Phunware, Inc. Q4 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Phunware's Fourth Quarter and Full Year 2023 Investor Conference Call. Currently, all participants are in a listen-only mode. Joining me today are Mike Snavely, Chief Executive Officer, and Troy Reisner, Chief Financial Officer. The format today will include prepared remarks by Mike and Troy followed by a question-and-answer session. As a reminder, today's discussion will include forward-looking statements. These forward-looking statements reflect current views as of today and are based on various assumptions that are subject to risks and uncertainties disclosed in the Risk Factors section of our SEC filings. Actual results may differ materially, and undue reliance should not be placed on them. Additionally, the matters being discussed today may include non-GAAP financial measures. Reconciliation of GAAP to non-GAAP information is set forth in the earnings press release, which is available on the Investor Relations section of Phunware's website. I further encourage you to visit investors.phunware.com to access not only the earnings press release but also the current investor presentation, SEC filings, and additional collateral on Phunware. At this time, I'd like to turn things over to Phunware's CEO, Mike Snavely. Please proceed.

Thank you, and we welcome our fellow shareholders to our fourth quarter and full-year 2023 investor call. We're glad you've joined. Last time I spoke with you was a couple of weeks after the Board asked me to step into the role of CEO. In the 90 days or so since that earnings release, we've reshaped nearly every aspect of the company with an eye toward delivering predictable, sustainable, and profitable growth for our shareholders. Troy will run through the details of those actions here shortly. When I took over this role, there was a fair bit of cleanup that needed to be done. Our balance sheet was burdened with debt obligations, we had litigation exposure in various places, and we were burning too much cash both in the core software business and in the ancillary business. Most importantly, we lacked strategic focus. Most of these problems are solved and all are well understood as we speak to you today. We built our go-forward plan on a number of bright spots in the business, a highly satisfied and referenceable customer base, clear ROI that our customers are achieving with our solutions, and a talented and experienced product engineering team. From this strengthened foundation, we are on a new trajectory for 2024 and are bullish on Phunware's future. I will turn it over to Troy to talk about our financial performance. After his remarks, I'll return to talk about our vision for the future of Phunware.

Thanks, Mike, and good afternoon, everyone. I'd like to add my thank you for joining us today for a review of our full year 2023 financial performance and our progress against key cost reduction 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. In addition, I will provide insight into our operating expense run rate and how we have strengthened our balance sheet in early 2024. As a reminder, in November, we made the decision to shut down our hardware business, and in accordance with Generally Accepted Accounting Principles, that business is presented as a discontinued operation in the financial statements. The shutdown was substantially completed in December. Net revenues from continuing operations for the full year of 2023 totaled $4.8 million compared to $6.5 million in the prior year. The decline in revenue is due to the sale of $1.5 million in the prior year. Gross margin from continuing operations was approximately 34.9% compared to approximately 53.8% last year, with the prior-year margin benefiting from the sale. Operating expenses from continuing operations, including goodwill impairment of $25.8 million, were approximately $47.4 million this year compared to approximately $27.5 million last year. Excluding the goodwill impairment, operating expenses from continuing operations were $21.6 million for 2023 compared to $27.5 million last year, reflecting significant progress late in 2023 to reshape our cost structure. For a better picture of our cost reductions, we note that the average monthly operating expense from continuing operations for Q4 of 2023 was approximately $1.1 million compared to an average of $2 million for the previous nine months. Other non-cash operating expense items included stock-based compensation and goodwill impairment, totaling approximately $30 million this year compared to approximately $3.1 million last year. Excluding these non-cash charges, adjusted operating expenses were approximately $17.9 million this year compared to approximately $24.3 million last year. Our loss from discontinued operations for 2023 was approximately $10.9 million compared to $5.5 million last year. Non-GAAP adjusted EBITDA loss from continuing operations was $15.5 million this year compared to $20.8 million last year, reflecting a 25.5% improvement. In late February, we executed a 50:1 reverse stock split, which under GAAP, all share information has been recast. Shares used to calculate earnings per share were approximately 2.4 million this year versus approximately 2 million last year. The net loss from continuing operations was $41.9 million or $17.62 per share this year compared to $45.4 million or $22.95 per share last year. Our backlog and deferred revenue at the end of the quarter totaled approximately $4.7 million. Moving to the balance sheet, we closed the fourth quarter with $3.9 million in cash and $4.9 million in debt, down from the $9.7 million in debt at the end of the prior year. With our historical numbers covered, I want to highlight other recent accomplishments. First, we reduced monthly cash burn by prudently restructuring operations. Here are some examples: Compensation expense: We retained key talent to support existing customers and initial growth projects, which resulted in reduced compensation-related costs by approximately 55%. Our total headcount was 25 at the end of 2023, and we are currently at 27 today. Rent expense: During 2023, we negotiated the termination of three of our five existing office space leases. We expect 2024 monthly lease expense net of sublease income to approximate $50,000. We continue to pursue the sublease or early termination of our lease. Beyond compensation and facilities costs, our Q4 run rate for other expenses has decreased more than 50% compared to the beginning of 2023. Secondly, strong improvement in our balance sheet. Beginning with a small equity raise in December followed by others in January, we were able to stabilize our financial position and fund our runway for the foreseeable future. In early March, we have approximately $17 million of cash on hand, zero debt, nearly $2 million of future lease obligations eliminated, approximately $4 million of current liabilities paid, we've settled a significant pending lawsuit, and we have a clean capital stack consisting of just common stock. We will remain active with financial conferences and investor meetings to share our story and strengthen our corporate profile in the capital markets. The next major financial conference we will attend is the 36th Annual ROTH Conference on March 17th through 19th. We look forward to many one-on-one conversations with long-term-minded institutional investors at the event. With that, I want to turn the call back over to Mike for his discussion of our forward-looking strategy.

