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

Good morning, and welcome to the WiSA Technologies First Quarter 2023 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Barnard, Investor Relations. Please go ahead.

Thank you, Andrea, and thank you all for joining us today. With us on the call are Brett Moyer, CEO, President CFO, Jeff Oliva; and Mike Binn, SVP of Business Marketing from ComHear. Before turning the call over to Brett, I'd like to remind everyone that today's presentation includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21 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 WiSA's business, including current macroeconomic uncertainties associated with the COVID-19 pandemic, our inability to predict or measure supply chain disruptions resulted from 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 of future revenue associated with design wins and predict customer demand for existing and future products to secure adequate manufacturing capacity, consumer demand conditions affecting customers and markets, the ability to hire, retain and motivate employees and the effective competition, including price competition, technological, regulatory and legal developments, developments in the economy and financial markets, risks and uncertainty detecting the proposed come transaction, such as the inability to enter into definitive agreements with respect to the proposed transaction, the expected performance of the Part 2 risk related to receipt of necessary regulatory and shareholder approvals, failure to realize the anticipated benefits from the transaction, the ability of the parties to satisfy various conditions, closing the proposed transaction 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 in our annual report on Form 10-K for the year ended December 31, 2022, as revised or update for any changes described in any subsequently filed quarterly reports on Form 10-Q and the preliminary and definitive proxy statement or other documents at WiSA intends to file with the SEC in connection with the proposed come transaction. The information in this presentation is as of the date hereof, and the company undertakes no obligations to update required to do so by law. With that, I'll turn the call over to Brett. Go ahead, Brett.

