Movella Holdings Inc. Price & Performance (MVLA)

Good afternoon, and welcome to Movella's Q2 2023 earnings conference call. Today's discussion will contain forward looking statements based on the environment as currently seen by the company's management and as such are subject to various risks and uncertainties. Actual results may differ materially. It also contains references to non GAAP financial measures that the company believes provide useful information to its investors. The earnings release, most recent annual report on Form 10 ks and other filings with the SEC, each of which are posted on Movella's IR website, provide more information on the specific risk factors that could cause actual results to differ materially from management's expectations. They also provide additional information on non GAAP financial measures, including reconciliations where appropriate to corresponding GAAP financial measures. Guidance provided today incorporates the order trends that management has seen to date and what they believe today to be appropriate assumptions. Results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, Changes in global economic and geopolitical conditions and customer demand and spending, including the impact of recessionary fears, world events, The rate of growth of our core markets, including the live streaming community and other various factors detailed in the earnings release and the company's filings with the SEC.

It's not possible to accurately predict demand for goods and services, and therefore, the company's actual results could differ materially from guidance. And now, I'll turn the call over to Movello's CEO, Ben Lee.

Thanks, Lana, and thank you all for joining us today. We are pleased to share our results for the Q2 of fiscal year 2023. I'll begin with a high level overview of the quarter's results and the business. We're excited to have launched the obscure broadcasting platform last week, Expanding Movella's XSENSE mocap technology from professional Hollywood studios to individual streamers and VTubers. Aspira enables live streamers to create engaging content, including motion enabled avatars. We achieved $8,400,000 of revenue in Q2 of 2023, down 3% year over year, While the rider strike impacted our top line in Q2, our results reflect The resiliency embedded in the business and our continued expansion of MVMT digitization use cases into our existing markets as well as new growth areas such as automotive workplace ergonomics. We remain well positioned for significant opportunity ahead, particularly in film and game production once all parties reach a resolution. We continue to be in a very strong cash position with $51,000,000 on the balance sheet, which affords us the opportunity to make measured investments in new products and use cases while managing our expenses In our last earnings call, which was our first call as a public company, I provided a detailed overview of our technology and markets.

Since some of you may be newer to the story, I'd like to share an abbreviated refresher. Movella is a global leader in digitizing movement of the human body and of automatons that mimic human movement. We digitized movement with a highly differentiated full stack solution that integrates Sensors, visualization software and AI analytics. Movella is best known for XSENSE technology. Our Xtense products integrate sensors, advanced algorithms and user friendly software that digitized non verbal movements of the human body and automatons. Movella technology is based on a Proprietary inertial sensors, which are small, lightweight devices that can be attached to the body or to objects to digitize movements in 3 d space. Movella sensors are incredibly accurate with a High sampling rate that captures even the most subtle movements. But what really sets Movella apart is our software. Movella's software is designed to be user friendly and intuitive, allowing developers and creators to capture and analyze And with our powerful analytics tools, Movella's software makes it easy to turn raw movement data into actionable insights, helping users to optimize performance and improve results. Movella's full stack product portfolio is protected by over 160 granted patents, which provides a strong competitive moat.

We continue to invest In the advancement of our products and extending our technology leadership, our products serve 3 diversified core end markets: Entertainment, Health and Sports and Automation and Mobility. We sell directly as well as through channel partners and serve the Americas, EMEA and APAC geographies. Now I'll share with you our recent wins and progress in each of these end markets. In the health and sports market, biomechanics researchers and industrial athletes are leveraging our workspace ergonomics solutions. In Q2 2023, We continued to expand our use cases in the automotive industry, assisting automotive manufacturers in the improvement of the safety and wellness of industrial athletes. Our XSENSE motion capture tools provide information about the physical stresses of employees while they work on the production lines. If data indicates increased ergonomic stresses, workplace adjustments are made to reduce physical stress, which also can result in improved mental health. In the Q2, we announced an exciting project with BMW, Building on our previously announced partnership with Toyota, the BMW Group selected Movella's workplace ergonomic solutions with XM's mocap system and software to provide faster, objective workplace ergonomic assessments across all international production facilities. The BMW Group utilizes Movella's motion capture technology to Easily transform realistic, accurate, ergonomic evaluations of production workers with superior precision.

