Smith Micro Software, Inc. (SMSI) Earnings Call Transcript & Summary

Thank you, operator. We're pleased to have everyone joining us as we review Smith Micro Software's results for the third quarter of 2026. By this point, you should have received our press release with the financial figures. If you haven't gotten it yet and would like one, it's available in the investor relations area of our website, www.smithmicro.com. With us on the call today are Bill Smith, our President, CEO, and Chairman of the Board, along with Bethany Braund, our Chief Financial Officer. I want to flag that some of what we discuss today will contain forward-looking statements. These include, without limitation, statements about the company's future revenue and profitability, our plans and expectations, new product development and availability, new and expanded market opportunities, future product developments, growth by new and existing customers, operating expenses, and the company's cash reserves. Such statements involve risks and uncertainties that could cause actual results or trends to differ materially from what our forward-looking statements express or imply. For more information, please refer to the risk factors included in our most recently filed Form 10-K. Smith Micro isn't on the hook to revise any forward-looking statements; those reflect management's views and presumptions solely as of the day they're given. Note that during the prepared remarks we're about to deliver, we'll cite certain non-GAAP financial measures. Reconciliations of those non-GAAP figures appear in the press release we issued earlier today. Having said that, let's hand things to Bill. Bill?

Thanks, Charlie, and I appreciate everyone joining us today for the earnings conference call covering our third quarter of 2026; we're grateful for the ongoing interest in and support of Smith Micro. All in all, it was a quarter marked by a lot of activity and solid productivity. The progress we've achieved pleases me, since we kept building on the momentum that got established during the first half of the fiscal year. Results for our third quarter came in ahead of what we delivered in the second quarter. Revenue climbed 16% on a quarter-over-quarter basis. Gross margins increased to 81.6%, and our non-GAAP loss came in below $300,000; we stay confident that we can keep this progress going through the rest of fiscal 2026 and anticipate double-digit sequential revenue growth in Q4 relative to Q3. On the commercial side, we keep making meaningful headway in winning and expanding contracts with customers both new and existing, and in bringing new product offerings to market. In my view, these wins show growing market interest in our solutions along with the strength of the relationships we hold with our customers. Three new contracts were announced during Q3, and we anticipate announcing further new contracts across the coming quarters as our sales pipeline keeps growing and producing high-quality opportunities. We also broadened our product portfolio considerably during the quarter, assembling a comprehensive family-focused ecosystem of software products and services built to connect and protect families across generations. With this expanded portfolio, we can address a wider range of market needs, extend our overall reach, deepen relationships with our customers, and generate additional opportunities for long-term growth. It's an exciting moment at Smith Micro. I believe momentum across our business is strong and growing. Teams throughout the company are working hard to support expansion of our sales pipeline while delivering and strengthening our product offerings. In my view, we are only scratching the surface, and I expect continued success as we move through the rest of the fiscal year and beyond. Finally, I'm excited to be back as CEO. Smith Micro has a great team, and I'm proud to be at the helm as we keep fulfilling our mission of delivering innovative software solutions that help families stay connected, protected, and safe. We look forward to building on the momentum we've created this year. Our progress encourages me, our growing opportunities energize me, and I remain very confident in our ability to turn this momentum into long-term growth. Later in the call I'll share more details, but first, let's hand the call over to Bethany Braund, who will review the financial results for the third quarter. Bethany?