Thank you, David, and good morning. I'd like to welcome both new investors, old investors and particularly the economy investors today on the call. We will be focusing on our intent to and describe the strategy around acquiring ComHear. For the new investors, we're going to do a quick overview on WiSA but I would recommend you either reach out to me to get more detail on WiSA's strategy or let's listen to one of our prior calls. But WiSA is focused on smart devices and getting wireless audio from smart devices into the room, around the room, around its commercial space to make sure that the consumer gets that immersive audio experience as if they're in the stadium listening watching live game as if they're in a theater here in the movie itself and all the audio above it, behind it to the size of it. So in the core that we're going after that market, and we have a strong portfolio of wireless IP. We have an interoperability standards under the brand WiSA. We have a pretty broad customer base of Tier 1 consumer electronics customers and WiSA has a small product line of speakers under Platin Audio. That's mainly there to drive awareness of WiSA certification within the industry, build up WiSA stores with the retailers and drive technology demo success with our new technologies as we launch it. But today, to that portfolio, we'll be adding ComHear's Immersive IP and immersive audio techniques for adapting audio to where a listener is where they're sitting. Financially, we think it has a strong impact once we've merged the 2 companies. There will be -- there's some variability around Q3 and how that impacts us. But starting in Q4 and into 2024, we think the combined impact of the technology investments in the last 3 years of both companies, the design work of the last 3 years of both companies drives a revenue forecast for $24 million in the $10 million to $15 million range. So a little bit about WiSA for the new investors. Traditionally, we've had a custom chip on modules going into either small hubs into televisions into speakers under the WiSA HT brand. It's been expensive. -- each module is $10 to $12, but it was the highest-performing wireless technology industry that even allowed Bang & Olufsen in their $40,000 speaker. So where the investment has gone in the last 3 years is to take the know-how and IP in WiSA HT and make it portable in IP so that we can load it onto lower-cost noncustom chips yet still deliver a higher performance of audio than any competitor can do. And the first product we launched with our IP in that format was on an expressive chip under the brand of WiSA DS. And WiSA DS is roughly 1/4 of the cost of WiSA HT, it does a few less channels, but it is extremely powerful in this impact when you add rear speakers to a sound bar with up-firing drivers that send the sound above. So you'll see that rollout in the Platin Rio products this year. We talked about it last call. There's design wins going on actively with DS, and it will impact revenue this year. The next phase was we took the IP and moved it to a Realtek Chip. Now the Realtek Chip is a 5 gigahertz chip. It is more powerful. That will allow us to give comparable performance, and in some cases, see the performance of WiSA HT, and we expect to release that product to production in Q3. Finally, the IP, and we showed a small demo prototype at CES of our same WiSA E running on a set-top box SoC, which means the IP not only has been demonstrated working on a 2.4 gigahertz IoT module and DS of 5 gigahertz with Realtek for WiSA E. But here, it was with a SoC demo for a set-top box where the set-top box was streaming a 2.1 audio signal out to speakers, not the full home theater suite, but the first step in developing and morphing the WiSA E into a complete product. We think the total TAM of smart devices that -- and an embedded IP platform can penetrate is up to 1 billion units. And so we think that a strong market. We've got the best technology position, and it's all starting to hit production and revenue this year. From a business update on the last call, there were a few highlights that we gave you, so I'm just going to update those for those that were listening. WiSA E, we still believe is a very compelling technology to the industry. It is in beta with the initial customer. When it gets released to production. There's a good list of Tier 1 branded companies that are waiting to test and get their hands on it. So that will start happening in Q3 and when we release the first software to production on the Realtek chip. DS as I mentioned, is in production. We will launch the sound bar around it under Platin Audio's brand names, they called the Rio 5.1.4 Soundbar. It will be at a great price point for the consumer and a good price point for us from a margin perspective. So we look forward to demonstrating to the industry that WiSA DS delivers a product that the consumers want. And finally, around WiSA marketing, we talked last quarter, we have scaled down the marketing from Q4 to Q1. We are still working it to be highly efficient. So the objective of the marketing program is to drive awareness of WiSA-certified WiSA stores. We think there's a -- we'll be announcing another is store coming up with a major Midwest retailer in the next month or so. So while we're trying to be cost-effective, we are still marketing WiSA-certified and WiSA products to the industry and the consumer. From an overall industry, we think consumer electronics is in a slump and will continue that way through Q2 and maybe early Q3. We think the impact of overbuilding inventory from the logistical issues in -- during COVID is leading to price erosion and margin compression, and that will last through the summer. You can see that in your ads. You could hear that in the [ Sonos ] calls. Demand is soft. So brands are lowering their price to try to move inventory to get ready for the Christmas season with new products. We did drop operating price expenses from Q4 to Q1, approximately $0.75 million. And with the new products going into production in the second half of the year, we still expect to have year-over-year growth. And those new products are both DS WiSA HT designs and the Platin RIO designs. Now with that, before Mike gets started, we're pretty excited about the announcement we put out yesterday. We think it's a great opportunity to take add to WiSA's audio IP portfolio for immersive audio. Dolby is pushing their Atmos object-based 3-dimensional audio [indiscernible] wireless capability plus ComHear's ability to steer the audio to specific locations depending on using some AI and where consumers are complements our products and lets us build out the portfolio. We think when you look at it financially, both companies have spent the last 3 years investing heavily in terms of taking their technology and putting it into an IP licensable format so that we can have not only licensing revenue and module revenue. We think there's an overlap in market segments like consumer electronics so that it makes sense from a synergy perspective. And when you look at some of the bigger international corporations, ComHear may be working with a commercial group, we may be working with a consumer group that gives the sales combined being the ability to have more products that talk to and have one or the other companies on the approved vendor list and now let's see other products come onto that approved vendor list. And finally, when we look at why now and the ComHear brings, bringing Andy Arno, who's Chairman of ComHear on to the WiSA Board on to as Chairman, we think strengthens the Board's governor capabilities and adds some capital market expertise. So strategically, that's what we see as WiSA, but Mike's going to walk through what they see in the immersive audio, and I'm going to turn it over to Mike now to talk about ComHear and some of their plans. Mike?

