Sonim Technologies, Inc.
Q3 2020 Earnings Call Transcript

Published: 11 Nov 2020

[Operator:]

Good afternoon, and welcome to the Sonim Technologies Incorporated Third Quarter 2020 Results 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 Matt Kreps, Investor Relations. Please go ahead.

[Matt Kreps:]

Thank you, Gary, and welcome everyone to today's Sonim Technologies' results call for the third quarter ended September 30, 2020. Sonim has just distributed a press release and filed the Form 8-K with the Securities and Exchange Commission. Those documents are available on the sonimtech.com website under the Investors link. Information from that press release includes historical financial results, some of which will also be discussed in the company's remarks on this call.

[Tom Wilkinson:]

Thanks, Matt, and hello to everyone joining us on the call and online. First, I would like to say Happy Veterans Day to all of our veterans and their families. On behalf of Sonim, we thank you for your service. This year has continued to be a period of rapid transformations we've communicated on prior quarterly calls. We at Sonim continue to implement changes that we believe will position our business for broader addressable market, revenue growth with improved control and visibility and leaner, more efficient operations. We've reduced our operating expenses and made our balance sheet more cash efficient. Our transformation into a low cost and more productive team has begun to pay off enabling us to respond to lumpy quarterly revenue, while delivering period-over-period improvements in our gross margin, reduce net loss and preservation of our cash resources. We have frequently pointed out how lumpy the rugged business can be in the forefront and the third quarter is a good example. Carriers had accelerated a number of orders into the second quarter, which came in well above forecast, and then adjusted delivery timing in the third quarter, as they had already taken in these additional orders. As we have also discussed previously, getting OpEx down to an appropriate level for a hardware business of our size has been a top priority. We managed to streamline and reduce our operating costs cutting OpEx by 20% year-over-year. In the fourth quarter, we have undertaken additional changes to cut another $2 million of annual run rate operating expenses with ideas for future efficiencies.

[Bob Tirva:]

Thanks, Tom. Our press release issued earlier today announced the results for the third quarter ended September 30, 2020. A copy of the release is available in the Investor Relations section of our website. Net revenues for the third quarter of 2020 decreased to $14.4 million. The sequential decrease in net revenues was primarily attributable to the timing of customer orders, including some sales that were accelerated into our $21.1 million second quarter. As Tom mentioned, revenue can be lumpy from quarter to quarter for this reason and the two quarters combined to an average of about $18 million. We have made good progress in our efforts to balance out our inventory for efficiency of working capital while maintaining readiness to ship in response to the changing order patterns from our customers. Gross profit for the third quarter of 2020 was $4.4 million, or approximately 30.6% of net revenues, which is up from 23.9% of net revenues in last year's third quarter. The increase in gross margin was primarily attributable to one-time inventory adjustments, which occurred in the third quarter of 2019, along with lower than expected customer discounts and rebates, which will require to sell our products in 2020. Sonim anticipates that margins will benefit from increased scale, as well as corporate plans that are undertaken to improve cost of goods sold in the future, beginning with the launch of higher gross margin scanner products in the first quarter of 2021. Looking at our operating expenses, total operating expenses for the third quarter came in at $10.5 million. This represents an improvement of $2.6 million from the $13.1 million of operating expenses in the year ago quarter. The decline in operating expenses reflects Sonim's commitment to maintaining a lean operating model while continuing to invest in sales, marketing and new product development in a more cost effective manner. OpEx also declined sequentially from the $11.5 million we experienced in the second quarter. We anticipate reinvesting a portion of our operating cost savings into R&D for our next generation products going forward.

[Tom Wilkinson:]

Thank you, Bob. As you can see, we have made important progress on the business model, positioning Sonim to perform well in both up and down revenue quarters while maintaining our ability to take the right steps for our long-term strategic goals. We believe Sonim offers the most rugged mobile devices in the market. But we're always looking to do better. We're bringing new devices to the market, both in our core mobile feature phones and smartphone categories, as well as entering new addressable markets such as handheld scanners. Our new smart scanner devices are set out to roll in Q1 of this year. We are bringing two devices to market built on the same chip and software platform. They will initially be released with Android 10. It will be upgraded to Android 11 at a later date. Our two devices will be an 8 inch screen tablet and a 6 inch screen handheld, both with integrated barcode scanners. These devices support multiple bands including those required for Europe. We expect our SmartScanners will deliver both better features and better pricing compared with larger competitors. Introduction of these devices will increase our addressable market and open new channels, both in North America and Europe. In addition to these devices, which provide an exciting market expansion platform, we've also received verbal or written design wins for all of the major North American carriers for our new feature phones. While many hardware verticals focus on just smartphones, our feature phones consistently outsell our smartphones, demonstrating that Sonim’s target market often just need a good, reliable and durable way to facilitate communications with their workforce. And we meet that demand extremely well. Our refresh offerings of the XP5 and XP3 will include design features and updates that are responsive to our end user customer requests, while opening new and exciting markets for our products.

[Operator:]

We will now begin the question-and-answer session for covering analysts. . The first question comes from Jaeson Schmidt with Lake Street. Please go ahead.

[Jaeson Schmidt:]

Tom, just want to get your thoughts on your visibility into sort of inventory levels at the carriers, just given how they always tightly manage it here towards year end? How should we think about that for Q4?

