Summit Wireless Technologies, Inc. (WISA) Q3 2020 Earnings Call Transcript

Summit Wireless Technologies, Inc.  (NASDAQ: WISA) Q3 2020 earnings call dated Nov. 10, 2020

Corporate Participants:

Kirsten F. Chapman — Managing Director/Principal, LHA

Brett Moyer — Chief Executive Officer, President and Chairman

George Oliva — Chief Financial Officer

Analysts:

Ruben Roy — The Benchmark Company — Analyst

Edward Woo — Ascendiant Capital Markets, LLC — Analyst

Jay Schuster — Private Investor — Analyst

Presentation:

Operator

Greetings and welcome to Summit Wireless Technologies Third Quarter Update. [Operator Instructions]

It is now my pleasure to introduce your host, Kirsten Chapman, with LHA Investor Relations. Thank you. You may begin.

Kirsten F. Chapman — Managing Director/Principal, LHA

Thank you, Judd. Good morning, everyone. I’d like to welcome you to the Summit Wireless Technologies third quarter 2020 update call. With us today are Summit Wireless’ CEO, Brett Moyer; and CFO, George Oliva.

Before I turn the call to Brett, I’d like to remind everyone of the safe harbor statement referenced in the SEC filings. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during the course of today’s call. Statements contained herein that are not based on current or historical facts are forward-looking in the nature and constitute forward-looking statements within the meaning of the securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements reflect the Company’s expectations about its future operating results, performance and opportunities. These forward-looking statements are based on information currently available to the Company and are subject to a number of risks and uncertainties and other factors, including current macroeconomic uncertainties associated with COVID-19 pandemic, our ability to predict the timing of design wins entering production in the future revenue associated with our design wins, our rate of growth, our ability to predict customer demand for our existing and future products and to secure adequate manufacturing capacity, consumer demand conditions affecting our consumers’ end markets, our ability to higher retain and motivate employees and effects of competition, including price competition, technological, regulatory and legal developments, developed in the economy and the financial markets and others that could cause the Company’s actual results, performance, prospects and opportunities to differ materially from those expressed in or implied by the forward-looking statements.

For a more detailed discussion of the upcoming risks and ongoing risks and uncertainties of the Company’s business, I’ll refer you to the Company’s various SEC filings.

With that, it is my pleasure to turn the call over to Brett Moyer. Please go ahead, Brett.

Brett Moyer — Chief Executive Officer, President and Chairman

Thank you, Kirsten. And I’d like to welcome you, ladies and gentlemen, to the Summit Wireless call for Q3 update. When we started the year, our team was very excited about all the progress and work that got done in 2019 and how that would impact 2020’s P&L. Clearly, COVID impacted that initially. But this is the quarter we get to start showing you what has kept us motivated and excited in terms of design wins, membership growth, consumer response and revenue growth.

Now for the new investors, I’ll do a quick overview. For potential investors, Summit has two pieces. One is the technology side that design the custom ASICs that gone to wireless modules that get built into either TVs or AV receivers but primarily speakers. So if a company is selling a WiSA certified product, that means they’ve purchased a module from me for $9 to $10, and inserted it into that product. If they’re WiSA ready, that means they’re interfacing to us, but they have not bought a module.

Now the other part of Summit investment is WiSA. We run the WiSA Association for the industry and — which is more than 60 brands. And that WiSA Association has a critical role, right? It is to make sure that the consumer ultimately has a great experience, number one, because they know that this product can connect with the other products. So for the consumer, when they see that, they know that they’re going to get a simple setup that they’re going to know it’s going to be a high fidelity signal and they’ll be able to have immersive sound or theater — movie theater sound, however you want to phrase it, in your room, in your living room.

Now during the last four months, we added seven more companies to WiSA. We added 11 more brands. And two of the more important ones out of that group are Skyworth and Hisense. Now these are display companies. Skyworth claims to be the largest Chinese domestic TV manufacturer. And Hisense is either number five or close to number five worldwide for TV production. And you’ll see their products in the big-box stores in the U.S. You’ll see Skyworth all over China and Europe. They own the Metz brand, which was a German TV company. And so we continue expanding membership with critical players like Hisense and Skyworth.

One of the other critical achievements in Q4 is the surround sound, WiSA SoundSend. Now this is critical for the consumer. So with this product, the consumer now has a very affordable product that will plug into any Smart TV with ARC or eARC, there is probably 800 million to 1 billion of those installed now, and will translate to any WiSA certified speakers. This isn’t going to list at $179. It’ll probably street at $149. It can get bundled with other speakers for a surround sound in the box for probably a $99 price point, right?

For the speaker company, this gives them confidence that they can do what they love, design speakers and deliver great audio sound for their price point without having to worry about is there enough transmitters so that they can sell enough speakers to make the project worth it.

