Phunware Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 7 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to Funware's First Quarter 2023 Investor Conference Call. Currently, all participants are in a listen only mode. Joining me today are Ross Byth, Chief Executive Officer Randall Crowder, Chief Operating Officer and Matt Oney, 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.

Operator

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 of Funware's website at investors. Funware.com. Are further encouraged you to visit investors.

Operator

Funware.com to access not only the earnings press release, but also the current investor presentation, SEC filings and additional collateral on FundWear. At this time, I would like to turn things over to FundWear's CEO, Ross Bies. Sir, you may proceed.

Speaker 1

Thank you very much and welcome to our Q1 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 Funware is all about. We bring contextual engagement to brands trying to achieve just that. We made huge strides in Q1 in realizing this purpose.

Speaker 1

Starting with the product platform, we progressed both our mapping and engagement SDKs, which form the foundation for contextual engagement. We updated our Smart App module, which underpins our industry solutions and creates a consumer grade experience for our customers. And we updated our healthcare industry solution, our offering to enable healthcare 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 boon to brands and users alike.

Speaker 1

And while we're talking about product progress, The U. S. Patent Office has awarded Fundware a patent for geofence event prediction technology, a technical innovation that uses machine learning to predict what 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, Funware finished its deployment with Gaylord Hotels by Marriott.

Speaker 1

The Opryland, Texan, Rockies, at 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 are in the same position as the outpatient pavilion and a parking system integration to boot. We have several large opportunities at a late stage in the pipeline that we hope to announce soon. The current selling environment is pretty challenging with rising interest rates and nervousness around where the economy is headed.

Speaker 1

That has delayed decision making with some prospects. Fortunately, we've been unaffected by the stresses seen on regional banks over the past quarter. I'm also delighted to tell you, Funware has joined the Siemens Connect Ecosystem, a network that brings together experts in software development, IT, cybersecurity, remote and digital services and business intelligence. This partnership brings the power of our Blue Dot Wayfinding technology to optimize smart buildings. Our smart Workplace and Multi dwelling Unit Solutions integrate seamlessly with Siemens platforms, including its building management system, Desigo CC, The Apogee Automation System and Related Platforms.

Speaker 1

We look forward to working closely with Siemens and other Connect Ecosystems network experts to deliver are in an effective way to broaden our reach to target customers across markets and we will be enlisting more of them to complement our direct sales force. We are also strengthening our marketing effort and investments to drive more customer awareness, including publishing more thought leadership content and ROI studies, demonstrating the opportunity and imperative of adopting our industry solutions to reduce costs, gain efficiency and increase revenue alike. On the block can reward consumers for the right to engage them. As I mentioned last quarter, we're taking a slow and steady approach on this given the current crypto winter and continuing regulatory headwinds. This privacy preserving and fully compliant offering will include ads and offers to help brands reach audiences they want and it will complement our industry solutions to give our customers greater power to reach their existing and prospective users.

Speaker 1

On the hardware side, our light business unit faced the same headwinds affecting the whole PC market in Q1. However, we managed to outperform the industry averages while maintaining discipline on customer acquisition and materials costs. And now our CFO, Matt Aouni, will cover our financial performance.

Speaker 2

Thanks, Russ, and good afternoon, everyone. I'd like to thank you all for joining us today for a review of our Q1 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 ks and website provide a reconciliation of our GAAP to non GAAP financial results. Net revenues for the Q1 of 2023 totaled 4,700,000 Of which our platform revenue represented 28 percent of net revenues or $1,300,000 Our hardware revenue or Light by Funware represented 72% of net revenues totaling $3,400,000 Gross margin was 7.6% compared to 26.1% last year.

Speaker 2

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 are in the range of 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 Gaylord deployment in Q1.

Speaker 2

However, GAAP revenue recognition for this project requires that the revenue 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 will 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 Light by Funware continues to show operational by trimming the business units adjusted EBITDA loss by 46% quarter over quarter with a target of reaching profitability in the next 1 to 2 quarters. Total operating expense was $7,600,000 up from $6,800,000 last year.

