Hello, and thank you for standing by. Welcome to Movella's Second Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to turn the conference over to Lana Adair. You may begin.
Good afternoon, and welcome to Movella's Second Quarter 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-K 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. Now I'll turn the call over to Movella's CEO, Ben Lee.
Thanks, Lana. Thank you all for joining us today. We are pleased to share our results for the second quarter 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 OBSKUR broadcasting platform last week, expanding Movella's Xsens MoCap technology from professional Hollywood studios to individual streamers and YouTubers. OBSKUR enables live streamers to create engaging content, including motion-enabled avatars. We achieved $8.4 million of revenue in Q2 of 2023, down 3% year-over-year. While the writers strike impacted our top line in Q2, our results reflect the resiliency embedded in the business and our continued expansion of movement 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 million on the balance sheet, which affords us the opportunity to make measured investments in new products and use cases while managing our expenses prudently. 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 digitize movement with a highly differentiated full-stack solution that integrates sensors, visualization software, and AI analytics. Movella is best known for Xsens technology.
Our Xsens products integrate sensors, advanced algorithms, and user-friendly software that digitize non-verbal movements of the human body and automatons. Movella technology is based on our proprietary inertial sensors, which are small, lightweight devices that can be attached to the body or to objects to digitize movement in 3D space. Movella sensors are incredibly accurate, with a high sampling rate that captures even the most subtle movements. 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 movement data quickly and easily. With our powerful analytics tools, Movella 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 three diversified core end markets: entertainment, health and sports, and automation and mobility. We sell directly as well as through channel partners, serve the Americas, EMEA, and APAC geographies. Now I 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 Xsens 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 second quarter, 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 Xsens 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 Xsens suits are used to capture and digitize human body movement 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 automatons on land, sea, and in the air. In Q2, we showcased a robotic mower designed by iKnowHow, which relies on our MTi-680G sensor module to keep it on track, even when satellite positioning signal is temporarily unavailable. Autonomous mowing can be safely performed with 24/7 reliability. Movella continues to expand into new agricultural robotics use cases such as this. Next, turning to the entertainment market, Movella remains the gold standard for Hollywood-quality motion capture. In the film and video game industry, Movella's Xsens 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 OBSKUR platform. The live streaming community continued to be enthusiastic about this offering. Our pre-launch private event in July was attended by VTuber live streamers, who collectively represented over 100 million monthly views. We are encouraged by the early social media engagement with our official launch. The OBSKUR launch announcement reached viral levels on Twitter, now X, with 500,000 views on the first day. OBSKUR 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.
OBSKUR is the first broadcasting software built on Unreal Engine 5 and is the ultimate tool for streamers looking to grow a vibrant community and captivate their audiences. OBSKUR incorporates AI computer vision for face and body tracking to enhance better real-time, non-verbal engagement. Creators can choose to stream in various formats that include a classic webcam layout or a customizable 3D environment, or as a 3D VTuber wearing our OBSKUR MoCap sensors powered by Xsens. We are now shipping the OBSKUR MoCap Box. The MoCap , the MoCap Box includes the OBSKUR upper body MoCap set with nine sensors and new, comfortable, washable gloves that digitize the intricate movements of the fingers and hands. Our OBSKUR MoCap Box has an up to 12-hour battery life to accommodate those long streaming sessions required by YouTubers.
In other developments, in Q2, we hosted our growing developer community at the annual Movella DOT Developers Conference. Over 300 attendees and thought leader speakers in digital health participated in our marquee event. We continue to believe that there's further opportunity to expand and grow our third-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. Far, our DOT third-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 Movella, 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, lifelike movements of digital characters, avatars, and robots.
Our sensors collect massive amounts of data that often comes with noise and bias. At the firmware level, our intelligent algorithms decipher and extract useful data from a sea of noisy, raw data. Our sensor fusion algorithms aggregate and integrate the 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 3D 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 observation opportunity. We believe that our business will be a strong beneficiary of AI, especially with generative AI. For example, StepLab, an intelligent gait tracking app developed by Movella partner, Zero C- Seven, analyzes walking motion scientifically using just two Movella DOT sensors with one on each foot. In addition to the visualization and graphical information, the StepLab app uses generative AI to process gait data collected by Movella DOT sensors for assessment and recommendation to enhance the patient's ability to improve their walking motion. Thank you. With that, I'll turn it over to Steve to provide more detail on our second quarter 2023 financial results.
Thanks, Ben. Thanks everyone for joining us today. Consistent with last quarter, I'll begin with a review of our second quarter 2023 results and then provide limited guidance. Throughout 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 $8.4 million, 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 Movella serves. We estimate the impact to our revenue in Q2 to be approximately $2 million. GAAP gross margin was 53% as compared to GAAP gross margin of 50% in the second quarter of 2022, and 61% in the first quarter of 2023.