We also continue to expand into additional use cases within the automotive industry this quarter. For example, in Q2, we secured a key project with a leading electric vehicle company to assist Training of humanoid robots and workplace ergonomics. Our Xtens suits are used to capture and digitize Human body movements of shop floor workers. The data is then used for robots to mimic and replicate precise human movements. In the automation and mobility market, Our sensor fusion modules are used today by top companies to sense movements of robots and In Q2, we showcased a robotic mower designed by I know how, which relies on our MTI680 gs sensor module to keep it on track Even when satellite positioning signal is temporarily unavailable, autonomous mowing Can be safely performed with 20 fourseven reliability. Movella continues to expand into new agricultural robotics use cases such as this. Next, turning to the entertainment market. Ovella remains the gold standard for Hollywood quality motion capture. In the film and video game industry, movella's X Sense motion capture technology has been used to create highly realistic and immersive experiences by digitizing movements of actors and animating them in real time. Emerging new use cases for entertainment Beyond the professional studios continue to expand, particularly in the individual creator and live streaming market.

In Q1, we previewed the strong early response to our new Upspira platform. The live streaming community continue to be enthusiastic about this offering. Our pre launch private event in July was attended by VTuber live streamers, who collectively represented over 100,000,000 monthly views. We are encouraged by the early social media engagement with our official launch. The obscure launch announcement reached The viral levels on Twitter now x with 500,000 views on the 1st day. Apps Script provides creators with user friendly tools to deliver interactive experiences, including real time human movements for digital avatars during live streaming sessions on well known streaming sites such as Twitch. Aspira is the 1st broadcasting software built on Unreal Engine 5 and is the Ultimate tool for streamers looking to grow a vibrant community and captivate the audiences. Obscure incorporates AI computer vision for face and body tracking to enhance better real time Nonverbal Engagement. Creators can choose to stream in various formats that include a classic webcam layout for a customizable 3 d environment or as a 3 d VTuber wearing our Upskare mocap sensors powered by XSENSE. We are now shipping the Upskare mocap box. The mocap box includes the Upskare upper body mocap set With 9 sensors and new comfortable washable gloves that digitize the intricate movements Fingers and Hands, our SKU mocap box has an up to 12 hour battery life to accommodate those long streaming sessions required by VTubers.

In other developments, In Q2, we hosted our growing developer community at the annual Mobella. Developers Conference. Over 300 attendees and thought leaders speakers in digital health participated in our market event. We continue to believe that there is further opportunity to expand and grow our 3rd party developers community through the Movella Dot SDK. Movella Dot Sensors and our software development kit save developers the engineering effort of making their own sensors, so they can focus their resources on creating amazing apps. So far, our top 3rd party developer count has grown to over 800, many of which are starting to announce exciting products, primarily serving the health and sports market. At movela, we continue to refine our AI algorithms that power our products for digitizing movement. We have invested in AI across our full stack to provide more precise Life like movements of digital characters, avatars and robots. Our sensors collect massive amounts of data that often comes with noise At the firmware level, our intelligent algorithms decipher and extract useful data When we see a noisy raw data, then our sensor fusion algorithms aggregate and integrate We curated data from the gyroscope, accelerometer and magnetometer to generate positioning and orientation information.

At the software level, our AI assembles the positioning and orientation information from the sensors With a 3 d human body biomechanical model to duplicate precise human body movement represented by an avatar in our software in virtual space. Our AI algorithms Continuously adapt to temporal variations in human body movement as well as changes and disturbances In noisy environments to maintain accurate spatial movements of the avatar. Our HD reprocessing AI software evaluates data from 17 sensors on the body and learns and balances good versus poor sensor data to continuously maintain realistic human body movements. We see recent advancements in AI as an enormous growth acceleration opportunity. We believe that our business will be a Strong beneficiary of AI, especially with generative AI. For example, StepLab, An intelligent gate tracking app developed by Movala partner, C7, analyzes walking motion scientifically using just 2 Movella top sensors with 1 on each foot. In addition to the visualization and graphical information, The StepLab app uses generative AI to process gate data collected by Movella thought sensors for assessment and recommendation to enhance the patient's ability to improve Thank you. And with that, I'll turn it over to Steve to provide more detail on our Q2 2023 financial results.

Thanks, Ben, and thanks, everyone, for joining us today. Consistent with last quarter, I'll begin with a review of our Q2 2023 results and then provide limited guidance. During my remarks, I will refer to various non GAAP metrics. A reconciliation between GAAP and non GAAP is available on our earnings press release and on our Investor Relations website. I'll begin with our top line results. Net revenue for the quarter was 8,400,000 A 3% decrease compared to the same period last year and a decrease of 9% as compared to Q1 2023. While seasonality plays a role in our quarterly revenue profile, this past quarter was directly affected by the Hollywood labor dispute that began in early May and has not yet reached a conclusion. These strikes have had a wide ranging impact on the entertainment industry and has affected many production, filming and animation studios. While the labor dispute started in the United States, It is impacting the entertainment industry across many geographies which mobella serves. We estimate the impact to our revenue in Q2 to be approximately $2,000,000 GAAP gross margin was 53% as compared to GAAP gross margin of 50% in the Q2 of 2022 and 61% in the Q1 of 2023.

