Phunware, Inc.
Q2 2019 Earnings Call Transcript

Published: 15 Aug 2019

[Operator:]

Greetings, and welcome to the Phunware Second Quarter 2019 Earnings Audiocast. This call has been pre-recorded, so there will be no question-and-answer session upon its completion. I would now like to turn things over to your host, Marcus Chan, Phunware’s Director of FP&A and a member of its Investor Relations team.

[Marcus Chan:]

Thank you and welcome to Phunware's inaugural Earnings Audiocast presenting our financial results for the second quarter of 2019. I am Marcus Chan, Phunware’s Director of FP&A. Joining me today are Alan Knitowski, Co-Founder, Chief Executive Officer and President; Randall Crowder, Chief Operating Officer; and Matt Aune, Chief Financial Officer. The format today will include prepared remarks by Alan, Randall and Matt.

[Alan Knitowski:]

Thank you, Marcus. Good afternoon everyone and thank you for joining us on our first Earnings Audiocast as a public company. I want to welcome many of you who we have met over the last 10 years and have supported Phunware on our journey first as a private company and now as a publicly company trading on Nasdaq as PHUN. For those new to our story, I’d first like to give a quick overview of what Phunware does, including the capabilities of our platform and our overall business model and strategy. Phunware is the pioneer of Multiscreen-as-a-Service, or MaaS, a fully integrated enterprise cloud platform for mobile that provides companies the products, solutions, data and services necessary to engage, manage and monetize their mobile application portfolios and audiences globally at scale. Phunware helps the world’s most respected brands create category-defining mobile experiences, with approximately one billion active devices touching our platform each month. Founded in February 2009, Phunware helps brands transition from the web to mobile by enabling enterprise-level mobile applications through its MaaS platform, including the software, data and infrastructure needed to support these mobile application portfolios on Apple iOS and Google Android devices, including smartphones, tablets, wearables, smart televisions and digital signage. Our ideal customer is a Fortune 1000 brand that standardizes on our MaaS offerings for all of their mobile initiatives and needs, much like they would standardize on Microsoft Office for their productivity software or Salesforce for their CRM. Over the past 10 years, Phunware raised over $100 million in private financing from notable investors including Cisco Systems, Samsung, PLDT, WWE, Firsthand Technology Value Fund, Wavemaker Partners, Maxima Ventures, Fraser McCombs Ventures, Khazanah and the Central Texas Angel Network amongst many others, while providing Fortune 1000 brands everything they would need to succeed on mobile.

[Randall Crowder:]

Thanks, Alan. Q2 was a continuation of our corporate strategy to grow responsibly while ensuring that we are operationally efficient. Our current strategy actually dates back several years when we exited over $24 million of low-margin application transaction business and focused on backfilling that with higher margin platform subscription and services deals, as well as data enriched application transaction campaigns. To that end, we finished 2018 with approximately $25 million of backlog, which represented a complete replacement of the prior low-margin application transaction business, even though we require one to five years for forward revenue recognition against these contract wins and terms. Throughout 2019, we have accelerated our efforts to reduce our burn rate and streamline our operations, which ultimately reduced our OPEX spend by 11% year-over-year. Our cash used in operations improved 57% quarter-over-quarter as we continue our efforts toward reaching break-even on both operating cash and adjusted EBITDA. Many brands struggle to transition from having a mobile application to having a true mobile strategy because they are managing numerous vendor relationships, with numerous point solutions, that were never designed to be interoperable. Phunware enables brands to power their entire mobile strategy, with a single vendor relationship to ensure accountability and responsiveness. With MaaS, a brand can access all of the proven features and capabilities that we have developed over the past decade to deliver everything you need to succeed on mobile. During the quarter, Frost & Sullivan recognized Phunware with its 2019 North American Company of the Year Award for MaaS. A Frost & Sullivan executive commented

[Matt Aune:]

