Good day and welcome to the Smith Micro Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Charles Messman, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, operator, and good afternoon everyone. We appreciate you joining us today to discuss Smith Micro Software's financial results for the second quarter ended June 30, 2022. By now you should have received a copy of the press release with the financial results. If you don't have one and would like one, please visit the Investor Relations section of our website at www.smithmicro.com. On today's call we have Bill Smith, our Chairman of the Board, President and Chief Executive Officer; and Jim Kempton, our Chief Financial Officer. Please note that some of the information you'll hear during today's discussion consists of forward-looking statements, including without limitation those regarding the company's future revenue and profitability, our future plans, new product development, new and expanded market opportunities, future product development, migration and growth by our new and existing customers, operating expenses, company cash reserves and the expected impact of last year's acquisition of Avast Family Safety Mobile Business on our business strategy, operations and financial positions going forward. Forward-looking statements involve risks and uncertainties which could cause actual results or trends to differ materially from those expressed or implied by forward-looking statements. For more information, please refer to the risk factors included in our most recent filing Form 10-K and in our subsequent filings on Form 10-Q. Smith Micro assumes no obligation to update any forward-looking statements, which speak to our managers' beliefs and assumptions only as of the date they are made. I want to point out that in forthcoming prepared remarks we'll refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. That said, I'll turn the call over to Bill. Bill?

Thanks, Charlie. Good afternoon and thank you for joining us today for our 2022 second quarter conference call. Over two years ago, in February of 2020, Smith Micro embarked on a mission to take over absolute industry leadership in the delivery of Digital Family Lifestyle solutions for wireless carriers around the world. The first step of this journey was the acquisition of Circle Media’s carrier business, through which we gained contracts with T-Mobile, US and Sky in the UK. A little over a year later, in April of 2021, we concluded the second acquisition, this time acquiring the Avast Family Safety business, securing additional contracts with Verizon, AT&T, and Wind Tre, a Hutchison property in Italy, as well as additional business with T-Mobile US. While the additional contracts significantly expanded our business space, the acquisitions also provided significant intellectual properties which afforded us the opportunity to leapfrog our product offering to be the absolute best available. As we have discussed on prior investor conference calls, when we set out to consolidate the best features of the acquired technology into our SafePath Digital Family Lifestyle platform, we had to significantly grow our engineering teams to meet that goal. The exciting news is that we are quickly approaching the completion of our mission. In March of this year, we completed the integration of the best of the Circle code base, which culminated in the launch of the first release of SafePath 7. We are now about to complete the integration of the best of the Avast code base into SafePath 7 as well. This has been a massive undertaking for our engineering teams and the successful completion will allow us to migrate all of our customers to the same SafePath platform going forward. The achievement of the migration will also result in another profound effect on our business, as it allows us to significantly reduce our operating expenses beginning in the current third quarter. We expect that the full effect of the cost optimization will be realized by the start of the second quarter of 2023. As we have stated during our previous earnings calls, since the acquisition from Avast, we also anticipate a rebound of our gross margins into the 80% to 90% range after all customers are fully migrated. The resulting profit margin should fall in the mid-20% range. None of this is new as we've stated this consistently since the acquisition from Avast. What is new is that we are at a point in time when the mission is virtually complete, and the acquisition synergies can start to be realized. We expect to release the last build of the legacy Avast Ring platform in Q4 of this year, with required updates to support the latest Android and Apple iOS releases. There will be no new releases of the legacy Circle platform, and we will officially end of life the Avast platform in mid-year 2023, by which time we will have no remaining customers on the platform. This means that all customers will be operating on the SafePath platform. Overall, we are anticipating that these synergies would result in a quarterly operating expense reduction of over $3 million versus Q2 2022, by the end of Q1 2023. Now, a quick recap of our Q2 quarterly results. Revenue of $12.7 million for the quarter came in relatively flat when compared to Q1 2022. This revenue softness represents the continued decline of legacy Sprint revenues from both the CommSuite and Safe & Found product families. Sprint CommSuite revenues were essentially gone by Q3 2022. The non-GAAP loss was slightly higher than guidance due to additional contract engineering being deployed to complete the migrations to SafePath. As you can tell, we've been quite focused, and we are very excited to begin the next phase as a company—a period that should bring strong recovery, operating results, and exciting growth for the company's business case. Now, let me turn the call over to Jim to detail our second quarter results. Jim?

