and monetize. While I teased that we're here in Q2 upcoming, we already have a signed global distribution deal that we'll be providing details to. We have not yet publicly done an announcement or broken out how that go-to-market will work. But now that it's been signed, you should expect to see in Q2 a formal announcement, a formal rollout that will really shine all the work that we've done in the last several quarters to activate these channels. And we'll expect to see the benefits of those rolling forward.

And the next question is coming from Howard Halpern.

Howard from Taglich Brothers. Congratulations on navigating the year.

Appreciate that. Good to talk to you, Howard.

Yes. First question is regarding my understanding of what you mentioned earlier, can we anticipate sequential quarterly growth moving forward in 2021?

Matt, you go ahead and take that.

Yes, Yes. No, I can take that. Yes, yes. So we're not providing guidance for this year, at least yet. Obviously, there's a lot of factors that go into what we're doing in terms of timing and deliverables to customers and getting customers to sign up for deals. So our reaching focus, as Alan mentioned, is to try to grow at 30% year-over-year. You've seen in the last several quarters, there's been some few dips here and there, and that's really just been as a result of timing issues. And so our publication for the full year will be the growth, how that grows between quarter – between quarters, still – we're working through that. But obviously, as we get more certainty into that, we'll share that as we get to that point.

Okay. And can you guys talk a little bit about the activity or pent-up demand you're seeing in Q1 as compared to the second half of last year?

Yes, let me begin with that, and then Randall will provide additional details. I will discuss the strategic aspects we've observed, and then Randall can delve into some of the tactical elements we are experiencing simultaneously. Our platform is applicable to all Fortune 5000 customers, including government entities. Specifically regarding healthcare and government sectors, both are fully operational. Looking back, independent of the pandemic and its aftermath post-vaccine, both sectors will remain very active similar to what we saw a year ago. The second point involves sectors severely impacted by the pandemic, such as travel, live sports, live music, and hospitality, which suffered due to restrictions on travel for work and leisure. We are now witnessing a significant resurgence in these areas. For instance, the Wynn Hotel in Vegas has reopened, Macau is operating, and while Boston continues to expand its reopening, Atlantis was closed until about a month ago. Any business related to hospitality and travel is experiencing a noticeable increase in activity in Q1. As these facilities return to full operation, travel is rising with more people taking flights, suggesting ongoing improvement throughout the year. Additionally, in the media and entertainment sector, organizations involved in distributing content through television applications and networks have seen consistent consumption, which actually accelerated during the pandemic as many of us stayed home. Finally, regarding sectors like aviation and corporate campuses, we are observing an upswing in activity as workplaces adapt to returning employees. We mentioned Norfolk, and now I’ll turn it over to Randall, who will share specific customer examples related to the vertical sectors we are monitoring.

Thanks, Alan. I would emphasize that we have two main competitive advantages. First, we can deploy feature-rich mobile application portfolios faster and more scalably than most others because we've been doing this since the early days of mobile applications. This modular application framework allows us to meet the needs of sectors like health care and corporations that are just starting to adopt mobile applications. Many hospitals have relied on mobile-responsive websites and existing applications like MyChart, but now, as more corporations figure out how to manage their workforce and bring employees back to the office, there is a significant demand for mobile applications. While some may think remote work is permanent, history shows us that trends can change. Our most active sectors are corporations adapting to return-to-office strategies and health care systems resuming elective procedures, which are crucial for their operations. Additionally, another major advantage is our location-based services. To create smart environments, software must connect mobile devices with various access points designed to provide contextual location information. This is where Phunware excels. We serve as the intermediary between mobile devices and technologies like WiFi or smart lighting, enabling the identification of individuals through signals, similar to how GPS identifies devices. There is significant interest in creating these smart spaces, where people live, work, and play in one location. Projects like Society Las Olas, a major co-living development in Fort Lauderdale, highlight this trend. As density increases and people desire amenities in close proximity, applications that manage customer journeys with location-based services will be essential. Many of these developments have five-year timelines, and despite challenges like COVID, they are committed to moving forward. Therefore, we are witnessing considerable activity in health care, smart workplaces, and mixed-use residential developments, which is very promising.

Okay. And are you seeing any near term or like when the stadiums are opening up across the country?

