Datavault AI Inc. (DVLT) Earnings Call Transcript & Summary

Greetings, and welcome to the WiSA Technologies' Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, the conference call is being recorded. With us today are: Brett Moyer, CEO and President; and CFO, Jeff Oliva -- George –- sorry. Before turning the call over to Brett, I'd like to remind everyone that today's presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of risks and uncertainties impacting the company's business, including current macroeconomic uncertainties associated with the COVID-19 pandemic; our inability to predict or measure supply chain disruptions resulting from the COVID-19 pandemic and other drivers; our ability to predict the timing of design wins entering production and the potential future revenue associated with design wins; rate of growth; the ability to predict customer demand for existing and future products and to secure adequate manufacturing capacity; consumer demand conditions affecting customers' end markets; the ability to hire, retain and motivate employees; the effects of competition, including price competition, technological, regulatory and legal; developments in the economy and financial markets; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission, including those described in risk factors on our annual report on Form 10-K for the year ended December 31st, 2021, filed with the SEC, as revised or updated for any material changes described in any subsequently filed quarterly reports on Form 10-Q. The information in this presentation is as of the date hereof, and the company undertakes no obligations to update unless required to do so by law. With that, I'll turn the call over to Brett. Go ahead, Brett.

Thank you, David, and thank you, ladies and gentlemen, for joining George and I in this Q2 update. Last year, the company initiated a strategic vision to expand our technology solutions beyond the niche audio file market that we dominate, to solutions that can reach the broad consumer electronic market. The primary investments that were undertaken, included expanding our R&D effort and patent filings, hiring the former HDMI executives to build strategic partnerships in the industry, expand WiSA's role to work with retailers and directly with the consumer. Today, in addition to our Q2 results, we will discuss why now for these investments, the size of the market opportunity, the technology road map for each market segment and the anticipated revenue ramp. So, why now? When you think about where the industry has evolved, there's enormous work on spatial algorithms. There's release of codecs that can give you that 3-dimensional sound by both Dolby Atmos and DTS. Wi-Fi chips have become significantly faster and lower cost, even at a point that some of the IoT chips like the expressive chip we have a partnership with, can become useful in multichannel versus wireless sound. As we all saw in the last 2 years, being in our COVID caves, content is prevalent, right? It's streamed everywhere from every device. Yet when we're watching that content, it is not the same as when you're in a theater, when you're in a stadium, when you're at a concert or a symphony. That audio sound is half the experience, not just the video. So, we got the content, how do we bring the rest of the audio to market. Then the third leg here is, when you look at the TVs, they've gone 1K, 2K, 4K, 8K. They're running out of display technology that's meaningful to the consumer. So how do you continue to grow your business as a TV manufacturer? You synchronize audio to your TV and integrate audio solutions to build your P&L. So, we think those 3 factors create a great opportunity for spatial audio and for WiSA Technologies. Now where do we fit in that space? Because we're not the content guys. We're not the Wi-Fi, media guys, right? And we're not the codecs. But we are the transport. So, what our engineering team knows how to do is synchronize a lot of speakers, keep the latency low, make sure we work in a heavily congested Wi-Fi space. So, we get audio from the smart device to the speaker, and that's our role, to support the other 3 legs of the stool. We've been successful with our original technology launch. Most of you have tracked us, so you've seen these brands. But these are really the premium brands in the industry. They're -- the audio guys are some of the highest performing audio speaker companies in the world. So, we have a great reputation to launch this new endeavor, right? So, we take -- number one, we take the IP developed in -- originally with WiSA HT. We extended and developed the WiSA Association that moved from a test organization, a certification organization to a broad consumer reaching organization, which we'll talk about in a little bit. We are now launching the first product with our IP called WiSA DS. That's on a 2.4 gigahertz high performance. And then, following that, we'll take the IP that we are working with, in DS, and move it to a 5 gigahertz solution which lets us add more features and reduce latency, as well as license IP. So, 3 technologies; 1 existing, 2 starting to ship this year. They're going to come in next year, right? WiSA HT, WiSA DS for sound bars, TV integration, WiSA E for IP licensing and smart speakers and all other devices. Right? And when you look at the whole market, WiSA is the only company that is able to offer a low-cost module for sound bars, a mid-range solution for all smart