Good day, and welcome to the Smith Micro First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Charles Messman, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, operator, and good afternoon, everybody. We appreciate you joining us today to discuss Smith Micro's financial results for our first quarter ended March 31, 2023. By now, you should have received a copy of our 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. On today's call, we have Bill Smith, our Chairman of the Board, President and Chief Executive Officer; and Jim Kempton, our Chief Financial Officer. Please note that some of the information you will hear during today's discussion consists of forward-looking statements, including, without limitations, those regarding the company's future revenue and profitability, our plans and expectations, new product development, new and expanded market opportunities, future product deployments, migrations and/or growth by new and existing customers, operating expenses, and the company's cash reserves. Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by a forward-looking statement. For more information, please refer to the risk factors included in our most recent filed Form 10-K and in subsequent filings on Form 10-Q. Smith Micro assumes no obligation to update any forward-looking statements, which speak of our management's beliefs and assumptions only as of the date they are made. I want to point out that in the forthcoming prepared remarks, we will refer to non-specific financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. That said, I'll turn the ball over to Bill. Bill?

Thanks, Charlie. Good afternoon, and thank you for joining us today for our 2023 first quarter conference call. As I look at the first quarter, I am quite pleased with the overall progress we made of some of the initiatives that we outlined and discussed during our fourth quarter conference call. First off, on our last earnings call, we reported that we had set a goal to reduce our expenses by $4 million per quarter during 2023, as compared to fourth quarter 2022. We intended to achieve those savings on an expedited basis. We took decisive measures across the entire organization in March to help us reach this goal. Taking actions that will result in the elimination of approximately 26% of our global workforce, as well as taking certain other measures that we anticipate will result in achieving our cost reduction goal in the second quarter. This will bring our aggregate non-GAAP expenses to approximately $11 million, compared to 14.3 million that we reported in the first quarter. Implementing our plan with such swift action was a challenging task and I am pleased that this alignment of the cost structure will position the company for a return to profitability. Another key initiative was the migration of the AT&T secure family application to the SafePath platform. I am happy to report that we expect to deliver the new build later this month to AT&T for their testing process, which we believe aligns well for a public launch during the third quarter. This is a significant milestone for the company and we're looking forward to a successful launch. Lastly, I am very encouraged by the increase of new sales activities that I will talk about later in the call. We overhauled our sales organization over the last year under the leadership of Von Cameron, our Chief Revenue Officer. And we are starting to see the benefits of these changes. Before Jim covers the financial results for the quarter, I want to cover a few highlights. The first quarter results came in-line with our expectations with revenue for the first quarter of 10.9 million, down from 11.4 million we reported in the fourth quarter. We did see our non-GAAP gross margin tick-up to 72% this quarter. And upward trend, we anticipate continuing in the second quarter. In addition, we continue to drive down our operating expenses with our quarterly non-GAAP operating expense down by about 2.5 million, compared to second quarter of 2022 when we started our initial cost reduction campaign. This resulted in a non-GAAP net loss for the quarter of 3.5 million or a loss of $0.06 per share. Let's now turn the call over to Jim for a more detailed analysis of our financial results. Jim?

Thanks Bill, and good afternoon everyone. I wanted to start my presentation today by calling on a change we're making to our non-GAAP presentation. Starting this quarter, we are adjusting for depreciation as part of our non-GAAP presentation. With the thought being that this similar to our adjustment for amortization and is a non-cash item. In the numbers being discussed today, the prior period non-GAAP results have also been recast so that the results I'll be discussing are on a consistent basis. As a frame of reference, depreciation was approximately 200,000 in the first quarter of 2023. With that, I'll now cover the financial details of the first quarter 2023. For the first quarter, we posted revenue of 10.9 million, compared to 12.7 million for the same quarter of 2022. A decrease of approximately 14% as a result of the decline in family safety revenues, coupled with a decrease in CommSuite revenues. When compared to the fourth quarter of 2022, revenue decreased by approximately 500,000 or 4%. During the first quarter of 2023. Family Safety revenue decreased by 1.3 million or 12%, compared to the first quarter of the prior year. Primarily as a result of the reduction of the legacy safe and found platform revenue related to the continued attrition of legacy Sprint subscribers driven by T-Mobile's acquisition of Sprint. Family Safety revenues declined by approximately 600,000, compared to the fourth quarter of 2022. During the first quarter of 2023, CommSuite revenues was approximately $800,000, which decreased approximately 600,000, compared to the 1.4 million in revenue produced in the first quarter of 2022. This decrease is primarily attributable to an implementation fee of approximately 300,000 recognized in the first quarter of 2022, coupled with the attrition of legacy Sprint subscribers off of the CommSuite platform over the past year.…

