Good afternoon, ladies and gentlemen, and welcome to Phunware's First Quarter 2023 Investor Conference Call. [Operator Instructions] Joining me today are Russ Buyse, Chief Executive Officer; Randall Crowder, Chief Operating Officer; and Matt Aune, Chief Financial Officer. The format today will include prepared remarks by Russ, Matt and Randall, followed by a question-and-answer session. As a reminder, today's discussion will include forward-looking statements. These forward-looking statements reflect current views as of today and are based on various assumptions that are subject to risks and uncertainties disclosed in the Risk Factors section of our SEC filings. Actual results may differ materially, and undue reliance should not be placed on them. Additionally, the matters being discussed today may include non-GAAP financial measures. Reconciliation of GAAP to non-GAAP financial information is set forth in the earnings press release, which is available on the Investor Relations section on Phunware’s website at investors.phunware.com. I further encourage you to visit investors.phunware.com to access not only the earnings press release, but also the current investor presentation, SEC filings and additional collateral font wear. At this time, I would like to turn things over to Phunware’s CEO, Russ Buyse. Sir, you may proceed.

Thank you very much, and welcome to our first quarter of 2023 investor conference call. Contextual engagement, how to interact with users where they are, when they are to enhance their experience and reach them in a potential buying moment. That is what Phunware is all about. We bring contextual engagement to brands trying to achieve just that. We made huge strides in Q1 in realizing this purpose. Starting with the product platform, we progressed both our mapping and engagement SDKs, which form the foundation for contextual engagement. We updated our SmartApp module, which underpins our industry solutions and creates a consumer-grade experience for our customers. And we updated our health care industry solution, our offering to enable health care providers to provide exceptional patient experience. We also launched our Experience Optimizer, which streamlines the patient experience across different hospital buildings and curates unique experiences for sub-brands of large hospitality companies, all without requiring the download or management of multiple mobile applications. This flexibility is a boom to brands and users alike. And while we're talking about product progress, the U.S. Patent Office has awarded Phunware a patent for geofence event prediction technology, a technical innovation that uses machine learning to predict what experiences will matter most to users based on their location, preferences and previous activity. All of these advances serve to enhance brand's ability to delight their users with a more compelling experience and underscore the tremendous progress we've made as a company. On the customer front, Phunware finished its deployment with Gaylord Hotels by Marriott the Opryland, Texan, Rockies, Palms and national properties are now fully operational. Our deployment teams finished this rollout both under budget and ahead of schedule. VHC Health also expanded their engagement with us, adding 250,000 square feet with their outpatient pavilion and…

Thanks, Russ, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our first quarter 2023 financial performance and our progress on key strategic initiatives. For clarity, I'll be discussing GAAP financial measures, unless otherwise specifically noted. Our press release, 8-K and website provide a reconciliation of all GAAP to non-GAAP financial results. Net revenues for the first quarter of 2023 totaled $4.7 million, of which our platform revenue represented 28% of net revenues or $1.3 million. Our hardware revenue or light by fund wear, represented 72% of net revenues totaling $3.4 million. Gross margin was 7.6% compared to 26.1% last year. On a non-GAAP adjusted basis, gross margin was 12.9% compared to 26.8% last year. Platform gross margin was 5.5% compared to 57.2% last year. On a non-GAAP adjusted basis, platform gross margin was 23.4% compared to 58.9% last year. The cause for the year-over-year drop can be primarily attributable to a mismatch of cost of goods sold and the revenue associated with it. As previously mentioned, we are extremely excited to have completed the Gayler deployment in Q1. However, GAAP revenue recognition for this project requires that the revenue will be taken over the 5-year life of the contract, which means all the costs associated with deploying the multiple locations in Q1 are not offset by revenue in Q1. If we were to be able to match the revenue, our non-GAAP gross margin for software would be much closer to last year. This will happen from time to time as we continue to build up a bigger base of SaaS revenue that ultimately will be able to absorb the shift in margins from a single project during the quarter. Our hardware business life by Phunware continued to show operational improvement…

