Smith Micro Software, Inc. (SMSI) CEO Bill Smith on Q1 2021 Results - Earnings Call Transcript

Smith Micro Software, Inc. (NASDAQ:SMSI) Q1 2021 Earnings Conference Call May 5, 2021 4:30 PM ET

Company Participants

Charles Messman - Vice President of Investor Relations & Corporate Development

Bill Smith - Chairman, President & Chief Executive Officer

Tim Huffmyer - Chief Financial Officer

Conference Call Participants

Scott Searle - ROTH Capital

Eric Martinuzzi - Lake Street

Josh Nichols - B. Riley

Mark Schappel - Benchmark

Jim McIlree - Chardan

Operator

Good day and welcome to the Smith Micro Software’s Financial Results for the First Quarter of 2021. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Charles Messman, Vice President of Investor Relations and Corporate Development. Please go ahead.

Charles Messman

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today as we discuss Smith Micro Software’s financial results for the first quarter of 2021 ended March 31, 2021. By now, you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit the Investor Relations section of our website at www.smithmicro.com.

On today’s call, we have Bill Smith, Chairman of the Board, President and Chief Executive Officer of Smith Micro; and Tim Huffmyer, our Chief Financial Officer.

Please note that some of the information you’ll hear during our discussion today consist of forward-looking statements, including, without limitations, those regarding the company’s future revenue and profitability, new product development, new market opportunities, operating expenses, company cash reserves, the recently completed acquisition of the Family Safety Mobile Business from Avast and how the acquisition may impact Smith Micro’s business strategy, operations and the financial position going forward.

Forward-looking statements involve risks and uncertainties, which could cause actual results or trends to differ materially from those expressed or implied by our forward-looking statements. For more information, please refer to risk factors included in our most recently filed Form 10-K and the preliminary prospectus supplement filed with respect to our public offering. Smith Micro assumes no obligation to update any forward-looking statements, which speak of our management’s beliefs and assumptions only as of the date they are made.

I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for the reconciliation of those non-GAAP financial measures.

With that said, I’ll now turn the call over to Bill. Bill?

Bill Smith

Thanks, Charlie. Good afternoon, everyone, and thank you for joining us today for our 2021 first quarter conference call. I am very excited to be talking about our progress on what has been truly a transformational start to the 2021 fiscal year. Our forward-looking business case is the strongest it's ever been. And I'm incredibly proud of the team's execution in closing the Avast acquisition. Bolstered by our strengthened employee base and diversified customer portfolio, we are well-positioned to maximize revenues throughout the rest of the year and beyond.

Let's look at the results for the first quarter of 2021. Revenues for the quarter came in $11.4 million, which is better than the previous guidance provided in March. Non-GAAP net income for the first quarter was $700,000. The business generated solid free cash flow from operations of $3.5 million. During the quarter, we also continue to invest in R&D to accelerate the SafePath related product development.

I believe we have now reached the point where we can ratchet back the growth of R&D spending. This will enable us to turn our attention to integrating the people, customers and technology gains through the Avast acquisition.

Later in the call, I will add more color on our path forward. But for now, I'll turn the call over to Tim for an in depth look at our first quarter financial results. Tim?

Tim Huffmyer

Thanks, Bill. Before we review the first quarter results, let me provide a summary of activities since our last call. On March 15, we close the previously announced public offering and issued 9.5 million shares of common stock. After deducting all the related costs, the net proceeds were approximately $60 million.

On April 16, we also completed the previously announced acquisition of substantially all the assets of the Avast Family Safety Mobile Software Business, including certain liabilities, along with all the membership interests of Location Labs, LLC, a US-based subsidiary.

The base purchase price of $66 million was delivered through the payment of $56 million in cash raised in the public offering, any issuance of approximately $1.5 million unregistered shares of common stock. As Bill mentioned, we are very pleased that the efforts extended to complete these transactions on time and as planned.

Now, let's cover the financial details of the first quarter. For the first quarter, we posted revenue of $11.4 million, compared to $13.3 million for the same quarter last year, a decrease of 15%. When compared to the fourth quarter of 2020, revenue was down 8%, which was better than our expectations communicated last quarter.