devices, and a premium solution for those audio file customers that we have today. And that's the only -- we're the only company that's been able to expand the breadth of solutions and cost points. When you look at the market size, this dramatically increased our market size. We showed you this slide last time, but just for the refresher, we're going from a 40 million, 50 million, 60 million TAM to several hundred million with WiSA DS, to over 1 billion with WiSA E. And the price parallels are: HTs are most expensive; WiSA DS is probably 65%, 70% less than HT; and WiSA E is right in the middle. So, that chart of feature cost goes from the lower left hand all the way up to the right. And no matter what your objective is, whether you need IP licensing or a complete module, we're able to handle the whole market. So, the role of WiSA which has expanded dramatically in the last 12 months. I think it was this time last year that we talked about WiSA stores, and the first one was Amazon.com/WiSA. We expected to get 5 or 6 last year. Today, we did announce that we expect to expand that, and by another 3 to 5. And materially, we now have inbound requests from retailers asking how do they become a WiSA-certified retailer, how do they set up a WiSA store and what are the requirements. That's a big swing in terms of momentum for WiSA, when you can take WiSA-certified TVs or speakers, and have the retailers aggregating them so that WiSA looks like one complete solution to the consumer. With the consumer marketing, you saw us grow web traffic from relatively nothing to 2 million consumers last year. This year, we'll increase that to 3 million -- between 2 million and 3 million. That's lower than our previous guidance, and that's as a result of consumer patterns changing and what they're buying. Now that people are leaving the COVID cave, we saw a change in demand, both through our customers as well as our marketing with WiSA. So, we shifted more of the marketing dollars out of Q2 and Q3 into the fall selling season when people come back from their vacations, come back from their first trips, come back from leading restaurants, they're back in their house, thinking about what to do for the fall and winter. And finally, for WiSA, critical to that was, we did launch -- invest and then launch the SoundSend. And as you can see below, the SoundSend actually provides to the industry, the safety of knowing they can design speakers and there will be a WiSA HT SoundSend for our interoperable standards. The industry has responded with some great awards, including the 2022 winner for Smart Home excellence. And we'll continue to support that product so that the consumer and the retailer and the speaker guys know there's a product that will connect WiSA speakers to any smart TV. Okay. So, new information on this slide for the new people joining this call. WiSA DS has 1 primary competitor that dominates the wireless speakers in the sound bar, and the sound bar transmits either subwoofer or rear speakers. WiSA DS comparing to that can offer more channels that we can do up firing, as well as rear speakers and a subwoofer. It has a stronger performance in a congested wireless space, and is substantially cheaper. So, we think all 3 of that positions us strongly. Now, we've launched this particular feature of 5.1.4 capability in March. COVID has hampered our ability to go to Asia, but our Asian team has already generated 12 companies that are going through the testing evaluation cycle, and they break out between 8 companies focused on sound bars, 3 companies focused on integrating testing and for the possible integration into TVs, and 1 company that's launching a product for the auto-aftermarket. We expect at least 2 of these will go into production in Q4 this year. So, how does all this technology evolve over time? So, if you start with 2023, you have WiSA HT, the Gen 1 modules. You have the speaker systems, you have WiSA DS and WiSA E modules, all in market next year. Now, WiSA E will just be getting there late in the year, and we will launch Platin speakers into the market with a WiSA E SoundSend. And again, what's the purpose of that, not to be a speaker company, but to prove to potential customers that we perform well in the retail and perform well in the consumer home, and we're a safe technology to adopt, right? So WiSA you will start in '23 and build us the blue color. WiSA DS modules will start in Q4 this year in terms of revenue, and continue to build, we think, is a strong product, and it builds continuously through 2024. Speakers will grow as a result of our effort to prove WiSA E, a viable technology, and performing well with consumers. And the G1 WiSA HT modules will have new design starts throughout next year, and then slowly ramp down over the next 3 or 4 years. From an IP position, from our investment in the last 12 months and the next 6, fundamentally changed our position in terms of our patent holdings. We've now got -- 12 issued are in the process of review or filings. That's from the benefit of the 12 years we've been working at it. And again, this is all about, do you have an engineering team that knows how to handle sync latency, congested Wi-Fi space and audio repair? And the engineering team has done fabulous at developing WiSA DS and WiSA E. We're really excited at that performance of the measures against competition. So now I'd like to turn the slides -- the presentation over to George, our CFO.

