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spk03: Hello, and thank you for standing by. Welcome to Mobella's second quarter fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the conference over to Lana Adair. You may begin.
spk00: Good afternoon and welcome to Novella's second quarter 2023 earnings conference call. Today's discussion will contain forward-looking statements based on the environment as currently seen by the company's management and, as such, are subject to various risks and uncertainties. Actual results may differ materially. It also contains references to non-GAAP financial measures that the company believes provide useful information to its investors. The earnings relief, most recent annual report on Form 10-K, and other filings at the SEC, each of which are posted on Mozilla's IR website, provide more information on the specific risk factors that could cause actual results to differ materially from management's expectations. They also provide additional information on non-GAAP financial measures including reconciliations where appropriate to corresponding gap financial measures. Guidance provided today incorporates the order trends that management has seen to date and what they believe today to be appropriate assumptions. Results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions, and cuts in demand and spending, including the impact of recessionary fears, world events, the rate of growth of our core markets, including the live streaming community, and other various factors detailed in the earnings release and the company's filings with the SEC. It's not possible to accurately predict demand for goods and services, and therefore the company's actual results could differ materially from guidance. And now I'll turn the call over to Novello's CEO, Ben Lee.
spk01: Thanks, Lana, and thank you all for joining us today. We are pleased to share our results for the second quarter of fiscal year 2023. I'll begin with a high-level overview of the quarter's results and the business. We're excited to have launched the obscure broadcasting platform last week, expanding Movala's XSense mocap technology from professional Hollywood studios to individual streamers and VTubers. Obscure enables live streamers to create engaging content, including motion enabled avatars. We achieved $8.4 million of revenue in Q2 of 2023, down 3% year over year. While the writer's strike impacted our top line in Q2, our results reflect the resiliency embedded in the business. and our continued expansion of movement digitization use cases into our existing markets, as well as new growth areas, such as automotive workplace ergonomics. We remain well positioned for significant opportunity ahead, particularly in film and game production, once all parties reach a resolution. We continue to be in a very strong cash position with $51 million on the balance sheet, which affords us the opportunity to make measured investments in new products and use cases while managing our expenses prudently. In our last earnings call, which was our first call as a public company, I provided a detailed overview of our technology and markets. Since some of you may be newer to the story, I'd like to share an abbreviated refresher. Movala is a global leader in digitizing movement of the human body and of automatons that mimic human movement. We digitize movement with a highly differentiated full stack solution that integrates sensors, visualization software, and AI analytics. Movala is best known for XSense technology. Our XSense products integrate sensors, advanced algorithms, and user-friendly software that digitize nonverbal movements of the human body and automatons. Mogada technology is based on our proprietary inertial sensors, which are small, lightweight devices that can be attached to the body or to objects to digitize movements in 3D space. Movala sensors are incredibly accurate with a high sampling rate that captures even the most subtle movements. But what really sets Movala apart is our software. Movala software is designed to be user-friendly and intuitive, allowing developers and creators to capture and analyze movement data quickly and easily. And with our powerful analytics tools, Movala software makes it easy to turn raw movement data into actionable insights, helping users to optimize performance and improve results. Movalis full-stack product portfolio is protected by over 160 granted patents, which provides a strong competitive moat. We continue to invest in the advancement of our products and extending our technology leadership. Our products serve three diversified core end markets, entertainment, health and sports, and automation and mobility. We sell directly as well as through channel partners and serve the Americas, EMEA, and APEC geographies. Now I'll share with you our recent wins and progress in each of these end markets. In the health and sports market, biomechanics researchers and industrial athletes are leveraging our workspace ergonomics solutions. In Q2 2023, we continued to expand our use cases in the automotive industry, assisting automotive manufacturers in the improvement of the safety and wellness of industrial athletes. Our Xsense motion capture tools provide information about the physical stresses of employees while they work on the production lines. If data indicates increased ergonomic stresses, workplace adjustments are made to reduce physical stress, which also can result in improved mental health. In the second quarter, we announced an exciting project with BMW, building on our previously announced partnership with Toyota. The BMW group selected Movala's workplace ergonomic solutions with XSEN's MoCap system and software to provide faster, objective workplace ergonomic assessments across all