Yes. Hi, everyone. Thanks again for your time. Brett, I definitely would reiterate that there's definitely a lot of excitement about the areas of synergy between the 2 companies as well as future areas of where the technology overlaps and can enhance different areas. So a little bit about ComHear. ComHear's mission is really to innovate the immersive and directional audio space. with our foundations from patents that are highly defensible from Qualcomm, the Qualcomm Institute in UCSD. We deliver a world-class experience by leveraging a number of different technologies and deliver those suites with world-class brands, which is really exciting for us. We continue to innovate in a lot of those areas of innovation are in the wireless space, wireless, meaning using IoT sensors and emerging AI to really create unique audio listening experiences, whether that be finite directional audio like Brett mentioned or immersive audio without the need for surround sound speakers through a linear speaker of AR, et cetera, and multiple different application verticals is really exciting for us, and we're looking forward to the opportunity to collaborate further as this conversation and acquisition moves forward. What does that mean? What are we doing with AI? What are we doing with IoT sensors? And how does that apply to how we want to expand to the marketplace? ComHear has a unique set of patents like I mentioned and what we're able to do is do dynamic audio filtering. What that means is we can take in AI-enabled and information from sensors and in real-time beam audio into different areas and create different formats, meaning we can detect – if we can detect the number of people in the room or objects or movement, we can reciprocate with an audio format that's very interesting. So it's important for immersive audio, for 3D audio, whether it be in entertainment in the home, smart conferencing or and casino basin kiosks, and I'll talk a little bit about the verticals that we're active in or whether it's partitioned or private audio for different types of listening experiences. Just a background into the basics of our beam forming. This is just an example of how we do some of it. We're really trying to use our software and our algorithms and that in conjunction with DSP and system and audio systems on a chip to create either private audio, immersive audio or highly functional beam-steered audio, meaning we can say audio we want, audio in one space, and we don't want audio another space. We can enhance beams. We can do surround sound fields. And that all comes from one linear speaker ray versus having several speakers all around you in a traditional format. Like Brett said, there's a lot of synergies. We are active in the consumer electronic markets, meaning we have current engagements with top-tier brands in the smart TV space, sound bar, home entertainment. We're highly active in the emerging area of hearing health and hearing optimization. Just a quick note, you probably heard some of the rulings that happened through government for hearing aids to go over the counter this year, which has been a large increase in interest into those types of applications within the home as well as partitioned audio. Gaming is a space that we're highly active, and we worked with major brands on bringing immersive audio and binaural experiences. Binaural meaning a headphone experience without having headphones. So that's highly popular with the gaming industry. We are also working in various other areas that are less commercial or consumer direct or direct-to-consumer. So smart kiosks, gaming casinos, advertising, technology, marketing, technology. Some of these use new AI-enabled solutions and IoT and some of them are just looking for added enhancement to their current customer base. For a quick example, in casinos, and we'll jump into that in another part of the deck, just having an immersive experience to correlate with new and more interactive content. Audio and AI delivery platforms we talked a little bit about and then smart audio retail solutions. So that is the growing market of marketing as well as creating frictionless retail shopping experiences or consumer engagement experiences where that time spent with the consumer is highly valuable and brands and technology companies are looking for ways to engage that consumer in a more immersive way. We can break that down a little bit and this little diagram some of these areas, you can see a clear correlation between some of the markets that WiSA is working in. So working with digital media and directed audio. Whether that means working with smart TV companies or integrated audio solutions in the home entertainment space, as an example, multi-beam surround sound or multi-beam content delivery. So this also pertains to our partitioned audio capabilities, meaning we can deliver audio content to one side of the room and not the other side of the room or we can do what we call directed boost beam, and this is highly relevant, and our audio or hearing enhancement and hearing optimization solutions. Meaning if someone's hard of hearing in the room, we can create a level amount of decibels in the entire room and then boost it from one person with higher speech intelligibility and parametric EQ. So that's really interesting. We're getting a lot of traction with major audio brands in that space. Automated retail, I call it edge consumer engagement. So really just using sensor fusion and AI to deliver really unique and targeted audio experiences to match the legacy investments into visual types of formats that marketing companies, kiosks and others alike have been using. Gaming, as I mentioned, in immersive 3D audio continues to be an integral part of our technology solution in Stack. And then other growing segments of content, so 3D content and then having the correlating real-time 3D audio that correlates with the imaging with the 3D displaced. So that's really an interesting space for us. So just a couple of slides on examples. So entertainment and gaming and hearing health, these are all very much direct-to-consumer correlated with major brands. So whether that's in someone's home, whether it's on their desktop, whether it's a smart conferencing solution where they want a different experience or they're in a workplace and they don't want their audio bleeding over to the neighbor or their coworker. These are all very interesting solutions that we've been engaged with Tier 1 brands to deliver hearing health, which I already mentioned. One of the fastest-growing segments for ComHear is our entrance and growth into immersive audio for the casino gaming space. The casino gaming space up until about 3 or 4 years ago was a bit antiquated. And now they've been growing into more dynamic content delivery. In addition to that, the consumer in that space and the player in that space has been changing. It's not the player of old. They demand different types of games, different mathematics into the content solutions and how it interacts. So there's been a lot of movement into licensing, lots of interesting solutions, everything from celebrities to movie conglomerates to National Football League to F1 racing and then deliver a real immersive experience. And what that does is it enhances consumer attachment to the content. It keeps them playing longer and it's an overall better experience. That's a little bit more engaged. And then on our Edge consumer engagement platform and specifically Smart Retail, we have solutions around helping brands communicate to their customers and enhance their equity when they talk to a consumer, whether it's through natural language processing during the audio, creating a private conversation, allowing for immersive audio. For an example, maybe a sports drink brand has some type of promotional material that wants to run while this person is using this frictionless shopping platform. They can create a really unique and impactful immersive experience, both visually and through the audio that leaves that customer with a different feeling about that brand that's quite impactful. Yes. So overall, we're really excited. We see a lot of areas where ComHear as a unique market penetration into brand into areas that aren't necessarily direct to consumer. It's consumer-related but has different market trends in cycles. So we think that adds something. Also, our suite of services is both software licensing, IP, and reference and module related. So we have several different ways to deliver those revenues, and we think it's complementary to what WiSA is doing. And the 2 together, I think, is a great story, but also functionally, I think it's going to be a great move.

