Smith Micro Software, Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Mar 2021

[Operator:]

Good day and welcome to the Smith Micro FoFurth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

[Charles Messman:]

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Smith Micro Software’s financial results for the fourth quarter and year-end for our fiscal 2020 year ended December 31, 2020. By now, you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit the Investor Relations section of our website at www.smithmicro.com.

[Bill Smith:]

Thanks, Charlie. Good afternoon, everyone, and thank you for joining us today for our 2020 fourth quarter and year-end earnings conference call. Overall, I am very pleased with what the team at Smith Micro accomplished in 2020. Let’s take a look at the results, which came in line with our expectations. For fiscal 2020, total revenue from operations increased 18% to $51.3 million compared to $43.3 million reported in fiscal year 2019. For the fourth quarter of 2020, revenue increased slightly to $12.4 million when compared to $12.3 million earned in the fourth quarter of 2019. Non-GAAP net income for 2020 fiscal year was $10.4 million or $0.24 per share. And for the fourth quarter, non-GAAP net income was $1.4 million or $0.03 per share. Importantly, we achieved continued positive cash flow from operations of $7.9 million for the year. As with everyone, 2020 was a challenging year. The global economic shutdowns caused by the COVID-19 pandemic definitely had an adverse effect on our business as the month-long closure of carrier retail stores temporarily paused a strong revenue pipeline for our business.

[Tim Huffmyer:]

Thank you, Bill. Before we review the results for the fourth quarter and fiscal year 2020, let’s review some further details on the recently announced acquisition. We entered into a definitive agreement with Avast and certain of its subsidiaries to acquire substantially all the assets of their Family Safety Mobile Software Business, including certain liabilities, along with all of the membership interest of Location Labs, LLC, a U.S.-based subsidiary. Further to Bill’s comments, the Family Safety Mobile Software Business will include the purchase of application source code, license rights to shared source code and both ownership and licenses to a patent portfolio. The acquisition includes five mobile operator contracts, which are mostly U.S. Tier 1 contracts, and an Avast partnership to join forces and further service current and potential customers together. The U.S. Tier 1 contracts are comprised of one large recently renewed contract and several legacy product contracts with declining revenue as those customers are phasing out Location Labs with some carriers moving onto the SafePath platform. In order to service these new customers and the separate product offerings, we will acquire approximately 140 employees from Avast. Those employees are located in the United States and Serbia, which are existing locations for Smith Micro; and the Czech Republic and Slovakia, which will now become two new strategic European locations. All of these markets provide an impressive talent pool necessary to continue Smith Micro’s product development and growth.

[Bill Smith:]

