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SI

SurgePays, Inc. (SURG)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 delivered profitable growth: revenue $35.9M (+28% YoY), gross margin 28% (vs 8% YoY), net income $6.0M ($0.40 EPS), and EBITDA $6.4M; results tracked management’s expectation that Q2 revenue would align with Q1 ($34.8M) .
  • Upside drivers: ACP subscriber growth, lower device costs, and lower interest expense as debt declined; gross profit rose to $10.0M (from $2.2M YoY) and operating income to $10.9M (from a $1.9M loss YoY) .
  • Execution focus shifted to low-CAC in-store enrollments and new partnerships (ParichuteConnect, Boys & Girls Clubs on native lands, LeadEx ATMs), with growth expected to accelerate from late Q3 through 2H; target 13,000 stores on network by year-end and positive operating cash flow in 2023 .
  • Risk/controversy: July 13 8‑K rebutted allegations, asserted ACP compliance, and disclosed preliminary Q2 net income of “over $6 million,” reinforcing profitability momentum into the quarter .

What Went Well and What Went Wrong

What Went Well

  • Profitability inflection sustained: “net income of $6 million and EBITDA of $6.4 million,” with gross margin expanding to 28% (from 8% YoY) on ACP scale and cost tailwinds .
  • Channel expansion: signed partnerships with ParichuteConnect, Boys & Girls Clubs on native lands, and LeadEx to source ACP leads via schools, community orgs, and ATMs; management expects these to bear fruit from late Q3 onward .
  • Strategic moat via convenience-store footprint and proprietary fintech/CRM; pipeline >25,000 stores and only ACP player initiating brick‑and‑mortar sign‑ups inside stores .

What Went Wrong

  • Mixed operating expenses optics: SG&A rose 26% YoY (management cites one-time bonus timing dynamics across prior periods), complicating a clean YoY OpEx compare despite strong margins .
  • Store-channel still early: <10% of ACP sign‑ups came via stores in Q2 as teams refine follow-up conversion for ATM and in-store leads; execution work remains .
  • Competitive and regulatory overhangs: management acknowledged more ACP competition; July 13 8‑K addressed a critical report and emphasized compliance, underscoring headline risk despite strong results .

Financial Results

MetricQ2 2022Q4 2022Q1 2023Q2 2023
Revenue ($M)$28.0 $36.2 $34.8 $35.9
Gross Profit ($M)$2.2 $6.7 $7.7 $10.0
Gross Margin (%)8% N/A22.1% 28%
Operating Income ($M)-$1.9 N/A$4.7 $10.9
Net Income ($M)-$0.973 $3.0 $4.5 $6.0
Diluted EPS ($)-$0.08 N/A$0.32 $0.40
EBITDA ($M)N/A$4.1 >$5.0 $6.4
Cash And Equivalents ($M)N/A$7.0 $8.9 $5.2
Accounts Receivable ($M)N/A$9.2 $9.7 $10.3

Notes:

  • Management said Q2 revenue should align with Q1; actual $35.9M vs $34.8M in Q1 achieved that objective .
  • CFO cited lower interest expense YoY due to significantly decreased debt as a tailwind to net income .

Segment breakdown: Not disclosed in the call/8‑K materials reviewed.

KPIs

KPIQ4 2022Q1 2023Q2 2023
Stores on Network (approx.)N/A~8,000 N/A
Store Pipeline (staging target <12 months)N/A>25,000 >25,000
YE 2023 Store Target13,000 13,000 13,000 reiterated
ACP Sign‑ups via Stores (% of total)N/AN/A<10% (early rollout)
YTD Net Income ($M)N/A$4.5 >$10 (H1 cumulative)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2023At least $190M (Q4’22) No numeric update; growth to accelerate in 2H Maintained
Operating Cash FlowFY 2023Positive during 2023 Reiterated expectation for positive operating cash flow Maintained
Stores on NetworkYE 202313,000 stores Reiterated 13,000 stores Maintained
Q2 Revenue vs Q1Q2 2023Expected to align with Q1 Delivered $35.9M vs $34.8M in Q1 Achieved

