Earnings Transcript for PHUN - Q4 Fiscal Year 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to Phunware's Fourth Quarter and Full Year 2023 Investor Conference Call. Currently, all participants are in a listen-only mode. Joining me today are Mike Snavely, Chief Executive Officer, and Troy Reisner, Chief Financial Officer. The format today will include prepared remarks by Mike and Troy 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 information is set forth in the earnings press release, which is available on the Investor Relations section of 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 on Phunware. At this time, I'd like to turn things over to Phunware's CEO, Mike Snavely. Please proceed.

Mike Snavely: Thank you, and we welcome our fellow shareholders to our fourth quarter and full year 2023 investor call. We're glad you've joined. Last time I spoke with you was a couple of weeks after the Board asked me to step into the role of CEO. In the 90 days or so since that earnings release, we've reshaped nearly every aspect of the company with an eye toward delivering predictable, sustainable and profitable growth for our shareholders. Troy will run through the details of those actions here shortly. When I took over this role, there was a fair bit of cleanup that needed to be done. Our balance sheet was burdened with debt obligations, we had litigation exposure in various places, and we were burning too much cash both in the core software business and in the ancillary Lyte business. Most importantly, we lack strategic focus. Most of these problems are solved and all are well understood as we speak to you today. We built our go-forward plan on a number of bright spots in the business, a highly satisfied and referenceable customer base, clear ROI that our customers are achieving with our solutions and a talented and experienced product engineering team. From this strengthened foundation, we are on a new trajectory for 2024 and are bullish on Phunware's future. I will turn it over to Troy to talk about our financial performance. After his remarks, I'll return to talk about our vision for the future of Phunware.

Troy Reisner: Thanks, Mike, and good afternoon, everyone. I'd like to add my thank you for joining us today for a review of our full year 2023 financial performance and our progress against key cost reduction 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. In addition, I will provide insight into our operating expense run rate and how we have strengthened our balance sheet in early 2024. As a reminder, in November, we made the decision to shut down our hardware business Lyte Technologies, and in accordance with Generally Accepted Accounting Principles, Lyte is presented as a discontinued operation in the financial statements. The shutdown of Lyte was substantially completed in December. Net revenues from continuing operations for the full year of 2023 totaled $4.8 million as compared to $6.5 million in the prior year. The decline in revenue is due to the sale of $1.5 million of PhunToken in the prior year. Gross margin from continuing operations was approximately 34.9% compared to approximately 53.8% last year, with the prior-year margin again benefiting from the sale of PhunToken. Operating expenses from continuing operations, inclusive of goodwill impairment of $25.8 million, were approximately $47.4 million this year compared to approximately $27.5 million last year. Excluding the goodwill impairment, operating expenses from continuing operations were $21.6 million for 2023 compared to $27.5 million last year, which reflects the significant process we've made late in 2023 to reshape our cost structure. For a better picture of the impact of our cost reductions, we note that the average monthly operating expense from continuing operations for Q4 of 2023 was approximately $1.1 million as compared to an average of $2 million for the previous nine months of 2023. Other non-cash operating expense items related to continuing operations in 2023 were stock-based compensation and impairment of goodwill, which totaled approximately $30 million this year compared to approximately $3.1 million in the prior year. By excluding these non-cash charges, adjusted operating expense was approximately $17.9 million this year compared to approximately $24.3 million last year. Our loss from discontinued operations for 2023 was approximately $10.9 million and $5.5 million in the prior year, which encompasses all the revenues and costs of Lyte. Non-GAAP adjusted EBITDA loss from continuing operations was $15.5 million this year compared to $20.8 million last year, which reflects a 25.5% improvement. In late February, we executed a 50

Mike Snavely: Thanks, Troy. Now that we have a solid foundation to work from, here is how we plan to build the future for our shareholders. Our commitment to our shareholders is one of sober execution. What does this mean? Solid steady growth, careful stewardship of company assets, driving the core software business toward breakeven and then profitability, and deployment of a portion of our capital against carefully considered opportunities that have a potential for outsized returns. Our strategy in software

Operator: Certainly. Everyone, at this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Darren Aftahi from ROTH MKM. Your line is live.

Darren Aftahi: Hi, Mike. Hi, Troy. Thanks for taking the questions, and good to hear this strategic focus going forward. If I could ask a couple? I guess, first, when you think about the Software as a Service business, you guys have made inroads into the three kind of verticals you talked about. I guess, now that you sort of got some of the heavy lifting done with restructuring the company, where do you see the most opportunity in those three verticals? And then, I guess my second question, as we think about, like, mix of revenue going forward, how impactful is digital assets going to be on your 2024 P&L? Or is that going to be more of a long-term strategy? Thanks.