Thanks, Matt. During the quarter, we took great strides to streamline how we price, contract and bundle our core offerings. For a simple annual license, any enterprise can launch a branded mobile application that is configurable, scalable and capable of any number of integrations with third-party point solutions to include our very own best-in-class location-based services that delivers real-time blue dot and advanced way finding, a fund where we can now take care of everything from any required hardware to professional services to maintenance, so our customers are only responsible for a straightforward software license. This is actually an important change that has been very well received by our prospects. In the past, we still sold like a custom development shop that resulted in overly complicated contracts and sometimes sticker shock, but now we are offering simplified SaaS pricing, we believe, will drastically improve our sales cycle and close rate. Enterprise customers don't need to settle for low-code templated apps that will not scale and are limited in both features and functionality. They can now launch an enterprise-grade mobile application on our proven platform for less than $5,000 a month. Our platform approach is important because our customers benefit from all the product improvements we are making. For example, we successfully tested our configurable location-based services solution at Gaylord Opryland Resort and Convention Center in Nashville. This is something that many vendors have tried but failed to deliver and with something of a unicorn in the conference industry. However, Phunware has made the impossible possible. Our platform can finally help event attendees optimize their time and route to the right exhibits while giving organizers the ability to personalize attendee engagement conference organizers and venues can seamlessly reconfigure convention center space and our routes will adjust to account for any new…

Thanks, Randall. To conclude, I am very happy with the progress we've made this past quarter and the changes we've made to extend our reach and deepen our contacts with customers in our target markets. You can expect more developments on these fronts from us going forward as we invest more time and energy into sales and marketing. We're all about market growth, meeting customer needs with our market-leading solution focused on contextual engagement. Expect to see bookings growth and spending discipline to control our OpEx. At the same time, our strategic transactions committee is actively looking for opportunities to grow the business through inorganic transactions. And one last thing; we are no longer using the term multiscreen as a service or MAS as it fails to capture the range and significance of the investments we've made in our software platform. We call it our location-based platform, which is about more than just a screen and whose capabilities any enterprise can activate almost immediately. We deliver everything you need to engage anyone anywhere in a mobile-first world where context matters. I would like to open up the call now for questions to the operator. Operator, please go ahead.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Darren Aftahi with ROTH MKM.

Two, if I may. On your pipeline, can you characterize, I guess, one, how that's changed in the last 90 days? And maybe what verticals those deals are in right now? Sorry, go ahead.

So I was just going to say that good to hear your voice again. And how things have changed over the last quarter as we see more opportunities to have join the pipeline and the ones that were kind of in middle stages are now in later stages. And the 2 verticals that we see the most activity in are in hospitality and our health care, which are 2 favorites.

Great. And then that kind of leads to my second question. Given the inroads you've made in hospitality and all the book law around generative AI, I'm just wondering, is that any sort of road map in terms of integrating that into your platform just in terms of opportunity to provide clients with maybe more revenue opportunity or lift over time?

Well, AI is something we're certainly keeping an eye on, especially as large language models that have come up with very naturalistic write and speaking -- or excuse me, Britelanguage, which, of course, could be turning to spoken as well. And we're just looking for opportunities like where that would make sense for us to plug it in. We are about contextual engagement, which is reaching those consumers where they are and when they are. And so there may be an application in the way that we offer essentially, if you will, the writing that will allow them to reach those customers. We're still looking at that.

Great. Maybe one last one for Matt. Just your comments about the mismatch on revenue and deals and costs when you called out Gaylord. But like is there any way to kind of smooth that out? Or is that just a function of GAAP accounting and a valor hands with growth.

