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spk00: Good afternoon, and welcome to the Sonom Technologies Incorporated third quarter 2020 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Matt Kreps, Investor Relations. Please go ahead.
spk01: Thank you, Gary. And welcome, everyone, to today's Sonom Technologies results call for the third quarter and September 30th, 2020. Sonom has just distributed a press release and filed a Form 8K with the Securities and Exchange Commission. Those documents are available on the sonomtech.com website under the Investors link. Information from that press release includes historical financial results, some of which will also be discussed in the company's remarks on this call. Please note that certain information discussed on the call today will include forward-looking statements about future events, Solon's business strategy, and its future financial and operating goals and plans. These forward-looking statements are only subject to risks, uncertainties, and assumptions. They're difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in SEC filings, including our most recent quarterly report on Form 10-Q and most recent annual report on Form 10-K. These forward-looking statements reflect management's belief, estimate, and projections as of the day of this live broadcast, November 11, 2020. And SONM undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law. Now I'd like to turn the call over to Tom Wilkinson. Thanks, Matt. And hello to everyone joining us on the call and online. First, I would like to say happy Veterans Day to all of our veterans and their families. On behalf of SONM, we thank you for your service. This year has continued to be a period of rapid transformation as we have communicated on prior quarterly calls. We at Sonom continue to implement changes that we believe will position our business for broader addressable markets, revenue growth with improved control and visibility, and leaner, more efficient operations. We have reduced our operating expenses and made our balance sheet more cash efficient. Our transformation into a low cost and more productive team has begun to pay off, enabling us to respond to lumpy quarterly revenue while delivering period over period improvements in our gross margin, reduced net loss, and preservation of our cash resources. We have frequently pointed out how lumpy the rugged business can be in the forefront, and the third quarter is a good example. Carriers had accelerated the number of orders into the second quarter, which came in well above forecast, and then adjusted delivery timing in the third quarter as they had already taken in these additional orders. As we have also discussed previously, getting OPEX down to an appropriate level for a hardware business of our size has been a top priority. We managed to streamline and reduce our operating costs, cutting OPEX by 20% year over year. In the fourth quarter, we have undertaken additional changes to cut another $2 million of annual run rate operating expenses with ideas for future efficiencies. But we are not just focusing on OPEX efficiency. Our product development efforts reflect the same diligence on costs and cash efficiency as our operating performance. Our strong balance sheet allows us to focus on our business transformations. The strength in our business lies within the future product plan that will expand and build upon our well-documented market strengths and differentiation. First, our feature phones, the XP3 and XP5, have been our best-selling products this year. Both exemplify our industry-leading rugged design and also our differentiated push-to-talk functionality. Our next-generation feature phone products will also expand our range of supported carrier bands and play a key role in our growth outside of North America, particularly in Europe. These additional geographies present a robust and valuable market with nearly $1 billion of rugged cell phone demand. We believe we can move quickly with these new phones to enter these expansive markets through various distributor relationships where our management team has prior experience. We're also excited to announce that we've already received major carrier design win awards for our next generation XP3 and XP5 devices during the third quarter. We believe these design wins are a direct result of our differentiated capabilities. We have prioritized development of these new feature phones with a current timeline for delivery in mid-2021. Second, we expect to launch our smart scanner handheld computer and tablet device in the first quarter to allow us to begin to access a total addressable market of approximately $2 billion and add another product to our sales basket. These