Sonim Technologies Inc (SONM) 2019 Q2 法說會逐字稿

Good afternoon. Welcome to Sonim Technologies Second Quarter 2019 Earnings conference call. Joining us for today's call is Sonim CEO Bob Plaschke and CFO Jim Walker. Following their remarks, we will open the call for questions.

Please note that certain information discussed on the call today will include forward-looking statements about future events, Sonim's business strategy and its future financial and operating performance, including as expected third quarter and fiscal 2019 performance.

These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements.

Certain of these risks and assumptions are discussed in front of the SEC filings, including its registration statement on Form S-1, and its quarterly report on Form 10-Q for the second quarter of 2019.

These forward-looking statements reflect management's belief, estimate and protections as of the date of this live broadcast, July 24, 2019. And Sonim undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Additionally, Sonim has just distributed a press release and filed the Form 8-K with the Securities and Exchange Commission detailing its second quarter 2019 financial results. The press release includes historical financial results and GAAP to non-GAAP reconciliations, some of which will also be discussed in the Company's remarks on this call.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via link available in the Investor Relations section of the Company's Web site at www.sonimtech.com.

Now, I'd like to turn the call over to Sonim's CEO Bob Plaschke. Bob, please proceed.

Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter and six months ended in June 30, 2019, a copy now, which is available in the Investor Relations section of our Web site.

This is an exciting time for Sonim. Two months ago, we became a publicly-traded Company on the Nasdaq Stock Exchange, successfully completing the public offering or common stock that resulted in net proceeds of approximately $37.5 million.

Even more so, we were encouraged by the breadth and depth of new institutional ownership our Company has attracted and we sincerely appreciate the support from the investment community.

We're looking forward to the new opportunities being a public company provides us, including access to additional financial resources at a much larger and more diversified shareholders base, which we believe are fully aligned with our Company's mission.

For those who've had the opportunity to meet with our team on the IPO road show or who has spoken to us since then, you know that Jim and I are eager to talk about our technology, our product and our strategy as well as the multibillion-dollar market opportunity we're targeting. But perhaps most of all, we're most passionate about our goal of ensuring task workers, first responders and others who work in hazardous or mission-critical environment have access to the solutions that meet their essential needs.

Sonim's devices enable public safety officers and task workers to gather real-time information across multiple systems and to respond and to react to change in circumstances. Simply put, our products worked because in many cases, they absolutely must.

With that as an overview, I'd like to hand the call over to our CFO Jim Walker, who will walk us through the financial results for the second quarter and for the first six months of 2019. Once Jim goes through the numbers, I'll come back to speak more fully on why we believe Sonim is well-positioned to capitalize in what we believe will be a major industry shift, the public safety and critical infrastructure transitioning from historical LMR systems to dedicated networks like LTE, and ultimately, to 5G and smart cities. And hopefully, by the end of this call, you'll have a much better understanding of our progress and of the opportunity we have ahead of us.

With that, I'll now hand it over to Jim.

Thank you, Bob. Good afternoon, everyone. It's a pleasure to have the opportunity to speak with all of you today. Turning to our financial results for the second quarter and the first six months of -- ended June 30, 2019, net revenues for the second quarter of 2019 increased 39% to $43.7 million from $31.5 million in Q2 of last year.

For the six months -- for six months of 2019, net revenues increased 41% to $70.2 million from $49.6 billion in the same period last year. The increase in net revenues for both periods was primarily due to increased volumes for both the XP8 smartphone and the XP5s feature phone to major wireless carriers as well as the first full quarter of shipments of our newly introduced XP3 feature phone.

For the quarter, total unit sales increased 108% to approximately 150,800 units compared to approximately 72,500 units sold in Q2 of 2018. With the introduction of the higher volume XP3 in the second quarter of 2019, feature phones represented about 77% of our unit sales compared to approximately 46% in Q2 of 2018 with smartphones primarily being XP8 accounting for the remainder in both periods.

For the first six months, total unit sales increased 99% to approximately 222,900 units compared to approximately 111,700 units sold in the first half of 2018. Feature phones represented about 73% of unit sales compared to 47% in the same period in 2018.

Gross profit for the second quarter of 2019 increased 41% to $14.8 million or 33.9% of net revenues from $10.5 million or 33.5% of net revenues in Q2 of last year. For the first six months of 2019, gross profit increased 53% to $24.2 million or 34.4% of net revenues from $15.8 million or 31.8% of net revenues in the same period last year.