All right. Thanks, Mike. So before we open up for questions today, I think we're excited about this opportunity. I think it strengthens our relationship with key customers. It deepens our IP portfolio. And so we're looking forward to completing a set of final documents and sending us out for shareholder vote and closing the transaction in Q3. And with that, operator, we'll open up the call for Q&A.

[Operator Instructions] And our first question will come from Jim McIlree of Dawson James.

The $10 million to $15 million in revenue that you're looking for next year, can you just break that down in a range of what you think it will be from the legacy WiSA versus the acquired ComHear?

So we didn't do that. I think the characteristics between the 2, Jim, is there is a large pipeline of design work going in. Anyone can move by a quarter or 2, it makes a difference. But if you want to split it out roughly it's 5 to 10 for each.

Okay. That's helpful. And in the ComHear deck, it shows that they sell modules as well as IP licensing. Is there -- can you give us some indication about the split between those 2 revenue streams now and what you think it will be in the future? And that's just for the ComHear side.

Just for the ComHear side? Mike, do you want to answer that?

Yes. So when we say modules, we mean integrated audio hardware that has our technology on it and the software. So moving forward, we see a higher ratio of software licensing and IP licensing over the hardware component and moving directly to – or I should say the majority of our revenue will be off of reference designs, our IP licensing and our software stack with our suite of solutions. So we do take a revenue share off of the hardware that's delivered to consumers through our global manufacturing partners. That will shrink as our software and licensing income increases, which is higher revenue for us and is a good complement to WiSA.

Understood. That's great. And I know you didn't put this in the release, but can you just give us either a range or a broad brush characterization of the ComHear cash burn in either recently or the expectation for 2023?

Well, our expectations when we get consolidated is that it would not impact our cash burn as a company. So there would be offsetting cost reductions in the WiSA group to absorb the ComHear expenses. But they have a very lean operation right now. And one of the advantages of the merger for them, I think, is to fall into a company that's been built out.

Understood. Great. And I'm sorry, just a couple of more. Is there going to be a merger of the R&D teams or are they going to operate separately?

Well, depends on what time frame you are. If you go out 3 years, there's one team that's working on all opportunities based on the value of the opportunities. If you're looking at day 1, both teams are highly focused on getting their initial customers launched, and I don't think we would change that in year 1.

Thinking day 180 or the midpoint of that? Never mind, Brett. I think I see what you're saying. So that's fine. I got it. I'll withdraw that. And my last one is, can you just talk about the inventory reserve in the quarter that you reported? What was that about? And I'm assuming that you think that's all you need to reserve, but is there additional risk to the inventory that WiSA is holding right now?

So the answer to that is we do not believe so or we would have had a different reserve. The reserve largely is addressing an imbalance between different components which is a legacy of the whole COVID supply chain debacles. So I believe we've adequately reserved for products that are misbalanced. We have a number of products that are still going into production on HT that have 3- to 4-year life. So I think we're okay.