Thanks, Tim. Since Tim has provided color on our three core products, I won’t spend time on them on this call. Instead, I will concentrate on the acquisition as I’m sure you have many questions. Let’s look at the acquisition from a 30,000-foot perspective, why we did the deal and how we see it as transformational for Smith Micro. The acquisition of the Avast Family Safety Mobile Business clearly positions Smith Micro globally as the number one family safety software provider to wireless carriers. To give you some perspective on market size and where we see opportunity, we estimate that the total annual carrier revenue from digital safety solutions was approximately $1.1 billion in 2020. This value is projected to nearly double to more than $2 billion in 2023. The transaction is immediately accretive and further diversifies our customer base. We believe that the collaboration agreement we now have in place with Avast will create significant new growth opportunities for Smith Micro as it enables us to further penetrate our carrier accounts with new IoT security offerings that complement our Family Safety portfolio. The Avast Family Safety Mobile Business has its roots in the Location Labs technology platform, which Avast acquired through its merger with AVG Technologies in 2016. Location Labs pioneered mobile safety solutions for the carrier market and holds a number of patents covering various mobile technology innovations, including geolocation. The business unit we are acquiring employs more than 140 individuals, which are based in Slovakia, Serbia and the Czech Republic in Europe and in Emeryville, California in the U.S. When compared to our SafePath Connected Lifestyle Platform, Avast Family Safety mobile product line has a very complementary feature set and customer base. Once the acquisition closes, it is our plan to operate SafePath and the acquired Family Safety as two separate product lines in the interest of making this consolidation easy for our customer base to digest and in the interest of putting the needs of our customers first. This approach, which is different from the full integration we completed after the Circle transaction in 2020, will enable a seamless transition in the near term as we learn more about the acquired Family Safety platform, its features, the needs of our acquired customers and the platform’s future potential. We are confident that this is the best path forward as it will allow us to maximize revenues from existing carrier contracts while we blend both talent teams over time to optimize the future of our Family Safety portfolio. While this approach will take time, we feel it is necessary to successfully combine the experience and market presence of Avast with the knowledge, expertise and market leadership of our SafePath team. Just as important, this acquisition will also benefit Smith Micro from a customer marketing and user acquisition perspective. As underscored by the retail closures of 2020 due to the pandemic, digital customer acquisition has never been more important. By blending the talents, experiences and strategic relationships of our combined teams, we will optimize the efficiency and bottom line impact of our digital product marketing efforts. While Smith Micro has successfully completed many transactions over the years, this is our largest one to date. I couldn’t be happier that both sides are benefiting so much from this acquisition. Overall, 2020 was a very successful year for Smith Micro as we remained profitable, generated cash from operations and grew year-over-year revenue. On top of these achievements, we diversified our carrier customer base by signing multiple new greenfield contracts for both SafePath and ViewSpot, opportunities that are loaded with expansion potential. We acquired Circle’s operator business, a deal that strengthened our competitive position in the family safety market, accelerated our SafePath roadmaps and generated more than $4 million in revenue during the fiscal year. By successfully integrating Circle’s parental controls into SafePath, we made good on our vision to bring a full-featured family safety solution to market. We also greatly expanded the utility and total addressable market for our ViewSpot platform, an investment that enables us to sell diverse flavors of the platform based on the specific needs of the carrier. As you can imagine, I am very confident regarding our business case and competitive position as we move into 2021, which has been significantly expanded with the acquisition of the Avast Family Safety Mobile Business. Once the deal is complete, we will have added Verizon to our Family Safety customer list, positioning us as the dominant player in the United States. The acquisition will also accelerate our vision of European expansion, a region that signifies great upside for Smith Micro as we broaden our operator-focused Family Safety business on a global scale. Armed with an impressive customer portfolio, extensive financial resources and a diverse sales pipeline and a talented global staff of professionals, Smith Micro is poised to soar even greater heights in 2021. With that said, I will open the call for questions. Operator?

[Operator:]

Our first question comes from Josh Nichols with B. Riley. Please go ahead.

[Josh Nichols:]

Hi Bill. Well, first off, congratulations on the accretive Location Labs announcement coming out this afternoon. I did want to ask, I think you hit on it briefly, could you provide us also with a little bit of an update on T-Mobile and the opportunity that represents for the Company as we think about the back half of this year and really longer term in 2022 as well?

[Bill Smith:]

Sure, Josh. Things are going really well with T-Mobile. A lot of planning going on, lots of joint meetings between our team and the T-Mobile team. We continue to look for a launch of the new SafePath 7 offering, which will be called FamilyMode, and that that product will launch midyear as planned. We are quite excited about it. We think that this will allow T-Mobile to really start to focus on a single family safety offering going forward. I think the fact that we have now just announced the acquisition of the Avast product as well will make it even simpler from the Ts-Mobile standpoint to get all their various offerings unified with the new SafePath 7. I think, this is going to be just a great opportunity. We look for super growth out of T-Mobile as we head into the back half of ‘21, and we expect some really big outcomes going forward. Clearly, T-Mobile is a carrier with a lot of energy, a lot of excitement, a lot of growth. And we’re really pleased to be part of it. And we think that the FamilyMode 3.0 is just going to be a fabulous offering.

[Josh Nichols:]

Thanks for providing some additional color on that. Good to hear things are providing on track there. Also you did mention a really interesting collaboration agreement here with the strategic partnership. Could you talk a little bit about really the opportunities that that could create for Smith Micro, particularly since Avast has a lot of carrier relationships and a really strong presence, particularly in Europe?