Thanks, Bill, and good afternoon everyone. We acquired the Avast Family Safety mobile business in April 2021, which influences the comparisons I will discuss today. Now, I'll go over the financial details for the second quarter of 2022. For this quarter, we reported revenue of $12.7 million, down from $15.9 million in the same quarter last year, a decline of about 20% due to decreased CommSuite and Family Safety revenues. Compared to the first quarter of 2022, revenue remained nearly unchanged. Year-to-date revenues through June 30, 2022, totaled $25.4 million, compared to $27.3 million during the same period last year. The $1.9 million decrease stems from a decline in CommSuite revenues, mitigated by the increase in Family Safety revenues following the acquisition. Family Safety revenue decreased by roughly $1 million or 9% from the same quarter last year, mainly due to a reduction in revenue from the legacy Safe & Found platform related to the attrition of legacy Sprint subscribers after T-Mobile's acquisition of Sprint. Compared to the first quarter of 2022, Family Safety revenues decreased by 2%. In the second quarter, CommSuite revenue was $1.4 million, down approximately $2.5 million from $3.9 million in the second quarter of last year. Revenue from CommSuite was stable compared to the previous quarter. The drop in legacy Sprint subscribers on the CommSuite platform is a result of subscribers moving to the T-Mobile network for voice services. As more subscribers leave the Sprint network, CommSuite revenues continue to fall. Given the current trends, we expect minimal revenue from legacy Sprint subscribers in the third quarter, after which we anticipate this revenue stream will be depleted. Boost, which was formerly part of Sprint, is now owned by DISH. Through our agreement with DISH during the first quarter, we are strengthening our relationship with DISH regarding the CommSuite platform, aiming to grow CommSuite subscribers over time. ViewSpot revenue was approximately $1.1 million for the second quarter of 2022, an increase of about $300,000 from the same quarter last year and up roughly 16% compared to the first quarter of 2022. ViewSpot revenue is made up of both fixed and variable elements. The fixed portion comes from license fees, generally recurring, while the variable portion relates to device and promotional campaigns, which are less predictable. With the launch of SafePath 7 in the first quarter at one of the Tier 1 US wireless carriers, and anticipated migration at another Tier 1 US carrier later this year, we believe we have significant opportunities to grow subscriber bases with our US Tier 1 carrier customers in the upcoming quarters. However, despite certain marketing efforts at specific carriers, we do not foresee a significant subscriber increase in the third quarter based on current activities. We expect growth to align with the timing of marketing initiatives planned by our carrier customers later this year. Therefore, we predict consolidated revenue for the third quarter to be down by 5% to 10% compared to the second quarter of 2022. For the second quarter, gross profit was $9.1 million compared to $12.6 million during the same period last year, with a gross margin of 71.5% compared to 78.9% in the prior year. The gross profit of $9.1 million for the second quarter was unchanged from the first quarter of 2022. In the third quarter, we expect gross margin to decline slightly by 1% to 2% due to the anticipated drop in revenue. Our long-term goal is to return gross margin to the 80% to 90% range. To achieve this, we will optimize the third-party applications and service contracts as we migrate our Family Safety carrier customers onto a single platform. Once we fully transition all carriers from the Avast Ring platform to our SafePath platform, we anticipate realizing synergies that will enhance our gross margins. Due to a revised migration timeline that Bill will address, we expect these synergies to be fully realized in the second half of 2023. Year-to-date gross profit as of June 30, 2022, was $18.2 million compared to $22.4 million for the same period last year, with a gross profit margin of 71.5% for the year-to-date period. GAAP operating expenses for the second quarter were $17.5 million, a decrease of about $200,000 or 1% compared to the previous year’s second quarter. This decrease was due to lower amortization expenses and acquisition costs, as the acquisition of the Avast Family Safety mobile business was completed in the second quarter of 2021, partially offset by rising contractor costs linked to SafePath migrations and severance costs in the second quarter of 2022. Year-to-date GAAP operating expenses ended June 30, 2022, were $33.6 million, an increase of $2.8 million or 9% from last year. Non-GAAP operating expenses for the second quarter were $14.1 million, up from $12.9 million in the second quarter of 2021, reflecting an increase of about $1.3 million or 10%. Sequentially, non-GAAP operating expenses rose by 6% from $13.4 million in the first quarter of 2022 due to rising contractor expenses associated with SafePath migrations, which amounted to approximately $1.4 million during the second quarter. We expect third quarter 2022 non-GAAP operating expenses to decline by 4% to 6% from the second quarter, as we anticipate completing the development for our SafePath migrations this quarter and expect to reduce nearly all development contractor resources by the end of this quarter. We have already started to ramp down resources related to the migrations and have released some of these resources in June and July. We also expect a more substantial decrease in operating expenses in the fourth quarter following the completion of these development activities. Non-GAAP operating expenses for the year-to-date period through June 30, 2022, were $27.5 million, an increase of $5.5 million or 25% compared to last year, largely due to the addition of the Avast business in April 2021. The GAAP net loss for the second quarter was $8.5 million or $0.15 loss per share, compared to a GAAP net loss of $5.2 million or $0.10 loss per share in the same quarter last year. The non-GAAP net loss for the second quarter was $5.1 million or $0.09 loss per share, compared to a non-GAAP loss of roughly $300,000 or $0.01 loss per share in the same quarter last year. The GAAP net loss for the year-to-date period was $15.5 million, or a $0.28 loss per share, compared to a GAAP net loss of $8.4 million or $0.17 loss per share for the previous year-to-date period. The non-GAAP net loss for the year-to-date period ended June 30, 2022, was $9.4 million or $0.17 loss per share, compared to a non-GAAP net income of around $400,000 or $0.01 of diluted earnings per share last year. In our press release today, we provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metrics. For the second quarter, the reconciliation includes adjustments for intangible asset amortization of $1.6 million, stock compensation expenses of $1.1 million, and severance-related costs of about $700,000, including approximately $600,000 in additional stock-based compensation. For the year-to-date period, the reconciliation includes adjustments for intangible asset amortization of $3.2 million, stock compensation expenses of $2.2 million, and severance-related costs of about $700,000. Due to our cumulative net losses over recent years, our GAAP tax expense mainly relates to certain state and foreign income taxes. For non-GAAP purposes, we applied a 0% tax rate for 2022 and 2021, with the resulting non-GAAP tax expense reflecting the actual income tax charge for each period. Our balance sheet shows $5.4 million in cash and cash equivalents as of June 30, 2022, with no borrowings under our line of credit, which had a maximum capacity of $7 million. Earlier today, we announced the completion of a $15 million convertible note transaction mainly with a capital management firm that has been a long-time shareholder of Smith Micro. We also entered an agreement to execute a $3 million equity offering, further supported by key participants. These transactions will enhance our liquidity as we finalize our migrations to SafePath, bridging the company to the expected revenue increase anticipated in the fourth quarter of this year and in 2023. In conjunction with the convertible note transaction, we ended the Wells Fargo revolving credit facility. The convertible note transaction has a maturity date of December 31, 2023, with amortization payments beginning April 1, 2023. Amortization can be settled in cash or equity at the company’s discretion; if paid in cash, the repayment is at 103% of the amortization installments. If settled in equity, the equity is subject to a discount from the market price during the amortization period. The notes carry a 6% interest rate, payable quarterly. The conversion feature is priced at $3.35 per share, offering a 12% premium over the average of the last five closing prices through August 10. Warrants were issued alongside the notes at the same strike price of $3.35 per share, with a five-year term and representing 50% coverage on the notes. Regarding the equity transaction, we expect it to close tomorrow, subject to standard closing conditions. Under this agreement, we will sell a total of $3 million worth of common stock at $2.65 per share, along with an equal number of warrants priced at $2.65 per share. Similar to the capital raised from the notes transaction, we anticipate using the proceeds from the equity offering for general corporate activities and working capital. For more information, please refer to the 8-K filed earlier today regarding these transactions. This concludes my financial review. Now back to Bill.