Got it. Okay. And just one more, if I might. So the operating expenses this quarter down about $800,000 from Q4. Is the current operating expense run rate stable for the rest of the year, flat, down, up? Can you characterize directionally what you think OpEx is going to do just on the WiSA side for the rest of the year?

Yes. So it will be up in Q4 as we launch the 5.1.4 sound bar with WiSA DS. We think there's -- we're continuing to look at pushing expenses down in Q2 and Q3. So I don't see it going back up. But Q4 with Christmas season, we'll have some additional marketing expense in it.

And that additional is relative to Q1 or relative to the potential declines in Qs 2 and 3?

Both.

Okay. Fantastic. And congratulations on the transaction. It looks very interesting.

The next question comes from Jack Vander Aarde of Maxim Group.

Okay. Great. I appreciate the update. Good to see the strong 2024 growth outlook. So Brett, it's clearly been a tough environment for the entire consumer electronics industry, as I mentioned last quarter. But it sounds like you're still expecting 2023 growth. Can you just talk about the industry headwinds in general and what you're seeing in maybe your online marketing data? And then I'll have a follow-up just on the pandemic highs in 2020 and consumers refreshing – I guess upgrading their home theaters. Is there an upcoming refresh cycle to think about from those consumers?

All right, Jack. That's a lot of big questions. All right. So from a demand perspective, we think we get a fairly solid pulse from the Platin Audio line. It's not our main business, but we see stuff turn. And from what we've seen this quarter so far, at least if you make price moves, tough price moves in some cases, consumers respond, which is good. But I still personally believe consumers are pretty tight on the wallets. There's a fair amount of inflation sucking up discretionary income, but we've seen response -- we've seen demand change with price actions. So we'll continue to take those price actions in Q2 and Q3 to align the speaker business with the new products that are rolling out. The point of the marketing in Q3 and Q4 around the speakers is really to talk about WiSA and Atmos and immersive audio. So we will move the smaller ones out, and we will focus on Atmos 5.1.2 Monaco, which has the bigger speakers and the up-firing speakers in the front. And then at a lower price point, we'll focus on the 5.1.4 sound bar. They both have advantages, the sound bars cheaper, but it's got rear upfiring speakers whereas the Atmos system is a killer sound field with bigger speakers. So that's what we see on the consumer side. What was the next question you had?

Yes. From the pandemic [indiscernible] where everyone was in there when COVID came, upgrading their home theaters back in 2020, '21. Are we -- is there a potential for a refresh cycle from those consumers further upgrading their home fee?

Yes, I don't think there's a refresh cycle on TVs coming. But I do think there's an opportunity for the audio space. I wouldn't say refresh but to extend that home entertainment piece. So if you look at building, whether it's a sound bar, a sound bar with rears full 5.1 or 5.1.2 whatever speaker system around that TV, you still have 75% of the TVs sold without external audio. And if you think about your experience in the movie theater or your experience when you go to a professional sports event, that immersive audio really is impactful. So we think as the consumers either see their wallets expanding with wage increases or price discounts, so expands the reach of the disposable income that this fall should see a rebound in audio demand?

Okay. Great. And then just a follow-up. I'm not sure what you can comment. I haven't looked too deep into the 10-Q yet, but with the pending acquisition of ComHear, can you connect this to your ongoing exploration of strategic alternatives that's been laid out in your prior filings? Is this all tied together to just satisfy what were your exploration? Just any update there would be helpful.

Yes. So we are still active in conversations around strategic partnering with bigger companies. We think the ComHear opportunity is a great opportunity if we stay stand-alone and potentially depending on which strategic partner we're talking about could strengthen our opportunity to be of value to a bigger partner.

Okay. Great. I appreciate the comments there. Again, congrats on the strong growth outlook and the exciting announcement of ComHear. Looking forward to tracking it.

This concludes our question-and-answer session. I would like to turn the conference back over to Brett Moyer for any closing remarks.

Yes. So I'd like to thank the people that are taking the time this early morning for today to listen to the call. I'm certainly available for calls. But look, the WiSA team is excited on 2 fronts, both with the traction and the performance we're getting out of WiSA DS and WiSA E and the possibility, the intent to merge that with the efforts coming from ComHear. We think the 2 teams can execute well. They can be a more valuable partner to some of our customers and vice versa with our customers, and we look forward to our next call with you in August. That's it. Operator?

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.