Yes. I mean it is more or less a function of GAAP accounting. Certainly, over time, as we're able to deploy quicker with less resources, there's not going to be as much of that upfront work. And also, as I mentioned on the call, I mean, we've got to build up a bigger base. So like if there's one customer has happened to last quarter, it had a pretty significant impact on the margins, whereas next year, if something like that happens, it might only change margins by 2 or 3 points. So it's a matter of we need to grow that base more. And then as we mature more and more, these deployments will get faster and faster. I mean Gaylord was already fast, but still there was a significant amount of work just going to the 5 different sites. But we should see that improve over time. It's just nothing that we can do kind of in the short term just as of the GAAP accounting rules.

Our next question is coming from Scott Buck with H.C. Wainwright.

I'm curious, could you give us just a little bit of color on what expectations are in terms of scaling up the partnership with Siemens and maybe when we could expect to see some incremental revenue from that partner?

Well, we're sort of hot off the presses in announcing that Siemens partnership. So we -- there's a period of kind of bring up of getting that partnership going and doing the cross training and whatnot. But we do expect to see deals kind of enter the pipeline within a quarter or so that will be related, especially to the smart workplaces, certainly with Siemens strength here. And it's going to really be a function of Siemens kind of a working set of opportunities themselves. But like I'm expecting to see concrete business that we do directly out of that partnership within a quarter or 2.

Great. That's helpful, Russ. And then on the hardware business, it looks like revenue is down kind of 20% year-over-year. Is that just, I mean, macro environment and then people cutting back on discretionary spending? Or is there something else going on there? And as a follow-up, I seem to remember you guys were going to put -- had some new products there in the pipeline. What's the status of those?

Yes. Thanks for asking. The entire PC market, including Max is actually off quite a bit in Q1. The PC group was basically off almost 30% and Apple, their MAX sales were down 40%. So we actually were tracking 10 points ahead of the cohort there in the PC space. And so what we've done is really just focus on the cost discipline around customer acquisition costs and make sure that we stay in line with our build costs as well. So we're tracking kind of ahead of plan if we had kind of a normal market. I think that we'd be seeing greater revenue out of that as well as better than the bottom line, too. And you asked about wider products in -- for the light unit. We are expecting to introduce the workstation lines this quarter. So that will give us offerings that are aimed at power business users, and that's a good complement to the gamer market that we already serve.

Great. That's helpful. And then last one for me. Just on OpEx, you guys have done a nice job kind of reeling that in versus the last few quarters. Curious if you have some additional levers there to pull or what we're looking at this quarter is kind of the expected run rate here for the rest of the year?

Yes, Matt, I'll let you talk about that one.

Yes, sure. Yes. No, I mean we're -- this is something we're constantly looking at. Like I said on the call, we've had a couple of consecutive quarters of reducing it, and we anticipate Q2 will be reduced as well. So I mean, in terms of levers, I mean, we're -- majority of our OpEx is headcount. And so we're evaluating the headcount and making sure we're rightsized for the number of deals we have. We have made a few -- trimmed a few here and there towards the end of last quarter that you're not really seeing the impact of in Q2 yet. So I think there'll be a little bit of savings there. And then we'll just kind of evaluate going forward and make sure if the staff we have is the stuff we need to continue to grow. But again, it's going to be a slow process. I don't see -- weren't going to drop $1 million or $2 million in OpEx in a single quarter, but it's mostly just a process of continuing evaluating and making sure that we're terming those expenses quarter-over-quarter.

Great. Appreciate that, guys. Thank you very much.

Thank you.

Our next question is coming from Howard Halpern with Taglich Brothers.

Are you -- with the pivot, I guess, towards much more now the Software as a Service, SaaS-based model, are you seeing less hesitation by customers then because a lot of businesses are seeing hesitation deploying a fund. But with your business model now and your customers or customers in the pipeline, are they really committed to going forward with the projects?