During the first quarter of 2021, our Family Safety revenue, inclusive of our SafePath product, decreased 20% to $6.3 million compared to the first quarter of last year, and increased 3% sequentially compared to the fourth quarter of 2020. This increase exceeded our expectation communicated last quarter.

The primary reason for the sequential increase in Family Safety revenue was related to a customer contract modification, resulting in an acceleration of previously recorded deferred revenue. The contract modification was related to a UK-based customer, acquired in the Circle acquisition and was a result of the customer exercising an option to reduce the service period by two years. Instead of ending in 2024, the contract is now expected to end in 2022.

This increase in Family Safety revenue was offset by the expected reduction of Sprint subscribers. As a reminder, all current marketing initiatives are only focused on T-Mobile branded products and not the Sprint branded products.

In the coming quarter, based on the current subscriber trends through April, and our newly acquired Family Safety products on April 16, we expect Family Safety revenue to increase by 70% to 75% compared to the first quarter. This guidance assumes the current subscriber trends continue through the second quarter of 2021.

During the first quarter of 2021 CommSuite platform revenue was $4.1 million, which was down 9% from the first quarter of last year. Revenue from the comp suite platform decreased 13% sequentially compared to the fourth quarter of 2020. This decrease was slightly greater than communicated last quarter. This decrease was due to an expected loss of subscribers offset by better than expected advertising revenue.

We continue to navigate the T-Mobile/Sprint merger as subscribers now have an option to move from Sprint to the T-Mobile network for voice services. As the subscribers transition from the Sprint network, we expect a continued decline in Sprint CommSuite subscribers.

As a reminder, Boost Mobile, formerly owned by Sprint is now part of DISH and comprised approximately 25% of the CommSuite platform revenue. We look forward to expanding our relationship with DISH in the future including the goal to increase Boost Mobile CommSuite subscribers. During the second quarter of 2021, we expect CommSuite platform revenue to be down 5% to 10% compared to the first quarter.

ViewSpot revenue was approximately 930,000 for the first quarter of 2021, up 25% compared to the first quarter of last year and down 32% compared to the fourth quarter of 2020. This decrease was slightly higher than our expectations communicated last quarter and was primarily related to a lower volume of variable revenue with our Tier 1 US customer.

Based on the current outlook, we expect ViewSpot revenue in the second quarter to be higher by 5% to 10% compared to the first quarter. This increase is primarily related to our near term visibility of variable revenue activity. For the second quarter of 2021, we expect consolidated revenue, including the newly acquired Family Safety products to be higher by approximately 30% to 35%, compared to the first quarter of 2021.

For the first quarter gross profit was $9.8 million compared to $12.1 million during the same period last year. Gross Margin was 86% for the first quarter compared to 91% last year. GAAP operating expense for the first quarter was $13.1 million, an increase of $2.9 million or 28% compared to last year. Non-GAAP operating expense for the first quarter was $9.1 million, an increase of $1 million or 13% compared to last year.

The increase in the first quarter non-GAAP operating expense, compared to last year is primarily related to an increase of $1.5 million for compensation and employee related expenses, as headcount increased 25% year over year, resulting in 264 employees at the end of the first quarter and an increase of 200,000 for third party contract development costs. These costs are variable and allow us flexibility to increase or decrease the number of engaged resources.

This increase was offset by a decrease of 700,000 related to trade show and business travel related expenses. The first quarter non-GAAP operating expense of $9.1 million was $400,000, less than the fourth quarter of 2020 and exceeded the expectations communicated last quarter.

During the first quarter, we reduce the third party contract development costs and increase the employee run rate costs as we continue to phase in headcount throughout the quarter.

For the second quarter of 2021, we expect consolidated non-GAAP operating expenses to be approximately 40% higher than the first quarter. This increase is mostly related to the additional 158 employees from the newly acquired family safety business. Then non-GAAP net income for the first quarter was $700,000 or $0.02 diluted earnings per share, compared to a non-GAAP net income of $4.1 million or $0.10 cents diluted earnings per share.