Thanks, Bill, and good afternoon, everyone. First, I'd like to highlight a few key contract developments that shaped our third-quarter results. We signed an expanded multi-year deal with one of our biggest Tier 1 customers, which strengthens a partnership we've had for a long time and our mutual dedication to providing creative family safety solutions. That agreement generated NRE fees and started adding to higher recurring revenue in the quarter. We also rolled out new agreements with two additional carriers during the third quarter and started recording revenue from them: the first is in the U.S. for our SafePath OS for Senior Phone solution, and the second is in Europe with our SafePath Connect solution. In addition to these customer wins, we keep realizing gains from the strategic cost cuts we announced in last year's fourth quarter. We delivered longer-term cost benefits in this year's second and third quarters, and we anticipate those gains carrying on through the fourth quarter. Our priority stays on reaching sustainable profitability by generating revenue growth while keeping cost management disciplined. Now let's go through the financial results for the third quarter of 2026. In the third quarter, our positive momentum carried on, giving us a third straight quarter of sequential revenue growth. We recorded revenue of $5.0 million for the third quarter of 2026, versus $4.3 million in the same quarter of 2025, which is a 15% increase. Measured against the second quarter of 2026, revenue rose by $676,000, or 16%. Year-to-date revenues through September 30th, 2026 came to $13.6 million, compared with $13.4 million through the third quarter of last year, up 1.4%. In the third quarter of 2026, family safety revenue reached $4.2 million, an increase of $631,000, or 18%, over the third quarter of last year. Family safety revenues rose by $645,000, or 18%, versus the second quarter of 2026. In the third quarter of 2026, CommSuite revenue came in at $857,000, up $65,000 from the third quarter of 2025. CommSuite revenue grew by $31,000, or 3.8%, compared with the second quarter of 2026. For the fourth quarter, we anticipate further sequential revenue growth, backed by expected contributions from new contracts, with revenue projected in the $5.4 million-$5.6 million range. For the third quarter of 2026, gross profit was $4.1 million, versus $3.2 million in the same period a year earlier, an increase of $885,000, or 28%, driven by the period-over-period rise in revenues and our strategic cost reductions. In addition, gross margin came to 81.6% for the quarter, consistent with the guidance we gave for the prior quarter and a substantial improvement over the 73.9% recorded in the third quarter of 2025. Our third-quarter gross margin of 81.6% was the second quarter in a row above 80% and exceeded the 81.3% posted in the second quarter, reaching a new five-year high. The $4.1 million gross profit in the third quarter of 2026 was up by $566,000 from the gross profit recorded in the second quarter of 2026. Looking ahead to the fourth quarter of 2026, gross margin should stay in the 81%-83% range. For the year-to-date period that ended September 30th, 2026, gross profit came in at $10.9 million, versus $9.8 million in the same period a year earlier. Gross margin for that September 30th, 2026 year-to-date period was 80.5%. GAAP operating expenses in the third quarter of 2026 totaled $5.6 million, which is down $2.1 million, or 28%, from the third quarter of 2025. On a sequential basis, GAAP operating expenses fell by $341,000, or 5.8%, against the second quarter of 2026. Those cost reductions in both comparisons came from our cost optimization efforts. GAAP operating expenses for the year-to-date period ended September 30th, 2026 were $18.1 million, versus $34.5 million in the same period of the prior year, a reduction of $16.4 million. And even if you set aside the impact of certain one-time events in that prior year period, which included the $11.1 million goodwill impairment and the $1.3 million gain on the sale of ViewSpot, our GAAP operating expenses still fell by $6.6 million, or 27%, year-over-year. non-GAAP operating expenses were $4.2 million in the third quarter of 2026, compared with $5.7 million in the second quarter of 2025, a drop of roughly $1.5 million, or 26%. Sequentially, non-GAAP operating expenses came down by $104,000, or 2.4%, versus the second quarter of 2026. For the year-to-date period through September 30th, 2026, non-GAAP operating expenses were $13.3 million, compared with $17.8 million for the year-to-date period ended September 30th, 2025, a decrease of roughly $4.4 million, or 25%, from last year. We expect non-GAAP operating expenses to be relatively flat in the fourth quarter of 2026 compared with the third quarter of 2026. The GAAP net loss attributable to common stockholders for the third quarter of 2026 was $1.7 million, or a $0.30 loss per share, versus a net loss attributable to common stockholders of $5.2 million, or a $1.23 loss per share, in the third quarter of 2025. GAAP net loss attributable to common stockholders for the nine months ended September 30th, 2026 was $8.3 million, or a $1.57 loss per share, versus a GAAP net loss attributable to common stockholders of $25.4 million, or a $6.50 loss per share, for the nine months ended September 30th, 2025. The non-GAAP net loss attributable to common stockholders for the third quarter of 2026 was $281,000, or a $0.05 loss per share, versus a non-GAAP net loss attributable to common stockholders of $2.6 million, or a $0.61 loss per share, in the second quarter of 2026. Non-GAAP net loss attributable to common stockholders for the nine months ended September 30th, 2026 was $2.8 million, or a $0.52 loss per share, versus a non-GAAP net loss attributable to common stockholders of $8.2 million, or a $2.10 loss per share, for the nine months ended September 30th, 2025. In today's press release, we've included a reconciliation of our non-GAAP metrics to the most comparable GAAP metric. In Q3 of 2026, the reconciliation mainly captures a $1.2 million adjustment for intangible asset amortization, $118,000 in stock compensation expense, $20,000 of depreciation expense, plus $112,000 for amortization of debt discount and financing issuance costs. Because we've accumulated net losses over the last few years, our GAAP tax expense comes largely from certain state and foreign income taxes. When it comes to non-GAAP, we applied a 0% tax rate for both 2026 and 2025. The non-GAAP tax expense that results shows the actual income taxes expensed in each period. Turning to the balance sheet, we had $2.4 million in cash and cash equivalents as of September 30th, 2026. That wraps up my financial review. I'll now hand it back to Bill.