The increase in gross -- in gross profit for both the quarter and the six-month period was primarily due to the increase in net revenues I just mentioned as well as the reduced manufacturing cost per unit sold.

Going forward, our expectation is this, the gross margins will gradually expand a bit more over time as we realize manufacturing improvements and related volume efficiencies and as we begin to build up the anticipated software and services portion of our business.

In terms of the ongoing discussions regarding potential tariffs on imports from China, as you're probably all already aware, discussions continue for the time being and further tariffs are on-hold for now.

We will continue to complete our final assembly of our devices that are manufacturing in -- facility in Shenzhen, China. But while we're considering the lack of certainty, we're continuing to closely monitor trade conditions between the U.S. and China.

While we're operating our business as usual should conditions develop that may be unfavorable, that several contingency plans in place to react quickly and decisively up to and including potential relocation of our manufacturing operations.

Looking at operating expenses, total operating expenses for the second quarter of 2019 were $19.9 million compared to $9.9 million in Q2 of last year. Of the $10 million increase in total operating expenses, $5.2 million pertained to a one-time expense related to preapproved stock awards issued to several key employees as performance bonuses and recognition of our successful initial public offering in May, which was included in the G&A expense line.

On the non-GAAP basis, excluding the one-time charge, operating expenses were $14.6 million, up 46% increase over the second quarter of last year. The increase was spread across all departmental areas as we expanded our employee base commensurate with our revenue growth during the period.

For the first six months of 2019, total operating expenses were $34.5 million, including the $5.2 million one-time charge noted above, compared to $19.2 million in the same period last year. On a non-GAAP basis, excluding the one-time charges I just mentioned, operating expenses for the first six months were $29.3 million, a 52% increase over the same period of last year.

The increase was primarily due to higher G&A costs related being a public company, higher R&D costs related to new project launches and product approvals as well as investments and expanding our sales and marketing teams. Going forward, we expect the operating expenses to remain about the same level as Q2 for the rest of the year.

Turning to our profitability metrics, net loss attributable to common shareholders for the second quarter of 2019 totaled 6.1 million or $0.34 per basic and diluted share. This compares to net loss attributable to common shareholders of 3.1 million or $3.01 per basic and diluted share in Q2 of last year.

So, I mentioned earlier, net loss attributable to common stockholders in Q2 included the 5.2 million or $0.29 per basic and diluted share for the non-cash, non-recurring expense related to stock award. The EPS calculations are based on 18.1 million shares for Q2 of 2019 and 1 million shares outstanding for common stock in Q2 of 2018.

For the first six months of 2019, net loss attributable to common shareholders totaled 12.3 million or $0.73 per basic and diluted share, including the one-time charge. This compares to a net loss attributable to common shareholders of 11.2 million or $10.78 per basic and diluted share in the same period of last year. The EPS calculations are based on 17 million shares outstanding and 1 million shares outstanding, respectively.

Adjusted EBITDA, which is a non-GAAP metric for the second quarter of 2019 increased 15% to $1 million from $894,000 in the second quarter of 2018. The increase in adjusted EBITDA was primarily due to the increase in net revenues and gross profit, partially offset by higher operating expenses.

Adjusted EBITDA loss for the first six months of 2019 totaled $3.9 million compared to adjusted EBITDA loss of $2.7 million in the first six months of last year. The higher adjusted EBITDA loss was primarily due to an increase in operating expenses, partially offset by an increase in both revenues and gross profit.

As for the balance sheet, at the end of the quarter, we had cash equivalents of about $15.7 million. Because we started shipping our XP3 relatively late in the quarter, accounts receivable were up about $23.8 million over the prior quarter. We expect our shipments to be a little more consistent month to month in Q3, thus improving our cash position substantially by the end of the third quarter.

Turning to the financial outlook, for the third quarter ending September 30, 2019, we expect net revenues to increase to between $49 million and $52 million, represents growth of about 25% to 31% compared to the $39.5 million reported in Q3 of last year.

For the fiscal year ending December 31, we expect net revenues to increase between 25% and 30% over the $135.7 million we reported in fiscal 2018. Further, we expect to achieve adjusted EBITDA profitability of between 4% and 6% of net revenues for the year as a whole.

That completes the financial summary. I'll turn it back now to Bob.

Thanks, Jim. As you just heard, we had a successful first half of the year. Our increased sale numbers were propelled by a first full quarter of shipments of out XP3 feature phone, making the device now available to three of the four major U.S. carriers, with the fourth Verizon scheduled to begin shipping later this year.