international production facilities. The BMW Group utilizes Movela's motion capture technology to easily transform realistic, accurate, ergonomic evaluations of production workers with superior precision. We also continue to expand into additional use cases within the automotive industry this quarter. For example, in Q2, we secured a key project with a leading electric vehicle company to assist training of humanoid robots and workplace ergonomics. Our X10 suits are used to capture and digitize human body movements of shop floor workers. The data is then used for robots to mimic and replicate precise human movements. In the automation and mobility market, our sensor fusion modules are used today by top companies to sense movements of robots and automatons on land, sea, and in the air. In Q2, we showcased a robotic mower designed by iKnowHow which relies on our MTI 680G sensor module to keep it on track, even when satellite positioning center is temporarily unavailable. Autonomous mowing can be safely performed with 24-7 reliability. MoVoLA continues to expand into new agricultural robotics use cases such as this. Next, turning to the entertainment market, Movala remains the gold standard for Hollywood-quality motion capture. In the film and video game industry, Movala's Xsense motion capture technology has been used to create highly realistic and immersive experiences by digitizing movements of actors and animating them in real time. Emerging new use cases for entertainment beyond the professional studios continue to expand, particularly in the individual creator and live streaming market. In Q1, we preview the strong early response to our new Opsphere platform. The live streaming community continue to be enthusiastic about this offering. Our pre-launch private event in July was attended by VTuber live streamers who collectively represented over 100 million monthly views. We are encouraged by the early social media engagement with our official launch. The obscure launch announcement reached viral levels on Twitter, now X, with half a million views on the first day. Obscure provides creators with user-friendly tools to deliver interactive experiences, including real-time human movements for digital avatars during live streaming sessions on well-known streaming sites such as Twitch. Obscure is the first broadcasting software built on Unreal Engine 5 and is the ultimate tool for streamers looking to grow a vibrant community and captivate the audiences. Obscure incorporates AI computer vision for face and body tracking to enhance better real-time nonverbal engagement. Creators can choose to stream in various formats that include a classic webcam layout or a customizable 3D environment, or as a 3D VTuber, wearing our obscure mocap sensors powered by Xsense. We are now shipping the obscure mocap box. The mocap box includes the obscure upper body mocap set with nine sensors and new comfortable washable gloves that digitize the intricate movements of the fingers and hands. Obscure mocap box has an up to 12-hour battery life. to accommodate those long streaming sessions required by VTubers. In other developments, in Q2, we hosted our growing developer community at the annual Movala Thought Developers Conference. Over 300 attendees and thought leader speakers in digital health participated in our market event. We continue to believe that there is further opportunity to expand and grow our third-party developers community through the Movala DOT SDK. Movala DOT sensors and our software development kit save developers the engineering effort of making their own sensors so they can focus their resources on creating amazing apps. So far, our DOT third-party developer count has grown to over 800, many of which are starting to announce exciting products, primarily serving the health and sports market. At Movela, we continue to refine our AI algorithms that power our products for digitizing movement. We have invested in AI across our full stack to provide more precise lifelike movements of digital characters, avatars, and robots. Our sensors collect massive amounts of data that often comes with noise and bias. At the firmware level, our intelligent algorithms decipher and extract useful data from a sea of noisy raw data. Then our sensor fusion algorithms aggregate and integrate the curated data from the gyroscope, accelerometer, and magnetometer to generate positioning and orientation information. At the software level, our AI assembles the positioning and orientation information from the sensors with a 3D human body biomechanical model to duplicate precise human body movement represented by an avatar in our software in virtual space. Our AI algorithms continuously adapt to temporal variations in human body movement, as well as changes and disturbances in noisy environments to maintain accurate spatial movements of the avatar. Our HD reprocessing AI software evaluates data from 17 sensors on the body and learns and balances good versus poor sensor data to continuously maintain realistic human body movements. We see recent advancements in AI as an enormous growth acceleration opportunity. We believe that our business will be a strong beneficiary of AI, especially with generative AI. For example, StepLab, an intelligent gate tracking app developed by a Movala partner, 0C7, analyzes walking motion scientifically using just two mobile thought sensors with one on each foot. In addition to the visualization and graphical information, the StepLab app uses generative AI to process gait data collected by mobile thought sensors for assessment and recommendation to enhance the patient's ability to improve their walking motion. Thank you. And with that, I'll turn it over to Steve to provide more detail on our second quarter 2023 financial results.