The sequential decrease is attributable to the lower revenue over which fixed costs of production are amortized and product mix, which combined caused about 4% of the decrease and an increase in the excess and obsolete reserves on components on hand that caused an additional 3% decrease, each of which was also a direct result of the Hollywood labor dispute and lower revenue. Non GAAP gross margin for the quarter was 53 compared to 63% 64% in the Q2 of last year and the prior quarter, respectively. The change due to the same reasons mentioned with the GAAP numbers. Turning to operating expenses. We remain keenly focused on investing in new products and technologies to drive top line growth, return on investment and shareholder value, while managing our expenses prudently. GAAP operating expenses this quarter totaled $12,200,000 inclusive of 1,600,000 A fees backed transaction and capital markets related costs won in the 2nd quarter, 600,000 Higher accruals related to increased costs of being a public company and a $500,000 non cash increase in reserves as our outlook grows more conservative given the uncertain macroeconomic conditions. This compares to $11,100,000 in Q2 22. Sales and marketing expenses in Q2 totaled $3,800,000 essentially even with the same quarter last year and up about $300,000 sequentially, largely due to higher employment costs and stock compensation.

Our R and D expenses were $2,200,000 versus $4,300,000 in the same period last year and $2,900,000 in the Q1 of 2023. In Q2 2023, we capitalized $1,500,000 of software development as compared to just over 100 In the Q1 2023 and 0 in Q2 2022, as Ben articulated earlier, our engineering focus is on developing New MVMT digitization technologies, including hardware, software and artificial intelligence and bringing the Obscure platform to market. G and A expenses totaled $6,200,000 in Q2, inclusive of $1,600,000 of expenses associated with the Deespac transaction, the majority of which are non recurring and capital markets related expenses and $600,000 of new Public company costs that were not incurred in the prior year. This compares to $3,100,000 for the same period last year and $4,000,000 in Q1 2023. Our GAAP loss from operations for the quarter was $7,700,000 compared to a loss $6,800,000 in the same period last year and $9,400,000 in the Q1. These results, after accounting for the effect of the Hollywood labor dispute And various reserves, accruals and de SPAC transaction costs were in line with our expectations as we continue to invest in our business and drive for long term growth.

GAAP net loss attributable to Common shareholders for the quarter was negative $13,900,000 or a loss of $0.27 per share. This compares to a GAAP net loss of $7,600,000 or a loss of $1.48 per share in Q2 2022. The Q2 GAAP net loss includes A non cash revaluation loss on the VentureLink notes and non cash gain on the Pathfinder warrants of $7,300,000 $300,000 respectively. These revaluations are non cash And are primarily a result of Movella's stock price, volatility and interest rates. Adjusted EBITDA, which excludes certain items such as stock compensation, amortization, depreciation, interest income and expense And the effect of income taxes, revaluations of the VLN and warrants and certain other infrequent costs was negative $5,200,000 for the quarter compared to negative $4,500,000 in the same period last year. The Q2 adjusted EBITDA amount includes approximately $600,000 of incremental public company that were not incurred in Q2 of 2022. Please refer to our press release for a full description of items excluded for the purpose of adjusted EBITDA. Turning to the balance sheet. We ended the quarter with $51,000,000 in cash cash equivalents compared to $62,100,000 at the end of Q1 2023. We remain in a strong cash position due to our February 2020 3 NASDAQ Listing, which through a series of transactions raised $60,300,000 in net proceeds, providing an ample cash runway to support our sales and marketing initiatives and R and D Investments.

The cash consumed in the last quarter was a combination of $7,700,000 operating loss, Winning stock based compensation of $500,000 additional reserves raised of $500,000 Depreciation and amortization of $300,000 combined with $3,500,000 of cash used in working capital, which is primarily to settle transaction of capital markets related costs and $1,500,000 on capitalized software, primarily related to our Just launched broadcasting software, Obscure. This quarter was an outlier from the perspective of cash consumption with one time and We expect transaction costs being paid. We expect cash consumption to be closer to non GAAP operating profit in the future, Plus or minus changes in working capital. Now I'll share a broader outlook and guidance, beginning with some color on our operating environment. Irrespective of the excitement we feel about our product traction such as the recent Obscure launch, we are taking what we believe is a cautiously prudent stance with respect to the macro environment and more specifically the uncertainty around any near term resolution in the writer and actor strike and a broader return to work in the entertainment industry. Fortunately, and as Ben and I have both articulated, we are in a strong cash position, which we expect will allow us to navigate this environment, maintain our focus on new product development and expansion of our global markets.