Within the recently issued press release, we have provided a reconciliation of our non GAAP metrics to the most comparable GAAP metric. For the first quarter, the reconciliation includes the following adjustments, stock compensation expense of $1 million, intangible amortization of $2.3 million in acquisition costs of $611,000, some of which are non cash items. The intangible amortization expense includes a one time expense acceleration of 1.5 million related to the customer contract modification previously mentioned.

Due to our cumulative net losses over the past few years, our GAAP tax expense is primarily due to certain state and foreign income Taxes. For non-GAAP purposes, we utilize the 0% tax rate for both 2021 and 2020. Any resulting non-GAAP tax expense reflects the actual income taxes expense during each period.

This concludes my financial review. Now back to you Bill.

Bill Smith

Thanks, Tim. Let's start out with CommSuite, our voice messaging platform. We will focus in on CommSuite to Dish, the newest tier one carrier in the United States. DISH’S goal of expanding this 5G network to cover about 70% of the US population by June of 2023 is a great opportunity for Smith Micro to build yet another profitable user base, not just for CommSuite, but for our other products as well.

Life for DISH to become a major carrier customer for us once their mobile network rollout is completed. Boost Mobile owned by DISH and already a CommSuite customer has initiated some strategic marketing efforts to increase the conversion of trial premium Visual Voicemail users into paying subscribers. This marketing campaign commenced in the first quarter is gaining momentum. Boost launched a new value added service offering in the first quarter that includes premium digital voicemail, granted privacy premium, this service bundles premium Visual Voicemail with secure WiFi and call screener premium to other services popular with their users.

As mobile phone vulnerabilities addressed by this bundle, pose a risk to every smartphone user, please view this as a good opportunity to grow the CommSuite revenues for premium Visual Voicemail app boost.

Now let's take a look at ViewSpot, our smart retail platform. There is no secret that the COVID-19 pandemic has significantly reduced traffic in retail brick and mortar stores. The good news is that trend may be about to change. And with that shift, the future for ViewSpot may be very bright. Thanks to the aggressive delivery of COVID vaccines here in the US, it is now conceivable that shopping habits by consumers will return to storefronts. It is also reasonable to assume that as vaccine distribution accelerates in both Europe and the Middle East that a return to additional retail activity should follow. Thus the retail sector is ongoing return to normalcy paired with a rising consumer demand for 5G cable phones bodes well for ViewSpot revenues.

And that has an excited for what the balance of 2021 and 2022 holds for ViewSpot. On device promotions delivered via ViewSpot promises to be a critical component of our carrier customers in store promotions going forward.

Now, let's turn to Family Safety, where we are clearly the number one software provider to wireless carriers. I am, as I commented earlier, very excited with the Avast acquisition, and I'm proud of how Smith Micro has hit the ground running. As I stated during our last call, we will initially run two Family Safety applications. This strategy will enable us to minimize disruption for our new Family Safety clients and maximize the productivity of the talented team we gained as part of the acquisition.

I'm happy to report that this transition of these 158 employees went quite smoothly. We are thrilled to welcome these experienced and highly capable individuals to the Smith Micro family.

Our first quarter Family Safety revenues were slightly higher than expected. We believe we have a significant growth potential going forward, far larger than the first quarter positive results.

Now let's look to see, where things stand with some of our largest Family Safety deployments. Currently, T-Mobile is on track to launch the new SafePath 7 to their subscriber base mid-year. We've been working hand in hand with T-Mobile on building out an integrated, multi channel marketing strategy to support this launch.

In this regard, the experience we've gained over the past few years and supporting other Family Safety customers has been invaluable, it has enabled us to develop a plan geared towards both new user acquisition and user retention. On a high level, I believe this campaign will follow the blueprint similar to the successful Sprint initiatives executed in support of safe and sound prior to the merger with T Mobile.

In addition to these launch preparations, we have made progress in renegotiating the Family Safety contract with T-Mobile, which we gained as part of the circle acquisition completed in 2020 to be better aligned with our business case. While still a work in process, we remain confident in reaching the positive outcome.

We are also confident this new SafePath 7 launch with T-Mobile will ignite a new growth engine for Smith Micro, resolving a meaningful impact on revenues in the back half of 2021 and beyond.