Thanks, Troy. Now that we have a solid foundation to work from, here is how we plan to build the future for our shareholders. Our commitment to our shareholders is one of sober execution. What does this mean? Solid steady growth, careful stewardship of company assets, driving the core software business toward breakeven and then profitability, and deployment of a portion of our capital against carefully considered opportunities that have a potential for outsized returns. Our strategy in software: Software has always been the core of our company. We believe that our software assets and our partnerships provide us the ability to deliver the benchmark solution for the mobile engagement of our customer stakeholders and to continue to be recognized as an indispensable revenue generator for brands. This is the primary mission of our software business, which is focused on hospitality, healthcare, and connected office environments, like we have in place with Gaylord Hotels, Phoenix Children's Hospital, and Norfolk Southern's Corporate Campus, to name a few examples. In recent years, as our software business has evolved from a professional services model to SaaS licensing, our staff had become oversized in relation to the portfolio we have under management. We have rightsized that part of the business while preserving the institutional knowledge embodied in our leadership team. Our goal for the next few quarters is to deliver ever-increasing results from the software business, and we believe that we can do so based on achievable revenue growth goals and delivery efficiencies. Since our last earnings call, we have launched new customers in Miami, Hawaii, and Montreal. These hospitality customers join a portfolio of existing customers that have consistently renewed and expanded their relationships with Phunware. Our solution is deemed indispensable by our customers to engage and monetize their guests, patients, and employees. The mobile applications and experiences we develop for our clients consistently win industry accolades, underscoring their effectiveness and reliability. We also see the best indicator of customer satisfaction through referrals and positive references to their peers. We continue to enhance our platform by internally developing new capabilities. For example, artificial intelligence that identifies customer desires based on location, activity, and profile, providing services at the right time. However, we also believe that acquisitions and strategic partnerships will play a significant role in expanding our footprint in the markets we serve. To that end, we are actively seeking relationships that support our strategy of delivering a complete end-to-end solution for user engagement that directly drives revenue for our customers. On patent monetization: We are committed to protecting our company's rights against any patent infringement we can identify and to engaging in efforts for recovery of damages. We believe that our patent portfolio covers fundamental methods of how data is managed and distributed on the internet and mobile, and we intend to aggressively hold infringers accountable. We've seen the first fruits of progress on this front. A jury in the U.S. District Court in Los Angeles has found that U.S. patent number 8989715 is infringed by Netflix's video streaming services. While we previously sold this patent to GoTV Streaming, we retain a significant economic interest in all future enforcement, licensing, and other recoveries related to this patent, including damages from the Netflix case. Today, we have 16 other issued patents and eight pending. We are conducting an evaluation of our remaining patent portfolio and look to partner with one or more entities to assert our rights and monetize these assets. On digital assets, including PhunCoin: Digital assets will also be part of our strategy moving ahead. Given the expansion and broader acceptance of Bitcoin, Ethereum, and other digital assets, along with what we believe to be increasing regulatory certainty, we believe it’s the right time to refocus on this area as part of our software offerings. We have been a public company pioneer in the digital asset space. For example, we created our own native tokens, PhunCoin and PhunToken, as well as the PhunWallet application. We've made significant progress on implementing our digital assets business strategy by mid-2022. Increasing regulatory uncertainty and unexpected market events led us to pause until now. It will take us time, but we are committed to building a successful, multifaceted digital assets business with differentiated offerings. Today, we confirm some initial steps for our digital assets business strategy: Number one, issuance of PhunCoin. We will finalize the structure of PhunCoin and its ecosystem, solidify the role of PhunToken within the system, and complete our initial issuances of PhunCoin at the earliest opportunity. We are engaged in the necessary work to get this done. We may make changes to PhunCoin and the ecosystem that we believe will benefit our stakeholders. Number two, we've developed IP that will take our digital assets strategy well beyond just coins and tokens. For example, we have been issued U.S. patent 11829996, a hybrid organizational system for data management. We have applied for a patent called the global crypto passport, which we believe will be essential for connecting traditional financial institutions to the crypto ecosystem. In summary, we believe we have solved many of the challenges facing the company. 2023 is in the past and we are moving ahead. Unencumbered by debt, with the right management team in place, and with access to capital, our goal is to deliver results with sober, responsible execution in building long-term shareholder value. I would like to open up the call now for questions through the operator. Operator, please go ahead.

