Phunware, Inc. Q3 FY2023 earnings call

• Product strength: Indoor wayfinding technology is superior to competitors like Aruba Meridian, and location marketing is gaining adoption.
• Customer renewals: Renewed $2 billion Virginia Hospital Center for a 5-year term and saw a renewal at Mayo Clinic through partner HID; account health indicators are strong with substantial upsells in the pipeline.
• New logo acquisition: Account-based marketing approach has led to ~$8 million in total contract value in the pipeline, with a third from channel partners like Cox Business and Siemens Connect.
• Cost containment: Winding down non-core Lyte business, reducing staff headcount, and executing early lease terminations for office spaces, resulting in annualized savings of approximately $6.0 million.
• Phunware 3.0 vision: Pillars include selling location/wayfinding tech as software components, monetizing IP, and developing a digital asset ecosystem with PhunCoin, PhunWallet, aiming to launch PhunCoin for trading in the next several months.

Net revenues for the third quarter of 2023 totaled approximately $2.8 million. Platform revenue accounted for 45% ($1.3 million) and hardware revenue made up 55% ($1.5 million). Gross margin was 7% compared to 16.7% in the prior year. On a non-GAAP adjusted basis, gross margin was 9.8% versus 17.9% last year. A non-cash write-down of Lyte inventory totaling approximately $500,000 significantly impacted Q3's gross margin. Platform gross margin was 50.4% compared to 46.5% last year, while hardware gross margin was negative 28.3% versus 6% last year, reflective of the Lyte inventory write-down.

• Expect to enter several new software contracts in Q4 and Q1 next year, ranging from $50,000 annually for smaller properties to $200,000 annually for hospital properties.
• Plan to officially launch PhunCoin for trading in the next several months, with a Reg A offering for PhunCoin in the works.
• Anticipate further announcements on the digital assets ecosystem, including PhunCoin launch, in the coming weeks and months.

• Regulatory uncertainty surrounding digital assets, particularly utility tokens and NFT projects, has disrupted the ecosystem. The company is monitoring evolving regulations around utility tokens to ensure compliance.

Q: How quickly do you think you can monetize, token and wallet. And what is the kind of additional investment dollar wise required there to get it to a point that you can monetize it?

A: Our Chief Legal Counsel is working through linking components, expect to be definitive on timing in the fourth quarter, with minimal incremental investment needed.

Q: Mike, if you could talk a little bit more about, I guess, the software, the pipeline that's of engagements that you envision occurring in Q1 of next year. Could you I mean, add a little context to it in terms of maybe, initial engagement size and then the opportunity within each engagement to grow and to really to grow within each engagement?

A: We have a few dozen opportunities in the pipeline across hospitality and healthcare. Healthcare opportunities are larger on average, 3x larger in annual revenue. New contracts in Q1 will range from $50,000 annually for smaller properties to $200,000 annually for hospital properties, with upsell opportunities available.

Q: How should we look at the strategy going forward in terms of direct sales versus using your channel partners over the next year or two?

A: Continue direct sales with experienced team, channel partners contribute ~45% of pipeline dollar volume, support partners in the sales process.

Q: If targeting bigger hospitality clients, will it require a greater investment in the sales cycle as well as should we expect a sales cycle to kind of be extended as these deals appear to be bigger?

A: Larger deals take longer, but strategy to incorporate into major apps could lead to hundreds/thousands of properties, with blocking and tackling at individual property level in the meantime.