Sonim Technologies, Inc.
Q3 2019 Earnings Call Transcript

Published: 3 Nov 2019

[Operator:]

Good afternoon. Welcome to Sonim Technologies Third Quarter 2019 Earnings Conference Call. My name is Laura, and I will be your operator today. Joining us for today’s call are Sonim’s CEO, Tom Wilkinson; Interim CFO, Bob Tirva; and Investor Relations Consultant, Tom Colton. Following their remarks, we will open the call for questions. I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the company’s website at www.sonimtech.com. Now, I would like to turn the call over to Tom Colton. Sir, please proceed.

[Tom Colton:]

Thank you, Operator. Please note that certain information discussed on the call today will include forward-looking statements about future events, Sonim’s business strategy and its future financial and operating goals and plans.

[Bob Tirva:]

Thanks, Tom. Welcome everyone and thank you for joining us today. This morning we issued a press release announcing our results for the third quarter and nine months ended September 30, 2019, a copy of which is available in our Investor Relations section of our website. In a few moments, we will go through the details of our financial results, but first, I’d like to take a moment to address the change to our management team, which we announced in our earnings release this morning. As I’m sure many of you now know the Board of Directors has appointed Tom Wilkinson as Sonim’s new Chief Executive Officer. Tom, who is joining me on the call today and whom, I will turn the call over to in just a moment has replaced Bob last year CEO. Bob has been with Sonim since 2002 and he has served as the company’s CEO since 2005. Over the course of his many years here, he has been instrumental in growing this business. He led Sonim through its early years of development and helped guide the company’s transition to a publicly traded company in May of this year. And though he will no longer be serving as CEO, Bob will continue to play a part in the leadership team as a strategic advisor to the Board. On behalf of the management team, our Board of Directors and our entire organization, I would like to thank Bob for his many years of service and for his commitment to Sonim’s future endeavors. We are looking forward to a successful leadership transition as he passes the reins to Tom.

[Tom Wilkinson:]

Thank you for that kind introduction, Bob. I will keep this relatively brief as I’m getting up to speed on the intricacies of the business. I was attracted to Sonim, because I believe the company is in a premier position to capitalize on a variety of trends that are driving robust growth in the rugged device market. We are unique juncture in the company’s history and I’m very much looking forward to helping the company navigate it’s critical stage in its development as a public company, while realizing its full potential as a leading provider of ultra rugged mobility solutions to drive long-term shareholder value. Over the next 90 days, the management team and I will formulate a refresh plan for 2020 and beyond. We will be considering our product offerings, our geographic markets, our target users, as well as our overall go-to-market strategy. We will emerge from that process as a company on a path to solidify its position as a leader in the rugged device market.

[Bob Tirva:]

Thank you, Tom. For the sake of brevity, I’m going to focus my discussion on our financial results for the third quarter of 2019, while still providing certain metrics for the first nine months of the year. Our complete financial results for the first nine months of 2019 were included in the earnings release we issued this morning, which is available in the Investor Relations section of our website. Now with that in mind, turning to the financial results for the third quarter. Net revenues for the third quarter of 2019 decreased 27% to $28.9 million from $39.5 million in Q3 of last year. The decrease in net revenues was primarily attributable to lower volumes for the XP8 smartphone and XP5 feature phone sold to U.S. carriers. Total unit sales in the third quarter of 2019 increased 2% to approximately 95,000 units, compared to approximately 93,000 units sold in Q3 of 2018. With the introduction of the higher volume XP3 in Q2 of 2019 feature phones represented about 79% of unit sales, compared to approximately 49% in Q3 of 2018, with smartphones, primarily the XP8 accounting for the remainder in both periods. Gross profit for the third quarter of 2019 decreased 48% to $7.2 million or 25% of net revenues from $14.1 million or 36% of net revenues in Q3 of last year. The decrease in gross profit percentage was primarily attributable to a one-time inventory reserve adjustment of $2.8 million related to the aging of materials and finished goods, as well as a different product mix compared to Q3 of 2018. Gross profit for the first nine months of 2019 increased 5% to $31.4 million or 32% of net revenues.

