SurgePays, Inc. (SURG) Earnings Call Transcript & Summary

Welcome to the SurgePays First Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the call over to Brian Prenoveau. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to the SurgePays First Quarter 2023 Earnings Webcast and Conference Call. Today's date is May 11, 2023. And on the call today from SurgePays are Brian Cox, President and Chief Executive Officer; and Tony Evers, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see SurgePays most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Also during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon. Copies of today's press release are accessible on SurgePays Investor Relations website, ir.surgepays.com. In addition, SurgePays Form 10-Q for the quarter ended March 31, 2023, will also be available on the SurgePays Investor Relations website. And now I'd like to turn the call over to President and Chief Executive Officer, Brian Cox.

Thanks, Brian. First of all, I'd like to thank our shareholders and those interested in SurgePays for joining the call. As we have expanded and are continuing to expand our audience, I'd like to give a brief overview of who we are, what we do and our target market. SurgePays brings financial and telecom products to the underbanked and underserved populations of the United States where they live and where they shop. Our goal is to build the largest direct distribution network of underbanked products and services in the country. The underbank do the majority of their financial transactions at their trusted local convenience store that closest to their home. SurgePays utilizes these stores as the points of distribution into these communities. As we onboard stores to our fintech software platform, we enable the clerk at that store to perform transactions such as prepaid wireless activation and payments, along with reloading debit cards and other financially-enabling services to improve the daily lives of those without traditional access to banks, credit and checking accounts. One of the really great things is that our revenue is directly tied to how many essential services we provide to those who need the most. The Affordable Connectivity Program, or ACP, has been the revenue driver for SurgePays growth over the last 2 years, taking us from a company with $50 million in revenue in 2021 to $121 million in 2022 with roughly breakeven profitability. In 2023, we are guiding to $190 million of sales with positive cash flow. The ACP offers a federal subsidy for a tablet device in a monthly cellular broadband Internet service to the recipients of any other income-based government benefit such as Medicaid, Veterans Pension, Section 8 and most notably, the program historically called food stamps or EBT, but now goes by the name SNAP. There are several wireless companies out there with licenses to offer the ACP program to the public. However, we are uniquely positioned as the only ACP company that owns its own customer relationship management software platform that's integrated with the FCC's database and also AT&T and T-Mobile. Further, we are the only ACP company that owns one of the few prepaid transaction platforms that has a nationwide network of convenience stores. This trifecta competitive advantage paves the way for us to be the only ACP company able to do brick-and-mortar sign-ups inside convenience stores, which means store owners can earn revenue by helping those in their underserved community get connected. We are utilizing this great ACP program as the enticing catalyst to build what is now over 25,000 stores to be onboarded with a staging target of less than 12 months. In some areas, more than 30% of the transactions at convenience stores and supermarkets are using a SNAP card, which is the government benefit. Every customer who pulls out that card in the store is eligible for ACP. What's even more exciting is that ACP is limited to 1 per household. And through our surveys, we know that each household has 3 to 4 smartphones on another prepaid wireless company. With our presence in these stores where these customers shop, and the ability for these customers to pay their monthly prepaid wireless bills at the same store, it's a fantastic launching pad for our non-ACP prepaid wireless subscriber push later this year. Another exciting facet of our business is now the store owner is making money directly in partnership with helping his community, and we're enabling this. Directly, because of this, I've never seen a warmer reception to upselling and distributing other products to a store. Not only does our software platform have a navigation interface similar to a website for doing these transactions, it also has a wholesale marketplace back office, where store owners can order high-margin products that are in demand directly from the manufacturer. These products are the impulse consumables by the register that many store owners in rural areas especially have difficulty obtaining or the minimum orders from their local distributors are just too high. Using ACP to add stores to our network by the tens of thousands, grows our ACP subscriber base, our prepaid top-up and payment revenue and give those points of distribution for selling other third-party products into these communities nationwide. This is the mindset or the driving force for parlaying the success of the ACP program into exponential revenue growth in our other verticals. We are piggybacking this hot reception by store owners to have access to this offering. Even with the majority of our team's energy focused on this longer-term growth model, I'm pleased to announce that the first quarter of 2023 continues the profitability trend we began to see at the end of 2022, delivering net income of $4.5 million and EBITDA over $5 million. With our funding in place, we've secured a consistent supply of tablets at a significantly lower cost. And in the meantime, we've built out the infrastructure to distribute them in the most efficient means possible. We should no longer see periods of throttling growth due to running out of devices. We expect revenue to ramp higher in future quarters. As I mentioned in the last quarter's call, the key metric is new stores on our platform going forward. More stores on our platform means more ACP sign-ups, more prepaid wireless subscribers, more products on the shelf, more transactions over our fintech platform and more sales per individual store. As always, we're focused on managing our cash and our cash flow while deploying that cash to maximize growth. We expected first quarter revenues to align with fourth quarter 2022 revenues and is precisely what happened but with strong positive cash flow. We anticipate the full benefit of our lending facility to be realized toward the end of the second quarter, with growth accelerating quickly and continuing into the second half of the year. We still expect 13,000 stores to operate on the SurgePays network by the end of the year and see positive operating cash flow during the year and only looking to raise capital for a defined opportunistic purpose. I don't normally enjoy preparing for these calls but stopping for a minute to see the fruits of your labor has changed my mind a bit, considering how the fruit looks now. I think our next couple of calls will continue elevating my smile as we're able to continue shifting gears upward. Until then, thanks go out to the SurgePays team for pushing forward and delivering on a daily basis. I'll turn the call over to Tony to review our financial results briefly before summarizing today's call. Tony?