No, the challenge with that is related to business use cases. You have the NFL team that pays for it, along with a stadium owner and a sponsor wanting to place their name on it, and everyone is pointing fingers when it comes to covering costs. Ultimately, we are an enterprise software company capable of deploying anywhere, but we are also careful about identifying the easiest opportunities. If we focused solely on getting people to return to work and enhancing tech-enabled patient experiences, along with excelling in luxury, residential, and our political sector, we could be a Fortune 100 company. While we do have some discussions regarding stadiums, targeting them is not a primary focus for us, to be honest.

And to actually supplement that a little bit, Howard, just to your point, what you might expect is it's state-by-state if you're talking domestic, and it's still subject to the lockdown and shutdown differences. So if you actually said stadiums and arenas, yes, we're dealing with March madness right now, obviously, for the NCAA. If you're in Texas, if you're in Florida, things are pretty wide open, then they're just managing, are we going to allow full capacity or half capacity. If you're in New York, if you're in California, you're just not having these sporting events at all. Even I think the UFC is relocating itself back to the United States, opening up stuff in Florida. So I think what you're seeing is it's not so much a holistic thing across these stadiums and arenas across the country, it's still which states are open, which ones are not. And the states that are open are being flooded with not just professional sports, but going down into Collegian sports and use sports as well. But I think over the next two quarters, as California, New York, and other parts of the country start behaving more like Texas and Florida, we're going to see an acceleration of that.

And one last question about the blockchain launch. Will there be any significant additional costs associated with that? Or will your existing infrastructure support that launch moving forward?

I'll take that one. It's a really intuitive question, and it's great. It's what sets us apart from the majority of the blockchain cryptocurrency space. After the setbacks of 2017, everyone is searching for authenticity and the capability to succeed in this area. For me, decentralization can sometimes feel like a rudderless ship. Therefore, it's essential to have individuals committed to this in their product roadmap and go-to-market strategy who can drive progress. Otherwise, mainstream adoption will never happen. Our current engineers are world-class, and our existing infrastructure supports everything. We don’t need to hire new people or create new features since we've been developing mobile and engagement tools for enterprises for over a decade. This means there are no significant additional costs we need to bear. However, as we expand as a company and our market cap grows through both organic and inorganic means, we will continue to enhance our team to offer more features and capabilities. There will be a natural evolution in this process, but we don't have a separate engineering team dedicated exclusively to our blockchain initiative that adds extra liabilities. Our engineers are already working on this because we're developing it for the same enterprises for which we created mobile applications, using the same design-led thinking, which is why it will succeed.

And the one thing I'd want to highlight here that I think is super important about this is much like people got familiar with Red Hat as the safe onboard for open source and Linux, if you were a corporation or government, the trust that we've earned in working on mobile applications at scale and controlling up to 1 billion devices every month with our software and using literally hundreds of thousands of transactions per second, what we're going to be able to do is a couple of interesting things. One, we'll be able to provide a safe onboard for these enterprise customers, government customers, that want it tie into data and mobile loyalty in a safe way, bridging through Phunware to get into this new ecosystem in a way that they actually can trust, as Randall said, very directly and very accurately. The other thing is that we're not aware, and maybe you all know, but we believe that our launch of our full ecosystem tied to PhunToken and PhunCoin next month, will represent the first-ever crypto ecosystem ever launched by a public company that trades. We know there's people that buy bitcoin with corporate treasury as an example. We know there's people that are doing bitcoin mining. We know that there are financial groups offering ETFs or funds or other things like that to try to get exposure. We even see some that are dealing with the trading aspects of security tokens or utility tokens. What we've yet to see and what we think we're going to be the first is a credible NASDAQ trading, listed company, fully audited with the pristine components of governance and everything that goes around this ecosystem, launching an entire ecosystem to take advantage of what we're doing and to allow others to use it in a safe, responsible, compliant way according to all the laws, regulations, and everything in between. So we're really excited by that. We've been doing this for years, and now we finally get to hit the proverbial go button. And that will be something that, as I said in my portion, we'll start having successes in the second quarter, those PhunToken that will actually flow through our P&L, that will be net new. And then you'll start seeing those when we report in, I believe, mid-August for the second quarter.

The next question is coming from Ed Woo.