We're also continuing to see a healthy demand for our existing feature phone, the XP5s and our flagship smartphone, the XP8. These distributed revenue sources provide multiple avenues for ongoing growth, and together, it had served as reliable foundation for Sonim's continued expansion.

We believe our current market opportunity encompasses the roughly 47 million task workers in North America, including approximately 9 million in the public sector and 38 million in the industrial enterprise market.

Each group within this market has their own unique needs for feature requirements and certification processes, but our current portfolio of handset devices were well-positioned to serve the needs of all of these industries.

So, I just mentioned during the second quarter, we launched the XP3 with several carriers, including AT&T for use on the FirstNet communications platform, which is the government program aimed at building and operating a nationwide broadband first responders. I'll talk -- explain more about that in a minute.

The XP3 is an ultra-rugged flip phone built to communicate in extreme conditions. Not many of you might be surprised to hear that the demand for flip phones remain strong especially among those in the field who need voice-centric communications.

The XP3 is also the first flip phone that has been tested and certified to operating on FirstNet. We're encouraged with the initial traction we're seeing from this product line and we believe we'll see continued interest going forward.

Now, those that are new to our story and the industry, the FirstNet Authority is an independent entity with the U.S. Department of Commerce that was established to develop, build and operate a nationwide broadband network utilized for and by first responders.

The First Responder Network Authority was authorized by Congress in 2012 in response to the 9/11 attacks, the lack of interoperability between land mobile radio or LMR systems of the multiple responding agencies in New York City and surrounding areas coupled with the halting of commercial cellular communications due to the increase in call volumes contributed to many firefighters lives during -- being lost during the attacks.

FirstNet is being built with AT&T in public private partnership with the FirstNet Authority, an independent agency within the federal government. According to the public statements made by AT&T in March, the FirstNet build out is approximately 53% complete and they expect to get to 60% by the end of Q3.

To be clear, in the areas where FirstNet has been built out, the network is fully operational. The percentage completion refers to the areas of coverage itself. Now, this is important because we're already seeing evidence of this network driving growth for solutions like ours which can operate on this dedicated network.

Currently, Sonim's devices comprise four of the nine ruggedized handsets were currently operable on AT&T's FirstNet. We believe that FirstNet's ongoing employment and eventual completion in the coming years marks one of the most significant tailwinds working in our favor over the near and medium-term.

While we're always working to improve our internal performance irrespective of market conditions, our recent success in future growth has been and will be reinforced by several positive industry tailwinds and mandates in addition to FirstNet, among these, influences of the ongoing transition from LMR and push-to-talk or PTT to smartphone and LTE networks.

More broadly, we're also cognizant of the anticipated growth of push-to-talk over a cellular market in North America, which analysts expect to grow at a 17% compounded annual growth between 2013 and 2025 compared to just 3% for traditional LMR solutions.

We intend to leverage the large-scale deployment of our solutions over these dedicate LTE networks in the public safety market to further position Sonim as the trusted solution within the cities that we serve. As public safety agencies continue to shift to these dedicated LTE networks, we intend to deliver premium mobility solutions to increase the security, safety and effectiveness across those cities.

Today, we have a product stock at 13 carriers in North America. We currently sell or ruggedized mobile phones and accessories to three of the four largest wireless carriers in the United States, AT&T, Sprint and Verizon as well as the three largest wireless carriers in Canada, Bell, Rogers and Telus Mobility.

While we've experienced good success of late and demand for our products is building, we're not resting on our laurels. While that we're continuing to invest in areas of our business with the highest anticipated return on investment, this includes continue in investing in our channel partnerships to further penetrate the industrial enterprise and public sector markets we target by leveraging their large and vast direct sale forces.

As Jim has mentioned earlier, we are also increasing our investment in marketing of the Sonim brand and our solutions and customers in those target markets. In doing so, we believe we'll be able to raise brand awareness, deepen existing channel partnerships and acquire and retain new channel and end customers for our solutions.

In addition, we're exploring public safety infrastructure products -- or I should say projects in both Australia and in Europe. We believe these markets will follow the U.S. in creating dedicated LTE networks for first responders similar to FirstNet. To give you an idea of the market size, there's approximately 3 million first responders in Australian and Europe, which is about the same size as the U.S.

Another integral part of our long-term strategy is to introduce our anticipated subscription-based products and services. As many of you know, our devices run on Android operating system, which gives our users access to all of the apps available through the Google Play to work.

While we believe the convenience and functionality provided on such a well-known, secure and accessible network is important, we also believe there's a longer term opportunity for Sonim in this area.