spk07: Thanks, Ben, and thanks, everyone, for joining us today. Consistent with last quarter, I'll begin with a review of our second quarter 2023 results and then provide limited guidance. Throughout my remarks, I will refer to various non-GAAP metrics. A reconciliation between GAAP and non-GAAP is available on our earnings press release and on our investor relations website. I'll begin with our top line results. Net revenue for the quarter was $8.4 million, a 3% decrease compared to the same period last year, and a decrease of 9% as compared to Q1 2023. While seasonality plays a role in our quarterly revenue profile, this past quarter was directly affected by the Hollywood labor dispute that began in early May and has not yet reached a conclusion. These strikes have had a wide-ranging impact on the entertainment industry. It has affected many production, filming, and animation studios. While the labor dispute started in the United States, it is impacting the entertainment industry across many geographies which Mobella serves. We estimate the impact to our revenue in Q2 to be approximately $2 million. Gap gross margin was 53% as compared to gap gross margin of 50% in the second quarter of 2022 and 61% in the first quarter of 2023. The sequential decrease is attributable to the lower revenue over which fixed costs of production are amortized and product mix, which combined cost about 4% of the decrease and an increase in the excess and obsolete reserves on components on hand that caused an additional 3% decrease, each of which was also a direct result of the Hollywood labor dispute and lower revenue. Non-GAAP gross margin for the quarter was 53% compared to 63% and 64% in the second quarter of last year and the prior quarter, respectively. The change due to the same reasons mentioned with the GAAP numbers. Turning to operating expenses, we remain keenly focused on investing in new products and technologies to drive top-line growth, return on investment, and shareholder value while managing our expenses prudently. GAAP operating expenses this quarter totaled $12.2 million, inclusive of $1.6 million of fees-backed transaction and capital markets-related costs won in the second quarter. $600,000 higher accruals related to increased costs of being a public company, and a $500,000 non-cash increase in reserves as our outlook grows more conservative given the uncertain macroeconomic conditions. This compares to $11.1 million in Q2 2022. Sales and marketing expenses in Q2 totaled $3.8 million essentially even with the same quarter last year and up about $300,000 sequentially. largely due to higher employment costs and stock compensation. R&D expenses were $2.2 million versus $4.3 million in the same period last year and $2.9 million in the first quarter of 2023. In Q2 2023, we capitalized $1.5 million of software development as compared to just over $100,000 in the first quarter of 2023 and zero in Q2 2022. As Ben articulated earlier, our engineering focus is on developing new movement digitization technologies, including hardware, software, and artificial intelligence, and bringing the obscure platform to market. G&A expenses totaled $6.2 million in Q2, inclusive of $1.6 million of expenses associated with the D-SPAC transaction, the majority of which are non-recurring, and capital markets-related expenses, and $600,000 of new public company costs that were not incurred in the prior year. This compares to $3.1 million for the same period last year and $4 million in Q1 2023. Our gap loss from operations for the quarter was $7.7 million compared to a loss of $6.8 million in the same period last year and $9.4 million in the first quarter. These results, after accounting for the effect of the Hollywood labor dispute and various reserves accruals and D-SPAC transaction costs were in line with our expectations as we continue to invest in our business and drive for long-term growth. Gap net loss attributable to common shareholders for the quarter was negative 13.9 million or a loss of 27 cents per share. This compares to a gap net loss of 7.6 million or a loss of $1.48 per share in Q2 22. The Q2 GAPNES loss includes a non-cash revaluation loss on the venture-linked notes and non-cash gain on the Pathfinder warrants of $7.3 million and $300,000, respectively. These revaluations are non-cash and are primarily a result of MoVilla's stock price, volatility, and interest rates. Adjusted