Thank you, Bethany. As we noted on the previous earnings call, demand keeps rising in the markets we serve, which supports the broader go-to-market approach we have adopted for our SafePath platform and the wider set of solutions, features, and functionality around it. During last quarter's call, we told you we were just days away from signing a larger multi-year agreement with one of our Tier 1 customers. I am happy to report that the contract was signed on schedule and is already bringing in extra revenue, and we anticipate it will keep producing meaningful revenue growth for the company as we deliver additional items under the new contract. This represents a significant achievement for us, and in our view it demonstrates both the strength of what we offer and the trust customers place in our ability to deliver inventive family safety products. Through this new agreement, we'll supply broader capabilities and features along with fresh deployment choices built to serve a much larger share of users, which should fuel subscriber expansion. Beyond that contract growth, during the quarter we introduced our initial SafePath Drive premium upgrade alongside a Tier 1 partner, and we expect it to generate revenue growth right away. Additionally, this quarter we took pride in helping Consumer Cellular roll out a fresh connected care offering designed specifically for older adults along with the family members who care for them. That offering was purpose-built atop our SafePath OS for Senior Phone platform and reaches customers under Consumer Cellular's SpeakEasy brand. Deployment is now in its initial phase, and additional features plus functionalities will be introduced across the quarters ahead. Several new opportunities in the Americas and Europe have opened up for us thanks to our SafePath OS for Senior Phone solution. Carriers are looking to reach the sizable and expanding senior market, and in our view mobile devices will matter more and more in helping seniors remain connected, preserve their independence, and get support when they need it—and our SafePath OS for Senior Phone offering addresses that need. To give this important market further backing, we recently became part of the AgeTech Collaborative from AARP, a worldwide network of organizations that collaborate on innovation, research, and cooperation to enhance how people age. The quarter brought another milestone as well, when we launched SafePath Connect. SafePath Connect provides all the trusted real-time location services, parental controls, digital wellness tools, and family safety capabilities found in our SafePath solution, but gives partners an easier route to market. Thanks to App Store distribution through Smith Micro, a wider range of partners can deliver safety-focused experiences without needing complex integration or development. During the quarter, we closed our first SafePath Connect win with Orange Belgium, which is offering SafePath Connect as part of its safer phone solution designed to help families establish healthy digital habits from day one. This marks another positive step for the company, expanding our footprint with the Orange Group and confirming the speed and efficiency of our SafePath Connect distribution strategy. Let me stress that SafePath is evolving into a full platform for family safety, protecting households at every life stage—from kids to seniors and everyone in between. That's important to our carrier customers, who are trying to attract and retain the best subscribers possible, which means the family. Carriers can roll out SafePath in several ways: as an over-the-top app, bundled with a handset that includes SafePath OS, or built into their own apps using our SafePath SDKs and APIs. What excites us even more is our belief that before long a customer will be using all three deployment methods at once, with each of them communicating with the same SafePath servers in the cloud. SafePath is becoming a full-featured family safety platform, with additional capabilities, additional paths to reach families, and additional avenues for growth. From children to seniors, spanning devices, apps, and deployment models, SafePath is designed to protect and connect families at every stage of life. We're providing the solutions that our carrier customers are asking for and that their family subscribers require. Smith Micro is out in front and building toward a remarkable future. All in all, as I look toward the rest of the year and on into 2027, I believe we've established a strong foundation for growth. Our pipeline is still robust, and we keep finding opportunities with new customers as well as existing ones throughout the SafePath ecosystem. We're seeing growing interest from existing partners in broadening the premium features and capabilities they provide to their subscribers, and from potential new partners who understand the worth of delivering solutions to families at every stage. Considered together, I believe these developments put us in a good position for ongoing growth; we have the products, the opportunities, and the team to seize the momentum we're seeing throughout our business, and I'm eager about what's ahead for Smith Micro. Having said that, operator, please open the line for questions.