The sequential decrease is attributable to the lower revenue over which fixed costs of production are amortized and product mix, which combined cost 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% and 64% in the second quarter 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 $12.2 million, inclusive of $1.6 million of de-SPAC transaction and capital markets-related costs won in the second 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 $11.1 million in Q2 2022. Sales and marketing expenses in Q2 totaled $3.8 million, essentially even with the same quarter last year, and up about $300,000 sequentially, largely due to higher employment costs and stock compensation. R&D expenses were $2.2 million versus $4.3 million in the same period last year, and $2.9 million in the first quarter of 2023.
In Q2 2023, we capitalized $1.5 million of software development as compared to just over $100,000 in Q1 2023, and zero in Q2 2022. As Ben articulated earlier, our engineering focus is on developing new movement digitization technologies, including hardware, software, and artificial intelligence, and bringing the OBSKUR platform to market. G&A expenses totaled $6.2 million in Q2, inclusive of $1.6 million of expenses associated with the de-SPAC 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 $3.1 million for the same period last year and $4 million in Q1 2023.
Our GAAP loss from operations for the quarter was $7.7 million, compared to a loss of $6.8 million in the same period last year and $9.4 million in the first quarter. 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 -$13.9 million, or a loss of $0.27 per share. This compares to a GAAP net loss of $7.6 million, or a loss of $1.48 per share in Q2 '22.
The Q2 GAAP net loss includes a non-cash revaluation loss on the venture-linked notes and non-cash gain on the Pathfinder warrants of $7.3 million and $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 effects of income taxes, revaluations of the VLN and warrants, and certain other infrequent costs, was - $5.2 million for the quarter, compared to - $4.5 million in the same period last year. The Q2 Adjusted EBITDA amount includes approximately $600,000 of incremental public company costs 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 million in cash and cash equivalents, compared to $62.1 million at the end of Q1 2023. We remain in a strong cash position due to our February 2023 Nasdaq listing, which, through a series of transactions, raised $60.3 million in net proceeds, providing an ample cash runway to support our sales and marketing initiatives and R&D investments.
The cash consumed in the last quarter was a combination of $7.7 million operating loss, excluding stock-based compensation of $500,000, additional reserves raised of $500,000, depreciation and amortization of $300,000, combined with $3.5 million of cash used in working capital, which was primarily to settle transaction and capital markets related costs, and $1.5 million spent on capitalized software, primarily related to our just-launched broadcasting software, OBSKUR. This quarter was an outlier from the perspective of cash consumption, with one-time and transit de-SPAC 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 OBSKUR 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 actors strike and a broader return to work in the entertainment industry. Fortunately, and as Glenn 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 market.
...For the third quarter of 2023, we expect revenue in the range of $8.6 million ±$500,000. Given the lower top line, driven by the continued macro environment challenges in Europe and China and the writers' 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 break even 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 million-$38 million. Thank you all again for joining us today. We'll now open the line for questions from the analyst community.
Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tore Svanberg with Stifel. Your line is open.
Yes, thank you, and congratulations on getting OBSKUR launched. First question is on the numbers, however, for the year. I understand the Q3 guidance and some of the dynamics there, but based on my math, it does seem like you are expecting, you know, decent sequential growth in the December quarter. Do you have visibility towards that at this point? Yeah, any comment that you, you can give us on your conviction of growth in Q4?
Yeah. Hey, Tore, this is Ben. You know, guidance for both Q3 and the entire year, we are assuming that the writers' strike and the actors' strike in Hollywood will impact the entire full year. Now, having said that, roughly 80% of our business is not related to the strike, including about 50% of our entertainment business. We are continuing to see quarter-over-quarter growth in the, in those portions of the business that's not affected by the strike.
Got it. Yeah, thanks for clarifying that. You mentioned $2 million impact from the strike this quarter. Any way to quantify that for Q3? Any sense at this point, you know, when you could potentially recoup some of the money? I'm just trying to think how we should think about, you know, whether that's kind of just a push out, is it a delay, or, you know, will you perhaps not be able to recoup some of that revenue?
Yeah. That's exactly the way we think about it, which it's a push out and a delay of projects in our pipeline. Literally, in terms of the $2 million 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 two months. You know, if you look at it that way, essentially, the projects that are associated with professional studios, they're on hold. 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 writers to continue production, right? It's not gonna be a sort of a hockey stick rebound, but, you know, we certainly see it as a return to normal growth over time.
That's great. Last question. When should we start thinking about OBSKUR contributing to financials? I know that business model, of course, is quite different than some of your other businesses, but yeah, any, any visibility on when you should start to see the financial impact of OBSKUR would be, would be great. Thank you.
Yeah. 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 streamers and the YouTubers. We said in prior calls that we expect non-material contribution to this year, as the market develops. However, we, we do see a meaningful contribution in line with our expectation for next year.
Great. Thank you very much.
Thanks, Tore.