More specifically, we're looking to introduce new subscription-based monetization channels through the development of proprietary apps that will function across all of our devices in addition to our SCOUT app, which is free in the Google Play Store.

We launched Sonim Scan in Q1. Sonim Scan replaces a traditional handheld single-purpose barcode scanner that allows users to use existing rear camera on our XP8 device to do scanning. Beyond being a new feature, this app also eliminates the need for end-users to have to carry two separate devices, which historically has been the norm. Sonim Scan is available now for $599 per user per month.

Looking ahead, we've entered the second half 2019 with strong momentum and we're confident in our ability to achieve our near, long-term operational and financial objectives. With our results -- as our results for Q2 indicate, we believe we can continue to drive top-line revenue growth margin expansion and adjusted EBITDA profitability for the foreseeable future.

Furthermore, we have multiple avenues we're exploring that have the potential to take our already diversified income streams and generate additional higher margin performance. As the leading provider of the next-generation ultra-rugged mobile solutions, we are well-positioned to further capitalize on the domestic and international market opportunity in front of us. We are encouraged by the prospects of our business and we expect to continue to deliver on the metrics that will drive long-term growth to our Company.

Thank you, all, for the time today. We look forward in updating you, guys, on our progress and on our future calls, and we're now ready to open the line for questions. Operator?

Thank you. We will now take questions. (Operator Instructions). Our first question come from Zack Silver with B. Riley FBR. Your line is now open.

Okay, great. Thank you for taking the question. The first one is just, I understand that you see a gross margin benefit going forward from manufacturing efficiencies, but the other big driver there is the feature versus the smartphone mix. I was wondering if you could give us your thoughts on how you see that evolving after this year.

Hey, Zack, it's Bob. Thank you, by the way, for the coverage. Nice to -- I appreciate that.

Sure.

So, the history for task workers is that they traditionally -- they start off using basic communication tools, kind of iDEN ESC capability, so push-to-talk or Walkie Talkie. And over time as the agencies and enterprises that deploy them become more sophisticated with more application -- kind of the application capabilities or requirements that we are -- we are already seeing and we will continue to see that transition for them moving from feature phones to smartphones.

The other benefit is data rates reduce over time and become more kind of comparable between what you pay for a data -- or data rate -- the data plan for smartphone versus only -- a voice-only or a push-to-talk plan for a feature phone.

As those rates start to come together, you'll see more and more people move over to the smartphone. So, it's -- this is we've already -- before we introduced the XP3, we're already seeing a nice transition to the XP3 or to the smartphone.

The flip phone just simply because it's such a -- it's such a significant volumes in the United States of flip phones out there, had kind of skewed us back a little bit, but we -- we're confident that we're going to continue to see that transition. It's just -- it's more an evolution than a revolution.

Got it. And then the second one, at least for FirstNet as you said, you have more stock devices than some of other ruggedized competitors. I was wondering how the competitive intensity differs in industrial enterprise and if you have seen any changes or foresee any changes in that competitive intensity going forward.

No, I think the -- on the industrial side, it's -- yes, it doesn't -- I don't know the right word, the carriers have been in competition with each other for decades. And so -- and enterprises are -- I don't know the right word -- more sophisticated frankly and more -- this isn't like all new and fun and like a new shiny toy of sorts where FirstNet is in itself a major shift for public safety and so there's a lot of education and learning going on.

So, to some degree, the enterprises more about just kind of grinding it out and making sure people know that we -- that we grow there, that we as a brand and as a product are there to serve their needs. A lot of it is just us building incremental wins kind of sub-vertical by sub-vertical. So, it has a -- it has a very kind of, again, an evolutionary pace.

The public safety on the FirstNet side, it's a more -- there's just a lot of attention being shown to all agencies, all public safety agencies across the country all simultaneously. And to some degree, they are going to be -- kind of almost bombarded with, "Hey, where before, you wouldn't even have thought the use of cell phone, here is 27 different models you can choose and they're all free or they're all -- they're all discounted and all kind of with lots of goodies, so to speak."

So, to some degree, I think it's going to take the agencies a couple of years to kind of -- kind of let the dust settle and figure out what makes sense operationally. So, to some degree, it's kind of -- I don't know the right -- a fashion show to some degree for the public safety today, which will over time transition to more of what I'd call operational discussion.

Got it. And then just -- I guess one more quick one I will try is, if you could give us a sense of maybe how much of the volume year-to-date has come from the FirstNet build out and maybe what inning do you think we're at in terms of that growth runway for FirstNet specifically.

Hi, Zack, this is Jim.

Hey, Jim.