devices also tend to sell with more favorable gross margins to rugged phones. We have the first-involvement units in hand, and they are performing well. Third, our current smartphone product offering the LTE-based XPA. We are proud to announce that the XPA has been upgraded to support Android 10, which extends the useful life into 2021 and beyond. When we ask our customers about what they value most from our rugged devices, what they tell us is that beyond being rugged, what they want is rugged, is reliable connectivity, and a long battery life. We understand the importance of 5G as the technology is deployed around the world, but at the moment, the primary advantage is faster download speeds. These faster speeds are far less important to our customers and have not been effectively deployed yet. We will thoughtfully invest in 5G as it becomes more generally available from carriers and becomes a more important feature for our customers. By taking this approach, we believe that we can more specifically align our products to the dominant 5G technologies as our customers will ultimately use and create a better overall value proposition. All of these initiatives are made possible by our strong balance sheet. We believe that given our improved operations and strong cash position, we have sufficient capital to build and launch these products as we execute our 2021 plan. Let me stop here for a few minutes and ask Bob to cover our financial results. Then I'll share more about our strategy ahead and the continued transformation of Sonom. Thanks, Tom. Our press release issued earlier today announced the results for the third quarter ended September 30th, 2020. A copy of the release is available in the investor relations section of our website. Net revenues for the third quarter of 2020 decreased to $14.4 million. The sequential decrease in net revenues was primarily attributable to the timing of customer orders, including some sales that were accelerated into our $21.1 million second quarter. As Tom mentioned, revenue can be lumpy from quarter to quarter for this reason, and the two quarters combine to an average of about $18 million. We have made good progress in our efforts to balance out our inventory for efficiency of working capital while maintaining readiness to ship in response to the changing order patterns from our customers. Gross profit for the third quarter of 2020 was $4.4 million, or approximately $30.6 million. of net revenues, which is up from 23.9% of net revenues in last year's third quarter. The increase in gross margin was primarily attributable to one-time inventory adjustments, which occurred in the third quarter of 2019, along with lower-than-expected customer discounts and rebates, which were required to sell our products in 2020. Sonom anticipates that margins will benefit from increased scale, as well as corporate plans undertaken to improve cost of goods sold in the future beginning with the launch of higher gross margin scanner products in the first quarter of 2021. Looking at our operating expenses, total operating expenses for the third quarter came in at $10.5 million. This represents an improvement of $2.6 million from the $13.1 million of operating expenses in the year-ago quarter. The decline in operating expenses reflects Sonom's commitment to maintaining a lean operating model while continuing to invest in sales, marketing, and new product development in a more cost-effective manner. OPEX also declined sequentially from the $11.5 million we experienced in the second quarter. We anticipate reinvesting a portion of our operating cost savings into R&D for our next-generation products going forward. Net loss for the third quarter of 2020 totaled $6.5 million compared to a net loss of $6.8 million in the third quarter of 2019 and compared to a net loss of $7.1 million in the second quarter of 2020. The sequential and year-over-year decline in net loss reflects improved operating model efficiencies that Sonom has implemented to date. Turning to the balance sheet. We have used $879,000 in cash for operations year to date. Our cash balance at the end of September was $31.7 million and we are effectively debt free. As Tom mentioned, we believe that given our improved operations and strong balance sheet, we have sufficient capital to develop and launch our next generation of products as we execute our 2021 plan. As in previous quarters, we will not be providing specific guidance today. However, we anticipate continued progress on our strategic goals for the business through the end of the year, and we are now sufficiently capitalized to shift our focus to long-term growth initiatives. I'll now turn it back over to Tom for additional comments.
spk02: Thank you, Bob.