[Bill Smith:]

Yes. We’re really excited about this as well. It’s early on in the conversations with Avast. Some of the early talks were between myself and my counterpart there. And one of the Ondrej’s final questions that we got into was, you guys are in IoT space, do we compete, and explain to them what we did that we viewed the digital family lifestyles have been not only family safety, but bringing in all the new wearable consumer IoT devices. And then from a single app, you could run the whole thing. And he goes, wow, okay, that you’re taking a totally different approach than we are. What we’re looking at from a consumer IoT standpoint is the safety or the security and in keeping the home network secure. And I said to them, I said, I think we have just identified an area where we can partner, not compete. And we both really thought this was a great idea. We had expanded that through the process. And I think that we look forward to joining hands as we really look at how to service the wireless carriers and the cable MSOs going forward. They need both, family safety and device and security whether it’s a device or network. And we lead family safety, they lead security, joined hands and working together, we can create amazing products. And we think this really will work out very well for us.

[Josh Nichols:]

Thanks Bill, congrats again. I’ll pass the baton and let someone ask some questions. Thank you.

[Bill Smith:]

Thanks, Josh.

[Operator:]

The next question is from Scott Searle with Roth Capital. Please go ahead.

[Scott Searle:]

Congratulations on the deal, Bill.

[Bill Smith:]

Thanks, Scott.

[Scott Searle:]

Real quickly, in terms of the Avast model, I just want to clarify, unlike Circle, Avast is a subscription or per user-driven model. Is that correct? And then, I think you referenced as well that Avast has -- there are some European relationships that come along with it. I don’t think you’ve named the carriers. But, could you give us an idea in terms of the size of some of these carriers? Are these pan-European carriers, or how should we be thinking about that?

[Bill Smith:]

Yes. Okay. Let’s take the first part of your question there, Scott. Yes, Avast marketed it in a mode that’s very compatible with us. It was all a subscriber monthly fee. So, it’s a SaaS model, it’s recurring. It is just very consistent with how we do business. So, that works very, very well. Yes, there are a couple of carriers that will be joining our lineup as a result of this transaction. First off, there’ll be the Vodafone Czech group will be offering family safety and then be using our software going forward, as well as Wind Tre, part of the Hutchinson Group, is based in Italy, and they also will be working with us. So, that’s a nice add to our lineup of carriers. And we look for many, many more in the European market. And even beyond that, I mean, we’re also very heavily focused on the Middle East. And a few weeks ago, we announced the launch at Ordu of our SafePath product. And it’s off and running. And I think there’s a lot of energy there. We think there’s a lot more opportunities in the Middle East as well. So, when you combine the Middle East with the European markets, we just see some really significant growth going forward, and we think this transaction helped us quite a bit.

[Scott Searle:]

Hey Bill, just to quickly follow up, and then I’ll get back in the queue. But, just in terms of the pipeline, you referenced a little bit off of that with Ordu, which you announced I think a couple of weeks ago. You’ve had TELUS. You’ve got DISH now starting to ramp up as well. I’m wondering if you could talk a little bit about the pipeline, how broad it is. And I know it’s early. But, looking at the competitive landscape now, you’ve consolidated the North American landscape. What does the rest of the European continent look like in terms of the competition out there? Is it going to be mostly greenfield opportunities that you’re chasing as it relates to the SafePath family of products? Thanks.

[Bill Smith:]

Sure. Look, I think we will find many greenfield opportunities, but we also think we can find somewhere they’ve had some efforts underway. So, we’re looking at both. We talked in the last call that we have signed four new carrier contracts, one in the ViewSpot area. We’ve put a release out talking about. We weren’t able to name names and still can’t really because that’s the wishes of our customer is off and running. And we think it’s just the first country in a very large European carrier. So, we look for growth off of that. We also talked about the fact that we have signed deals with three new SafePath customers. Ordu is now named and out there. The others are in process. I’m not convinced yet that we’re going to be able to give you the names. We hope we can, and you’ll just have to stay tuned. But we’ll -- things are going quite well. We’re pretty excited about where we are in general. And clearly, adding the Avast business -- Location Labs is the company that started all this years ago, and they owned all of the U.S. carriers at one point. We now, as a result, have control of all of them in our side. So, I’m pretty excited about the whole thing.

[Operator:]

The next question is from Eric Martinuzzi with Lake Street. Please go ahead.

[Eric Martinuzzi:]

Yes. I had a question about the revenue. I think you said $18 million to $19 million. Is that a 2021 full 12 months year, or is that the remainder, assuming an early Q2 close?