And for the TV guy who made it critically, TV guy — the TVs used to be the center of family entertainment. The sound has gotten worse. A lot of the video content watching has moved off to handheld devices, tablets and phones.

This gives the TV brands the opportunity to bring that cinema sound back to the TV, around the big TV and the family night and be in the center of home entertainment. They’ve got all the content being streamed down through Netflix and Hulu and Amazon Prime and Apple TV, etc. Now they have an easy way to market to their customers, great audio around the big screen for good family fun.

Now this chart is an updated chart from ones you might have seen a year ago. And the point here is whether you’re a high-fidelity audiophile and you want to spend $10,000 on a giant music system, 2.0 or Bang & Olufsen surround sound or you are a soundbar customer, a value customer. These are the green highlighted ones. I want a great audio experience, but don’t want to break the bank. WiSA Certified products now range from the lowest to the highest price points from all configurations. We’ve got great soundbars, we’ve got great surround sound in the box, we’ve got great music systems and this is what’s going to be driving our revenue, this breadth of products. And these are some examples and this is cheap.

Now the other great progress we’ve made is we continue to make progress on products integrating to WiSA systems. We’ve talked in the past about LG OLEDs and Nanocells and Xbox, but Enclave and Roku TV integrated their products so that they could get surround sound around Roku TV. We announced Skyworth, which should have been on this slide. They’re integrating our transmitter into their Sculpture 1 products, so the TV can transmit directly to their speakers when they start shipping this quarter.

So a lot of great products in the product development occurred last year. They’re now showing up on the market for you to buy, see, validate Summit’s business model.

Now we’re going to look a little — talk a couple of slides now about these green SKUs that are being marketed by Platin and Enclave and Axiim, the sub-$1,500 to sub-$1,000 price points. SoundSend certainly helps that in the product line. But what’s the consumer response? I’m not going to go through these, but if you take a quick scan or look at it later or better yet, go out to Amazon and check out the comments in the reviews from verified buyers, consumers love these products. Getting a simple-to-set-up surround sound system at a value price of $1,000 or less is getting great response out there, right? So there’s a lot of great trade around it, but the consumers are doing very well and enjoying the experience. Why?

Well, fundamentally, it’s about spatial sound. So if you think about the audio experience, TVs have the least audio performance. Add a soundbar, it gets better. Add an expensive soundbar, it gets even better. But the subwoofer takes a lot of — a big step-up. Now putting a couple of rears in the room, that helps it a little bit. So really 90%-plus of your content, the audio content is in the front of the room. So when you jam it into a small soundbar, your left, your setting, your right sound tracks are all in the small little space. When you move to separate speakers and you separate them out, now all that audio related to the video that you’re seeing is crossing the room. And you got a much deeper sound, a richer sound that the consumer is appreciating. Combine that with — you can get this experience for sub-$1,000. We think the price value performance equation is heavily weighted to gaining traction around the sub-$1,000 products.

Another critical indicator. We started tracking this in Q1 when we did our Q4 earnings call last — at the end of the year. We continue to see consumer growth and interest in the WiSA website. This is coming from referrals, from product reviews, open box reviews, links from other sites like THX, from WiSA Wave participants. We continue to see consumer growth grow. We expect that we’ll hit 150,000 to 175,000 visitors this quarter. We think — we see that if you look at quarter-to-date versus September, viewing time is up 22%. And probably more critically in terms of what’s going to happen in the holiday season and in 2021, return users have moved from 10% of the viewers to 16%, 17% of the viewers. So these are people coming back to WiSA Association to do their research to figure out what’s surround sound system, what high fidelity music system they want to buy.

Now I’d like to turn it over to George to do — to give you a few highlighted comments. George?

George Oliva — Chief Financial Officer

Thank you, Brett. So Q3 was our strongest quarter to date. Revenues in the quarter were $607,000. That’s a 45% increase over the same quarter in the prior year. Our gross margin was just over 17 points, which was compared to 7.6% in Q3 2019, which was about 9.5-point improvement. And our cash was north of $9 million at the end of the quarter, and we’re projecting that Q4 will be $860 million-plus, 100% growth over Q4 in the prior year.

Brett Moyer — Chief Executive Officer, President and Chairman

All right. Thank you, George. So when we look at all the activity that’s gone on in 2019 and 2020 under the radar screen, and we look forward into Q4 and 2021 we still anticipate to add new members, including more TV and projector companies. We expect more brands to ship WiSA Certified products as well as more projects from existing brand shipping. We see SoundSend increasing speaker sales because of the easy installation and the broad distribution. And we expect to add more TV brands and increased volume in WiSA-enabled TV.

Now before we go to the questions, it is the season. I just want to highlight, there is great surround sound in a box. All you have to do is wrap it out — up and wait for the surprise. So here’s three links to three great audio systems that will give you, for under $1,500, a kickass sound, ship in one box and you click there. If you want to really build out your home theater, LG has got some great OLED and Nanocells that are WiSA ready that will connect to Platin and Klipsch speakers.

