Smith Micro Software, Inc. ($SMSI)

Good day, and welcome to the Smith Micro First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Charles Messman. Please go ahead.

Thank you, operator. And we appreciate you joining us today to discuss Smith Micro Software's financial results for the first quarter of 2026. By now, you should have received a copy of the press release, with the financial results. If you do not have a copy and would like one, please visit the Investor Relations section of our website at www.smithmicro.com. On today's call, we have Bill Smith, our Executive Chairman of the Board; Tim Huffmyer, our President and CEO; and Bethany Braund, our Chief Financial Officer. Please note that some of the information you'll hear during today's discussion consist of forward-looking statements, including without limitations, those regarding the company's future revenue and profitability, our plans and expectations, development and availability, new and expanded market opportunities, future product deployments, growth by new and existing customers, operating expenses and company cash reserves. Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by our forward-looking statements. For more information, please refer to the risk factors included in our most recently filed Form 10-K. Smith Micro assumes no obligation to update any forward-looking statements, which speak of management's beliefs and assumptions only as of the date they are made. I want to point out in our forthcoming prepared remarks, we will refer to specific non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of these non-GAAP financial measures. With that said, I'll turn the call over to Bill. Bill?

Thanks, Charlie, and thank you for joining us today for our first quarter 2026 conference call. We accomplished several key initiatives during the first quarter, positioning us for a solid fiscal 2026. First, we signed a contract with the first of the 2 new carrier customers I mentioned on our last call. Second, we completed the implementation of our executive succession plan with Tim now serving as CEO, Bethany as CFO and me as Executive Chairman. This transition has been seamless, and we are optimistic as ever about the company's future with a great team leading the charge. And third, we made great progress on the sales front as our pipeline now shows exponential growth with both new carrier customers that are yet to be announced as well as expansion with current customers. I truly believe we have now turned the corner and are set for a return to growth and profitability. As such, I want to reiterate our Q2 outlook from our last call. We believe that we are looking for strong top line growth in Q2, which will in turn result in a non-GAAP black number on the bottom line. Furthermore, we believe we will continue to deliver strong revenue growth and growing profitability for the remainder of fiscal 2026. This revenue growth in 2026 should lead to renewed cash generation. Success in 2026 should lead to a very strong 2027. In addition to growing revenues, we have continued to reduce both our cost of goods sold, as well as our overall operating expenses, and we believe this trend will continue throughout 2026. We have been able to achieve these reductions through enhanced operational efficiency, streamlined operations and better aligned resources to accelerate innovation and bring our solutions to market more quickly. Overall, I am extremely excited about the changes we have made across the organization and now have positioned Smith Micro for success. Our strategic shift to focus beyond traditional value-added services is working. Across our customer base, the family market has become a much higher priority from the top down, creating what we believe to be significant expanded opportunities for Smith Micro around the world. With that said, and before Tim provides the business update, let's turn the call over to Bethany for the financial update. Bethany?