Now let's shift our direction to Verizon. With the Avast acquisition closed and in the books, we have started working closely with our newly acquired Family Safety customers with a strong focus on Verizon. We look to enhance and expand a new joint marketing program designed to drive new user acquisition, encourage greater app engagement and maximize revenue for Verizon’s smart family. The untapped potential here is very exciting and should drive revenue growth in the coming quarters.

Lastly, I'd like to provide you a little bit more color around our long-term vision for our Family Safety business. As you would correctly assume, we do not plan on running two separate parallel Family Safety code bases in perpetuity. Our product strategy team has already developed a solid plan to blend the very best components from both the SafePath and Avast platforms. And we have an enormous amount of talent and resources to deliver on this directive.

Over the coming quarters, as we integrate the two teams in code bases, we will develop a unified SafePath code base to support all of our family safety deployments at our wireless carriers. As we also continue to work to streamline processes and grow margins.

Rightsizing our expenses to maximize profits, while significantly growing our revenue base is our mission. With that said, there are a number of reasons we are very well positioned for a strong resurgence in coming quarters. As more people are vaccinated, more retail stores will reopen and the economy will continue to recover.

Carriers around the world continue to show growing interest in our products. Our growing customer base continues to diversify. And we have a new partnership in place with a vast that will generate additional opportunities for revenue growth. The future has never been brighter for Smith Micro.

With that, I will open the call for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Searle with ROTH Capital. Please go ahead.

Scott Searle

Hey, good afternoon. Thanks for taking my questions. It's nice to hear T-Mobile moving ahead on schedule and sounds like a lot of energy going around related to Verizon. Couple of quick points to clarify, I'm not sure I heard the numbers right. Tim could you repeat what you said sequentially in terms of the outlook for ViewSpot? I don't know as well, did you quantify the SafePath revenue attributable to the accounting change? I'm sure we could back into it from the deferred revenues.

And then the outlook for location in SafePath services was 70% sequential growth, is that correct? And then add a couple of follow-ups.

Tim Huffmyer

All right, Scott, the ViewSpot guidance that I gave was 5% to 10% greater than the first quarter. The deferred revenue impact that I discussed was about 600,000.

And the last question, so as we look forward here, we're going to be looking at Family Safety, which will include multiple products, our product portfolio now, which includes the purchase Avast product and the SafePath product. So we will be talking about that revenue in total. And the guidance I gave and the outlook I gave for that was a 70% to 75% growth on top of the first quarter's revenues.

Scott Searle

Got you. And, Tim, just to clarify further so that that growth is on the 6.3 million not the 6.3 net of the one-time benefit. Is that correct?

Tim Huffmyer

It's growth on the 6.3. That's fair.

Scott Searle

Perfect. Okay. And Bill, it sounds like you continue to progress with T-Mobile. I was I was wondering, if you could provide any additional color in terms of how aggressive this push could be? How does the rollout initially look? Should we be expecting a soft launch initially followed by something more aggressive with some of the omni-channel strategy that you're talking about? And as well, kind of shifting to rising quickly? As you're re-engaging with that customer base, what are your expectations? When does that start to accelerate from a subscriber standpoint again?

Bill Smith

Okay. Scott, those are good questions. On the T-Mobile side, I think they will start with a soft launch initially, that soft launch could take a -- could be a matter of a few weeks to a month or so. Just to make sure everything is set as planned, and then we would go into more of a full rollout. So I think that's probably the expectation we should set. On the Verizon side, we have had very, very good conversations. And I think we have a good understanding between both Smith Micro and Verizon of what our goals are going forward.

Clearly, there's a strong desire to grow the size of the user base, and to do that, with a multi pronged marketing strategy. And so, these are the things that we're working on now. There's going to be a lot of follow-up discussions over the next few weeks, then I would say, by this time next -- next quarter is already fairly clear. So I won't be able to give you some better guidance that I can now.