So I’m going to let this slide hang during Q&A just to drive the point home. This is a great opportunity to click on this and look for promotions on these websites.

And with that, operator, I’d like to open up for the questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Ruben Roy with Benchmark. Please proceed with your question.

Ruben Roy — The Benchmark Company — Analyst

Hi. Thank you. Hi, Brett. Congrats on seeing some traction here. It’s great to see the numbers move up and kind of the excitement as we head into year-end. I guess just to start, can you maybe give us an update? Obviously, you’re getting some traction with some high-end brands out there. But in terms of overall market dynamics, as you think about — we’ve got your Q4 guidance, but obviously, you had a tough beginning of the year. How are things looking around the supply chain? Can we build these things and get them out the door? And are we going to have a little bit of a different seasonal trend as we think about the first part of next year, given that things slowed down a bit earlier this year? That would be helpful to kind of understand how you’re thinking about all that at this point.

Brett Moyer — Chief Executive Officer, President and Chairman

Well, so I think there’s going to be a different seasonality this year than traditionally in the consumer space or the home audio TV space. I say that for a couple of reasons. I have said most of the year that we expect the fall to be a good selling season. Because of COVID the home improvements, the home gyms, all that stuff got done in the spring, people went outside. Now what you do now you’re stuck in the house and we’re in wave two, right? I think there’s validation that we’ve seen from our customers that lead times are extending because products are selling out. We have seen orders coming in inside our lead times since late August. So I believe there’s a pretty strong consumer demand, and it should continue into Q1 because customers are not going to be able to fulfill all the demand even though it’s Christmas season — or our customers, right?

Ruben Roy — The Benchmark Company — Analyst

Right. Okay. That’s very helpful. And yeah, I’d agree with that. You were seeing that in some of the other areas of consumer electronics as well. Maybe just a quick follow-up, Brett. I dialed in a little bit late, but did you give us an update on how things are going with your wave strategy? And anything new to report around that at this point?

Brett Moyer — Chief Executive Officer, President and Chairman

Yeah. So if you go back to consumer interest and the graph, we had a lot of consumers growing. We have run a series of ads that are multi-brand whether it’s LG, Platin and Klipsch. Whether it’s Platin, Enclave and Klipsch or Platin, Enclave, Axiim, etc. They performed very well. I think from a consumer — from an integration perspective, this is critical for 2021. I think it’s huge leverage for the WiSA Association to help those brands cost effectively reach consumers as a partner. So our multi-brand test or what we refer to as, say, a good, better, best, for example, ad that lands on a Platin, an Enclave and Klipsch ad. If you run just one brand, you’ll get one click to one of those brands, website or Amazon page. When you put three brands in, you actually get 1.8 clicks. So almost — it almost doubles the number of clicks to WiSA Certified brands and it increases the engagement with the consumer. And I think you can see that impact, which I mentioned earlier, Ruben, that our return visitors to the site has gone from 10% in September to 17% in October, early November.

Ruben Roy — The Benchmark Company — Analyst

Right. Got it. Okay. Just to finish up, Brett. So obviously, exciting to see the traction, the engagements, the Wave etc. How are you thinking about module costs? You’ve said in the past that you think you could hold it on average of $9. Any changes as we start to see some momentum here into ’21?

Brett Moyer — Chief Executive Officer, President and Chairman

I do not anticipate us changing the guidance of $9. When we set that guidance, we anticipated whatever changes that we expected we’d have. So I think as you look forward, that’s a solid number in 2021.

Ruben Roy — The Benchmark Company — Analyst

Great. Awesome. Thank you, Brett. Have a great day.

Brett Moyer — Chief Executive Officer, President and Chairman

Thanks.

Operator

Our next question comes from the line of Ed Woo with Ascendiant Capital. Please proceed with your questions.

Edward Woo — Ascendiant Capital Markets, LLC — Analyst

Yeah, thank you and congratulations on the quarter. My question is more on the retail channel in terms of the retailers. Do you see them willing to take up more inventory as we head into the Christmas selling season or you’re kind of holding back? Or what is it like when you’re talking to the retail channel right now?

Brett Moyer — Chief Executive Officer, President and Chairman

So we’re a component. So we talk to the retail channel in the effort to get them to recognize WiSA as a category that they should multi-brand multi-SKU, right? Get them to recognize whether there’s one brand, there’s other brands around it that they should look at bringing in. We talked to them about the wave and how that can drive business to their actual storefronts or their websites. So I don’t think — we’re on the front line of — on the actual orders from retail. But I do know that we have had some of our customers say, they wish they had more access to components beyond us to build more product for the season. So I would expect retailers to have tight inventory because they were hurt hard by COVID. And I expect the consumer to have higher-than-normal demand for this category, as I mentioned in the prior questioning. So I think supplies will be tight, inventory will be tight by the end of the year at retail.