Thanks, Bill, and good afternoon, everyone. It is an honor to be speaking with you today as CFO amongst the incredible team that we have here at Smith Micro. Initially, I want to cover a few transactions since last year-end. As was mentioned in our last earnings call, in March, Bill and Dieva Smith entered into notes transactions through their trust, which provided the company with $4 million of new funding. Additionally, alongside the Smiths' investments in the March convertible note transaction, most of our other outstanding notes, which were due to mature at the end of March were also rolled into new convertible notes with 3-year terms. We are also continuing to see benefits from the strategic cost reductions we announced in October 2025. We are still executing on these changes and will continue to see their longer-term benefits as we remove certain costs. Our focus remains on achieving maintainable profitability through a thoughtful and systematic approach to both revenue growth and cost optimization. Now, let's cover the financial results of the first quarter of 2026. For the first quarter, we recognized revenue of $4.2 million compared to $4.6 million for the same quarter of 2025, a decrease of 9%. When compared to the fourth quarter of 2025, revenue increased by $247,000 or 6%. During the first quarter of 2026, Family Safety revenue was $3.4 million, which decreased by $367,000 or 10% compared to the first quarter of last year. Family Safety revenues increased by $244,000 or 8% compared to the fourth quarter of 2025. During the first quarter of 2026, CommSuite revenue was $800,000, which increased by $66,000 compared to the first quarter of 2025. Revenue from CommSuite also grew by $3,000 as compared to the fourth quarter of 2025. As previously indicated, we sold our ViewSpot product for $1.3 million in June 2025, and we will no longer have any future revenue from this product. ViewSpot revenue was $99,000 in the first quarter of 2025. For the second quarter of 2026, we expect historically contracted revenues of approximately $4.2 million. Based on the new contract that Bill mentioned, additional contracts that we are actively working on and projects scheduled for delivery during the quarter, total revenue recognized for 2026 second quarter is expected to increase and could reach approximately $5.2 million or a 24% growth as compared to the first quarter of 2026. Our development teams are already fully engaged on these projects and execution is well underway. As I noted, this outlook includes revenue associated with the launch of the solution under the recently executed new contract that Bill mentioned, which we believe marks the beginning of a new trajectory of meaningful continued revenue growth in 2026. While our expectation for the quarter includes some non-recurring engineering revenue from this and other projects, we anticipate that following these launch activities, the underlying revenue streams will drive sustained upward momentum and support the continued execution of additional contracts. For the first quarter of 2026, gross profit was $3.3 million compared to $3.4 million during the same period of the prior year, a decrease of $53,000, primarily due to the period-over-period decline in revenues. However, gross margin was at 78.4% for the quarter, quite an improvement as compared to the 72.8% realized in the first quarter of 2025. The gross profit of $3.3 million in the first quarter of 2026 increased by $275,000 compared to the gross profit realized in the fourth quarter of 2025. In the second quarter of 2026, we expect continued improvements and for gross margin to be in the range of 81% to 83%. We believe we are making our way toward what Tim has previously indicated is our longer-term goal for gross margin at 85%. GAAP operating expenses for the first quarter of 2026 were $6.7 million, a decrease of $1.9 million or a 22% decline as compared to the first quarter of 2025. The reduction was a result of our cost optimization activities that we have executed, inclusive of personnel and organizational cost reduction activities as well as lower stock compensation costs. Non-GAAP operating expenses for the first quarter of 2026 were $4.7 million compared to $6.1 million in the first quarter of 2025, a decrease of approximately $1.4 million or 23%. Sequentially, non-GAAP operating expenses were essentially flat compared to the fourth quarter of 2025. We anticipate a further decline in non-GAAP operating expenses of 8% to 11% in the second quarter of 2026 as compared to the first quarter of 2026 as we continue to realize the further positive impact of our reorganization efforts. The GAAP net loss for the first quarter of 2026 was $3.9 million or a $0.15 loss per share compared to the loss of $5.2 million or a $0.28 loss per share in the first quarter of 2025. The non-GAAP net loss for the first quarter of 2026 was $1.5 million or a $0.06 loss per share compared to the non-GAAP net loss of $2.9 million or a $0.16 loss per share in the first quarter of 2025. Within today's press release, we have provided a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. For the first quarter of 2026, the reconciliation primarily includes adjustments for intangible asset amortization of $1.2 million, stock compensation expense of $586,000, depreciation expense of $69,000, amortization of debt discount and financing issuance costs of $431,000 and personnel and reorganization costs of $126,000. Due to our cumulative net losses over the past few years, our GAAP tax expense is primarily due to certain state and foreign income taxes. For non-GAAP purposes, we utilized a 0% tax rate for 2026 and 2025. The resulting non-GAAP tax expense reflects the actual income taxes expensed during each period. On the balance sheet, we reported $1.7 million of cash and cash equivalents as of March 31, 2026. This concludes my financial review. Now I'll pass it over to Tim.