Congratulations on navigating a challenging year. My question is, as things return to normal, do you anticipate that your sales lead time and implementation software time will also return to normal and become quicker?

Yes. So I'll take that one. I think what we've seen and what Randall highlighted, we actually have in our vertical solutions, the ability to provision solutions extremely quickly. The 2 to 4 months, we typically talk about that you see in an average sales cycle that may be in the engagement, that may be an RFI, RFQ, RFP responses and then back and forth of the papering of deals that you win. So we think that that cycle is going to stay very consistent what we expect, though, to overlay that is actually two things. One is all this pent-up demand where companies really were deferring budget and deferring initiatives, deferring rollouts of their solutions, even for their employee bases in addition to consumers until their facilities were reopening. And we see that that acceleration that we were highlighting the delays that we've seen in some of our customers and partners, we expect there's going to be a lot of pent-up demand that's going to go with that. The other thing is that we see all the work that we put into creating a full software repository on GitHub, a full documentation, training, and certification set of repositories. All that work we set up for our indirect channels we're really looking forward to making those announcements in Q2 to show where that's going to be a one-to-many deployment where it's not even an upsell or a cross-sell, but we'll have our software bundled with product and every time those products ship, we're going to actually receive a license of 1, 3, 5 years across those venues and that square footage to Randall's point across those venues and those facilities that they're trying to activate for digital transformation on mobile.

Alan, that sounds great. And then my last question is in terms of average deal size as well as average duration, I know you guys have done a very good job to get bigger deals than for a longer time period. Is there a specific target that you guys want to get your average duration of new contracts going forward?

So I'll address the contract duration. Go ahead, Matt. Actually, you can handle this, sorry, discuss retail, you can take that.

Typically, we look at contracts lasting from 1 to 5 years because we prefer long-term commitments. Over the past 6 to 12 months, most of our deals have been around 3 years, with sizes ranging from $700,000 to over $1 million. Three years is an ideal timeframe for us, especially with large health care customers who prefer not to go through the renewal process every year. We usually manage to secure agreements for 3 to 5 years without issue. After that, our focus shifts to expanding our engagement. With clients like Baptist Health, we start with an initial engagement and concentrate on deepening the relationship to extend the duration of their involvement.

And the next question is coming from Mike Latimore.

This is Antal Sau on for Mike. Could you give me an update on how much of pipeline includes location-based services? And how are the revenue retention rate?

Matt, you can probably talk to that. We haven't been breaking that out in the past. I think we had that question before.

Yes, I missed the first part of the question. Could you repeat that, apologies?

Yes. So how much of your pipeline includes location-based services?

Let me start, Matt, and then see if you can provide some clarity. One important point to note when we deploy our platform is that, similar to Microsoft Office, just because not everyone on this call has used Access doesn't mean they don't understand it. There are a lot of misconceptions about our platform. We are deploying MaaS, which is fully feature-rich. Certain customers may choose to activate specific features, but they are still licensing the entire platform. We have never needed to differentiate between customers based on which applications they are using, like Access versus PowerPoint versus Outlook. Therefore, I don't think we have those numbers. Matt, I know we intended to look into this, and perhaps we can address it in a follow-up with Mike. Do we have any numbers related to customers similar to Baptist Health, Matt?

We aren’t sharing specific details at this moment. However, we have some data and can review it with the team to see if there's anything we can provide to give a clearer picture of the portion using the LBS. I’ll take note of that and will follow up accordingly. Regarding the second part of your question about churn, as previously mentioned, we're currently securing customers on 3 to 5-year contracts, reflecting extensive development over the past 12 years. Our platform is fully operational now, and we've been closing these types of deals for over a year. Therefore, it’s a bit premature to pinpoint the churn rate while we're engaging customers on longer contract terms. When we delve deeper into churn, we find that the lifetime value of initial engagement typically exceeds the customer acquisition cost. This makes the customer acquisition strategy effective. We believe that our deal sizes adequately cover the costs associated with acquiring these clients. Our primary focus is on customer success, as exemplified by BHSF, which significantly expanded its footprint from 3 million to over 6 million square feet. This illustrates how customer engagement increases retention and extends lifetime value. Moving forward, we will gain a clearer understanding of churn dynamics. However, it’s important to note that our business model is not one where customers have the flexibility to churn monthly; we are establishing longer-term contracts while being mindful of acquisition costs and lifetime value.