Thanks, Jim. I want to start by discussing our progress in consolidating our best acquired technologies into the SafePath platform and how this has streamlined our operations to help reduce overall operating expenses. Our path to profitability hinges on managing costs and growing customer revenues. Now, let’s turn our attention to our plans for revenue growth. Industry data shows that all three Tier 1 carriers in the US have between $15 million and $20 million multi-line family plan subscribers. There are many other subscribers interested in digital family solutions, but we will concentrate on the multi-line users first, as they are the most likely source for SafePath subscribers. We believe it's feasible to reach a SafePath subscriber base of 3 million to 5 million for each of our three Tier 1 customers by 2025. To accomplish this ambitious target, we've built a robust marketing team at Smith Micro to establish best practices for promoting SafePath. This team collaborates with our carrier customers to create coordinated marketing campaigns designed to grow each customer’s SafePath user base, which we see as a critical service we offer. Additionally, we have a strong product roadmap aimed at introducing innovative features to the SafePath platform. Similar to SafePath Drive and SafePath Home, these new capabilities will enhance our already leading solution. The SafePath platform offers a suite of turnkey family offerings that, if deployed effectively, can deliver significant revenue growth. Let’s review the updated project status by customer. As we noted in our last call, we successfully launched the first version of SafePath 7 at T-Mobile in late March, transitioning from the legacy Circle product. We continue to work closely with this customer as we prepare for the next phase, which will involve adding more features and functionality to drive subscriber growth. Although this phase has progressed more slowly than anticipated, the upcoming product enhancements should stimulate the subscriber growth we expect. We also advanced the legacy Safe & Found product onto the SafePath 7 platform, which we believe will help minimize the churn we’ve experienced in recent years and stabilize revenue for this offering. Looking at Verizon, we are focused on migrating the solution to the SafePath platform. Since our last call, the customer has requested an additional feature that is not essential for migration, which will delay the launch of Verizon on SafePath to late Q1 or early Q2 2023. However, the core SafePath development efforts for this client are nearing completion, allowing us to lessen our resource investment as I mentioned earlier. While I’m disappointed we won't be launching by year-end, I’m pleased with our progress. On the marketing front, we are implementing initiatives to create a long-term multi-channel approach to stimulate subscriber growth. Over the quarter, we launched various campaigns to raise awareness of Smart Family among potential new subscribers and the Verizon employee base. These campaigns are vital to our marketing strategy as we enhance our visibility across Verizon's organization, leveraging their existing infrastructure, like retail stores and digital channels. For instance, we are currently promoting a back-to-school campaign through multiple channels within Verizon. While there’s more to do, we are making solid progress in identifying Verizon teams and executing initiatives to prioritize the Smart Family platform, which should help drive subscriber growth. From AT&T’s perspective, we are optimistic about the opportunities ahead. Migration efforts are on track for a successful launch before the end of 2022. Our main SafePath development is nearing completion, which will help decrease our operating expenses in the future. We are also continuing awareness activities within different AT&T organizations to aid in marketing efforts, budgeting, and training support staff. Regarding ViewSpot, the development phase of ViewSpot Studio is complete, and we have upgraded our current customers onto the platform. Now, we will focus on growing ViewSpot revenues with a new set of features that improve the user experience in deploying retail campaigns and enhance analytical capabilities for real-time reporting of carrier retail operations. As Jim noted, our CommSuite solution in Sprint continues to decline as expected, with the revenue drop from this legacy business nearing completion. Meanwhile, we are making strides with DISH as they launch their new network offerings, which we see as promising for our product in 2023 and beyond. Before I finish, I want to briefly discuss the capital raise we announced earlier today. This capital management firm has been a significant shareholder of Smith Micro for many years. The capital raise consists of $3 million in equity funding and $15 million in convertible debt, which positions the company to bridge our capital needs into 2023, when we anticipate resuming free cash flow generation. This funding also replaces the $7 million revolving line of credit we had established with Wells Fargo Bank, which was terminated in connection with this capital raise. We appreciate the support of our capital partners, as we believe this raise allows us to position for significant growth in 2023. In conclusion, this is an exciting time for Smith Micro, our customers, employees, and shareholders as we complete a major consolidation project and advance as leaders in the Family Digital Lifestyle market for wireless carriers worldwide. There are vast opportunities ahead, not just with the major three in the US, but also with other Tier 1 carriers in Europe and globally. We are moving into a revenue growth phase that, along with our cost reduction efforts discussed today, should lead to profitability and strong free cash flow generation in 2023. Now, let’s open the floor to questions.