Thanks, Bethany. Thank you, Bill, for leading us off on the call. We appreciate everyone joining us for the call today. It's been a very busy quarter as we've continued building on the realignment and organizational changes made throughout last year and into the current year. Those efforts are beginning to show results as we look ahead to fiscal 2026, with a clear focus on growing revenue, increasing operational leverage and delivering profitability. During the first quarter, I had the opportunity to dive deeper into the business, working across teams to further optimize our output, while enhancing our internal technology capabilities to drive productivity and execution. Overall, I'm pleased with the progress we're making while also recognizing that we're still early in the process and committed to continuous improvements as we move forward. I also enjoyed engaging with existing and prospective customers during the quarter. These conversations have strengthened our relationships and given us a clear understanding of customer priorities, allowing us to evolve and focus our go-to-market strategies, while looking to maximize the value of offerings we have in the market today. We have strong partners and strong relationships, and I see meaningful opportunity to build on that foundation. Now I want to spend a few minutes talking about some market trends we're seeing and how they directly align with the expansion of our portfolio to serve a broader addressable market. Our SafePath OS solution for phones tailored to kids and seniors continues to resonate with carriers among both current customers and new prospects. You'll recall from our previous calls that SafePath OS is our software solution that enables carriers to offer an otherwise standard phone as the device specifically tailored to kids and seniors right out of the box. SafePath OS provides carriers with a tool to grow their subscriber base with the highest quality subscribers available in the market, The Family Sub. One of the most notable trends is the focus on super apps being developed by mobile operators around the world. These initiatives are becoming a higher priority across large M&O organizations as they look to deepen customer engagement and deliver more value through a single integrated experience. We believe this creates a very strong opportunity for Smith Micro as it aligns well with both the flexibility of our SafePath solutions and our long-standing expertise on delivering carrier-grade solutions. This is core to who we are and what we do best. This unique strength positions us well as we expand the way we deliver our solutions, whether as an out-of-the-box solution for senior and child-tailored phones through SDK and APIs or as an over-the-top application. Much of the SafePath 8 development supporting these solutions has been completed, which we believe positions us to deliver solutions and produce revenue more rapidly. These deployment models also support meaningful upselling and add-on opportunities, like IoT and other capabilities that can be configured to meet the specific needs of our partners and significantly expand the overall market we can address. Taken together, I believe this approach is opening new windows of opportunities for Smith Micro as we look ahead. In addition, we are seeing momentum within the MVNO market as these operators look to differentiate themselves and attract new subscribers. Enhanced family solutions are increasingly becoming a priority within their offering. We view this as a growing opportunity and one that plays directly to our strength. In parallel, we are also taking a broader view of how and where we bring our solutions to market. While mobile operators remain central to our core strategy, this year, we are exploring new ways to extend our technology beyond the traditional carrier ecosystem and unlock potential new revenue opportunities while leveraging the same core capability, domain expertise and carrier-grade standards that have long differentiated Smith Micro. While these initiatives are still exploratory and evolving, we are encouraged by early activity and engagement, and we believe this approach positions us well as we look ahead. I look forward to providing updates on this initiative in the coming quarters. Now let's focus on the short term, the second quarter. During Q2, we expect our current contracts to perform consistent with the first quarter. However, we have also guided on revenue growth related to the deployment and launch of multiple solutions. First, as Bill mentioned in his opening comments, we have signed a new contract with a new carrier customer and expect to deliver our solution by the end of Q2. This solution is based on our existing SafePath OS solution. And although, it contains some customization, the additional development time can be measured in months and not quarters. Second, we are pursuing multiple other opportunities with new carrier customers, including the second expected new customer mentioned on our last call, all of which we anticipate will result in new solution deployments late in the second quarter and beyond in 2026. Lastly, we are in active discussions with existing customers to expand their current offerings. This expansion is centered around SafePath 8 functionality, allowing us to deploy sooner and with less development requirements than historically realized. The team is extremely motivated and focused on this inflection point, which will further support margin growth and non-GAAP profitability within the quarter. In closing, our organizational changes have allowed our teams to be more focused than ever on the near-term delivery schedule and providing the operational leverage needed to produce profitable revenue growth. At the same time, we are driving to secure other carrier customer opportunities to help us achieve sustainable revenue growth. And lastly, we are investing in further development of our solution that can meet the demands of the market we now serve and can be applied to adjacent markets outside of our normal carrier footprint. This is an exciting time. We expect top line growth in the second quarter. We believe we will see consistent revenue growth, resulting in sustainable non-GAAP profitability and free cash flow. We are confident that we are at a turning point for the company and are excited for the opportunities that lie ahead. Operator, please open the line for questions.