Mike Snavely: Hey, Darren, it's Mike, and thanks for the questions. So, let me start with the first one, which is what verticals do you think are most promising within the software business. Think of our software portfolio as a digital companion to an in-person experience. And so, we've identified and we have traction in hospitality, which is people maximizing the value of the big investment they make in going to a resort property, let's say. Number two, in healthcare, where it's of literally critical importance that they get to their appointments on time and are able to access the information they need on that premises. And then, within the connected workspace segment where it's important for employees to be able to access various services on complex corporate campuses. You can extrapolate that concept of digital companion to an in-person experience to lots of different things. So, think about university campuses, think about arenas, think about -- we had an historic airport business, et cetera. So, all that to say that we believe that we have the ability to deliver an end-to-end guest experience specifically in hospitality because of some of the nuances and systems that are in place for some of those major resort properties. There are several hundred really large resort properties around the world and we're going to be super focused on that in the immediate term and more opportunistic on the other segments that we've identified. Relative to the impact of digital assets on the balance sheet or in the financials of the company for this year, we expect it's going to take a little bit of time to get this right. I'm personally very bullish on this idea of the global crypto passport. In fact, I'll be at the ROTH conference next week talking to investors and others, analysts like yourself about what our thoughts are there. Those thoughts are still crystallizing and coming together, but I think we're really on to something here specifically when it comes to connecting sort of legacy financial institutions to the crypto ecosystem. And we'll have a little bit more material that we can talk about then in terms of sharing our vision for that segment of the market.

Darren Aftahi: Great. And then just two more if I may. Your sort of legacy SaaS business had some channel partner relationships. Now that you've [figured] (ph) out headcount, like how important is that to growth going forward? And then I know you talked about M&A being important in the go-forward strategy. I'm more curious is that a horizontal or more of a vertical endeavor. Thanks.

Mike Snavely: Sure. Well, we're still pretty -- channel is still pretty important to us. And as I said on the last earnings call, about 30% of our pipeline comes from channel partners. Those are typically going to be systems integrators and others who are proposing large complex technology solutions for new build -- new buildings or potentially renovations of existing buildings, et cetera. So that remains important. On the M&A front, I think that we're looking at targets that will potentially provide us with acceleration for feature function and integrations that will serve the hospitality and healthcare spaces.

Darren Aftahi: Great. Appreciate the color. Thanks, Mike.

Mike Snavely: You bet.

Operator: Thank you. Your next question is coming from Scott Buck from H.C. Wainwright. Your line is live.

Scott Buck: Hi, good afternoon, guys. Thanks for taking my questions. Mike, I was hoping maybe you could expand a little bit more on that last question. I'm curious, any real changes to the way you're approaching sales on the location platform versus maybe the last regime?

Mike Snavely: Yeah. So, based on where we are in terms of staffing size, et cetera, we're going to have to be really smart about creating distribution leverage. And so, I brought in a couple of people who are sort of tried and true in terms of their effectiveness in not only selling, but also leading the sales function. We're going to be investing in demand generation and other traditional B2B marketing techniques to serve our direct sales force. In addition to that, and I'm personally going on the road and having discussions with some other ecosystem players specific to the hospitality segment, to be clear. I conducted one of those meetings last week. I've got another one coming up right after the ROTH conference next week. And these are folks who have sales forces of dozens and hundreds of reps, who can, hypothetically, take our solution to market as a complementary product offering to the solutions that they provide, whether they're technology, hardware, or otherwise. So, I suppose the point is that our intention is not to hire a bunch of direct sales reps and hope that they go out and sell. It's going to be to carefully and organically cultivate and grow an internal sales force, feeding them with the appropriate marketing, but then really kind of exploring outside of the company to identify and leverage distribution that's already in place with complementary solutions within the markets that we serve.

Scott Buck: Perfect. That's helpful. And then, in terms of business cadence from here, it sounds like all the noise is really in the past, and from here on out, we should really look at this as a fresh restart on the business. Is that fair?

Mike Snavely: I'm going to ask Troy to answer that because I need to take a sip of water, but I think you're probably right.

Troy Reisner: Okay. Thanks, Mike. Scott, thanks for the question. And yes, we're looking at this as a restart. When I joined back in June, we had bought a heavy lifting, and we've accomplished the vast majority of that. We've got our costs under control. We have a plan to breakeven. One of the things we've been fighting for a while is the potential NASDAQ delisting for trading under $1. Obviously, we did a reverse stock split, and I can share with you guys that today, we received a letter from NASDAQ that we're back in compliance. We'll be filing an 8-K on that here in the near future. So, we've come out of this period of time with cleaning up the cost structure, cleaning up the balance sheet and maintaining our liquidity options going forward. So, yeah, it's a new day, Scott.