We will now begin the question-and-answer session. First question comes from Josh Nichols with B Riley. Please go ahead.

Yes, thanks for taking my question and elaborating on the status for all the different carriers. In your comments, you did mention that you were pretty optimistic that you're going to see a nice bump back to growth in the fourth quarter, any visibility you could provide into what's going on in terms of the marketing campaigns, specifically at T-Mobile and what gives you confidence that that company is going to flip back to growth before the end of this year?

Actually it's a combination of both T-Mobile and the efforts going on at AT&T. So it's not a single carrier driven event. I would say that we are working closely with both carriers; there are some strong plans in place, and we believe they will be successful. As I said in my prepared remarks, the result already on ongoing marketing efforts underway at Verizon, and we also expect those to bear fruit going forward as well.

And then last question. So I think I hit on the topline and the opportunities there. On the OpEx side, the company is going into cost reduction mode, now that most of the development work is done. Could you kind of just elaborate a little bit on the timing? I think you said like $3 million or something by mid-next year, is that $3 million a quarter that you're expecting to reduce operating expense from the Q2 run rate or how much is OpEx can come down over the next 12 months?

Yeah. Again in my prepared comments, everything is in excess of $3 million off of the OpEx run rate that we have for Q2. And it would be fully in effect we believe by the end of Q1 2023.

Got it. Thank you. And then last question, just as it was mentioned in the press release. I think you've talked about the three US carriers a lot, but you did also kind of hit on Tier 1 operators in Europe as well, any updates on that front?

There's a lot of that activity; as soon as we have something done, we will raise to the market as you know, but nothing we can talk about today.

The next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Hey, this is Kevin on for Eric. Thanks for taking my question. Kind of piggybacking off Josh's question. I know these Tier 1 guys have a big marketing push in the second half. Could you kind of help us to better understand the timing around that? Is that a maybe a Black Friday thing? And then overall, maybe just generally, what are you hearing from these carriers in terms of the health of the consumer and the appetite for family plans given inflation and whatever else they're battling right now?

It's a great question. But I'm not sure how I can answer it. It really is a question you should be asking the carrier, but let me try to give some color. I would say that our approach to marketing for SafePath going forward is a multifaceted approach. In other words, we wanted to see activity in the stores, in the care organizations, online, digital, etc. So it's a multi-pronged overall approach. And this is really based on history; we’ve seen this in the past, it was a technique that we saw developed during this very successful growth of the Sprint business a few years ago, and we believe it will work very, very well going forward. As far as the overall state of the industry, all the carriers have reported their earnings, and all – I’ve pretty much talked to that. So I don't know that I can add anything to your question there.

Okay. Sounds good. I guess I'll leave it at that. Thanks.

The next question comes from Jim McIlree with Dawson James. Please go ahead.

Thank you. Good afternoon. In times past you've talked about the carriers in Q4 focusing on subscriber additions rather than signing customers up for new services. So just wondering if you could talk about that dynamic relative to the AT&T launch, as well as getting more aggressive with T-Mobile in Q4?

That's a good question, Jim. And I will say this, that the primary focus of the carriers, especially at the retail point, is focused on customer acquisition and the selling of new plans and new handsets. That said, we still believe that there is a lot of work that can be done now on selling value-added services like what we're talking about with SafePath. When we now talk about—and I've given you some numbers for the first time, where we're looking at an installed base of 3 million to 5 million subs per carrier for the big three here in the US, you're now reaching a very meaningful number. If you look at the street price for the SafePath offering, it's about $10 per month recurring; you add in other add-on services like home and drive that goes on top as well as IoT. So we're not talking about a small amount of money; you can run the numbers yourself. If you're sitting with 5 million subs times $10 bucks, times 12, this is a meaningful number for any one of our three Tier 1 carriers. So this is something to stay focused on.