For the Q3 of 2023, we expect revenue in the range of $8,600,000 plus or minus $500,000 Given the lower top line driven by the continued macro environment challenges in Europe and China and the rider strike, We will not achieve breakeven in Q3. We are taking action to increase demand generation and reduce OpEx. These measures are intended to allow us to breakeven as soon as practical and at a lower revenue level. As a result of the above, We expect full year revenue in the range of $34,000,000 to $38,000,000 Thank you all again for joining us today. We'll now open the line for questions from the analyst community.

Thank you. Our first question comes from the line of Tore Bannsberg with Stifel. Your line is open.

Yes. Thank you and congratulations on getting Obscure launched. First question is on the numbers, however, for the year. So I understand the Q3 guidance and some of the dynamics there. But based on my math, it does seem like you are expecting decent sequential growth in the December quarter. So Do you have visibility towards that at this point? Yes, any comment that you can give us on your conviction of growth in Q4?

Yes. Hey, Tore. This is Ben. So in our guidance for both Q3 and the entire year, We are assuming that the rider strike and the actor strike in Hollywood will impact the entire full year. Now having said that, roughly 80% of our business It's not related to the strike including 50% of our entertainment business. And we are continuing to see quarter Over quarter growth in those portion of the business that's not affected by the strike.

Got it. Yes, thanks for clarifying that. And you mentioned $2,000,000 impact from the strike this quarter. Any way to quantify that for Q3? And Any sense at this point when you could potentially recoup some of the money? I'm just trying to think how we should think about whether that's kind of just a push out? Is it a delay or will you perhaps not be able to recoup some of that revenue?

Yes. That's exactly the way we think about it, which is a push out and a delay of projects in our pipeline. So literally, in terms of the $2,000,000 in the second quarter, it's really the speed of the impact That was a little bit of a surprise for us in terms of the strike that impacted the last 2 months. If you look at it that way, essentially, the projects that are associated with the professional studios, they're on hold. So when there's resolution and work resumes, we expect those projects to resume. Now having said that, There's a finite capacity in Actors and Riders to continue production, right? So It's not going to be a sort of a hockey stick rebound, but we certainly see it as a return to normal growth over time.

That's great. Last question, when should we start thinking about Obscure contributing to financials? I know that business model, of course, is quite different than some of your other businesses. But yes, any visibility on when you should So we just launched it last week. The initial response has been better than what we had hoped for In terms of coverage and awareness and the excitement from the community that we're going after, which are the We said in prior calls that we expect Non material contribution to this year as the market develops. And however, we do see a meaningful Contribution in line with our expectation for next year.

Great. Thank you very much.

Thanks, Corey.

Thank you. Please stand by for our next question. Our next question comes from the line of Quinn Bolton with Needham and Company. Your line is open.

Hi, Ben, Steve and Lana. Just wanted to follow-up on Tore's question there. It sounds like the impact of the Riders' Strike just Prevents you from engaging in these professional studios or kind of halt production at those Professional studios have you kind of have just everything grinds to a halt. When the writers strike is over, they come back, but it's not like revenue that you miss in Q2, Q3, Q4 would all sort of be caught up in Q1 and you'd see kind of $6,000,000 or so all being caught up. It just seems like everything in the pipeline just pushes out. So you hopefully would get back to kind of a $2,000,000 to $3,000,000 a quarter from The professional studio side of the business, but it wouldn't necessarily rise above that level for a quarter or 2 as you catch up, right? It's just best to think of it as just a So permanent push out in those projects and you get back to a steady state, but you don't get to catch up revenue?

Yes. That is the right way to look at it for the professional studios, which is 50%, roughly 50% of our business for entertainment. And as I said earlier, you're absolutely right. There is a finite capacity in Hollywood production, right? So they're not going to all of a sudden double up in production that allow us to sort of recoup what was missed. So it's absolutely a delay for both us And the world of Hollywood. Having said that, what we are seeing is In the other half of the entertainment business, that's non Hollywood strike impacted, namely the smaller indie artists. We are seeing increased activity In terms of engagement in the indie production, so we are stepping up our efforts in demand creation And revenue generation on the part of the entertainment business that is not impacted by the strike. It is our hope that the efforts there and the increased activity of these indies Will help the growth to be better than just a push out as the professional rigor recovers.