Speaker 2

Other non cash operating expense items were stock based compensation and amortization of intangibles, making up a combined $1,300,000 this year compared to $700,000 in the prior year. By excluding these non cash charges, adjusted operating expense was $6,300,000 compared to $6,100,000 last year. We are pleased to see that our non GAAP operating expense was dropped quarter over quarter for the 3rd consecutive quarter. Non GAAP adjusted EBITDA loss was $5,600,000 compared to $4,200,000 last year. Adjusted EBITDA loss was narrowed for the 2nd consecutive quarter as we continue on the path to breakeven.

Speaker 2

We still have a ways to go to get to breakeven, but we are committed to showing improvement in this metric and look forward to sharing long term breakeven plans in the future. Net loss was $4,300,000 or $0.04 per share compared to $14,900,000 net loss or $0.15 per share last year. Weighted average shares used to calculate earnings per share were 103,200,000 versus 96,800,000 last year. Backlog and deferred revenue at the end of the quarter totaled $5,700,000 As Russ mentioned, we have several large deals at a late stage in the pipeline expect the Q1 backlog and deferred revenue number to be a low point for the year. Moving to the balance sheet, we closed the quarter with $700,000 in cash and $5,700,000 in debt.

Speaker 2

We currently hold approximately $2,800,000 of cash and digital assets based on today's prices. We are actively evaluating various debt and equity options to fund operations as we continue to push towards cash neutrality. We will remain active with both financial conferences and investor meetings in our efforts to tell our story and further strengthen our corporate profile in the capital markets. The next major financial conference we will be attending is the 18th Annual Needham Technology and Media Conference, May 16 through 18th end the 2023 Cancer Fitzgerald Tech Conference June 14 through 15th. We look forward to many 1 on 1 conversations and meetings with High class institutional investors at those events and other financial conferences as opportunities present themselves.

Speaker 2

With that, I would like to turn the call over to Randalls.

Speaker 3

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, are scalable and capable of any number of integrations with 3rd party point solutions to include our very own best in class location based services that delivers real time blue dot and advanced wayfinding. At Funware, 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.

Speaker 3

In the past, we still sold like a custom development shop that resulted in overly complicated contracts and sometimes sticker 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.

Speaker 3

This is something that many vendors have tried, but failed to deliver and was something of a unicorn in the conference industry. However, Funware 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 layouts without additional hardware or fingerprinting. We are thrilled to be working closely with several strategic partners who will be reviewing our solution live next month.

Speaker 3

These partners are able to open significant doors across the hospitality industry, both locally and abroad. Speaking of conferences, we were thrilled to partner with TD SYNNEX at HIMSS in Chicago this year And showcase our digital front door to numerous healthcare prospects. We also made great connections at Vibe in Nashville, and next month, will be at VITAC in Las Vegas for Casino Resorts as well as Hi Tec in Toronto, which remains the premier hospitality conference each year, Where we'll be showcasing our amazing work for Atlantis Bahamas and Gaylord Hotels by Marriott. Regarding blockchain, We are still on track to issue approximately 25 percent of Fundcoin's maximum supply for securitized this summer with regulated trading to follow thereafter. At this time, we are working to ensure all rightful holders have been notified and given time to properly set up their accounts.

Speaker 3

With the successful test of Fund Blocks via Fund Wallet, we are also looking at new ways to drive Fund Token utility and leverage its functionality within third party applications. Switching gears to light, we are excited to announce our new workstation line will be available this summer as well, Which will increase the size of our serviceable market and take advantage of our growing brand awareness despite headwinds in the industry due to macroeconomic trends. For closing remarks, I'd like to turn things back over to Russ.

Speaker 1

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 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.

Speaker 1

And one last thing, We are no longer using the term multi screen 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. I would like to open up the call now for questions to the operator. Operator, please go ahead.

Operator

Thank you. At this time, we will be conducting a question and answer thank you. Our first question is coming from Darren Aftahi with ROTH MKM. You may proceed.

Speaker 4

Hey, guys. Good afternoon. Thanks for taking my questions. 2, 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?

Speaker 1

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 have joined the pipeline and the ones that were kind of in middle stages are now at later stages. And the 2 verticals that we see the most activity in are in hospitality and our healthcare, which are our 2 favorites.

Speaker 4

Great. And then that kind of leads to My second question, given the inroads you've made in hospitality and all the oopla around generative AI, I'm just wondering, is that in the Sort of roadmap in terms of integrating that into your platform, just in terms of opportunity to provide clients with maybe more Revenue opportunity or list over time? Thanks.