Scott Searle

Okay. Perfect. Very helpful. And lastly, if I could from a high level, Bill, there's been a lot of activity within the industry, broadly speaking. You go back a week or so ago, Apple introduced their Apple Tags. And while it's not directly competitive, it is building the ecosystem, right? In terms of conductivity and location and tracking. So I'm wondering that, and along with Life360 is now brought Jiobit, you're starting to really see location kind of pushed to the forefront. So I guess with those items in mind, what do you see in terms of the development of your ecosystem in terms of bringing the devices and expanding it to get the platform. Now bringing those other devices on to the platform and being able to approach the carriers with that suite of services? And also the interest level now from the carrier for those suite of services. Effectively, with Apple kind of challenging for location kind of capabilities, are they kind of understanding that? Are they fighting back and looking forward to fighting back with things, whether it's tracking people, pets, things or otherwise? The Apple Tags and dog tag type of equivalents? Thanks.

Bill Smith

Yes, yes. Let me comment on that. I think the Apple launch is intriguing. I think it helps us out validate the desire for this foot for this market segment to grow. I will, however, say that, I think the Apple approach leaves a lot to be desired. I mean, candidly, the product is a Bluetooth device. It's basically a Crowdsource network you have to have other Apple iPhone users around you, in order for the thing to function. If you don't, it just doesn't work. It is not a network like a carrier network that is carrier grade with carrier quality, and with all sorts of operating controls and security. So that said, I think there's great room for the carrier's to play a very significant role in the space. I think the fact that devices or cellular can get, can reach out and over a much broader geographical areas than a Bluetooth device is the starting point.

I think that you're going to see the embrace of what we call the family digital lifestyle, going forward to be a major part of the marketing efforts that you'll see coming from carriers. And we obviously will be behind pushing that. And so yes, I think there's a lot of excitement in this market. I think that there's a lot of things that will develop through the end of this year. And we usually just sort of say stay tuned. I think the Apple launch just validates the market, but it's not the answer.

You also mentioned the Life360 launch and their acquisition is again a group of Bluetooth enabled devices, and I think has the same frailties as the Apple one. But nonetheless, I think again, it does talk about the need in the marketplace. But this is a need that needs to be filled by the real professional carrier networks and I think that's the answer.

Scott Searle

Great. Thanks so much.

Operator

The next question comes from Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi

I have a question regarding the Family Safety, not about the dollar amount on Family Safety upside and more about the customer behavior. If I understand correctly there ending the contract in 2022 rather than 2024. Does this -- what else does that tell us about this customer relationship? Is this customer going away? Is this customer a potential renew under a different contract? Help me understand the customer relationship?

Bill Smith

Okay. Eric, Yes, that’s a good question as well. This particular customer came to us via the acquisition of the Circle business unit. They're based in the UK. They're more on the cable side than they are on the cellular side. And as such, they were really focused more on broadband service. So this product offering is as constituted didn't quite make as much sense as it does, when you're talking about the name brand cellular service providers. So, yes, I think the CSA takeaway, but I think it was somewhat preordained. I don't think that it was the well conceived product to begin with and it reflects that.

Eric Martinuzzi

Okay. And then on the T-Mobile contract, obviously, you reiterated the timing there, that's important. But I'm just curious if you -- if you could take us a layer deeper on what is the next step? And this all goes back to my own model, and I believe it's also the model further analyst is that Q3 is a pretty substantial step up, obviously, Family Safety, but total revenue for Smith Micro, this -- if the next step is kind of what you talk about as a, as a soft launch that stretches into the bulk of the third quarter then, then our sequential growth scenario becomes a little bit more difficult to achieve, you know, what I'm saying?

Bill Smith

Yes. But we're not at one -- one trick pony any longer. So there's multiple customers and they're big customers. So when you start thinking about the growth of our business, on a quarter-over-quarter basis, it's not just on the back of one name. So that's number one.

Number two, I believe that there is a strong interest on the part of our customer T-Mobile to re-enter in a very meaningful way, the Family Safety space, I think the family subs are important to their business case going forward. They are obviously been incredibly successful. And this all plays well in it.

So I think that we have to start thinking about this micros business case as being one of a number of players that all can be very meaningful, simultaneously, as well as the fact that with the launch of SafePath 7 now -- we've got a very significant customer into T-Mobile that we'll be able to really relaunch as the new T-Mobile in the Family Safety space. So I -- let's just wait and see how the numbers work out. But I remain very positive.

Eric Martinuzzi

Okay. And then on the ViewSpot business. Last quarter, we were talking about issue with your I think, with AT&T Mexico, kind of, just said -- due to COVID, we had to take a pause here any signs that that businesses recovering, returning?