Thank you, Brian, and good afternoon, everyone. I will begin my overview of the first quarter's financial results. For the quarter, we reported revenues of $34.8 million compared to $21.1 million in the first quarter of 2022, representing an increase of 64%. The increased sales for the quarter were primarily attributable to subscriber growth in our mobile broadband business. Gross profit increased 192% in the first quarter to $7.7 million compared to $2.6 million in the year-ago period. First quarter gross margin also showed significant improvement up to 22.1% versus the 12.5% in the first quarter last year. SG&A expenses decreased by 22% year-over-year. This was primarily driven by a decrease in compensation expense of $875,000 from Q1 2022 to Q1 2023. Income from operations was positive for the quarter at $4.7 million compared to a loss of $1 million for the year ago period. Net income for the quarter was $4.5 million or a gain of $0.32 per basic share compared to a net loss of $1.2 million or a loss of $0.10 per basic share in 2022 Q1. Of the $4.5 million gain in the first quarter of 2023 showed an increase of gross margin of 13% over Q1 of 2022. Other income included a 33% gain on our investments in Centrecom. Turning to the balance sheet, liquidity and cash flow. Our cash balance as of March 31 was $8.9 million compared to $7 million at the end of -- year-end 2022. Accounts receivables have increased by $400,000 from year-end 2022 to $9.7 million. The receivable is from the U.S. government for the mobile broadband subsidy. Payment usually occurs in the last day of the month following the verification of a new customer with USAC. Given our strengthened financial position, higher cash balance and capital structure, our cash allocation priorities focused on investing in the business and maintaining ample liquidity for future growth. I'll now pass the call back to Brian for some closing remarks. Brian?

Thanks, Tony. Hopefully, it's clear what we are building here at SurgePays. We've succeeded and continued to succeed in making significant advances in the financial profile of the company while doing our best to protect shareholder interest. We are poised to create one of the largest direct distribution networks of underbanked products and services in the country and a vast market with tremendous growth potential awaits. These results have proven we can do that while delivering positive cash flow. Thank you so much for your time today. We will now open up the call to questions. Operator?

[Operator Instructions] And our first question today will come from Ed Woo with Ascendiant Capital.

Congratulations on the quarter. My question is the economic environment continues to get weaker. Have you noticed any change with your convenience store partners, either with their customer base?

Yes. Good question, Ed. Thanks for dialing in. We've seen -- I've been involved with convenience stores and delivering underbanked products for 20 years now. One of the things that I've noticed -- and it is proportionate to the macro environment is -- there's 2 components there. The stores are looking for ways to be more efficient with their capital, and then consumers are looking for ways to obviously get more from their capital or their income. So this always presents a really unique opportunity for us because considering that -- like we talked about, we have the competitive advantage where we're normally the value-based deliverable, the product, and we're delivering the best value at the best cost directly to them. When you have moments in time like this where people are aware and they take a step back and they evaluate things instead of just staying in that in that same rut in the road financially, it's always good for the value-based companies like us delivering a better cost product. So it's not so much that all of a sudden you see more people moving into an underbanked, underserved neighborhood because there's typically not a whole lot of houses for rent. Those neighborhoods are usually pretty packed already. So I don't think that all of a sudden, there's this explosion of customers. It's the customer's awareness that changes, and it's the store's awareness. If we have a way for that store owner to make more money without having to put out capital for inventory because most of our products are just transaction. So for example, he takes down the number, enrolls -- helps us enroll someone for ACP. That store owner just made $12. He didn't put out any money to earn that money. So that's why it's such a hot product for him, and our other transaction products, he doesn't have to lay out money, products sit on the shelf and then wait 30, 60 days to upsell that product with a risk of the inventory going bad. So it's a really strategic time for us. And I think it's one of those windows of time that we really want to take advantage of because when times get better, these products are still going to be there, and we're still going to have these relationships. So I think that's the opportunity, and that's the window of time for us related to the macroeconomic situation.