[Bill Smith:]

Yes, Eric. $18 million to $19 million reflects the forecast that Avast had given us for the entire year. Obviously, we will have a portion of that year, not all of it. We do expect to close in the next 30 to 45 days. So, it’s kind of looking like sometime in April. And so, we’ll have to prorate that. And that’s the go-forward revenue that is recurring. There will be still some legacy revenue, and we will hope to maximize that. Clearly, from a valuation standpoint, the valuation of the business was solely based upon the recurring revenue going forward. The legacy revenue was completely discounted out.

[Eric Martinuzzi:]

Okay. So just kind of blunt instrument on EV to revs, we’re talking $66 million over that $18 million to $19 million. Is that what you’re -- the point you’re making?

[Charles Messman:]

Okay. Yes. That’s correct, Scott.

[Eric Martinuzzi:]

Okay. Thanks, Charles. I wanted to dive into the customers that you picked up here. Obviously, we’re getting five mobile operator contracts. You mentioned Verizon, the two EU carriers, which you’ve named. You mentioned T-Mobile-Sprint, and then you mentioned AT&T. This -- you also mentioned that the revenues in decline in 20 -- was a decline in 2020 versus 2019. Can you give us any detail on where the decline was coming from, and is that expected to -- does the 2021 revenue outlook that you gave color on, does that include further decline? Where is the business kind of based? I guess, there’s a couple of questions in there.

[Bill Smith:]

Sure. First off, there was a decline for Avast from ‘19 to ‘20 of about 17%. That decline was really led by our efforts at T-Mobile-Sprint. T-Mobile-Sprint was basically leading their business that they were doing with Avast. And it was probably -- it was just on a wind-down mode where ours was growing. So that negatively impacted them. One nice thing to point out is their contract with Verizon was just recently re-upped. And so, it’s a multiyear contract, and we look forward to a long and prosperous business relationship with Verizon. AT&T, we do also include in the legacy category, and we will be working with AT&T to try to understand better their goals going forward.

[Eric Martinuzzi:]

Does that $18 million to $19 million in ‘21 include some AT&T, or does that not include AT&T?

[Bill Smith:]

No. That -- all the $18 million to $19 million are the ongoing revenue. So, that’s the revenues from Verizon as well as the European carriers.

[Eric Martinuzzi:]

Got you. Okay. And then, just curious to know, from the customer’s perspective, I’m assuming you reached out and touched all five of these mobile carriers, the contracts here. You mentioned that they’re excited to hear about your arrival. But obviously, that introduces some uncertainty. What can you tell me about why they are excited about the transaction?

[Bill Smith:]

I think, going into this transaction, we were already recognized as the leader in the space. With this transaction being closed, it’s -- we are the dominant player in the space. And from a wireless carrier to now have across the board the number one player as their vendor and a partner, I think, is reassuring. I think, the fact that they see us investing so heavily in the family safety space lets them know that we’re here for the long haul and that we can really work with them to grow their overall subscriber base, and in doing so, increase the revenues for both us and our customers. I think that really bodes well. I think, when you look at our roadmaps going forward that the carriers really can see how there’s some real vision for this market. And I think that that’s something they can get excited about now. We’ve added over 140 new folks from Avast, which gives us even more depth and more capabilities than we had before. I think, that’s reassuring as well. So, I think, they were very impressed. I think that they are very pleased to see that there is now a dominant leader in the space, a dominant leader with the girth, the expertise, the wellbeing to actually really grow the space. And I think that’s what gets them fired up.

[Eric Martinuzzi:]

Got you. Okay. Thanks for taking my questions. And congrats on the transaction announcement.

[Bill Smith:]

Thanks, Eric.

[Operator:]

The next question is from Jim McIlree with Bradley Woods. Please go ahead.

[Jim McIlree:]

A little bit on -- a few questions on the other parts of the business. Tim, the CommSuite revenues continue to surprise on the upside. Is this a function of you just being conservative, or is it a function of the stores not being opened and maybe less churn, or what’s -- can you talk about why we’ve been consistently surprised there?

[Bill Smith:]

Sure.

[Tim Huffmyer:]

Yes.