It's hard for us to tell. We talked about this, so when we first discussed this, I think it's really hard for us to tell where our product is going at least initially. We get a lot of anecdotal data from service records and that sort of thing, but in terms of actually being able to know who the end-user is and where the units are going, that's really difficult for us in the early stages.

So, if you ask me that question a year from now relative to the XP3, I'll be able to give you a little bit better guidance. But right now, we really just don't have enough data to know for sure.

Got it.

What I would say, Zack -- what I would say, Zack, generically, is that people -- about FirstNet in terms of where are we in the first inning and second inning, public safety has been operating with LMR technologies, land mobile radio technologies, for the last 30, almost 40 years. That technology works really well and mission-critical, but it only does voice and that's all it does, and that's all they're used to.

So, whether it's FirstNet or a Verizon or Sprint or any of our customers servicing public safety, this is -- we are absolutely in the first inning of a -- of an education process to pull that let public safety realized that, hey, they can actually have a mission-critical device on a mission-critical network and they can actually do a lot more things at a lower cost than they've ever realized.

I mean if you've been using an $8,000 radio and you've been told for 30 years that's the only thing that works and all of a sudden, a $600 smartphone with a shoulder -- kind of a remote shoulder like shows up and someone says. "Hey, this works to some degree, you're like, "Wow, you know what, I'd like to believe that because I get a smartphone, I get a -- I get a significant -- and I can actually afford to give all my officers and I can do a bunch of stuff." But "Wow, it seems almost -- it's -- there are still going to be some skepticism because it almost seems too good to be true.

Right.

And I think this learning process is significant and we, as a company, need to demonstrate we can produce mission-critical phones. That's how we differentiate ourselves. I don't think our competitors talk about producing mission-critical devices. And the networks themselves have work to do and they're making good strides across the board in terms of demonstrating what mission-critical looks like in their context.

So, again, I'd say it is certainly the first inning of the transition both domestically and them most interestingly, internationally as you see lots of countries star to kind of start of start to say, "Hey, this actually makes a hell lot of sense, let's go there," but early days generically.

Got it. Well, I'll leave it there and thank you very much.

Thanks, Zack. Thanks, Zack.

Our next question comes from Andrew Uerkwitz with Oppenheimer. Your line is now open.

Hey, thanks, gentlemen. Just I guess one question that's kind of broad here. You, guys, listed off several growth drivers, FirstNet, AT&T, Verizon and then international and private networks.

Could you kind of walk us through the timing and kind of priority of some of those and the duration of growth that we should expect from each of those? So, I feel like some investors get a little bit overwhelmed I guess when they start to think about all these drivers and how they -- how they affect your top-line growth opportunity over the next 18 to 24 months.

Sure, Andrew. Good to hear your voice. So, it's Bob. I think the way I would kind of -- it's almost like a Maslow's hierarchy of needs. I would think of first, there is a -- has been and continues to be a significant transition from iDEN, Nextel voice-only activities in the enterprise space to more sophisticated application deployment above and beyond in addition to voice capabilities in the enterprise space.

So, I think that is a shift that started in 2013 when Sprint shut down its network and down the Nextel network and the subsequently carriers follow that. I think that is the first shift of, which is well underway and it drives the majority of our -- of our -- kind of our growth is just that movement.

The -- I think the FirstNet/move of public safety away from LMR to LTE is -- kind of you would overlay that as a next growth driver, but it is -- as I said, it's relatively early days and it's such early days.

The -- those two models, enterprises and public safety agencies converting the broadband is now starting to happen internationally, Australia and Europe most specifically. But -- and it's happening at a pace that's I think roughly similar to the U.S. and so, I think you'll see our business pick up there, but it will be a subset because it just simply they're smaller -- it will be a subset of what -- of the growth that we're seeing in the U.S.

And then finally, I would put private LTE networks kind of at the tail end of those kinds of growth drivers. I think those -- I do think when they start to happen, we start to see these networks pop up, CBRS as an example.

You'll see them happen quickly, so the adoption will be quite quick, the enterprises will move to be economically -- to take advantage of economics, but I think that's still kind of the furthest out in terms of growth in that context. I don't know if that helped if that's what you're looking for.

Yes, absolutely. No, it's exactly what I was looking for. And then just a follow on that, as large organizations, whether it's public safety or not, we've seen some high profile switches over the FirstNet already. How -- what role do you play in that sales cycle and is there a bigger role that you could play in the future? Thank you.