Speaker 1

Well, AI is something we're certainly keeping an eye on, Written language, which of course could be turned into spoken as well. And we're just looking for opportunities like where that would make sense for us to plug it 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.

Speaker 4

Great. Maybe one last one for Matt. Just your comments about the mismatch on revenue and deals and costs, When you call that Gaylord, like is there any way to kind of smooth that out or is that just a function of GAAP accounting and it's kind of out of your hands

Speaker 2

Yes. I mean, it is more or less a function of Galpin County. 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 Yes, 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.

Speaker 2

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 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 because of the GAAP accounting rules.

Speaker 5

Thank you.

Operator

Thank you. Our next question is coming from Scott Buck with H. C. Wainwright. You may proceed.

Speaker 6

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

Speaker 1

Well, we're sort of hot off the presses in announcing that Siemens partnership. So there's a period of kind of bring up of getting that are 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 the Siemens strength there. And it's going to really be a function of Siemens kind of 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.

Speaker 6

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 has some new products there in the pipeline. What's the status of those?

Speaker 1

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 Mac sales were down 40%. So we actually were are tracking 10 points ahead of the cohort there in the PC space.

Speaker 1

And so what we've done is really just focus on the cost discipline around 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 a better to 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.

Speaker 5

So that will give us

Speaker 1

Offerings that are aimed at power business users, and that's a good complement to the gamer market that we already serve.

Speaker 6

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?

Speaker 1

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

Speaker 2

Yes, sure. Yes, no, I mean, we're some 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 right sized 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.

Speaker 2

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 that the staff we have is the staff we need to continue to grow. But Again, it's going to be a slow process. I don't see we're going to drop $1,000,000 or $2,000,000 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.

Speaker 6

Great. Appreciate that guys. Thank you

Operator

very much. Thank you. Our next question is coming from Howard Halpern with Taglich Brothers. You may proceed.

Speaker 5

Good afternoon, guys. You put 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?

Speaker 1

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 formally had broken out all the costs around fulfillment and beacons around location based services and everything was kind of unbundled. 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 what you heard Randall talk about earlier there, We've also lowered the floor, if you will.

Speaker 1

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 merely opens the middle end of in the lower end more.

Speaker 5

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?

Speaker 1

We have a few that are up and running like that and we are working on more partnerships Where we expected to broaden this, especially in markets where we don't have a direct sales effort. Is 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 not an area where we have like a specific outbound focus from within Fundwear. And so we're looking for those kinds of players. And of course, we've got we've improved kind of the training materials and the structure of the agreements can 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.

Speaker 5

Okay. And one last one from Matt, I guess, going back to the mismatch In revenues, especially with Gaylord, you brought up, but the revenues now that you'll be able to recognize going forward, They're going to be extremely high margin revenue, if not 100% revenue of margin.

Speaker 2

Yes, certainly. Certainly. So, yes, That portion is kind of devoted to the deployment, is will essentially be 100% gross margin going forward and that'll be blended in with our kind of support and maintenance Continuing for the next several years. So it will get right sized over time. It's just a bigger impact in the Q1 there as we saw.

Speaker 5

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?

Speaker 2

Yes. So gross margin quarter over quarter did dip 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.

Speaker 2

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. Hopefully this quarter, but we'll see if it happens this quarter in the next half.

Speaker 5

Okay. Thanks guys.

Speaker 4

Yes.

Operator

Thank you. Our next question is coming from Ed Woo with Ascendiant Capital. You may proceed.

Speaker 4

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

Speaker 1

Yes. The way I would characterize it is just a little bit more slowness, a little bit more caution. We haven't seen any dropout 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 kind of a local high for the last decade or more. Hospitality is having a good year.

Speaker 1

And so We expect them to keep going and of course healthcare is pretty countercyclical in nature. So this is more a function of The national budget cycles combined with a little bit more slowness due to that uncertainty.

Speaker 4

Great. Thanks for answering my questions, and I wish you guys good luck. Thank you.

Speaker 1

Thank you, Ed.

Operator

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.

Speaker 1

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's no season where that is not attractive.

Operator

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

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