[Bill Smith:]

Go ahead.

[Charles Messman:]

Go ahead, Tim.

[Tim Huffmyer:]

Yes, Jim. So, this quarter was related to seasonal ad revenue. It’s one of the best quarters we’ve ever had, in many years anyway. So, that was unusual item that we couldn’t have predicted. We do expect that the Sprint base will continue to be on that glide path down that I’ve talked about throughout the year. And then, we’re hopeful that we’ll continue to build the Boost side of the business, maybe not complete offset on the Sprint decline, but we’re going to try. And those are the components really of that CommSuite revenue.

[Bill Smith:]

And actually, it’s -- yes, it is Boost, but it’s also going to get a help, I think, from the DISH postpaid business as they start to launch that sometime this year. So, we’re pretty excited about partnering with DISH going forward. And let’s see what we can really do with CommSuite at DISH.

[Jim McIlree:]

And the ViewSpot customer that you picked up, can you characterize the size of that customer in terms of subscribers relative to the AT&T Mexico subscriber or customer you lost?

[Bill Smith:]

Yes. I think, the AT&T Mexico loss, by the way, is just a momentary problem that’s caused by the fact that their stores just can’t reopen. I think, once they can get to some stability in Mexico with the pandemic and they can get the stores back and open, I think there’s an excellent chance that they’ll come back and reengage with us. But, let me answer your question. The carrier that we’re doing business with in Europe is one of the very largest multinational carriers in Europe. We are launching in one of their prime target countries, one that is very often used to test new products and new technologies. It is going very well, and hopefully that trend continues. Because typically, if it goes really well in the first country, they will look to plan to deploy in a broader platform. So, it should be a driver for growth going forward. I also think that it’s a great reference account in Europe where we see a lot of activity for ViewSpot, and we think it could lead to additional carrier wins throughout ‘21 and into ‘22. So, we think that ViewSpot, in general, has a very nice growth profile. We think it’s a product as the pandemic starts to wind down, as we all get our shots and we can start to work through this, we think there’s some nice growth there. I would not say it’s as big as the growth potential for Family Safety. I think SafePath just has a huge total addressable market and should really drive the growth of the new Smith Micro immensely going forward.

[Jim McIlree:]

And my last one is -- I think it’s similar to what Scott was trying to get at is, are there large product lines or companies out there, maybe serving Europe or the Asian markets that are potential acquisitions for you, or is this going to be more of a building up the business from the ground up?

[Bill Smith:]

So, what you’re -- it was other products that we might want to get into that fit our SaaS value-added service model. Is that what your question, Jim?

[Jim McIlree:]

Yes. Yes, I think that’s a good way to rephrase it. Sure.

[Bill Smith:]

Okay, fine. Now, I get what your question is. Yes. Look, we have demonstrated that we have been very acquisitive. We’ve done two significant deals in the last 14 months now between the Circle acquisition in the first quarter of 2020 and now the Avast acquisition now. We are really trying to solidify the family safety market. But, we are also always looking for other opportunities. But, there is a very careful criteria that we apply. We are looking for opportunities where we can enter market segments where we can be either the number one or the number two player in the marketplace. And so, we would not, for instance, just -- oh, by the way, there is a very strong non-compete between us and Avast. So, we would never ever attempt to get into the security market. But it would never fit that model. If we were to enter the security market, we’d be number 6, 7 or 8. That is not the place you ever want to be. So, we are always looking for new opportunities. We have a number that we have started conversations on. But there’s nothing that we’re at a point that we really want to talk about. I think, we have our hands full now. We need to digest this acquisition. It is probably the largest one in our 38 years’ history. And I think it has the most incredible upside of any of the deals we’ve done. So, I think, I’ll be happy getting this one done and get it done right and get a bunch of really happy customers and get a bunch of new customers. But yes, we’ll be looking at other opportunities, but we do want to be at the top of the heap there. We do want to be number one or number two.

[Operator:]

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

[Charles Messman:]

Okay. I want to thank everyone for joining us. I know this was a little bit of a longer of a call because we got a lot to talk about. But should you have any questions going forward, please feel free to reach out to us. And we’ll look forward to talking to you in the near future. Hope everyone has a great day.

[Operator:]

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