[Operator:]

Thank you. Well, our first question will come from Zack Silver from B. Riley FBR. Your line is now live.

[Zack Silver:]

Okay. Great. Thanks for taking the question. One, for Tom, first of all, congrats on the new role. Looking at the share price of Xplore when you assumed CEO role, it was trading around $1.75 a share versus the Zebra ultimate acquisition they bought the company for $6 a share. Just wondering if you see similar opportunity here, similar upside? Thanks.

[Tom Wilkinson:]

Of course, I have never speak to any predictions or promises about stock prices. What I do know is that to develop value there is -- there are certain things you should do, deliver excellent products, deliver products that the market wants at a reasonable price and operate a lean organization. And those approaches have always worked for me in creating value and in creating specifically shareholder value. So, I guess, that’s the best way for me to answer that question.

[Zack Silver:]

Okay. And then, one more if I could, just on, I think, the three major buckets have headwinds, with carrier subsidy, retail store placement, and then also, technical issues of some of the devices. Can you guys break down for us, which of these do you think are fixable in the immediate term or have already been fixed, which of these are going to take a little bit longer and which if any of these issues might be permanent headwinds for the business?

[Tom Wilkinson:]

So I think that the best way to answer that is sort of answer the very end of it is, whether any of these are permanent headwinds, and I don’t think there are anything as a permanent headwind. I really don’t want to -- I’m not just, it’s a little too early in the game for me to answer anything with regard to timing. But I assure you that we are confident in solutions to all of the things that you have listed. I think I will be able to -- once I settled in and spend more time, I think, I will be able to answer that question with more detail next time we speak.

[Zack Silver:]

Got it. And then, I think one more, just on T-Mobile, they recently announced, I think, last week that they were deepening their exposure into public safety and just wondering if you can comment, I recognize there some noise around the T-Mobile-Sprint merger and Sprint is already a carrier customer of yours. But any sort of comments you can make around the opportunity with T-Mobile?

[Tom Wilkinson:]

Yeah. I mean, typically where we are prohibited from discussing, especially by name any of our customers and our interactions with them, so I can’t really speak to that. Obviously, our device is not only optimize. It’s truly the strongest offering in this space for public safety. So it would be natural for anybody who is taking public safety seriously to be focused on our phones.

[Zack Silver:]

Got it. Thank you very much.

[Operator:]

Thank you. Your next question will come from the line of Jason Smith from Lake Street. Please proceed.

[Jason Smith:]

Hey, guys. Thanks for you taking my questions. I just want to follow up on one of the previous questions regarding the subsidy issue, retail store replacement issue and the technical issues. Just need clarification, if there has been any progress or improvement on any of those issues, and believe was seven weeks ago when they first came to light or if these all still need to be addressed?

[Tom Wilkinson:]

No. There has been a great deal of progress and I can leave it -- I kind of leave it at that. I can’t really express anything regarding timing. But there has been a great deal of progress in all areas.

[Jason Smith:]

Okay. No. That’s helpful. And then, just wondering if you could comment, if you have seen any significant changes in the competitive landscape with some of the challenges you faced here in the near-term?

[Tom Wilkinson:]

You mean in terms of other people entering the market or existing makers change their devices or which aspect of the market…

[Jason Smith:]

Both of you can comment on?

[Tom Wilkinson:]

…or all of that. Okay. Well, I mean, I’d -- it seems that there has been some entries in the market at a ruggedness level lower than what we are working to achieve and certainly devices that are, I would say, are not particularly focused at all on the first responder community. There was a broad range when it comes to ruggedness and the new entrants seem to be focused on more of a consumer rugged and then try I guess an effort to up-sell that into tougher environments and see if they can make that happen. Most of them don’t feature push-to-talk, for example, some of them do have Band-14 for FirstNet, some of them do. But a lot of the people that are entering into our market are also coming in with prices when they do reach a comparable nature to our device. The prices they are bringing our astoundingly higher. And so, therefore, I don’t really consider them competition to us, where we are operating on a different plane. They also don’t seem to be focused on working through the carriers to reach the market, which make them part of the different competitive structure. So -- and then...