EBITDA, which excludes certain items such as stock compensation, amortization, depreciation, interest income and expense, and the effect of income taxes, revaluations of the VLN and warrants, and certain other infrequent costs, was negative $5.2 million for the quarter compared to negative $4.5 million in the same period last year. The Q2 adjusted EBITDA amount includes approximately $600,000 of incremental public company costs. that were not incurred in Q2 of 2022. Please refer to our press release for a full description of items excluded for the purpose of adjusted EBITDA. Turning to the balance sheet, we ended the quarter with $51 million in cash and cash equivalents compared to $62.1 million at the end of Q1 2023. We remain in a strong cash position due to our February 2023 NASDAQ listing, which through a series of transactions raised $60.3 million in net proceeds, providing an ample cash runway to support our sales and marketing initiatives and R&D investments. The cash consumed in the last quarter was a combination of $7.7 million operating loss, excluding stock-based compensation of $500,000, additional reserves raised of $500,000, Depreciation and amortization of $300,000, combined with $3.5 million of cash used in working capital, which is primarily to settle transaction and capital markets-related costs, and $1.5 spent on capitalized software, primarily related to our just-launched broadcasting software, Obscure. This quarter was an outlier from the perspective of cash consumption, with one-time and D-SPAC transaction costs being paid. We expect cash consumption to to be closer to non-GAAP operating profit in the future, plus or minus changes in working capital. Now I'll share a broader outlook and guidance, beginning with some color on our operating environment. Irrespective of the excitement we feel about our product traction, such as the recent obscure launch, we are taking what we believe is a cautiously prudent stance with respect to the macro environment, and more specifically, the uncertainty around any near-term resolution in the writer and actor strike, and a broader return to work in the entertainment industry. Fortunately, and as Gunn and I have both articulated, we are in a strong cash position, which we expect will allow us to navigate this environment, maintain our focus on new product development and expansion of our global markets. For the third quarter of 2023, we expect revenue in the range of $8.6 million plus or minus $500,000. Given the lower top line driven by the continued macro environment challenges in Europe and China and the rider strike, we will not achieve breakeven in Q3. We are taking action to increase demand generation and reduce op-ex. These measures are intended to allow us to breakeven as soon as practical and at a lower revenue level. As a result of the above, we expect full year revenue in the range of $34 to $38 million. Thank you all again for joining us today. We'll now open the line for questions from the analyst community.
spk03: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tori Vansberg with Stifel. Your line is open.
spk02: Yes, thank you and congratulations on getting OBSCURE launched. First question is on the numbers, however, for the year. So I understand the Q3 guidance and some of the dynamics there, but based on my math, it does seem like you are expecting decent sequential growth in the December quarter. So do you have visibility towards that at this point? Yeah, any comment that you can give us on your conviction of growth in Q4?
spk01: Yeah. Hey, Tori. This is Ben. So in our guidance for both Q3 and the entire year, we are assuming that the writer's strike and the actor's strike in Hollywood will impact the entire full year. Now, having said that, Roughly 80% of our business is not related to the strike, including about 50% of our entertainment business. And we are continuing to see quarter over quarter growth in those portions of the business that's not affected by the strike.
spk02: Got it. Yeah, thanks for clarifying that. And you mentioned 2 million impact from the strike this quarter. Any way to quantify that for Q3 and Any sense at this point, you know, when you could potentially recoup some of the money? I'm just trying to think how we should think about, you know, whether that's kind of just a push out, is it a delay or, you know, will you perhaps not be able to recoup some of that revenue?