Thanks, Jim. Let's first look at AT&T and the progress made on the migration efforts for Secure Family. As I mentioned earlier, we remain on track for delivery of our SafePath base version during the second quarter, when AT&T can begin their final testing efforts, which we believe will set the stage for a public launch sometime during the third quarter. These migration efforts have been a long journey for Smith Micro, and completing this effort will be a big achievement for the company. I want to note in addition to creating a best of breed product that incorporates select features of the former Avast platform into SafePath, another critical yet time intensive aspect of this effort was our investment in development that will allow us to maintain existing subscribers, user experience without interruption, preventing extensive migration driven churn among the existing subscribers is an important goal as we seek a user friendly process that seamlessly moves the user from the old Avast platform to SafePath. I would like to add that when AT&T secure family on SafePath goes live, it will conclude our migration efforts. This will allow us to reallocate resources to new customer activities and enable the expansion of our SafePath road map going forward. Beyond migration focused activities, our teams continue to collaborate with the AT&T team on a series of growth marketing initiatives across different distribution channels, some of which have already started as we begin building momentum going into the launch. I'll close my comments on AT&T by saying that we are very excited and optimistic for the pending launch of Secure Family, powered by the SafePath platform. Our partnership with T-Mobile continues to progress well. We had several new releases so far this year across their various family safety offerings to support T-Mobile…

[Operator Instructions] Our first question comes from Scott Searle with ROTH MKM. Please go ahead.

Hey, guys. Thanks for taking the questions. Hey, I'm sorry to belabor the point on OpEx, but I just wanted to clarify, Jim, in terms of the $4 million reduction, is that purely in OpEx or is it OpEx and COGS just for that clarification? And then moving over to the revenue front. Bill, what gives you the confidence now that AT&T is going ramp in the third quarter? It sounds like your tone on that front has certainly improved. What's really driving that increased confidence?

So, I'll answer your first question and I'll turn it over to Bill, Scott. That $4 million reduction is, encompasses both COGS and OpEx. So, the aggregate expense is, we are from Q4 of this past year, 2022, we are reduced by 4 million and that would encompass both COGS, as well as OpEx. Does that make sense?

Yes, absolutely. Just want to clarify.

Yes. Thanks. And then Scott, as we get ready for the launch of the SafePath based product at AT&T, we are seeing that very heavy activity from our customer. They are very engaged. They are very excited. It reminds me of something I've seen before. And it was a time when we saw some impressive growth at Sprints with a similar product. So, I'm pretty bullish.

Okay. And then real quickly going back to T-Mobile, it sounds like more of the dialogue was focused on AT&T, but T-Mobile is certainly a key customer where you've had success in the Sprint base in the past. What are the last remaining milestones that you have to hit here to start to see an inflection? And lastly, it sounds like there are some incremental opportunities with ViewSpot. It sounds like there are some opportunities internationally, but I'm wondering if there are some numbers in terms of wins that you're looking for within 2023, both for ViewSpot and SafePath that are non-AT&T and T-Mobile? Thanks.

Yes. Look, I'm not going to name names or give you actual numbers at this point, but I will simply say that there is a very strong pipeline for both SafePath and ViewSpot and we would feel very strongly that we will be closing new business. So, I think that the new sales organization led by Von Cameron is executing very nicely. And yes, we should see wins both in North America and in Europe. So, then I feel strongly about. As far as for the T-Mobile side, you know, we are seeing some organic growth already. We do believe that this product will perform very nicely there and regions have to continue to work with our customer and support your customer in the support of their users. And that's something that we're very much focused on. And if we do a good job on that, I'm sure you'll see some nice growth there going forward.

Great. Thank you.

Our next question comes from Griffin Boss with B. Riley.

Hey, thanks for taking my questions. So, yes, saw the 4 million cost savings now expected to be realized in the second order that's nice to see. Has this changed your expectation for a return to profitability in, I think you previously mentioned in the third quarter? Is that still the cadence going forward or any more color on that would be helpful?

At this point, we're still committed on the profitability in the third quarter. So, we are not moving that up yet.

Okay. All right. Great. So, I guess along the same lines, I was just curious if you could give any additional color on margins in the back half of the year? I know you [guided 2Q] [ph], is there anything you could talk to there or is it a little too early to tell?