[Jason Smith:]

Okay.

[Tom Wilkinson:]

The one thing I would -- here is one thing I -- let me put a little more color on it. I think it’s tremendous that everyone’s using the rugged word as much as they can, regardless of whether their device is truly hold up, because it’s an indication of how important this sector is. It’s a large market. And it wasn’t that long ago before when people running around the yellow pad or paper trying to do their work. And now we are talking about computerization of that work as a first attempt to create a better work environment which necessitates rugged. It’s something that’s proven out time and time again. So the more and more people are coming to rugged, I think, it’s just further verifies how important this market is and what opportunity there is for us.

[Jason Smith:]

Okay. That’s helpful. And the last one from me and I will jump back into queue. I know the company has previously talked about the opportunity for incorporating software and solutions into the broader product portfolio. Tom, with you just coming in, curious how you view that opportunity in that market?

[Tom Wilkinson:]

Yeah. I have definitely got a lot to do as far as catching up on that opportunity. So I think I will defer my opinion on that at this point, because I’m just -- I have really got to get into it and see what optionality there is, what we can do to be successful in that area.

[Jason Smith:]

Okay. Thanks a lot guys.

[Operator:]

Thank you. Your next question will come from Matthew Galinko from National Securities. Please proceed.

[Matthew Galinko:]

Hey. Good afternoon and thanks for taking my question. I was -- I didn’t hear in the prepared remarks, but did tariffs have any material impact on Q3 results. And can you also update us on any progress on expanding your manufacturing outside of Mainland China? Thanks.

[Bob Tirva:]

So, this is Bob. I will comment on the tariffs side. There hasn’t been an impact to us. Sonim has produced enough products before the tariffs initiation date to make it through Q3 and Q4. And so there’s really no impact to the tariffs and I will let Tom comment on the manufacturing relates more to next year. Tom?

[Tom Wilkinson:]

Yeah. I mean this is yet another one of the big things that I need to figure out, now that I have come into the company. It’s a big world and the options are always out there. But we want to be very careful about making long-term decisions related to things like tariffs, which can come and go. I think that we need to -- we need overall to build our products in a quality manner, in a place that we can consistently get supply chain, support and quality labor. So I think if we start with that, so that we can do a good job in producing our devices, we can then layer in things like tariffs to figure out the best way to get this done going forward.

[Matthew Galinko:]

Got it. Thank you. And then, Tom, maybe just general question, but did you know in your time at Xplore ever come up against Sonim head-to-head or did you have an impression of the company kind of in your prior life?

[Tom Wilkinson:]

We never competed. Xplore was first and foremost the tablet company. We had introduced a 6-inch device, which at that time was not exactly at all our competitor against, I mean, it wasn’t at all a competitor against Sonim. It was not a carrier certified device and it was something that was going kind of made for Wi-Fi use in the United States and possibly in Europe. So we never bid against Sonim. I was aware of the company. And -- but we had no relationships all of it. So -- and I guess, I said, I didn’t really form any particular opinions, just I did have a great deal of interest in any kind of rugged device companies that existed. I mean, clearly, I was aware at that time that Sonim was able to participate in what -- in 2017 was a $2.2 billion worldwide rugged cell phone business and I wasn’t in that business. At Xplore we were working in a $600 million worldwide market. So it was always intriguing to me an opportunity to get into that space. So hopefully that answers your question.

[Matthew Galinko:]

Thank you.

[Operator:]

Thank you. At this time this concludes the question-and-answer session. If your question was not taken, you may contact Sonim’s Investor Relations team at [e-mail]. I would now like to turn the call back over to Mr. Wilkinson for his closing remarks.

[Tom Wilkinson:]

Thank you for joining us on today’s call. We want to thank our employees, our customers, our partners and our investors for supporting us through this transition. Operator?

[Operator:]

Thank you for joining us today for Sonim Technologies third quarter 2019 earnings conference call. You may now disconnect.