Hi there, good afternoon. I appreciate you taking my questions. It's great to see that momentum building quarter over quarter, not just through the third quarter but also as we look ahead to the fourth quarter. Bill, to kick things off, regarding that fourth-quarter outlook, could you share some detail on exactly which applications you see beginning to ramp sequentially? After that, I have a few follow-ups regarding particular products.

Absolutely. What we're witnessing is a great deal of interest around family safety. During my prepared remarks I noted that this matters greatly for carriers seeking to draw in family subscribers, the highest-quality subscriber available to a carrier in today's market. When we consider future growth, it's coming both from our existing over-the-top applications and, as of now, from our first customer adopting SafePath OS, and, likely most crucially, from new customers who will arrive and use the SafePath SDKs and APIs to embed family safety right inside the carrier's branded app. That strikes me as especially meaningful, since carriers are going to spend heavily on distributing and marketing their own app, which ought to grow the user base considerably and, by extension, substantially expand Smith Micro's revenues. That's a development, I believe, you'll witness across 2027.

Hi Bill, I just want to ask a quick follow-up about the SDKs and APIs, or the super apps — when will we start seeing the first products of that kind show up in the marketplace? I realize it's still early, but as we begin thinking about 2027, how should we frame the sizing of that, both regarding how many potential operators or apps you'd aim to work with and as a share of sales?

Yes. Okay, so the first contract is signed. I believe a launch will happen in the first half of 2027. I think additional contracts will get signed in this area too, and a few involve some fairly significant players. I think 2027 will be a very exciting year. You should see growth coming out of the SDKs throughout it.

Understood. Could I ask one final follow-up? Drive looks like a potentially appealing product that complements all your other offerings. It seems to carry higher pricing as well. I was hoping you might share a few specifics on the timing for launch, roughly how many carriers you are currently in talks and engaged with, and what we should expect on pricing. Thanks.

Yes. Alright, so regarding Drive, our first Tier 1 customer has already launched it. It is already producing revenue growth and ought to keep growing through the remainder of the year as more and more of their subscribers begin using the Drive feature. Yes, it does bring in higher revenue, both for the carrier and for us, but it also delivers some really quite powerful safety features for the family. We are quite excited about it. We believe this is the first of what should be many customers that will also be offering Drive. But the first one is done, that is always the hard one, and now we will move on to the next.