I think we provide a proof point for AT&T vis-a-vis FirstNet, but also for Verizon and for Sprint, that the days where you were -- you could only depend on a proprietary network that you yourself had to fund and build and maintain with your own people in a very cost challenge way. Those days -- it may not be over but those days are sunsetting and that you should look to these networks, FirstNet or Verizon or Sprint., you should look to these as the future.

And I think we more than our competitors are leveraged in that process to show that LMR is transitioning to LTE. And the kind of things that we're doing, there's this -- we call it our rapid deployment kit, which is a capability that allows an agency to have communications when all power and all kind of -- power is out and there are kind of a tornado or hurricane as an example where we're adding capabilities that other phone providers wouldn't do.

We have a capability called Direct -- Sonim Direct, which basically allows the phones to talk to each other in the case where you don't have cellular coverage. And so, we are -- I think -- I would just say as -- we're the proof points that mission-critical is coming, and again, as I said before, it will take time, but that's -- and I think as more and more agencies start to depend on broadband, we will be more and more valuable and that are more and more present in that discussion if that make sense because we'll be more and more a part of that mission-critical discussion.

Got it. Thank you so much. Thanks, guys.

Thanks, Andrew.

Our next question comes from Jaeson Schmidt with Lake Street Capital. Your line is now open.

Hey, guys, thanks for taking my questions. I just want to start with the software and solutions. Bob, I know you mentioned you launched Sonim Scan this past Q1. Just any color on customer feedback and their willingness to add a subscription fee to their model.

Yes, it's really about awareness. The -- when you shop a customer that they -- that the typical used cases is you've got a -- it could be a delivery service, it's usually a pickup and delivery service of some sort, they do have two devices, they have an old scanner on the -- on the left side and they've got their cell phone in their pocket or on their belt on the right side.

And you walk in and you show them that the camera can effectively scan as effectively as the scanner, they -- it's almost -- it's a big wow. So, it really -- it -- and then they immediately go, "Oh, my God, you mean I don't have to upgrade, I don't have to buy another $1,200 or $1,500 scanner?" You're like, "Yes, that's right, you just have to pay $599 a month."

So, it's -- the feedbacks have been great, the -- there's been no hesitancy whatsoever to subscribe. It is a function of awareness and then a function of being able to tie the scanning, the downloadable scanning application into their other MRP or ERP systems so that that information gets there. They -- historically, it's been done in a more proprietary way so they do have to do a little bit of work to kind of plug this kind of open app into their architecture . So, so far so good.

Okay, that's helpful. And then I know it could be a little difficult with some of these launches at the carriers, but any color around where you think inventory level your carrier customers are?

They don't -- they don't give us that data and we wouldn't be able to convey it ourselves to you. The only -- the only color I'll give you is that this is not -- people don't stack for -- there is no kind of Christmas rush.

And so -- and carriers, they are low to take inventory if they don't have to. And so, they usually build very much to order or -- so -- but they expect to ship in the coming weeks and months. So, that's in general, that's the thing.

Okay. And the last one from me and I'll jump back in the queue, I know it's a smaller portion of the overall revenue pie, but can you just discuss the opportunity in your accessory business?

By the way, I didn't even say hello, Jaeson, so sorry, hello.

Hey.

And so, it's about 5% of our business. Am I allowed to say that?

Sure.

Good, okay. So ...

You, guys, are allowed to hear that.

Good. I guess we can't erase it. So, that's 5% of our business. I think it's an under -- so, it's an underserved or under-tapped opportunity for us. The -- if you think about -- if you look at the typical LMR implementation, if you out to your local police station or fire station, you would see -- certainly see LMR radios but you would see a whole bunch of other things. You would see all of them are connected with remote shoulder mics or earpieces, all of them kind of unique carrier cases, all of them have -- there's a backup -- there have backups, there is a multi-bay charging capability for the batteries.

So, and I -- and I gave you a couple of other examples of accessories like Direct Mode, which allows the phones to talk to each other when they're outside of the cellular coverage or this rapid deployment kit that we are -- we are providing to wildfire and other agencies.

I think there's a really very nice upside for us on accessories. But right now, we just -- task number one is to make sure we've got great quality and we get our phones out there and in the hands of folks and get them started down that path and then we can then -- we go back and then upsell in terms of -- as they get better -- they get more and more comfortable with what they have in their hands.

All right. Thanks a lot, guys.

Thanks, Jaeson.

Thanks, Jaeson.

Our next question comes from Matthew Galinko with National Securities. Your line is now open.

Hey, good afternoon, guys. Thanks for taking my questions. I guess first -- hey. Are there significant differences in accessory sales that you're sort of able to attach to a feature phone versus smartphone?