spk01: As you can see, we have made important progress on the business model, positioning Sonom to perform well in both up and down revenue quarters while maintaining our ability to take the right steps for our long-term strategic goals. We believe Sonom offers the most rugged mobile devices in the market, but we are always looking to do better. We are bringing new devices to the market, both in our core mobile feature phones and smartphone categories, as well as entering new addressable markets such as handheld scanners. Our new smart scanner devices are set out to roll in Q1 of this year. We are bringing two devices to market built on the same chip and software platform. They will initially be released with Android 10 and will be upgraded to Android 11 at a later date. Our two devices will be an 8-inch screen tablet and a 6-inch screen handheld, both with integrated barcode scanners. These devices support multiple bands, including those required for Europe. We expect our smart scanners will deliver both better features and better pricing compared with larger competitors. Introduction of these devices will increase our addressable market and open new channels both in North America and Europe. In addition to these devices, which provide an exciting market expansion platform, we have also received verbal or written design wins for all of the major North American carriers for our new feature phones. While many hardware verticals focus on just smartphones, our feature phones consistently outsell our smartphones, demonstrating that some target markets often just need a good, reliable, and durable way to facilitate communications with their workforce. And we meet that demand extremely well. Our refreshed offerings of the XP5 and XP3 will include design features and updates that are responsive to our end user customer requests while opening new and exciting markets for our products. As important as our rugged hardware designs, we are also very focused on our Sonomware and Sonom Care offerings. We have proprietary Sonomware software on every device, which allows our customers to manage their deployed devices centrally and ensure that the devices are up to date and secure. This is particularly important for feature phones, which cannot use the Google Play Store to download apps or update their own software. We have delivered a number of solutions in our Sodomware package and will continue to improve upon these offerings based on the feedback from end users. SodomCare is our commitment to service. From our industry-unique three-year comprehensive warranty to deployment, installation, and training, Sodom has long been recognized for its superior ability to support end-user organizations and keep critical personnel connected. As we approach each development as a platform instead of a product, we will more efficiently leverage our work and costs to bring out multiple products and open multiple new markets. While looking at the next generation is exciting, we're also taking steps to ensure Sonom's current devices were made ahead of the curve for our users. Our current portfolio will soon be enhanced with the release of mission-critical push-to-talk on both the XP8 and XP5 products. Further, we are beginning work on z-access technology which will enable our most advanced devices to be located not just in a building, but on what floor of the building. This core expertise and our investment in advanced technology will help further differentiate Sonom products from the competition. We are also actively seeking out opportunities for our products in industrial and enterprise markets. Let me finish with an example of the value that Sonom brings to our customers in terms of capability and cost savings. Recently, a very large construction company performed a cost and performance evaluation, of their existing rented LMR units against Sodom's technology solutions. Their analysis showed that Sodom affords improved functionality and performance versus the company's current LMR devices, and Sodom has the ability to provide cost savings of more than 60% over a two-year period. We are actively identifying similar use cases that expand our addressable markets and improve our visibility to revenues. We believe the story of Sodom's turnaround will become increasingly apparent as we progress through 2021. We are hedged out with our existing products, preparing the new products for release, and expanding our sales channel to facilitate new growth and new markets. As a final note on my excitement for our new products and their capabilities, I'm talking to you today from one of our RS-60 prototypes, which in addition to being a smart scanner, is a high-quality voice communication device as well. With that, I will now turn it back to the operator and our Q&A session.
spk00: We will now begin the question and answer session for covering analysts. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jason Schmidt with Lake Street. Please go ahead.
spk03: Hey, guys. Thanks for taking my questions. Tom, I just want to get your thoughts on your visibility into sort of inventory levels at the carriers, just given how they always tightly manage it here towards your end. How should we think about that for Q4?
spk01: It's a great question. We have a great deal of visibility into the inventory levels. You know, we believe that our carrier partners are – You know, they're responding to the current environment and their responsibility to their own investors and showing a de-risked balance sheet. So, you know, our expectation is that they will try and hit the end of the year with the minimal amount of inventory as possible and then start being able to buy up after that.
spk03: Okay, that's helpful. And looking at the new scanner products, just curious if this was something that your customers were asking for, if you just thought it would be a natural extension from the product portfolio, especially with your history at Explore. And I guess relatedly, is this just going to be a hardware sale, or is there any recurring revenue component along with that scanning feature?
spk01: Sure. So it is – It is both an identified need in the market that the management team brought in to the company, an unfilled need, as well as a natural extension of our experience in technology. You know, the neat thing about Sonom is with our Sonomware and Sonom Care deliverables, we can layer that into anything that operates off of Android. So we'll be, you know, very similar across all of our devices, whether they be phones or scanners in that way. The same thing with our commitment to service. We'll be able to bring that out. But we definitely see a need in the market. We know of opportunity. And to your question of whether this is a device play, we are looking at ways to expand our reach to the market within our capabilities and abilities beyond hardware. But at the moment, I really am focused on just getting these hardware devices out to market.