Yes, they are committed. And what this -- what we've done, which is in simplifying the pricing for them, we've taken kind of fewer variables for them to have to consider. We had formerly had broken out all the costs around fulfillment and beacons around location-based services and everything was kind of unbubbled. And we kind of rebundled it together. And it just makes it easier for them to understand and it's also easier for them to say yes because they don't have to contemplate sort of being their own -- thinking about every little option and addition that goes in there. And also, as you heard Randall talk about earlier there, we've also lowered the floor, if you will. So now we have a bundle where customers could get started for as little as 5,000 a month. And so that gives us much more range and variability in terms of the packaging that we can offer. It doesn't affect the margins or the size of opportunities at the enterprise end, it really opens the middle in the lower end more.

Okay. And in terms of your partners, I know you just announced Siemens, but prior announcements, are most of those up and running fully trained and bringing in leads [ph]?

We have a few that are up and running like that, and we are working on more partnerships where we expect it to broaden this, especially in markets where we don't have a direct sales effort. It's not exclusive to that. But as mentioned with Siemens, they're doing a lot of work about kind of building and constructing the smart workplaces in the future. And that's an area where we have like a specific outbound focus from within Phunware. And so we're looking for those kinds of players. And of course, we've got -- we've approved kind of the training materials and the structure of the agreements to make it easier to train their sales folks as well as to give them the proper incentives to be our advocates here. So eventually, this will turn into a model where instead of kind of co-selling with them, it's pure indirect where they can completely do it on their own...

Okay. And one last one for Matt. I guess, going back to the mismatch in revenues, especially with Gaylord you brought up. But the revenues now that will you'll be able to recognize going forward, they're going to be extremely high margin revenue, it's not 100% revenue margin?

Yes, certainly. So yes, that portion is kind of devoted to the deployment will essentially be 100% gross margin going forward, that'll be blended in with our kind of support and maintenance continuing for the next several years. So it will get rightsized over time. It's just a bigger impact in the first quarter there as we saw.

Okay. And in the hardware, you're still seeing improvements in gross margin. You're not -- you're going to maintain that discipline going forward and improving it as much as you can quarter-to-quarter.

Yes. So gross margin quarter-over-quarter dipped slightly in Q1, and there's some various factors that we're still working through in terms of inventory management and getting products out the door. However, on an overall basis, while the light business did lose some money, it did improve quite a bit quarter-over-quarter and had its best quarter since we've even owned the company. And so bottom line is doing well. Our customer acquisition costs have trimmed quite a bit from Q3 and Q4 of last year. So we finally kind of feel like we're in the fine-tuning process here where we're going to be able to get this thing to breakeven or better in the next 1 to 2 quarters. So hopefully, this quarter, but we'll see if it happens this quarter in Magna.

Yes.

Our next question is coming from Ed Woo with Ascendiant Capital.

Yes. Have you noticed any change in the pipeline given the uncertain economic environment in your sales cycle?

Yes. The way I would characterize it is just a little bit more slowness, a little bit more caution. We haven't seen any drop out of the pipeline, but this is kind of a multi-stakeholder decision when it comes to the enterprise end. And so they are kind of double checking their alignment and their own forecasting. I mean even despite interest rates being at kind of a local high for the last decade or more, hospitality is having a good year. And so we expect them to keep going. And of course, health care is pretty countercyclical in nature. So this is more a function of the natural budget cycles, combined with a little bit more slowness due to that uncertainty.

I wish you guy’s good luck. Thank you.

Thank you. We have reached the end of our question-and-answer session. So, I will now turn the call back over to management for any closing remarks.

Well, I have nothing further to add. I think our comments really kind of covered everything. I'd like to thank you all for your time. I do think this is still, despite kind of the economic environment, still a very good time to have the product we do that does what it does in contextual engagement using our location-based platform and being able to really help brands improve the quality of their guest experience, their patient experience as well as reduce their costs and enhance their revenue; so there is no season where that is not attractive [ph].

Thank you. This does conclude today's conference, and you may disconnect your lines at this time, and we thank you for your participation.