Bill Smith

Well, COVID is still an issue in Mexico. So as it is in Europe, as it is in the Middle East. And so it's still is too early for that. I think you're starting to see however, the effect of the vaccines through this distribution here in the US and you're starting to see stores reopen, I think you're going to see people re-entering the stores. And I think the demand for the ViewSpot product will grow. And as that happens, and as we -- are able to broaden the distribution of the vaccines in places like Mexico and Europe and Middle East, I think, you’ll see the same trend follow-up. So it's all about -- it's just a matter of timing. I don't think it's the question of if, I just think it's a question of when. But that's my judgment. And you may not -- subscribe to that. But I think the facts will bear it out.

Eric Martinuzzi

Last question is for Tim. Curious to know if you have an April 30 of cash debt, what’s the numbers are there for -- where the balance sheet was post the closed?

Tim Huffmyer

Yes. On a cash-wise, we were sitting out about around 30 million, no debt.

Eric Martinuzzi

Thank you.

Operator

The next question comes from Josh Nichols with B. Riley. Please go ahead.

Josh Nichols

Yes. Thanks for taking my question. Good to hear some of the updates on the code integration and the plans. Could you elaborate a little bit just on the potential timeline? And I know you just went through a large R&D investment cycle seems like you're going to start getting a little bit more leverage on that front. How long do you think it'll take for some of the code integration, some of the gross margin improvements? And what are some of the companies, kind of, longer term key target metrics given that this is a business that’s historically had a lot of operating leverage?

Bill Smith

Yes. Josh, as we said, during the presentations, we made to the street during the capital raise. We're a software company. And we are a company that should be looking at gross margins in the 90% range.

And those gross margins should then flow down to an even margin of around 25 points. And we said that was our goal. That's, where we needed to get back to. Clearly, the business that we acquired from Avast was not at that level. And it is our goal to get it there.

And I think that, we'll be able to execute on that, over the next few quarters and such that, if we should start to see improvement in both the top line margins as well as the bottom line. And we should start to approach our goal as early as possible in 2022.

So I think these are things that we have levers. And we know how to how to execute. But we also have to take care of, our new customers. And make sure that we don't disrupt any of the business flow.

And so, we're going to do this in a very thoughtful manner. And obviously, the right way to do it is to, grow our gross margins, by increasing our revenues through additional sales, without increasing our expenses. And that obviously, is our first choice.

Josh Nichols

Okay. Thanks. And then, I know the company has announced a few other SafePath wins earlier this year you hit on the company, of course, diversifying its revenue stream. Are those expected to add much revenue and kind of support the growth initiative in the second half of this year? And the updates you can provide on those wins?

Bill Smith

Yes. Look, we look for these ventures to grow and to grow overtime. And they all start out slow and then they grow. And I've always kind of talked about history, because I think history tends to repeat itself.

And if you look at what happened at Sprint, when we launched there, it was about a year from launch to the point where the revenue started to grow into a more meaningful flow, I think that will hold true for some of these accounts as well.

But the good news is that we have established accounts now, both with T Mobile and with Verizon, and others that should have growth and should be able to feel the kinds of numbers that we're looking for in 2021 and going into next year.

Josh Nichols

Thanks, Bill. I let someone else take a turn.

Bill Smith

Thanks, Josh.

Operator

The next question comes from Mark Schappel with Benchmark. Please go ahead.

Mark Schappel

Hi. Thank you for taking my question. It's just a couple of questions. One, with respect to ViewSpot, the expectation is for revenue to be up 5% to 10% sequentially in 2Q, but is the expectation for the product to grow sequentially each quarter or beyond that, this year?

Bill Smith

Hey, Mark. Yes, we are looking for growth on ViewSpot year-over-year and that's how it would lay out actually. Now I'll dial that into a 90 day view each quarter. But I think that's the right way to think about it.

Mark Schappel

Okay. Thanks. And then on CommSuite, the 25% that is Boost Mobile. Could you just comment whether that portion is currently growing?