Thank you. Please stand by for our next question. Our next question comes from the line of Quinn Bolton with Needham & 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 writers' strike just prevents you from, you know, engaging in these, you know, professional studios or, you know, kind of halts production at those professional studios. You kind of have just, you know, 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, you know, caught up in Q1, and you'd see, you know, $6 million all being caught up. It just seems like everything in the pipeline just pushes out.
You, you hopefully would get back to kind of a $2 million-$3 million a quarter from the professional studio side of the business, but, but it wouldn't necessarily rise above that level for a quarter or two as you catch up, right? It's just best to think of it as just a sort of permanent push out in those projects, and, and you get back to a steady state, but, but you don't get the catch up revenue.
Yeah, that is the right way to look at it, for the professional studios, which is 50%, roughly 50% of our business for entertainment. As I said earlier, you're absolutely right. There is a finite capacity in Hollywood production, right? They're not gonna all of a sudden double up in production that allow us to sort of recoup what was missed. It's absolutely a delay for both us and, you know, 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.
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. You know, it is our hope that the efforts there and the increase, the activity of these indies will help the growth to be better than just a push out as the professional market recovers.
Got it. That those efforts would, would help mitigate the impact of the writers' strike. Do you think that that business, that increased indie business, do you think that that would be sustainable, or do you think it's, it would be sort of a temporary shift and that too, would normalize once the, the strike ends?
You know, it's, it's unknown. You know, we believe to a certain degree, it opens up a new world of content creation. You know, we are in sort of new territory here, in, in at least in the company's history. I think the last strike was 2007. The company was formed 2009. We've never experienced this type of strike in our core business. You know, as we know that whenever there's a shift in market dynamics, it always creates opportunity for new entrepreneurs in entertainment. I think to a certain degree, it will be sustained.
You know, whether we're gonna see a sort of a spike and then, go to more normal, growth, or whether it's gonna be replaced by the professional studios, it's remain to be seen. Looking at the, the, the number of, indie projects getting started to try to fill the void of content, new content, next year, we find that to be encouraging.
Understood. And moving to OBSKUR, can you talk just a little bit about the monetization for OBSKUR, both between the app as, as well as the MoCap box? Then I think in the press release, you mentioned that you're bringing OBSKUR to the Epic Games Store. Is that the primary store for live streamers, or are there opportunities to bring OBSKUR to other app stores to increase, you know, sort of the distribution of that platform?
Yeah. The reason we distribute on the Epic Games Store is because the OBSKUR platform, the app, is the first app that's built on Epic Games' Unreal Engine 5. 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 with the app is then they take the app, because the app is a Twitch extension for broadcasting. Then they will take it to the Twitch platform, which is our first launch platform to for them to start streaming. Then, overall, the way we develop the software is it's actually platform-agnostic in terms of the broadcasting channel, it would if you would. Yeah, so it will be, we will go into, other platforms.
Then the monetization between the app software and the MoCap box?
Yeah. What we're trying to do is we're trying to make the entire solution as accessible as possible. You know, we priced the MoCap box at $1,995, which is a price point we feel that it's affordable for the segment of streamers that we're targeting, that middle band of streamers, that are already making, you know, some amount of, some amount of, annual income from their streaming livelihood. Then, once they start streaming, we add two new revenue streams that are on top of our existing revenue. One is the, the rev share from Twitch, which is 20% of the, the interactions that the streamers have with the fans.
Then on top of that, we embedded in our app is the marketplace for assets, for digital assets, which streamers will use to complement their virtual streaming environment. Those assets initially will be -- I think we have over 500 assets that are a combination of a few free assets and certain assets have a price on it that they will buy us, from us directly. So those are the two additional revenue streams. Overall, the combined UpSkill 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.
Thank you. Please stand by for our next question. 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 $2.8 million in entertainment, $2.7 million in each, well, actually, $2.7 million in automation and mobility, and about $2.8 million in health and sports. You know, we would have expected our entertainment side, if the strike hadn't happened, to be much larger.
All right. The strike, does that affect only the product revenue, or you're seeing some, revenue being affected even in the service because of the strike?
It's more in the product revenue.
All right. How are the bookings in the automation and mobility category?
They, they remain as expected. We're seeing some growth in automation and mobility in the 4%-5% quarter-over-quarter range. We expect that to continue.
All right. Thank, thank you.
Thank you. Please stand by for our next question. We have a follow-up from the line of Tore Svanberg with Stifel. Your line is open.
Yeah, thank you. I just had two quick follow-ups. First of all, on gross margin, how should we think about the mix for the second half of the year? It, it, it sounds like, you know, the mix is gonna remain an issue for, for Q3 and Q4, but, yeah, any, any other color you could add there, especially in light of, you know, you obviously also had some one-time items, right? Yeah.
Yeah.
Any comments on gross margin for the second half?
Yeah, you bet. This is Steve. I expect it to be up in the sixties.
Perfect. 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, you know, 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 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 break even at a lower revenue level.
Perfect. Thank you so much.
Thank you. Ladies and gentlemen, that concludes our Q&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.