[Operator Instructions] The first question comes from Scott Searle with Roth Capital.

Congrats on moving back into growth mode. Bill, Tim and Bethany, also congrats on your new roles. Maybe just to start off, Tim, I want to clarify the guidance. You're basically saying the core business is flat, so it's nice to see stabilization on that front. But is the formal guidance then $5.2 million with the expectation that you're going to have definitely these 2 additional carriers and opportunities going live? And as part of that, it sounds like there's some customization and development. Is that onetime NRE that we would expect it should be transitioning into recurring revenues as we go forward into future quarters?

Yes. Great question. So the guidance on the upper end of the range is the $5.2 million, Scott. That would be hitting on all cylinders as we see it today. So we offered that range just to provide the full scope of what we're staring at as we think about the second quarter. So you'll have to -- you can kind of set the guidance from there. But that is the range that we're providing, and there is stability in the core business. So you picked up on all that correctly. As far as engineering and nonrecurring engineering type activities, there is a certain percentage that would flow into this quarter. Generally speaking, Scott, you could look at any one project might have 25% to 75% type NRE type activity. So a good portion of that growth could come from that non-engineering activity. And as you stated, then convert into recurring revenue. So you're thinking about our revenue correctly, and I just wanted to reiterate that.

And then just a follow-up. In terms of looking forward then into the second half of this year, it sounds like you're expecting sequential growth, notwithstanding some of that possible NRE as you have carriers converting into commercial deployments and full quarter of contribution. Is that correct as well? And maybe if you could provide a little bit more color in terms of the application where you're winning, you've referenced SafePath OS, but that supports both kids as well as elder care opportunities. I'm wondering where you're seeing more of the movement and the near-term adoption as we think about 2026?

Yes. So timing is important here, right? So we have delivery schedules. We're working towards deadlines here in the quarter. Some things may slip into next quarter, right? But within that range, we expect to be on top of first quarter numbers. And then we do expect to be on top of those numbers as well. So some of it's timing, Scott, and there's a little bit of art to how that might play out. But we are looking for revenue growth here consistently through the rest of the year based on how we're viewing our opportunities and pipeline. Related to your second part of your question, could you repeat the second part of the question?

Yes, Tim, just in terms of the breakdown of the application, focus more on kids and Family Safety or more elder care opportunities.

Yes, yes. So, we're not at liberty to say what we're going to launch just because we want to keep that confidential for our new carrier customers. So we did purposely call it the OS system and didn't focus on kids or seniors. But I will say just generally, not necessarily related to the launch, we are seeing the senior market be maybe more attractive to our carrier conversations. And as I think we've mentioned on other calls, it's a bigger market, we believe, or a bigger portion of the carriers' subscribers. So that's where a lot of the focus is, but we do have conversations on both kids and seniors at this point, but there's probably a heavier focus on the senior side.

Tim, one last clarification and then one follow-up, and I'll get and I'll move on. Just in terms of the 2 potential deployments this quarter, are both of them new customers? I think you definitely referenced that one was. Just want to clarify that. And then just in terms of the opportunity pipeline today, is there some color that you could provide around it in terms of end market applications, geographies, existing carriers versus new carriers?

Related to the new activity this quarter, one is the new contract that we've highlighted several times. And the rest would be most likely with -- the revenue growth will most likely come from existing opportunities. We have several customer activities in process with existing. There could be another new one slip in there, just depends on how things fall there. But the good news is we have multiple irons in the fire right now, and it could play out a number of different ways. So there's a little bit of color on that. From a geography standpoint, most of this is U.S. activity and maybe with a little bit of Europe opportunities sprinkled in there. But the majority of what we're discussing right now, Scott, is coming from the U.S. Bill, did you want to add anything? Thanks, Scott. Bill, did you want to add anything to either of those questions?

Yes. I guess one thing is that we have a number of opportunities where carriers want to launch both. And so we're talking to them about Kids OS as well as Senior OS. And that's very doable. It runs with the same servers in the background. I'm sorry?

Sorry, no, there's just some interference on my line.