Bill Smith

Yes, that portion in the first quarter did not grow. We're focused on continuing to work with Boost. Bill talked about some promotions that are out there that were positive about, and we'll continue to work Boost with DISH to grow that revenue.

Mark Schappel

Okay. Thank you. That's all for me.

Operator

The next question comes from Bill McIlree [ph] with Chardan. Please go ahead.

Jim McIlree

Well, I'm going to assume that's me. Can you talk a little bit about gross margins, why it was down to the quarter versus prior and what the impact of the Family Safety business will be in Q2?

Tim Huffmyer

Yes. Thanks, Jim. Yes, so margins were down a little bit. Costs are a little bit higher and absorbing the SafePath 7 environments, a little more complicated environment, which is what we've been working on with the code integration for the last year. So that's why we got some revenue sliding down, obviously, and we got increasing costs there. We do expect that to improve as the year goes on. Certainly now we're going to be merging in obviously, the purchase business, our margins are going to start out lower than we would like, but we know that's where our opportunity is going to be through the rest of this year into next year is really getting in and dialing in on those costs and creating that respectable margin that Bill talked about.

Jim McIlree

So when we look at Q2, and blending in the Family Safety business, we're going to see another sequential decline and gross margin versus the 86% you reported this quarter that -- did I hear that right?

Tim Huffmyer

Yes, the margin percentage will go down.

Jim McIlree

Okay.

Bill Smith

And, Jim, let me let me add, if I could, let me add, if you look at the gross margin percentage for the Avast business that we acquired, it was down in the low 70s. So there will be an initial impact on us, as we integrate this business in, and then we will be working on growing both revenues and reducing expense to get it back to something around the 90 points that you would expect to see.

Jim McIlree

Understood. Thank you. And I'm trying to understand the trajectory of the Family Safety business, primarily at Sprint and T-Mobile. So it sounds like to me that as the Sprint customer base continues to migrate off, it's not going to be replaced, or completely replaced by the T-Mobile launch, at least in the early quarters, if it follows that same trajectory that you have talked about build that Sprint had. Am I hearing that correct that…

Bill Smith

Yes, let me add some color that might be helpful then. First of all, I think that part of the strategy will be to allow the Sprint users on Safe and Found to migrate over to the T-Mobile billing system and stay on safe and sound. So the melting ice cube as we've talked about for the last X number of quarters, that that dynamic should slow down substantially.

I think this is part of the overall strategy as we figure out how to easily and gracefully move users off of the Sprint product is a safe and found as well as the acquired Sprint product through the Avast transaction over to the T-Mobile platform. So we've got a lot of moving parts that the new T-Mobile, you've got the original FamilyMode, which was the circle code, you've got now the -- you were looking for the launch of SafePath 7 which will be the new SafePath products and incorporates the best of circle with the Smith Micro product, you'll have legacy products that came as a part of the Avast transaction, there's going to be a lot of moving parts. But I think there's been a lot of thought gone into how to make this easy.

There's a clear message that T-Mobile would like to get all of their users on the T-Mobile billing system. And so one of the things that we probably will be talking about in more in the next quarter, will be how people can stay on safe and found and still -- and be on the T-Mobile billing system. And I think that's the problem is that drip decline should start to go away. While at the same time, we launched the new FamilyMode 3, which is based on SafePath 7. So I think there's a lot of moving parts. It's not a simple thing to execute on. But there's been a lot of work and a lot of planning that's gone into this.

Jim McIlree

Okay. That's helpful. Thank you. And I know you're probably well, I don't know, but I'm guessing that you're reluctant to talk about the timing of the SafePath 7 launch at T-Mobile. But is there anything more specific you can tell us other than mid-year?

Bill Smith

We'll see is how we're in May and mid years not that far off. But I think I've been pretty accurate about it right now. So obviously, it's subject to change. I'm working with big carrier that's life with carriers. But that's where the plan sit. That's we're all working towards.

Jim McIlree

Okay. Very good. Thanks a lot and good luck with everything.

Bill Smith

Thanks, Joe.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Charles Messman for any closing remarks.

Charles Messman

Thanks, everyone for joining us today. We look forward to talking to you on our next quarterly conference call. Please feel free to reach out to us here, if you have any additional questions and have a great afternoon. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now be disconnect.