Thank you. Regarding the migration of the technology to a single platform, you mentioned that you have separate marketing and revenue contracts with the carriers. Do those contracts need to be renegotiated as part of the technology migration, or is that a separate discussion?

These are conversations that are ongoing with all of our customers. As we start to move forward and as we have now expanded out some of our service offerings, like all the added marketing service for best practices and things like that, there is an opportunity to look for additional revenue growth there as well. This is a process that will be ongoing. I don't think that anything that I've talked about as far as the growth of revenue in Q4 or in the beginning parts of 2023 are really dependent upon that. The revenue growth in these earlier periods are going to be driven off the fact that we now have all the customers on a much better product offering with SafePath 7 that gives them a lot more to sell to their customers, and we've already seen the response from customers at T-Mobile, they love the new products. So it's just a matter now of getting the marketing efforts to go along with all the positives.

Okay. And my last one. Jim, can you clarify what you said about CommSuite revenues? I thought you said that they go to zero in Q4, but don’t you still have Boost revenues from CommSuite?

No, I was speaking specifically about the legacy Sprint, T-Mobile revenue stream. So based on where we saw the run rates, especially coming out of June, we're expecting that to ramp down in Q3 and be very nominal if anything in Q4. Just—that's specific to the T-Mobile, Sprint revenue stream. The DISH side, we feel that's going to continue at its current rate, and we anticipate that in future periods we will have an opportunity to actually grow that revenue stream.

Hey, good afternoon and thanks for taking my questions. Maybe Jim just to quickly follow up on Jim's question. As it relates to CommSuite. So, T-Mobile and Sprint coming out of the equation, but how big was that in the second quarter? Just help us calibrate what that baseline number is. I thought we were kind of getting close to it in the past couple of quarters as it was. And then Bill, clarification on the 3 million to 5 million number or figure that you gave per carrier, was that accounts or was that subscribers that you thought were addressed? I just want to clarify that it was accounts for subscribers or adjustable with each carrier?

Yeah, why don’t you go first and I'll follow.

Okay. I'm going to answer it this way, Scott, in terms of what we saw is the exit run rate in June for this legacy Sprint, T-Mobile was under $100,000. So that gives you a pretty good sense of the decline that we were seeing coming out of the quarter. And again, we expect that to be down to nothing or next to nothing by the fourth quarter.

Got you.

Okay. Then Scott—restate your question –

I'm sorry, I just wanted to clarify, Bill, when you're talking about the opportunity of 3 million to 5 million per carrier that's accounts or is that subscribers? I was assuming it was accounts, but I wasn't sure.

Yeah, the way we look at it is a family is a subscription. So when we are talking about 3 to 5 million, we're looking at family coverage on a forward basis. And quickly let me add, as I stated, we think this is attainable by 2025. So we're going to go into a growth spurt as we go through ‘23 and ‘24 to get to that, so it doesn't happen all at once.

Got you. Perfect. And if I could, I'm not sure if I missed this, but in terms of a little bit of a pickup into the fourth quarter, did you give any idea as to the magnitude of how you expect that to pick up in terms of SafePath revenues as we go from September to December?

I will try to talk about that more as we get closer to the fourth quarter.

Got you. And then lastly if I could. Jim, in terms of the OpEx coming down, that's $3 million per quarter, given where you're expecting gross margins to respond to. I just want to make sure I'm thinking about this correctly that your breakeven then from an operating basis is in the $13 to $14 million range, and you're expecting to generate positive free cash flow in 2023. So a ramp above and beyond that as we get into the second half of next year, is that the right way to be thinking about this?

Yes.

Okay, perfect. All right, thanks guys.

Thank you.

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

Thank you, operator and thanks everybody for joining today. We look forward to speaking to you on our next call. If you have any questions, please feel free to reach out to us at Smith Micro. Hope everyone has a great day. Thanks again.

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