I believe what you're asking is important, so I’d like to slightly rephrase the question to provide you with the best answer. It's not just about who is using location-based services, but rather who is using that along with additional features. The reason clients choose Phunware is due to our ability to engage contextually, which is tied to location. We are not selling non-location-enabled mobile software to hospitals. Every hospital we partner with does so because we can enhance their offerings with our location-based services software. I can confidently say that around 90% or more of our revenue comes from licensing our location-based services software. The real question is how many of these clients are also utilizing a comprehensive mobile application portfolio through our modular application framework. For instance, Baptist Health South Florida is solely licensing our location-based services software. Virginia Hospital Center and Greater Baltimore Medical Center are also licensing it, but they required us to develop their digital front door as well. So, while everyone uses location services software, only some need us to create the mobile application too. Does that make sense?

Yes. All right. And how many salespeople do you have now? And how many more will you add this year?

Currently, we have five salespeople, and we are actively hiring more. The primary use of our funds will be for expanding our sales and marketing team, not to address a significant amount of technology debt. We recently announced a $25 million funding round from Northland and ROTH for this purpose. Our target operating model is a 4:1 ratio of lifetime value to customer acquisition cost. When I mention sales, a lot of it revolves around engaging with channel partner relationships rather than direct selling. We’re bringing in experienced sales executives who have two decades of success in selling enterprise software through channels, allowing us to significantly benefit from their contributions. Currently, we have five team members, and we're aggressively looking to hire more. I can't predict exactly how many we will have by year-end, as it will depend in part on how quickly we can activate these channels, with some of our sales staff also working within those channels to bring in new customers. I hope to add another five by the end of the first half of this year and then scale further from there.

All right. And the last one, should deferred revenue grow faster than revenue this year?

Repeat that question again, Mike?

Yes. You're referring to deferred revenue growth and our expectation for this year in terms of how it's going to grow versus revenue?

Got you. Matt, go ahead and take that one. Yes, we've certainly already seen a return in the corner, and we feel like we're at an inflection point to begin adding back to backlog and deferred revenue.

Yes. No, I think that deferred revenue growth, we've said it before, deferred revenue backlog are key indicators for us. And certainly, our focus is to build that as much as possible. That being said, I think that on a deferred revenue basis, we are able to deploy quicker, faster now. So you're not going to see projects that are held up for several months because of maybe in the past might have been development issues upfront with our customer. Now we have a fully capable platform and products that we can deliver quicker. But that being said, we're continuing to invoice annual advance and to build that. And so we do expect to see growth there. And we'll see how things play out with our strategy in terms of, obviously, we're continuing our direct sales that we've been doing for years. But really this indirect sales that we're focusing on this year, could have a fairly big impact on that. And so we'll update everybody as we kind of get through that. As Alan mentioned, we've got some partners we're working with, and there could be some opportunities there. We're going to be able to scale up our revenue and backlog.

And remember, that's going to be the biggest differentiator between last year and even the previous year to this year. As we grow, our ability to generate revenue is significant, and I hope everybody understands how blockchain is actually translating into revenue through our live product and ecosystem with PhunWallet, similar to selling digital goods. Selling a PhunToken is no different from selling location-based services software, which should be very appealing for shareholders looking to accelerate revenue growth. Additionally, I want to emphasize these indirect channel partner relationships, where you will see a notable shift towards usage-based pricing in the next few years, based on square footage. This approach means that once we bundle our offerings and partners have access to their customers, they can upsell or activate additional features, allowing us to collect revenue with great margins, priced according to square footage. This represents a significant change, as many still believe we need to engage in lengthy sales cycles to secure major brands like Fox, followed by gradual revenue recognition. We've successfully navigated this process in the passion verticals and will continue to improve our pace, particularly with hospitals and corporations. However, integrating our location software into others' offerings will fundamentally enhance our revenue growth.

Ladies and gentlemen, at this time, this concludes the company's question-and-answer session. If your question was not taken, you may contact Phunware's Investor Relations team at [email protected]. Thank you all for joining us today for Phunware's 2020 Earnings Conference Call. You may now disconnect.