Edward Woo — Ascendiant Capital Markets, LLC — Analyst

All right. That’s great to hear. And then my question is, you typically use CES in January as a big showcase for your new products, obviously. Will we get a similar type of new introductions by either you or by some of your partners?

Brett Moyer — Chief Executive Officer, President and Chairman

Yes. So I can’t tell you exactly how those formats will get done, right? Everybody is very curious on how CES plays out. The CES is going to happen. It will happen virtually. And it’s still — the consumer electronics has a very defined seasonality. Products have to be announced in early Q1. They have to be in production or going to production in Q2. They have to get delivered in their European, U.S. markets by late Q3, October. So I don’t think that seasonality changes. The events around CES might spread over four or six weeks in terms of product announcements because certainly if people aren’t there to see it, individual brands have the opportunity to wait until it’s closer. Well, the seasonality is going to remain the same. It’s all driven by the holiday season buying.

Edward Woo — Ascendiant Capital Markets, LLC — Analyst

Great. Well, we are definitely looking forward to hearing about your new products. Thank you for answering my questions and good luck.

Brett Moyer — Chief Executive Officer, President and Chairman

Thanks, Ed.

Operator

[Operator Instructions] Our next question comes from the line of Jay Schuster, a Private Investor. Please proceed with your question.

Jay Schuster — Private Investor — Analyst

Hi, Brett. Any progress with any of the cell phone manufacturers, Samsung or Apple or LG, in particular?

Brett Moyer — Chief Executive Officer, President and Chairman

Hi, Jay. So you’re really talking about what’s going on with Gen 2 and the ability to transmit from handheld devices, whether it’s a tablet, even in TV? We have said, which we will continue to say that we’ll announce our first product later this quarter. Well that’s what we anticipate. And that will be a — we’ll start talking more about Gen 2 in the year-end call.

Jay Schuster — Private Investor — Analyst

So when you say Gen 2, that will be your perfected product rather than an introduction of like LG has agreed to put this in all their phones?

Brett Moyer — Chief Executive Officer, President and Chairman

Agreed. That will be — we have a product that is different performance, meets the good enough, meets — is target to the broader market, and there’s a series of products that will roll out of that over the course of next year, and we are starting the sell-in process.

Jay Schuster — Private Investor — Analyst

Because it seems like if you get one of those done, the volume there is just enormous. And I don’t know what the margin on that will be. But if you get any of those three, it seems to put it in their phone, it seems the others are going to be driven to do it to copy.

Brett Moyer — Chief Executive Officer, President and Chairman

That’s true, in theory. Clearly, from the presentation though, now and mostly, this year, I am focusing both the team and the investor attention on market adoption at — in the soundbar space. We think it’s a highly competitive offering. We think that gives us the opportunity — that gives us a near-term service available market of $100 million, and we have a good foothold in the TV market and audio going around the TV market, and that’s our focus.

Now when we launch our Gen 2, we’ll start talking about that in more detail. But what’s going to drive this P&L this year and next year dominantly is the stuff we’re talking about today.

Jay Schuster — Private Investor — Analyst

And is there any forecast as to when you turn cash flow positive or is that just too unpredictable?

Brett Moyer — Chief Executive Officer, President and Chairman

Well, yes, we have those forecasts internally. We have not issued them publicly. We see a pretty strong business plan in front of us. So we’ll let the quarter speak for themselves as we continue to grow.

Jay Schuster — Private Investor — Analyst

And so have you publicly said what kind of revenue you need in a quarter to achieve cash flow positive?

Brett Moyer — Chief Executive Officer, President and Chairman

We have not.

Jay Schuster — Private Investor — Analyst

Okay.

Brett Moyer — Chief Executive Officer, President and Chairman

People can model off that historically. We have said on our opex is, runs around $2.4 million. I think we guided $2.4 million, $2.5 million for Q3 on a — excluding some noncash charges around stock issues, we were at $2.4 million in Q4. So I think anybody can model it out.

Jay Schuster — Private Investor — Analyst

Yeah, yeah, okay. Thank you. All right, we’ll appreciate the progress. Keep it up.

Brett Moyer — Chief Executive Officer, President and Chairman

Thanks, Jay.

Operator

[Operator Instructions]

Brett Moyer — Chief Executive Officer, President and Chairman

All right, operator. We’re going to give it one more plug. Go to Platin, go to audio — Enclave audio or Axiim, and get a great surround system in a box that you just have to wrap for Christmas and Hanukkah and all the other gift-giving opportunities in the holiday season.

And with that, I’d like to thank everybody for joining us today. Thank you.

Operator

[Operator Closing Remarks]