Thanks, Randall and good afternoon everyone. In addition to our second quarter results, I would like to take a few minutes to share more about Phunware and how we engage with our customers. Our business is geared toward driving platform subscription bookings while building our deferred revenue and backlog. We license our MaaS platform to customers under one to five-year contracts, consistent with a Software-as-a-Service business model, in which we typically invoice annually, prepaid in advance. If a customer engages us to enhance an application with our SDKs, Application Programming Interfaces or custom services, we provide software licensing, application development services and support and maintenance subscriptions which are then invoiced in advance and added to deferred revenue. Revenue is then recognized in accordance with ASC 606, once the company has satisfied its performance obligations. The timing of revenue recognition is determined by the period over which these obligations are met, either on a one-time basis or ratably over time, often representing 12 to 60 months for one to five-year contract terms. We implemented ASC 606 effective the first quarter of 2019. The new revenue standard has allowed us to recognize the application development services at the time of delivery to the customer versus ratably over time as we did under the old revenue standard, ASC 605. We typically pay sales commissions upon bookings, but with the implementation of ASC 606, the costs are matched with the timing of revenue recognition, aligning sales commissions over the period commensurate with the revenue. The net effect of these changes is that we removed $718,000 from deferred revenue, added $369,000 to prepaid expenses for sales commissions and added $1.087 million to accumulated deficit. As a result, we will not recognize $718,000 in net revenues over the applicable contracts’ terms. Backlog represents future amounts to be invoiced under current agreements and is a key business metric for us to measure the health of our business going forward. Together, deferred revenue and backlog represents the total billed and unbilled contract value that has yet to be recognized in revenue, and it provides us visibility into future revenue streams, along with insight into the diversification of our revenue. In Q2, Fox Network Group and Houston Methodist accounted for 57% and 8% of net revenues, respectively, but our backlog and deferred revenue is widely more distributed, with our top five customers accounting for 50% and no single customer accounting for more than 17%. Net revenues totaled $5.5 million, of which non-GAAP adjusted platform subscriptions and services revenue was $5.1 million, increasing 17% year-over-year, while comprising 92% of net revenues. We are excited that our platform subscriptions and services revenue increased for the 6th consecutive quarter. Non-GAAP adjusted gross margin was 51.2% compared to 47.2% in the same period last year. We have made a conscious decision to focus the business toward higher margin software and data deals and away from lower margin legacy application transactions. We are pleased to see overall Non-GAAP gross margins continuing to rise year-over-year as a direct result. Total GAAP operating expense was $5.7 million, down from $6.5 million for the same period last year, as we continued to streamline our business and limit our overall losses. Non-GAAP adjusted EBITDA loss was $2.4 million, a $1.2 million improvement year-over-year. GAAP net loss for the quarter was $3.1 million, or $0.08 per share, a 34% improvement quarter-over-quarter sequentially. Please note that our Non-GAAP adjusted net revenues and gross margins are adjusted by excluding items from net revenues that are one-time in nature, including, but not limited to, forfeited customer deposits and contract settlements. As a reminder, our earnings press release, its accompanying Form 8-K filing and the investor relations portion of our website at investors.phunware.com all provide a full reconciliation of our GAAP to Non-GAAP financial results. Before I turn to our balance sheet, I’d like to first highlight how the dual token structure that we launched during the second quarter operates for PhunCoin, our regulated security token, and Phun, our utility token, within our MaaS blockchain platform offerings. Namely, and as previously stated in our prior press releases and filings, PhunCoin security tokens remain a regulated store of value that afford fractional interests in our blockchain-enabled data exchange, including any dividends. To date, there continues to be limited accounting guidance around both security and utility tokens alike. However, we reanalyzed the economic characteristics of the PhunCoin Rights issued as they relate to our dual token economy and ecosystem. As a result, we have reclassified the $1.2 million that we received previously for PhunCoin Rights from deferred revenue to a liability of PhunCoin deposits. Our current belief is that once PhunCoin has been issued to the Rightsholders and custodied in their digital wallets, that the PhunCoin deposit liability will be further reclassified to a non-controlling equity interest on our balance sheet. We will continue to monitor all relevant accounting guidance from authoritative governing bodies worldwide regarding both our coin offerings and sales and will adjust accordingly should circumstances dictate. With the change reclassifying PhunCoin from deferred revenue, our Q2 ending deferred revenue was $7.1 million compared to $8.3 million in the same period last year. Ending cash for the quarter was $248,000 with $1.7 million of cash used in operations. This represents a 57% reduction in operational cash burn compared to last quarter sequentially and is consistent with our internal focus to drive to cash neutrality from operations by year end 2019. As Alan mentioned earlier, we do not intend to issue equity at current prices to raise cash for either organic operations or inorganic acquisitions. While our board has authorized us to issue up to $20 million in convertible five-year notes, as of today we have only issued $250,000 of these convertible notes and do not expect to be continuing their issuance in the near-term. We will remain open to exploring debt options for the company should we source any credit facilities that we deem attractive for organic or inorganic growth but have no specific plans or details to share currently. Looking ahead, we are well positioned with our SaaS, data and blockchain offerings to deliver true digital transformation for our customers. As we continue to win deals and help customers enhance their mobile experiences, we intend to drive revenue and gross margin expansion to reduce our operational cash burn to zero by the end of 2019 and move toward break-even on an adjusted EBITDA basis in the first half of 2020. With that, I’ll turn things back over to the Host.

[Operator:]

We have reached the end of today's prepared remarks. As a reminder, there will be no question and answer session, so this concludes today’s Earnings Audiocast. Please visit and monitor investors.phunware.com for the latest information on the company. Additionally, please visit Phunware executives at the Essex House in New York City from September 16th through September 17th for the Fall Investor Summit. Thank you.

[End of Q&A:]