Got it. Those efforts would help mitigate the impact of the Ryder's drink. Do you think that that business that increased indie business, do you think that that would be sustainable? Or do you think It would be sort of a temporary shift and that too would normalize once the strike ends.

It's unknown. We believe to a certain degree, it opens up New will of content creation. We are in sort of New territory here. At least in the company's history, I think the last strike was 2007, the company was 4,000 and We've never experienced this type of a strike in our core business. But as we To know that whenever there's a shift in market dynamics, it always creates opportunity for New entrepreneurs in entertainment. So I think to a certain degree, it will be sustained whether we're going to see a sort of A spike and then go to more normal growth or whether it's going to be Replaced by the professional studios, it's remained to be seen. But looking at the number of indie projects getting To try to sort of avoid content, new content next year, we find that to be encouraging.

Understood. Moving to Obscure, can you talk just a little bit about the monetization for Obscure both between the app as well as the mo And then I think in the press release, you mentioned that you're bringing obscure to the Epic Games Store, is that the primary store for live streamers or are there opportunities to bring obscure to other App stores to increase sort of the distribution of that platform?

Yes. So The reason we distribute on the Epic Store is because the obscure platform, the app is the first app that's Bill on FX unveiled engine 5. So naturally, the answer to your question is yes, That would be the place influencers, streamers will go do the download. The in terms of what they do with the app is then they take the app because the app is a Twitch Extension for broadcasting. So then they will take you to the Twitch platform, which is our first launch Platform for them to start streaming. And then overall, the way we develop the Software is actually platform agnostic in terms of the broadcasting channel, if you would. So, yes, so you will be we will grow into other platforms.

And then the monetization between the App software and the mocap box?

Yes. So, the What we're trying to do is we're trying to make the entire solution as accessible as possible. So we priced the MOCAB box at 19.95 which is a price point where you feel that it's affordable for the segment of streamers that we are targeting, that middle band of streamers that are already making some amount of Annual income from their streaming livelihood. And then once they start streaming, we add 2 new revenue streams that are on top of our existing revenue. 1 is the rev share from Twitch, which is 20% of the interactions that the streamers have with the fans. And then on top of that, we embedded in our app is the marketplace for assets, for digital assets, which Streamers will use to complement the Virtual streaming environment and those assets initially will be I think we have over 500 assets That are a combination of a few free assets and So an asset type of price on it that they will buy us from us directly. So those are the 2 additional revenue streams. Overall, the combined Opscale platform, once it scales, we expect it to be In line with our gross margin models for the entire company.

Got it. Okay. Thank you.

Our next question comes from the line of Aditya with Northland Capital. Your line is open.

Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on what was the revenue mix by industry vertical?

Sure. I can give you that. This is Steve. This quarter, we did About $2,800,000 in entertainment, dollars 2,700,000 in each well, actually 2 point $7,000,000 in Automation and Mobility and about $2,800,000 in Health and Sports. Yes, we would have expected our entertainment side if the strike hadn't happened to be much larger.

All right. And The strike, does that affect only the product revenue or you're seeing some revenue being affected even in this service because of the strike?

It's more on the product revenue.

All right. And how are the bookings in the automation and mobility category?

They remain as expected. We're seeing some growth in automation and mobility in the 4% to 5% quarter over quarter range. We expect that to continue.

All right. Thank you.

Thank you. Please standby for our next question. We have a follow-up from the line of Tore Van Buren with Stifel, your line is open.

Yes, thank you. I just had 2 quick follow ups. First of all, on gross margin, How should we think about the mix for the second half of the year? So it sounds like the mix is going to remain an issue for Q3 Q3 and Q4, but any other color you could add there, especially in light of you obviously also had some one time items, right? So Yes. Any comments on gross margin for the second half?

Yes, you bet. This is Steve. I expect it to be up in the 60s.

Perfect. And then you also talked about managing OpEx in the second half of the year in light of the lower revenues. Should we think of OpEx as kind of flattish from the current run rate or up or down?

No, I would expect it down. I take out the one time items that I articulated and I would expect it to be down from that. We're going to we're taking a look at all of our OpEx and making decisions on what to do. As Ben said, we're improving our rev gen to Actually grow revenue not just in entertainment with the indies, but across our whole portfolio and addressing OpEx. Our goal is to be able to Breakeven at a lower revenue level.

Perfect. Thank you so much.

Thank you. Ladies and gentlemen, that concludes our Q and A portion. Thank you for your participation on today's call. That concludes the call as well. You may now disconnect. Everyone, have a wonderful day.