DNA X, Inc. Q2 FY2020 earnings call

Key Points

• Second quarter revenue was just over $21 million, a 65.7% sequential increase due to resolution of prior software issues and improved carrier relationships. Some third - quarter targeted orders came in early.
• Benefited from shifts in first responder, healthcare, education, government, and commercial markets emphasizing remote work and connectivity.
• Made progress on operating metrics: increased gross margin, settled prior shareholder litigation, and reduced corporate OpEx.
• Plan to reinvest portion of operating cost savings into R&D for next - generation products starting in the third quarter.
• Developing two rugged platforms: one based on next - generation microprocessors for 5G voice and data communications, and another for refresh and improvement of the XP3 feature phone platform.
• Enhanced ecosystem around products, e.g., SonimWare Enterprise Mobility Software announced, which helps customers deploy and manage devices.
• Current portfolio to be enhanced with Android 10 on XP8 and mission - critical push - to - talk on XP8 and XP5.

Second quarter 2020 net revenues increased 66% sequentially to $21.1 million. Gross profits for the second quarter of 2020 increased $4.9 million, with gross profit percentage increasing from 17% of revenues last quarter to approximately 23% of net revenues. The increase in net revenues was primarily attributable to continued sales of the smartphone and increased sales of the XP3 flip phone at the major U.S. carrier. Feature phones, specifically the XP3, contributed significantly to revenue, accounting for approximately 66% of Q2 revenue.

Guidance

• Consistent with previous quarters, no specific guidance provided today due to continued uncertainty from the COVID - 19 pandemic.
• Anticipate continued progress on strategic goals through the end of the year and are fully capitalized, shifting focus to long - term growth initiatives.

Risks

• Uncertainty persists due to the continuing global COVID - 19 pandemic.
• Supply chain risks such as lengthening of lead times for certain components.
• Impact of product mix on gross margin, with feature phones having slightly lower margin than smartphones and lingering costs from Shenzhen factory shutdown in Q1.

Q: Hey, guys, thanks for taking my questions. Tom, I know you mentioned that there were some orders that came in early from Q3, but do you think there were any significant pull - ins into Q2?

A: No. We're really focused on delivering our products at the pace in which our carrier customers can consume them and get them out to the end users. We did not put any efforts into pulling in revenue.

Q: Okay, that's helpful, and did Q2 -- was Q2 impacted at all by any component shortages or supply concerns?

A: No, no, not at all. I mean I think things have changed in the supply chain, because we do control our supply chain, we were able to plan for and react. We actually had a substantial number of parts on hand, and we're ready. Probably the longer answer to your short question is as we keep an eye on these things, really the only supply chain effect is a lengthening of lead times for certain components, and we are reacting accordingly.

Q: Okay, and the last one for me, and I'll jump back into queue, obviously early strong sequential improvement in gross margin, should we be thinking about this sort of low to mid - 20s as being the new normal going forward?

A: Hey, it's Bob. I'll take that one. I think it depends on the mix. Our mix has shifted, and we mentioned a little bit in the narrative towards our feature phones, specifically the XP3, which has been doing really well at a couple customers, and it's grown a lot, and won significant customer, and those are just a little bit lower margin than the XP8 smartphones. So, I think that there is that impact. There is a little bit of lingering overhang from the shutdown of the factory that's in place in Shenzhen in Q1, the additional safety measures and protocols that have been put in place in order to reopen safely and keep our workers there in good shape, and I think those are kind of cost that should see a little bit. So, I think margins will be positively impacted by the efficiency of our operations, little bit negatively impacted by the mix.

Q: Okay, and sorry, just to clarify, I mean it looks like feature phones were 66% of revenue in Q2, I mean, obviously, you mentioned strong XP3, but going forward, I mean, Q2's levels should be the floor base, even if feature phones continue to be strong in the back - half of this year?

A: I would say without giving guidance, that's a fair statement.

Q: Okay, great. Thanks for taking the question. The first one, I fully appreciate that you guys are not giving guidance, but was -- you know, I figured I may as well try to just ask you how activity has been in July and more broadly, whether -- what kind of demand COVID has potentially stimulated that you weren't seeing before the pandemic for your devices?

A: Yes, I mean of course like Bob said, definitely not giving guidance, I don't really want to talk about what's been going on the quarter, but I will address kind of the back - half of the question of what is COVID doing to demand. Just like we talked about last quarter, there's a small portion of our sales that were flowing out through retail. Retail is getting back up and going, but it's not -- the traffic isn't there like it was in the past, and I think, for that small portion of the market, there're still some caution. On the on the other side, to the extent, any of our enterprise customers have been had needed a holdback or go on pause, we're showing that activity starting up again. So, heavy testing of our devices, use in the field, moving forward with larger projects that seems to be we're all back in business on that.

Q: The second one is just, you guys are obviously about to embark on somewhat of an R&D cycle to develop the 5G devices. You've heard AT&T talk about rolling out 5G on FirstNet, and I'm sure that other enterprise carriers are going to utilize 5G in their plans going forward. Just wondering how you ensure that you're going to get a good ROI on developing the 5G devices, and what sort of demand you think there is for upgrades from the carriers as they launch 5G over their enterprise networks?

A: So, we are deeply involved with all the carriers in 5G and what that's going to mean, in particular, what the market will bear. We have been very clear and open with them on what it costs and what the difference is. So, what the difference is in R&D for 5G, or even for the two different types of 5G, because there's millimeter wave and there's sub - 6, and it's all different, and certainly, the R&D and the components required will result in a more expensive phone, and we're defending our -- what we would consider to be a premium margin for those phones when adopted. We'd be releasing new technology, brand - new products, and you kind of return to the top of the gross margin percentage when you do that. So, we're very focused on it. We are almost consultative to them in a way to talk about which features really should be included in which phones, so that we can make sure that we have something those that the market can bear, but then also still delivers on their promises for 5G in the future.

Q: And then one more quick one, just around T - Mobile, any update there on talks with them, and do you have confidence that you can begin to do business with them at some point?

A: We are confident that we can do business with them, but we're not allowed to actually ever announce any business with any of the carriers by name, of course, but we're confident that our -- we're extremely confident that we have a relationship with T - Mobile.