Scott Buck: Great. Thanks for that, Troy. And I guess last one. In terms of the current cost infrastructure, how much support does that give you as the revenue begins to ramp? I mean, is this -- are we at trough levels, or is this something you can hang on to while revenue grows kind of 2x or 3x where we are today?

Troy Reisner: Yeah, good question. We're early stages. I believe we're going to have to make some investment as we grow. I think that investment probably starts to modestly ramp midyear. And then, we'll evaluate what the backlog looks like and invest accordingly. We're going to be conservatively aggressive, but we want to make sure that we're not getting too far in front of our revenue stream and get back into the situation where we're burning just too much cash.

Scott Buck: I appreciate that. Thanks for the time, guys.

Operator: Thank you. Your next question is coming from Ed Woo from Ascendiant Capital. Your line is live.

Ed Woo: Yeah, congratulations on all the progress on the turnaround. My question is, what are you seeing out there in terms of the sales cycle in your business? I think as you have reached a much better state of the company, has that improved when you make your pitches to your potential clients?

Mike Snavely: Yeah. It's starting to -- we're starting to see evidence of improvement. Let me speak to that a little bit. So, part of being -- part of our strategy and really being reliant upon in part in organic sales force, and then the sort of the third-party distribution represented by partners et cetera, is that those are very different kinds of sales cycles and different kinds of maturities. And so, our job is to do a better job of identifying direct sales opportunities where we can. We are working pretty hard referral programs from existing happy, satisfied, renewing customers. And I'll give you just one really quick anecdote. So, we recently launched in a particular property under the Marriott umbrella. That implementation went really well. The general manager of that property said, "Look, I'm really enjoying what I'm seeing here in terms of the app and the engagement it's driving. Let me introduce you to my friend over here who runs another resort in a different part of the country." And that sales cycle is maturing very, very rapidly. I think it's probably sort of in the 45 to 60 day close timeframe as distinct from some of the other beachhead accounts that may have taken many months to win. So, in addition to that, we've got a fair bit of what I characterize as incremental demand within our existing customer base, those should boil quicker as well. And so, we're employing kind of an all of the above strategy, identifying direct deals within existing customers and their friends and family, so to speak, while we are waiting for some of these deals that are coming through channel to mature on their own timeline.

Ed Woo: Great. Well, thanks for all the color, and I wish you guys good luck. Thank you.

Mike Snavely: Thank you, Ed.

Operator: Thank you. Your next question is coming from Howard Halpern from Taglich Brothers. Your line is live.

Howard Halpern: Congratulations on all the hard work that you've accomplished so far. Could you, I guess, provide some color on ideal size within the different verticals? And are you looking at maybe initially maybe a smaller deal size so you can move forward with incremental growth within new customers?

Mike Snavely: Yeah. So, we're actually kind of going the opposite direction. Let me tell you what I mean by that. So, we're kind of rejiggering the way that we tell the story of value that we deliver to our customers. And so, our goal and I'm speaking specifically to hospitality, the economics in the healthcare space are a little bit different and they're also different from the connected workspace. But as I mentioned, hospitality is going to be one of our primary focuses in the immediate term. We're really talking about this is turning our digital companion to the in-person experience into a revenue-generating concierge-type service. And what I mean by that is that it's essentially a digital companion sitting in the pocket of all the guests in such a way as to be able to allow them to transact. And we've got some good data from a couple of customers that tend to indicate that they're generating many hundreds of thousands of dollars per quarter through our application. So, we're going to lean into that. We're going to charge for the value we're delivering. And we're also going to be bundling in a deeper level of customer success into the relationship with these customers in such a way as to really allow them to extract more of that value without having to add staff on their side. And we can do all of that without kind of linear scaling. We can do that supported by artificial intelligence and various playbooks that we've built based on the best practices that are available or that we've identified through the partners that we have -- customers rather that we have that are achieving with the good results. So, I think that our ticket is going to go up as this sales strategy takes hold, but I think it's kind of early days, and I'd hate to say anything definitive until we have some more data to help you with your forecasting.

Howard Halpern: And can you talk to, I guess, your engineering and software teams? Have they developed a methodology for maybe quicker implementations than in the past? And how does that relate to potential growth opportunities?

Mike Snavely: They sure have. In fact, I must confess that I don't really know all the details because I'm really not a technical person. But long story short, we've identified some ways to really compress the timeframe and the level of effort required to implement a new solution. And that has to do with some of the ways that we've updated our app framework, some of the ways that we have identified certain capabilities within the implementation workflows that allow us to ingest data in mass and otherwise use that kind of cascade through the app, distinct from some of the handwork that was being done before. And we'll continue to focus on ways to decrease the time to market and decrease frankly the level of effort and cost associated with delivering these solutions.

Howard Halpern: Okay. Well, thanks and keep up the great work.

Mike Snavely: You bet. Thank you, sir.

Operator: Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.