spk01: Yeah, that's exactly the way we think about it, which is a push out and a delay of projects in our pipeline. So literally, in terms of the $2 million in the second quarter, it's really the speed of the impact that was a little bit of a surprise for us in terms of the strike that impacted the last two months. So if you look at it that way, essentially the projects that are associated with professional studios, they're on hold. So when there's resolution and work resumes, we expect those projects to resume. Now, having said that, there's a finite capacity in actors and writers to continue production, right? So It's not going to be a sort of a hockey stick rebound, but we certainly see it as a return to normal growth over time.
spk02: That's great. Last question. When should we start thinking about obscure contributing to financials? I know that business model, of course, is quite different than some of your other businesses, but any visibility on when you should start to see the financial impact of obscure would be great. Thank you.
spk01: Yeah, so we just launched it last week. The initial response has been better than what we had hoped for in terms of coverage and awareness and the excitement from the community that we're going after, which are the streamers and the VTubers. We said in prior calls that we expect non-material contribution to this year as the market develops. And however, we do see a meaningful contribution in line with our expectation for next year.
spk02: Great. Thank you very much.
spk01: Thanks, Corey.
spk03: Thank you. Please stand by for our next question. Our next question comes from the line of Quinn Bolton with Needleman Company. Your line is open.
spk05: Hi, Ben, Steve, and Lana. Just wanted to follow up on Tori's question there. It sounds like the impact of the writer's strike just prevents you from, you know, engaging in these, you know, professional studios or, you know, kind of halts production at those professional studios. So you kind of have just, you know, everything grinds to a halt when the writer's strike is over. they come back, but it's not like revenue that you miss in Q2, Q3, Q4 would all sort of be caught up in Q1 and you'd see kind of six or so million all being caught up. It just seems like everything in the pipeline just pushes out. So you hopefully would get back to kind of a two to three million a quarter from the professional studio side of the business, but it wouldn't necessarily rise above that level for a quarter or two as you catch up, right? It's just, best to think of it as just a sort of permanent push out in those projects and you get back to a steady state, but you don't get the catch up revenue.
spk01: Yeah, that is the right way to look at it for the professional studios, which is 50%, roughly 50% of our business for entertainment. And as I said earlier, you're absolutely right. There is a finite capacity in Hollywood production, right? So they're not going to all of a sudden double up in production. that allow us to sort of recoup what was missed. So it's absolutely a delay for both us and the world of Hollywood. Having said that, what we are seeing is in the other half of the entertainment business, that's non-Hollywood strike-impacted. namely the smaller indie artists. We are seeing increased activity in terms of engagement in the indie productions. So we are stepping up our efforts in demand creation and revenue generation on the part of the entertainment business that is not impacted by the strike. So, you know, it is our hope that the efforts there and the increased activity of these Indies will help the growth to be better than just a push out as the profession like it recovers.
spk05: Got it. Those efforts would help mitigate the impact of the writer's strike. Do you think that that business, that increased indie business, do you think that that would be sustainable or do you think it would be sort of a temporary shift and that too would normalize once the strike ends?
spk01: You know, it's unknown. You know, we believe to a certain degree it opens up a new world of content creation. You know, we are in sort of new territory here, at least in the company's history. I think the last strike was 2007. The company was formed in 2009. We've never experienced that type of a strike in our core business. But, you know, as we know that whenever there's a shift in market dynamics, it always creates opportunity for growth. new entrepreneurs in entertainment. So I think to a certain degree, it will be sustained, you know, whether we're going to see a sort of a spike and then go to more normal growth, or whether it's going to be replaced by the professional studios. It remains to be seen. But Looking at the number of indie projects getting started to try to fill the void of content, new content next year, we find that to be encouraging.