[Tom Wilkinson:]

It's a great question. We have a great deal of visibility into the inventory levels. We believe that our carrier partners are -- they're responding to the current environment in their responsibility to their own investors and showing a derisked balance sheet. So, our expectation is that they will try and hit the end of the year with the minimal amount of inventory as possible, and then start being able to pile-up after that.

[Jaeson Schmidt:]

Okay, that's helpful. And looking at the new scanner products, just curious if this was something that your customers were asking for, if you just thought it would be a natural extension from the product portfolio, especially with your history at Xplore? And I guess, relatedly, is this just going to be a hardware sale? Or is there any recurring revenue component, along with outstanding feature?

[Tom Wilkinson:]

Sure. So it is both an identified need in the market that the management team brought in to the company, an unfilled need as well as a natural extension of our experience in technology. The unique thing about Sonim is with our SonimWare and Sonam Care deliverables, we can layer that into anything that operates off a Android. So we'll be very similar across all of our devices, whether they be phones or scanners and that way. The same thing with our commitment to service, we'll be able to bring that out. But we definitely see a need in the market, we know of opportunity. And to your question of whether this is a device play, we are looking at ways to expand our reach to the market, within our capabilities and abilities beyond hardware. But at the moment, I really -- I'm focused on just getting these hardware devices off to market.

[Jaeson Schmidt:]

Okay, that makes sense. And then just the last one for me and I'll jump back into queue. Bob, on gross margin, you noted some of the year-over-year increase was due to less discounts and rebates. Should we conclude then that sort of this 30% plus level is sort of a new norm here in the near-term?

[Bob Tirva:]

I wouldn't really call it a good norm, it's a good question. I think, this reflects our experience with particularly one carrier that's been growing for us, and they have a rebate program that is funded both by Sonim, but could also be funded through other various programs within the carrier. So the carrier could use an unrelated discount to the customer that wouldn't dip into rebates that we would then have to give. And so we lack that little bit of visibility, so we are conservative in our forecasting, assuming that a high percentage of the sales would be done with the rebate applied, and then when the carrier does do the sale, they send us an invoice for the rebates earned and it's come in below what we forecast. So, I believe that it will continue to come in below what we have forecast but there's no way to know that for sure.

[Operator:]

The next question is from Zack Silver with B. Riley.

[Zack Silver:]

The first one is just around the distribution channels, whether you have any thoughts about changing the typical carrier led distribution model into 2021? And then relatedly how the distribution of the SmartScanner product and international mobile sales differs from what you're doing here in the U.S. now?

[Tom Wilkinson:]

So, I think the way to think of this is the right products for the right channels in the right geographies, and the answer is different wherever you go. Our rugged cellphones will sell through carriers in North America. We're making our rugged cell phones available for distribution as well and we're actually seeing some activity there. But we're not going to move away from our carriers in that sense in North America. We're also not going to be selling SmartScanners through carriers in North America. It's not something they naturally would sell. They're enabled, they work on LTE and they'll be certified. So they're functioned quite well with the carriers, but they're not a stock product. Now, when you turn to other geographies, the model flips. There is not quite the dominance of carrier players in other parts of the world. Therefore, they're on the same kind of footing that distributors are on. But what I like about our products in working through distribution in Europe, or even the distributors that we're going to bring in United States is that distributors are often working on more of a solution sale with us. They're bringing together not just their voice communication devices. But other aspects of let's say, kind of imagine all of the technology that's inside of a police car, inside of an ambulance. It's the distributors, value-added resellers, who are bringing all of that together. And we really look forward to working with them, increasingly to be part of that delivered solution.

[Zack Silver:]

The next one is just around with sort of the cash burn and with sort of the aging of the older devices, and some time in investment and upgrade into the newer devices. Just wondering if you can help us think about the cash burn and really what gives you the confidence that liquidity runway at this point is adequate?

[Tom Wilkinson:]

Bob, that sounds like your territory to talk about forward cash burn and the fact that we don't talk about forward numbers. But do you want to take?

[Bob Tirva:]

Sure. I'll just reiterate that, we're not giving guidance. But certainly we have modeled in the sunset of our existing portfolio of products. As Tom mentioned, we're getting to end of life for several devices. We've also extended the life of the XT8 through an Android 10 upgrade. So that should sell well into the next year and potentially beyond. And we are ramping our new scanners and feature phones through the first half of 2021. So we have carefully looked at the transition between the old products and the new, adjusted our burn rate through cost savings and just having especially lean operations at the company in order to bridge that gap with the cash that we have. And I think we've judiciously looked at the balance sheet where we can. We've reduced our inventory levels. We have managed payables and receivables as much as possible. And we believe that we can weather a period of burn to get to the new products, which will then start generating cash as we move forward.

[Operator:]

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

[Tom Wilkinson:]

Thank you for joining us on today's call. I really appreciate the questions. And I really appreciate the interest you all have in our company. We'll be participating in a number of investor conference events to the year-end and will announce those by press releases as they occur. If you would like to arrange a call with management, please reach out to Matt Kreps with Darrow Associates. His contact information is listed on our press releases, and we'll be happy to arrange a call if needed.

[Operator:]

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