No, not really. The -- it's more a -- it's funny, it's more of a customer perception, if that makes sense. So, the -- when you bring a feature phone in, they very much quickly link it back to and an iDEN or Nextel experience or an LMR experience.

And the -- and therefore, accessories become almost immediate well, because it's -- when you -- when they -- when you introduce a smartphone, the fact that the -- our XP8 has a side connector that allows you to screw in a remote shoulder mic, it's actually a very unique and novel innovation and something that they just don't expect, right, because they normally have a smartphone or pockets that wouldn't be able to connect or you wouldn't have, for example, the XP8 has a replaceable battery, which, as you know, the smartphone that you carry doesn't have a replaceable battery.

So, the -- so, it's a -- it's perceptual issue that I think over time, as I said before, we're going to see an increase in smartphones and then we're also going to see an increase in accessories for smartphones.

Got it, thanks. And then I guess in terms of SCOUT, how is the level of engagement with that at this point? Are most customers using it and comfortable with it? Is that expanding, is that -- is there a visibility component to that as well?

So, it's a -- we have a lot of headroom, let me say that way. Again, customers don't expect that enterprise customers don't expect that you've -- the people have solved some of the headaches and they're quite delighted.

Our challenge really more is communicating to the carrier salespeople and getting them to actually convey that SCOUT exists. That's our -- and that's our challenge. Our challenge is to kind of build up better case studies from large entities that use it. We have folks who are deploying across thousands of phones across the entire United States.

And these -- once we start to capture these case studies and communicate them to the salespeople, you can actually begin to use them as a -- as a differentiator. Right now, a salesperson goes in and probably doesn't want to discuss some of the -- all the I.T. challenges because it's not something that most phones can solve.

Our job is to get them to better understand that SCOUT solves a lot of the problems that you can't get from a normal one touch experience from Android or from Apple, and that we kind of fill in the blanks. So, it's in good progress and very happy for the folks that they're using it, but we have a lot more -- a lot more opportunities to get a lot more people to use it.

Got it, thanks. Can I just -- a quick last question, receivables seem to build pretty significant sequentially and seem kind of higher than historical levels that we have. I guess I'm just wondering, is there kind of annual cadence to receivables or what should we expect as we move to the balance of the year?

Hey, Matt, this is Jim. There's not a cadence in the seasonal sense. We generally with most of our carriers collect and there are some exceptions to this, they collect within 45 to 60 days kind of cycle.

So, so long as we are shipping smoothly receivables, we'll kind of grow commensurate with revenues for that particular quarter. We introduce volume shipments to Sprint in this quarter with the XP3 and we shipped them relatively late in the quarter .

So, as a result, we've got some receivables that are -- that are kind of higher than normal. Of course, the $34 million or so that we had in receivables, we've collected about a little over a third of that, maybe close to half of that.

So, it's kind of happening sequentially, but because of the introduction of the XP3 in Q2, we wound up with receivables building up a little nit. Normally speaking, we would see receivables being pretty consistent with the seasonal cycle, which is kind of low first quarter and then -- and then growing over the years.

Great, thank you.

Over the quarters rather.

(Operator Instructions). Our next question comes from the line of [Natalie Peskie] with [Wealth Advisors]. Your line is now open.

Hi, gentlemen, Thanks for taking the questions. So, I was looking at the some of your press releases since the IPO. Some of those had talked about some partnerships and business development activities you, guys, have been engaged with. So, maybe it would be great to hear about those more and then maybe a little more on the opportunity to increase the recurring subscription revenue piece of the business.

Natalie, first of all, good to hear your voice. Your -- I got the last -- I got the second question. I didn't hear clearly the first one. The phone is a little scratchy. You might consider using the XP8, by the way. That's great noise cancellation. Natalie, did I lose you?

I think she muted her.

Oh, she mutes her, oh, can she come back on?

Sorry, are you there? I'm on a headset. I should be using an XP phone. But yes, so the first question was just around this. I saw a couple of press releases since the IPO around business development activities. So, I was curious if you could maybe give some information on that and then also maybe some progress on an opportunity around the recurring revenue subscription piece of the business.

Sure, of course. Yes, the two press releases in -- oh, can I say they can expect two press releases? So, we do what we have -- so, take a step back, we have 800 different application partners that we work with. And we tried to create basically technology solutions for our customers both in the enterprise and in the public safety.