spk05: Understood. Moving to Obscure, can you talk just a little bit about the monetization for Obscure, both between the app as well as the mocap box? And then I think in the press release, you mentioned that you're bringing Obscure to the... Epic Games Store, is that the primary store for live streamers, or are there opportunities to bring Obscure to other app stores to increase sort of the distribution of that platform?
spk01: Yeah, so the reason we distribute on the Epic Store is because the Obscure platform, the app, is the first app that's built on Epic's Unreal Engine 5. So naturally, the answer to your question is yes, that would be the place influencers, streamers will go do the download. In terms of what they do with the app is then they take the app because the app is a Twitch extension for broadcasting. So then they will take it to the Twitch platform, which is our first launch platform for them to start streaming. And then overall, the way we develop the software is it's actually platform-agnostic in terms of the broadcasting channel, if you would. So, yeah, so we will grow into other platforms.
spk05: And then the monetization between the app software and the mocap box?
spk01: Yeah, so what we're trying to do is we're trying to make the entire solution as accessible as possible. So we priced the MoCap box at $19.95. which is a price point where you feel that it's affordable for the segment of streamers that we're targeting, that middle band of streamers that are already making some amount of money. annual income from their streaming livelihood. And then once they start streaming, we add two new revenue streams that are on top of our existing revenue. One is the rev share from Twitch, which is 20% of the interactions. that the streamers have with the fans. And then on top of that, we embed it in our app is the marketplace for assets, for digital assets, which streamers will use to complement their virtual streaming environment. And those assets initially will be I think we have over 500 assets that are a combination of a few free assets and certain assets have a price on it that they will buy from us directly. So those are the two additional revenue streams. Overall, the combined obscure platform, once it scales, we expect it to be in line with our gross margin models for the entire company.
spk06: Got it. Okay. Thank you.
spk03: Thank you. Please stand by for our next question. Our next question comes from the line of Adithya with Northland Capital. Your line is open.
spk04: Hi, this is Adithya on behalf of Mike Lattimore. Could you give some color on what was the revenue mix by industry vertical? Sure, I can give you that.
spk07: This is Steve. This quarter we did about $2.8 million in entertainment, $2.7 million in in each uh well actually 2.7 million in automation and mobility and about 2.8 million in health and sports you know we would have expected our entertainment side uh if the strike hadn't happened to be much larger all right and uh the strike does that affect only the product revenue or you're seeing some uh revenue being affected even in the service because of the strike
spk04: It's more in the product revenue. All right. And how are the bookings in the automation and mobility category?
spk07: They remain as expected. We're seeing some growth in automation and mobility in the 45% quarter over quarter range. We expect that to continue.
spk06: All right. Thank you.
spk03: Thank you.
spk06: Please stand by for our next question.
spk03: We have a follow-up from the line of Tori Vanberg, the CFO. Your line is open.
spk02: Yeah, thank you. I just had two quick follow-ups. First of all, on gross margin, how should we think about the mix for the second half of the year? So it sounds like, you know, the mix is going to remain an issue for Q3 and Q4, but, yeah, any other color you could add there, especially in light of, you know, you obviously also had some one-time items, right? So... Yeah, any comments on gross margin for the second half?
spk07: Yeah, you bet. This is Steve. I expect it to be up in the 60s.
spk02: Perfect. And then you also talked about managing OPEX in the second half of the year in light of the lower revenues. Should we think of OPEX as kind of flattish from the current run rate or up or down?
spk07: No, I would expect it down. I take out the one-time items that I articulated, and I would expect it to be down from that. We're taking a look at all of our op-ex and making decisions on what to do. As Ben said, we're improving our rev gen to actually grow revenue, not just in entertainment with the indies, but across our whole portfolio and addressing op-ex.
spk06: Our goal is to be able to break even at a lower revenue level. Perfect. Thank you so much.
spk03: Thank you. Ladies and gentlemen, that concludes our Q&A portion. Thank you for your participation on today's call. That concludes the call as well. You may now disconnect. Everyone have a wonderful day.
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