So did you hear my answer?

Yes, I did. I did.

Okay. Good deal. Yes. So look, I think there's a lot of growth on both types of OS as well as the rest of our product offerings. I think you're going to see a number of new customers throughout 2026, whether they start in Q2 or Q3 or Q4, you're going to see a number of them, and I think it's going to be at a very exciting time.

The next question comes from Matthew Harrigan with Benchmark.

Two questions. I guess I'll do them individually to give you some scope on the answers. You obviously have a really active queue now. You probably have some pull demand without a tremendous amount of marketing given the compelling need on family safety and especially, including seniors now. But how is the monetization for like given opportunities looking compared to what you would have anticipated 12 or 18 months ago when you're mostly dealing with the large U.S. guys. It sounds like you're still dealing with a large -- obviously, you're still dealing with some of the large U.S. guys and just the simplified, faster process with SafePath OS. Is that maybe not quite as meaningful revenue opportunity for carriers as you might have liked a few years ago? Or do you think that the customer value is probably roughly comparable to what you would have aspired to a few years ago?

Yes. Thanks for the question. Generally, speaking the opportunities are the same, if not greater, is what we're staring at. So we're pretty happy with the traction that OS is getting and what we see from a revenue potential there in our new opportunities and our pipeline opportunities. So we're very pleased with that. Part of the faster concept, too, is the fact that our development teams have sort of finished the core product, and then it's just a matter of some customization to get launched, which is a little bit simpler than maybe we've seen in the past. So we're pretty pleased with that. And that's what's driving this, which links back to some of our org changes that we did in late 2025. So that's how we're seeing that. The RPUs in Europe can be a little bit lower than the U.S. here. So maybe a little bit lower unit cost in Europe than we see in the U.S. But generally speaking, we're pretty pleased with the opportunities compared to the past, and then we see upside opportunities as we think about the future.

And then you kind of segued into answering my second question already, so you're pretty agile, but I was going to ask, I mean, you've ripped out a tremendous amount of the cost on the R&D side. I mean, clearly, some of that is having the primary template done, and then the customization. But you alluded to new opportunities. I mean, do you feel like you're going to have to restore some of the R&D spending over a period of time? Or you're getting more -- I don't know whether you're using AI to do programming. I think you're probably doing things on a modest scale, but it feels like you're pretty confident on sustaining that really trim cost structure and still having some incremental growth avenues.

Yes. We're pretty pleased with the structure and the capacity that our teams can give. They're working hard, no doubt, and we're very happy with that. Depending on the pace, there may be a need to add costs, but I don't think it would be significant. As we grow, we'll have some costs drifting up, but it shouldn't be significant at the end of the day on the R&D side of things. So we're pretty pleased with that capacity level. And for the foreseeable future, we think we can hold that line for a while. Again, the teams are extremely focused and working very, very hard right now. But our investments, right, we're looking for our investments to pay off that they've done over the last couple of years, too. So capitalizing on that is super important for us.

I guess, I'll sneak in another question. Are you seeing and this is kind of my default question, I apologize for being boring. But are you seeing anything new in terms of competition? You've got a large U.S. carrier that I guess, is bumbling around with doing things internally. Are they making any progress with their alternative? Or do you think that if they were smart, they would have just stayed with you?

Well, we're biased. We stand behind our product. We think we produce a quality product. And given the economics of the situation, we think we can drive the most value for our carriers, customers and their subscribers. So we're definitely biased when we think about that. From a competition standpoint, that is probably one of the most competitive threats that we have out there is just if the carrier decides to do something themselves. And then every day, there is new technology popping up. But we feel that we have a great reputation. We have been doing this for a number of years. We've got a very talented team that can deliver quality product at the carrier-grade status, and we're confident in that.

Great. Thanks, Tim. Congratulations everybody. Bill.

[Operator Instructions] This concludes our question- and-answer session. I would like to turn the conference back over to Charlie Messman for any closing remarks.

Thanks, everybody. We do truly appreciate you joining us today. It's fun to have Tim, Bethany and Bill all on. So if you guys have any further questions, please feel free to reach out to us directly, and have an awesome day. Thank you.

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