Certainly. Everyone, at this time, we'll be conducting a question-and-answer session. Your first question is coming from Darren Aftahi from ROTH MKM. Your line is live.

Hi, Mike. Hi, Troy. Thanks for taking the questions, and good to hear this strategic focus going forward. If I could ask a couple? I guess, first, when you think about the Software as a Service business, you guys have made inroads into the three kind of verticals you talked about. I guess, now that you sort of got some of the heavy lifting done with restructuring the company, where do you see the most opportunity in those three verticals? And then, I guess my second question, as we think about the mix of revenue going forward, how impactful is digital assets going to be on your 2024 P&L? Or is that going to be more of a long-term strategy? Thanks.

Hey, Darren, it's Mike, and thanks for the questions. So, let me start with the first one, which is what verticals do you think are most promising within the software business. Think of our software portfolio as a digital companion to an in-person experience. And so, we've identified and have traction in hospitality, where people maximize the value of the big investments they make in going to a resort property. Number two, in healthcare, where it's critical that clients get to their appointments on time and access the information they need. And then, within the connected workspace segment, where it's important for employees to access various services on complex corporate campuses. You can extrapolate this concept to many different things: university campuses, arenas, and historic airports, et cetera. We believe we can deliver an end-to-end guest experience specifically in hospitality, given the nuances and systems in place for major resort properties. There are several hundred large resort properties globally, and we're going to focus on that in the immediate term while being opportunistic in the other segments identified. Regarding the impact of digital assets, we expect it's going to take some time to get this right. I'm personally very bullish on the idea of the global crypto passport. I'll be at the ROTH conference next week discussing this with investors. Our thoughts are still crystallizing, but I believe we are onto something when connecting legacy financial institutions to the crypto ecosystem. We'll have more material to share then regarding our vision for this segment.

Great. And then just two more if I may. Your legacy SaaS business had some channel partner relationships. Now that you've figured out headcount, how important is that to growth going forward? And I know you talked about M&A being important in the go-forward strategy. I'm more curious if that is a horizontal or vertical endeavor. Thanks.

Sure. Channel relationships remain very important to us. As I mentioned on the last earnings call, about 30% of our pipeline comes from channel partners, typically systems integrators and those proposing large, complex technology solutions for new buildings or renovations. So that remains essential. On the M&A front, we're looking at targets that can potentially provide us with acceleration for feature functions and integrations in hospitality and healthcare spaces.