The two press releases, the one is called [Calio], I think it pronounces it right. And these folks make a -- basically, a suite of applications for public safety agencies to leverage the camera on the phone for a -- basically, a body camera. And so, they do a lot of work in terms of not only leveraging the -- capturing the film itself or capturing the video, but storing it and doing a lot of diagnostics or a lot of the work with it in terms of providing it for evidence and (inaudible) constructs. So, kind of an Axon competitor.

And so, where Axon would use a kind of a dedicated body camera, there are many agencies that very much like the idea of a multipurpose capability where you can use the phone obviously as a -- as a radio, as a smartphone, but also use it as a body camera. So, that's the first.

What else? Well, the second one is the ESChat. They do a kind of what's called over-the-top push-to-talk capability. So, it allows you to have -- to talk with -- if you have your agency or your enterprise as subscribers on Verizon, AT&T and Sprint, you can actually do a push-to-talk chat across all three or certainly within one agency as well. So, it's an over-the-top downloadable push-to-talk application.

And it competes with the Motorola systems and the Samsung systems and Zello and a few others. And they are providing what's called remote channel, a support for our ability to use a shoulder mic to change channels.

So, you -- if you think about a traditional LMR device, you -- they have this kind of knob at the top. I think if you turn the knob to go form Channel 1 to 2 to 3. And in a typical, say, like a wildfire example, there is a channel for all the different kind of command-and-control folks to talk, there's a channel for a particular battalion and there might even be a channel for a Strikeforce kind of a hotshot.

And so, the ability to switch channels for push-to-talk is really important in a mission-critical experience, and so push -- so, ESChat has created the ability for us to use our shoulder mics to -- there's a little knob on our shoulder mics that we offer. And you can then switch channels, so it makes it a much more mission-critical capability. So, that's -- I think that's the first answer. Did that make sense or can I expand?

Yes, that's really helpful. And just kind of looking -- and I guess that kind of builds into the second question. I was talking about the recurring subscription revenue opportunity. I know it's still early, but maybe, for example, that body camera, is that something that would be generating recurring revenue going forward and then can you talk a little bit more about the opportunity to add other subscription-like services?

Sure. And I think -- I mean -- and what's interesting is that -- and thank you for the question because back to the previous questions about where the -- where are we in the adoption of technology, of broadband technology by public safety, we're early days, when you walk into an agency and say, "Look, you can actually -- you don't have to go do the extra body camera and use Evidence.com."

There are other approaches, right? You're not -- you're not locked into that. You can use a different one. They're like, "Wow, I never thought about, I never realized, we've been -- we've been a Motorola shop for years or a [Harris] shop for years. We didn't realize that you could kind of mix and match.

So -- and the same with the ESChat example. It's like, "Oh, wow, you can actually create an operational experience that is exactly like the LMR experience. We don't -- we don't have to change kind of how we do things."

I think as that awareness emerges and we get these early adopters up and running, we can then start to create -- we're kind of fertilizing the ground that will allows us to go back and then begin to do the subscription-based services.

And as we've described in our S-1, we talked about the notion of creating solutions where we can bundle applications together and provide them on a solution basis, so platform as a solution or as -- software as a solution capability.

So, it's going to take time for enterprises and public safety agencies to kind of -- I don't know the right word, kind of figure it out. But as they do, we are very well-positioned to provide those kind of bespoke vertically centric solutions and we do as much as we think we do, as much better than the -- what are the normal consumer cell phones do.

Great, definitely helpful. Thanks for answering those and congratulations on the IPO.

Oh, thank you. And I hope -- is the weather nice in Salt Lake today?

It's great, yes, yes, it's really great, kind of hot but it's good.

Okay. Talk to you soon.

Bye.

At this time, this concludes our question-and-answer session. If your question was not taken, you may contact Sonim's Investor Relations team@ at SONM@gatewayIR.com. I'd now like to turn the call back over to Mr. Plaschke for his closing remarks.

Thanks, everyone, for joining us on today's call. We are super excited now to be a public company. And obviously, I want to thank our employees who've done such great work over the last months to get us this place, our customers, of all the wireless carriers that support us, our partners, certainly our investors and our new public investors, which is great.

But most importantly, I -- we do want to thank the workers that every day wake up and do their work quietly and heroically in many cases go home and take their showers and get up and do it again, they make our cities safe, they keep our children safe, they keep us and keep the cities that we live and work in, we want to thank them and appreciate it.

We look forward to updating you, guys, on our progress on the next call. And I think we're finished. So, operator?

Thank you for joining us today for Sonim Technologies Second Quarter 2019 Earnings call. You may now disconnect.