Your next question will come from Adam Waldo with Lismore Partners.

So I wanted to just get a little bit to see to what extent you guys could provide a little bit of guidance on the balancing of the continued hyper growth in the business through the ACP on the one hand and improving profitability by EBITDA margins and free cash flow on the other. So obviously, you had a very nice quarter here in the first quarter in that regard. Some of that was due to the timing around the device delivery cadence. You've given guidance for the full year for operating cash flow to be positive and haven't given margin guidance in your press release. But can you talk a little bit to what you would see the progression of margin structures and cash flow looking like over the year as you try to continue to balance both scaling up subscribers and improving profitability and cash flow.

Sure. No, that's a really astute question, by the way. I appreciate that. Because that right there is probably I'd say, on average of 30 minutes to an hour a day, the debate back and forth that Tony and I, our CFO, have when we're laying this out. So it's not just kind of what I call a jailbreak strategy of just get it done and go get sales, it's methodical and making sure we're making money because while, obviously, we are a public company, we're on the call right now, the core executives in our company come from the entrepreneurial, "Hey, we need to make money mindset," where it is our goal to make money and expand those margins as much as possible. So the thing that we look at -- and getting off into margins in the press release and what have you is a little bit challenging. But to add -- I want to add a little bit more color to why of all the things that I talked about in the press release and the script of why the stores are so advantageous for us as a distribution point for ACP, for our own MVNO subscribers and all the other products we sell. And then using ACP is that golden ticket to really just pave that way and open the door for us. It's not just the model. It's the cost. When we're paying folks out there in tents that go out and set up the pop-up tents, that's their only source of income. They're traveling hotels, gas, and their only source of income is doing the ACP program. So at the end of the day, those people require a much higher, let's call it, a spiff, a bounty, a payment for that. The store -- this is a simple quick transaction at the store where we're simply using them to get the telephone number where our software can then engage that customer by way of chat through SMS so that the heavy lifting of that subscriber activation is done by our people. So that store one is quick now. So we're paying the store $10 to $12 as opposed to paying someone in the field $50. So when you look at utilizing a borrowing base and our access to capital and really looking at that globally and stay another year and saying, okay, what's more important here? Are we trying to put up numbers every 90 days just to make certain people out there happy, or at the end of that year, at the end of that 2 years, do we want to squeeze in? And again, simple math. Our devices used to be $93, now they're $65 ballpark. Our field sales cost us $50, at a store it cost us $12. If you run the math, I can get 4 store customers for every 3 field sales. So that's -- when you talk about that, that's why our bandwidth and our energy and our focus has been pushed not only on that from a standpoint of the margins, but also think about this. You kind of -- you didn't ask this, but it's kind of in line with that, customer retention and attrition. If that tent rolls through town and it gets rid of all of its devices and gone. It's gone. It doesn't come back. The salesperson goes to the next town. If that customer ever has an issue, nobody to go to except the next tent that comes to town, if there's -- the tablet breaks or there's an issue, most of these people don't know their company. If it's the store that they go to 3 to 5x a week, and they can go back in there and that store owner has a very small residual payment just for that customer staying on the product. Well, that store owner has a vested interest to say, "Hey, Adam, hey, man, tell you what, text your problem to SURG, and the customer service, they'll help you out. They got -- they'll take care of it. And if you need anything else, let me know. They got an e-mail address and telephone number. We can help you. We got your back." So it's a completely different mindset of that customer engagement being in that community permanently for retention, for lower cost. And keep in mind, too, -- you asked specifically about margins. We're realizing the $25 to $27 lower cost per device right now as we speak. So that's why you're seeing some of these margins, and we're realizing this cash flow.