Great. Appreciate the color. Thanks, Mike.

Thank you. Your next question is coming from Scott Buck from H.C. Wainwright. Your line is live.

Hi, good afternoon, guys. Thanks for taking my questions. Mike, I was hoping you could expand a little more on that last question. I'm curious about any real changes in your approach to sales on the location platform versus the last regime.

Yeah. Based on our staffing size, we need to be smart about creating distribution leverage. I've brought on a couple of experienced individuals who are effective in both selling and leading the sales function. We'll invest in demand generation and other traditional B2B marketing techniques to serve our direct sales force. Additionally, I'm personally going on the road and having discussions with ecosystem players specific to hospitality. I've already conducted one meeting and have another after the ROTH conference. These are potential partners with large sales forces who could take our solution to market as a complementary product offering.

Perfect. That's helpful. And then, in terms of business cadence from here, it sounds like all the noise is in the past, and from here on out, we should look at this as a fresh restart on the business. Is that fair?

I’ll ask Troy to answer that because I need to take a sip of water, but I think you're probably right.

Okay. Thanks, Mike. Scott, thanks for the question. Yes, we're looking at this as a restart. When I joined in June, we had done a lot of heavy lifting, and we've accomplished most of it. We've got our costs under control and a plan to breakeven. One issue we faced was the potential NASDAQ delisting for trading under $1. We did a reverse stock split, and I can share that we received a letter from NASDAQ confirming we're back in compliance. We'll file an 8-K on this soon. So, we've come out of this period by cleaning up the cost structure, balance sheet, and maintaining liquidity options.

Great. Thanks for that, Troy. And I guess last one. In terms of the current cost infrastructure, how much support does that give you as revenue begins to ramp? Are we at trough levels, or can you hang on to this while revenue grows 2x or 3x?

Good question. We’re in the early stages. I believe we’ll have to make some investments as we grow, starting modestly ramping midyear. We will evaluate the backlog and invest accordingly. We’ll be conservatively aggressive but want to ensure we’re not getting ahead of our revenue stream to avoid burning too much cash.

Thank you. Your next question is coming from Ed Woo from Ascendiant Capital. Your line is live.

Yeah, congratulations on all the progress on the turnaround. My question is, what are you seeing in terms of the sales cycle in your business? As you have reached a much better state of the company, has that improved during your presentations to potential clients?

We're starting to see evidence of improvement. Part of our strategy relies on the organic sales force and third-party distribution represented by partners. These types have different sales cycles and maturities. Our job is to better identify direct sales opportunities. We’re implementing referral programs from existing happy, satisfied customers. Recently, we launched a project under the Marriott umbrella, and the implementation went well. The general manager expressed satisfaction and introduced us to another resort manager, which has matured quickly, likely closing within 45 to 60 days. We also have incremental demand from existing customers, and we’re employing a strategy that identifies direct deals alongside channel opportunities.

Great. Well, thanks for all the detail, and I wish you guys good luck. Thank you.

Thank you, Ed.

Thank you. Your next question is coming from Howard Halpern from Taglich Brothers. Your line is live.

Congratulations on all the hard work you've accomplished so far. Could you provide some color on ideal size within the different verticals? Are you looking at smaller deal sizes initially to encourage incremental growth with new customers?

Actually, we're going the opposite direction. We're adjusting how we communicate our value to customers. Specifically, in hospitality, we aim to turn our digital companion into a revenue-generating concierge service. We have data from customers showing they generate hundreds of thousands per quarter through our application. We're focused on capturing that value and bundling in deeper customer success, allowing customers to extract more without increasing staff. We expect our ticket size to go up as the strategy unfolds, but it’s early days, and I don't want to be definitive until we have more data.

Can you talk about your engineering and software teams? Have they developed a methodology for quicker implementations compared to the past? How does that relate to potential growth opportunities?

They have. We've identified methods to compress implementation timeframes and effort. This comes from updates to our app framework and identifying capabilities that allow us to ingest data more efficiently. We’re committed to decreasing the time to market and associated costs with delivering solutions. You bet. Thank you, sir.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.