We don't give guidance beyond the next quarter. So, what I would just leave you with is that we're expecting the margins off of the adjusted gross margin for this quarter to be up 150 basis points to 250 basis points and to at least maintain that or perhaps better it as the year goes on.

Okay. Excellent. Thanks And then lastly, you talked about additional AT&T growth initiatives that you are working on right now. Can you elaborate on those at all? Can those opportunities be quantified at all at this point? Any additional color will be helpful?

Yes, hi, good morning. This is Charles. Yes, I mean there's been a lot of different activities that are going on. I would call them preliminary type of things. So, you've seen some digital marketing, we've run some tests, we've done some training, particularly with some of the different channels. And I think you’ll start to see they have a newsletter. So, it's a building process because we want to build momentum into the launch where you'll start see a lot more activity. Does that help?

Got it. It does. Yes, thank you Charles. Appreciate it. All right. That's it from me. Thanks for the time.

Great, thanks Griffin.

Thank you.

Our next question comes from James McIlree with Dawson James. Please go ahead.

Thank you. Bill in your commentary regarding DISH. You talked about additional value-added services and growing with them. Were you referring just to ViewSpot or were you referring to the entire portfolio of services that Smith offers to discuss?

Look, I think we have a very positive relationship at DISH from the top down. And it would not surprise me to see somebody like DISH offering multiple products from us. And so, we have three of them. One of them is well underway and there's two more. So, we'll just wait and see.

Okay. Thank you. And regarding the AT&T launch in Q3. I was hoping you could expand a little bit on how that interacts with the carriers usual pulling back on marketing, the value-added services in Q4, as they focus on subscriber additions. Can you just discuss a little bit how that might interact a launch in Q3 with that typical pullback in support?

The pullback that you're speaking to usually happens in late November and December. It would be our final hope that there will be many months between that point in late November where they can start to grow their base at a good clip. So, I think we have time. And I think in this case time is going to work out. So, we'll just wait and see.

All right. Thank you. And my last one is, Jim, you talked about I think some cost cutting that needed to be announced to the employees in Europe before it could occur, has that notification taken place? And if not, when will it take place?

Yes, that notification did take place because of the statutory requirements in Slovakia. We can announce it, but then it takes a number of months until that can be effectively shut down. So, that has already been communicated that was communicated back in March, but because of the timing requirements around that, that's not going to be effectively shut down until June 30.

Got it. So, the full impact of the 4 million OpEx COGS, cost reductions we will see in Q3?

We would expect to achieve the full 4 million reduction in Q2.

Right. But if the cost – if the headcount reduction in Slovakia doesn’t take place until the end of Q2, you're not going to see the full impact until Q3? That's my question.

You won't see the impact of that until Q3, but there's other – there's other costs that are coming out. So, for like example, the quarterly bonus program has been suspended for Q2 so things of that nature. So, we are going to achieve the 4 million of savings in Q2.

Okay. Very good. Thank you. That's it from me.

Certainly.

Our next question comes from Matthew Harrigan with Benchmark.

Thank you. It feels like unfortunately in this environment, Family Safety product is almost table stakes so to speak for a mobile operator. I was curious if you were seeing a lot more demand to almost come in over the [transom] [ph]. I think instances like Mobile World Congress and all that. And then as a [corollary] [ph] to that, how do you see more competition shaping up? And in particular, the one [M&O] [ph] that defected, it seems like would have to do or would have to do something in-house and try to replicate that capability. Are you kind of seeing a lot of just natural demand and are you seeing more competition either from other fast companies or from the in-house development efforts of carriers you necessarily need to have an offering? Thank you.

Yes. Okay. Let me try to tackle that and I guess the way I would say it is this, we're seeing a lot of activity from names that will be new in North America, as well as a little broader activity in Europe. There hasn't been a lot of installed base for Family Safety in Europe and some of those areas are very high ARPU markets and fit very nicely for the, kind of offering that that we have. So, as I talk about the increased activity in our sales pipeline, both for SafePath and for that matter ViewSpot. It really takes place in both geos that we really focus on. So, I think your comment that is necessary, especially in North America for carriers to have a family safety offering. I think you're probably right there. As far as carriers that are doing their own thing, there's only one that we've talked about and that's the only one that we're really aware of at the present time.

Thank you.

[Operator Instructions] There are no questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Charles Messman for closing remarks.

Thank you and thanks everybody for joining us today. We appreciate you taking the time. Should you have any further questions, please feel free to give us a call and we look forward talking to you on our next earnings call for the second quarter. Thanks everybody.

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