Thank you, Brett. Q2 revenues were $946,000. It's down 40% from the same quarter in the previous year, but up 67% sequentially from Q1. The gross margin was 20 points, down from 29% in the previous year, but up from 11% sequentially from Q1. Operating expenses were $4.3 million, including $0.5 million of noncash expenses, primarily stock comp expense, compared to $3.3 million in the previous year with $400,000 of noncash expenses. The increase in OpEx was due in large part to our engineering efforts, as Brett has discussed. The loss for the quarter was $4.1 million compared to $4.6 million in the prior year. The larger loss in the prior year despite lower OpEx, was due to a noncash charge we took in relation to converting the preferred last year coming. The ending cash for the quarter was approximately $4.8 million. In terms of guidance for the rest of the year, we expect revenue to continue to increase sequentially in Q3 compared to Q2, and increase additionally in Q4 compared to Q3. As module volumes increase, the margins should continue to improve into the mid-20s. And then with the cash on hand, a combination with increasing revenue, decreasing inventories and the $3 million in financing that we announced this morning, should be sufficient to fund our execution into 2023. As we mentioned, we closed -- we signed a definitive agreement with our largest shareholder for $3 million of net funding on convertible notes, and that includes warrants that are priced at $1 -- approximately $2 million worth. And, that's it. I'll turn that over to Brett.

Thank you, George. So, in summary, before we go to Q&A, which will be open to all investors that have questions, the team has a high competency of technical skills that has been proven out with some premium audio brands. We're rapidly launching the IP that we put on to the expressive module, and that will start generating in Q4. WiSA has expanded its role in starting to bring inbound contacts from retailers, which is a significant shift in this performance. And we got a very strong IP position that we think sets up for continued growth in the next 4 years. And with that, David, I'd like to open it up for questions.

[Operator Instructions] We'll take our first question here and -- proceed.

Do they know they were selected?

I have several questions. I see Jack in here. and I see your hand is raised. I'm trying to call on you.

David, this is the operator. What phone number are you trying to allow to talk?

It ends in 884.

Okay. Go ahead, and you can ask your question now.

Appreciate the update. A sort of the question for Brett. Actually, I've got quick housekeeping question. Just a quick one. When do you guys expect to release the full financial statements in the 10-Q?

Any –- probably very soon. Within an hour, I guess.

Okay.

We might have to wait. We might be required to wait until the close of the market. I'll...

Today, regardless.

Today, regardless.

Okay. And Brett, maybe, as to the revenue guide, looks like we're now expecting sequential growth in the third quarter and the sequential growth in the fourth quarter. Just any additional color you can provide there on the top line? And then maybe any additional thoughts with overall revenue potential for 2023?

Okay. So, what we see -- and I think probably you've seen it reported out in other -- so last report out in the other earnings calls, what we do see that the -- we saw in our own internal tracking through the WiSA Group Association that consumers shifted -- demand shifted at the end of April. Right? So ,we see -- we think that's been followed up in orders coming in from our partners as well as reported out in Sonos' case. So, we're just being more conservative until we see that demand come back. We get the consumer desire, being consumers ourselves that get the hell out of the house, but we think that turns around back in the fall. So, we see sequentially growing revenue. We're just not forecasting yet how that impacts the full year. For 2023 -- what's that?

Yes. Understood there. And now move on to '23 then.

Yes. So, 2023, we're expecting a strong year between DS coming in, WiSA E coming in. WiSA E rolled into speakers, probably knocks $100 off of MSRP. So, in the world of inflation, consumer buying in $100 is everything. Every $100 is higher conversions and sell-through. So, we think 2023 is up against this year, up against last year, whatever reference point you want to use. And we think the feedback we've gotten out of those first 12 companies -- and a couple of them are really grinding WiSA DS, has been extremely positive. In their words, shockingly strong performance for a 2.4 gigahertz solution. So, we think, as that rolls into next year in 2024, that's a strong revenue driver.

And then actually, just to that point, just for clarity. So, we WiSA DS will be shipping this year? When exactly? And then WiSA E, is there a specific timeline for that during 2023 when that -- if it's at the end of the year? Is there a particular quarter? Would be helpful.

Well, actually -- Yes. So, I misspoke on WiSA E in my presentation. We will actually start sampling WiSA E in Q4 this year, right? So, there's 4 or 5 beta customers that we're talking to, and we'll select 4 or 5 in depending on our bandwidth, to work with them, to test, evaluate and -- just like we did with DS. So, that won't generate revenue, but just in terms of technology and shippable maturity, we expect to have those 4 or 5 beta customers with modules with WiSA E to test and bang up in Q4, right? WiSA DS, that will have 2 companies -- well, we have 2 companies that are planning to go into production, which means we're shipping, during Q4.

That would be the -- an official line? That would be a commercial-ready product in the fourth quarter with those 2 customers for WiSA DS?

Yes.

And then -- let's see -- how will your -- because the way to the balance sheet -- I'm not sure maybe I missed it, but can you provide an update on your inventory levels currently? And then, how you expect your inventory levels to move going into -- in the back half of this year? And then just anything you've heard or any update with your customers there in inventory situation?