spk03: Okay, that makes sense. And then just the last one for me, and I'll jump back into Q. Bob, on gross margin, you noted some of the year-over-year increase was due to less discounts and rebates. Should we conclude then that sort of this 30% plus level is sort of the new norm here in the near term?
spk01: I wouldn't really call it a good norm. It's a good question. I think this reflects our experience with particularly one carrier that's been growing for us and they have a rebate program that is funded both by FONM but could also be funded through other various programs within the carrier. the carrier could use an unrelated discount to the customer that wouldn't dip into rebates that we would then have to give. And so we lack that little bit of visibility, so we are conservative in our forecasting, assuming that a high percentage of the sales would be done with the rebate applied. And then when the carrier... does do the sale, they send us an invoice for the rebates earned, and it's coming below what we forecast. So I believe that it will continue to come in below what we have forecast, but there's no way to know that for sure.
spk03: Okay, I appreciate that caller.
spk00: Thanks a lot, guys. Again, if you have a question, please press star then 1. The next question is from Zach Silver with B. Riley. Please go ahead.
spk02: Okay, great. Thanks for taking the question. The first one is just around the distribution channels, whether you have any thoughts about changing the typical carrier-led distribution model into 2021 and then relatedly how the distribution of the smart scanner product and international mobile sales differs from what you're doing here in the U.S. now. Sure.
spk01: So I think the way to think of this is the right products for the right channels in the right geographies. And the answer is different wherever you go. Our rugged cell phones will sell through carriers in North America. We're making our rugged cell phones available for distribution as well, and we're actually seeing some activity there. But we're not going to move away from our carriers in that sense in North America. We're also not going to be selling smart scanners through carriers in North America because it's not something they naturally would sell. They're enabled. They work on LTE, and they'll be certified. So they'll function quite well with the carriers, but they're not a stock product. Now, when you turn to other geographies, the model flips dramatically. There is not quite the dominance of carrier players in other parts of the world. Therefore, they're on the same kind of footing that distributors are on. But what I like about our products and working through distribution in Europe, or even the distributors that we're going to bring in in the United States, is that the distributors are often working on more of a solution sale with us. They're bringing together not just their voice communication devices, but other aspects of, let's say, kind of imagine all of the technology that's inside of a police car or inside of an ambulance. It's the distributors and value-added resellers who are bringing all of that together, and we really look forward to working with them increasingly to be part of that delivered solution.
spk02: Got it. That's really helpful. The next one is just around, you know, with sort of the cash burn and with sort of the aging of the older devices and, you know, some time and investment and upgrading to the newer devices. I'm just wondering if you can help us think about the cash burn and what gives you the confidence that the liquidity runway at this point is adequate.
spk01: Bob, that sounds like your territory to, to, Talk about the forward cash burn and the fact that we don't talk about forward numbers, but you want to take that? Yeah, sure. I'll just reiterate that we're not giving guidance, but certainly we have modeled in the sunset of our existing portfolio of products. As Tom mentioned, we're getting to end-of-life for several devices. We've also... extended the life of the xp8 through an android 10 upgrade so that should sell well into the next year and potentially beyond and we are ramping our new scanners and feature phones through the first half of 2021 so we have you know carefully looked at uh the transition between the old products and the new adjusted our burn rate through cost savings and just having especially lean operations at the company in order to bridge that gap with the cash that we have. And I think we've judiciously looked at the balance sheet where we can. We've reduced our inventory levels. We have managed payables and receivables as much as possible. And we believe that we can whether a period of burn to get to the new products, which will then start generating cash as we move forward.
spk02: Okay, that makes sense. Thanks, Bob. Thanks, Tom.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Tom Wilkinson for any closing remarks.
spk01: Thank you for joining us on today's call. I really appreciate the questions and the and I really appreciate the interest you all have in our company. We'll be participating in a number of investor conference events the year in, and we'll announce those by press release as they occur. If any of you would like to arrange a call with management, please reach out to Matt Kreps at Darrow & Associates. His contact information is listed on our press releases, and we'd be happy to arrange a call if needed.
spk00: The conference is now concluded. you for attending today's presentation. You may now disconnect.
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