Yes. So, George, do you want to take the --?

Our second quarter inventory was relatively flat from Q1. But Q1, we saw an increase. As our customers have rescheduled orders out, we are also having to reschedule our vendors out. So, to the extent that we can defer the excess purchases to the next year, we should start to see our inventory come down in the second half of the year. We don't really have a lot of visibility of our customers' inventory. I know Brett, you can talk through that.

We do not. So -- but we do -- we are in the channel. I will say the feedback coming from the retailer side of the channel is that there's going to be healthy promotions and discounting in the fall around consumer electronics. So that leads us to believe that, as demand shifts -- our customers have been chasing product because of all the part shortages and logistics challenge. We still see part shortage issues impacting our customers, logistic challenges of getting stuff out of --manufactured in Asia into North America and Europe, seem to have abated largely. But you now have customers that are putting out large POs to try to circumvent part shortages. And now as consumer demand has shifted somewhat, at least temporarily for these 4 or 5 months, we think that builds a promotional opportunity for good discounts for consumers in the fall.

To confirm your question about the Q, the Q will be filed at the close of market.

Okay. Moving on, let's go to caller number -- ending in 386. I think that's Kevin. [Operator Instructions]

So, you touched on this a little bit, Brett, right? You touched on an abatement in source. I was hoping you could sort of add a little more color on that. I guess, a little more curious about the environment in China, given the pretty hefty COVID restrictions. It doesn't seem to me that you're seeing a manufacturing issue. I just wanted to confirm that.

Well, so, in terms of COVID in China, it's nasty, but where it impacts us most is being able to send senior executives from here to there to really show the vision of the product lines. So, we have to depend on people in country. We can't get in or out of China. We -- from a parts shortage, we know there's still sporadic part shortages. So that's impacting some of our customers, there's no question. But logistically, once stuff gets built, is flowing.

Yes. So that's kind of where I was going. I mean, things are getting built, and you see that people are able to meet orders. At least your customers see that trend, I guess, strengthening, which seemed to be an issue earlier in the year.

Yes. We think – now -- whether it's because people are pushing -- I mean, we've seen customers push out orders. We think it's around consumer demand. So, pushed out orders frees up inventory, right? So, we don't -- we do know from -- we have an ODM in China on our board. So, we do know there's still part shortages in the space. But I would say the industry has probably gone 75% to 80% back to normal.

Good to hear. Brett, you remarked during the presentation that brands – the -- I guess, a limited return on increased performance, and, I guess, pixel count on large-screen TVs, right? And so, you mentioned that you think they're going to try to exploit the sound experience as an avenue to boost margin. And I'm just wondering -- yes, I'm just wondering how much real evidence do you have of that?

Well, there's 2 brands that have been doing it for a couple of years, right? One is VIZIO, one is Samsung. So, if you look at their product lines and their merchandising at retail, they are heavily –- I want to say -- I don't want to say integrated as in they work flawlessly, but they are heavily merchandised together, number one. Number 2, we've seen through the WiSA Association, a number of retailers that do very well with bundles. Now, you can bundle a sound bar or you can bundle Enclave or Platin, right? So, again, if the retailers are seeing it, the brands will see it. Now if you take one step further back in the cycle, here we are launching WiSA DS out of the 12 companies that are actively digging into it. 8 of them are looking at it for sound bars.

Okay. So, does that mean the sound bar comes with the television? Like pre-packaged with the TV? Or is it a...

No. It's merchandising at point of sale. But the important nuance is that it's -- it will -- the TV will find it and turn it on with little consumer issue.

Right. So that's our play, right? So, why would you integrate WiSA DS into your TV?

I mean look, this is what B&O has been doing with us for 10 years, right? There's a WiSA module inside every one of their TVs. It finds every WiSA speaker in that room. So, our position, which we think resonates, is that, having wireless integration into TV to -- with an interoperable speaker standard, creates an opportunity for the TV brand to link their TV and their audio to one sale.

Okay. But the audio doesn't have to be of their brand?

It does not. That's the beauty of it.

Can you talk about just some.

Go ahead.

Yes. No. I'm sorry, I interrupted.

No, I was just going to say, that's the beauty of it, merchandising-wise from, pick any brands, Skyworth or LG, right? Merchandising. They're going to merchandise their audio with their TVs, right?

Right. But having interoperability less in [indiscernible]

Exactly. But not everybody wants a $1,000 audio system around their TV. Some want $20,000 around their TV, like a B&O situation.

Okay. You mentioned Amazon as your first retail location, and I know there was one other sort of name brand. Can you just talk about -- I mean, you did -- or that you'd expect...

For stores?