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’22 & Q1’23)Current Period (Q2’23)Trend
ACP as growth engineScaling ACP; device procurement moved direct to OEM; YE23 revenue ≥$190M; build in-store sign-ups Continued profitability; YoY margin expansion; competition acknowledged; program longevity viewed favorably Steady, scaled execution
Convenience-store channelBeta tests strong; targeting 13k stores YE23; ~8k on network Partnerships (ParichuteConnect, Boys & Girls Clubs, LeadEx); expect lead contribution late Q3+; in-store LCD devices piloted Accelerating build-out
CAC/Unit economicsShift away from tents; store CAC ~$10–$12 vs field ~$50; device cost down (prior commentary) Store share still <10% but rising; focus on lead conversion protocol and timing Improving mix over time
MVNO (non‑ACP)Positioning to upsell multiple phones per household; plan to launch Weekly execution cadence; green‑light to accelerate rollout; leverage carrier buying power Building toward launch
Macro/store economicsValue positioning helps stores amid credit cost squeeze Owners receptive to transactional products; LCD screens aim to boost throughput and upsell Favorable receptivity
Regulatory/complianceOngoing ACP compliance and audits implied8‑K rebutted critical report; affirmed ACP compliance and 3rd‑party oversight Headline risk managed

Management Commentary

  • “Even with most of the team and developers energy focused on growth, I’m pleased to announce that [Q2] continues the profitability trend... net income of $6 million and EBITDA of $6.4 million.” – Brian Cox .
  • “We expected second quarter revenues to align with first quarter revenues… with even stronger positive cash flow… We expect 13,000 stores to operate on the SurgePays network by the end of the year.” – Brian Cox .
  • “We are uniquely positioned as the only ACP company with its own CRM… and the only [one] able to initiate brick‑and‑mortar sign‑ups for ACP inside convenience stores.” – Brian Cox .
  • “Lower interest expense than a year ago as our… debt has decreased significantly.” – Tony Evers .
  • “This partnership [LeadEx] allows us to communicate directly on an ATM with individuals who might qualify for the ACP.” – Brian Cox .
  • 8‑K: “controls, policies, and procedures to enroll eligible households in [ACP] are vetted and compliant… expecting to report a net income of over $6 million in the second quarter alone.” – Brian Cox .

Q&A Highlights

  • Competition in ACP: Management sees more entrants but emphasizes its unique software-plus-store model as a defensible moat versus tent-based enrollers .
  • LeadEx ATM flow: ATM software flags likely underbanked users; prompts capture phone number; team optimizing follow‑up timing to convert leads effectively .
  • In‑store LCD screens: Company-owned 10” screens at registers to market offerings and collect customer inputs; real‑time centrally managed content aims to boost engagement and reduce clerk training burden .
  • Channel mix status/targets: <10% of ACP sign‑ups via stores in Q2; goal to reach 50/50 store/field by YE alongside absolute subscriber growth .
  • MVNO timing: Non‑ACP prepaid push accelerated with experienced hires and carrier leverage; positioned to undercut incumbent prepaid brands in stores .

Estimates Context

  • We attempted to retrieve S&P Global consensus for SURG Q2 2023 revenue and EPS, but the data could not be fetched at this time due to service limits; as a result, we cannot benchmark reported results versus Street estimates in this recap [GetEstimates error].
  • Management framed Q2 revenue to align with Q1 and achieved that outcome; no explicit quantitative guidance updates were provided for FY revenue beyond prior ≥$190M guide .

Key Takeaways for Investors

  • Profitability run‑rate improving: net income $6.0M and EBITDA $6.4M in Q2, with gross margin expanding to 28% on ACP scale and cost reductions .
  • Sequential stability with YoY acceleration: Q2 revenue $35.9M vs Q1 $34.8M as planned; YoY revenue +28% and gross profit up sharply to $10.0M .
  • Channel strategy is the catalyst: Partnerships (ParichuteConnect, Boys & Girls Clubs, LeadEx) and in‑store LCDs should increase low‑CAC store enrollments from <10% today, potentially improving unit economics and retention versus tents .
  • 2H acceleration setup: Management expects partnership benefits to kick in late Q3; YE target of 13,000 stores remains intact, supporting H2 growth narrative .
  • MVNO upside optionality: Accelerated non‑ACP prepaid rollout could monetize multiple devices per underbanked household via existing store relationships .
  • Working capital dynamic: AR tied to government subsidies typically pays in 30–60 days, with Q2 AR at $10.3M and cash of $5.2M; monitoring cash conversion remains important as volumes scale .
  • Headline risk acknowledged but addressed: July 13 8‑K rebutted allegations, reaffirmed ACP compliance and flagged preliminary Q2 net income >$6M, which aligns with reported results .

Appendices

Other Relevant Press Releases (Q2 2023)

  • Company update addressing allegations and preliminary Q2 net income “over $6 million” (Form 8‑K, July 13, 2023) .

Prior Two Quarters (for trend)

  • Q1 2023: Revenue $34.8M; Gross Profit $7.7M; Gross Margin 22.1%; Op Inc $4.7M; Net Income $4.5M; EPS $0.32; EBITDA >$5M .
  • Q4 2022: Revenue $36.2M; Gross Profit $6.7M; EBITDA $4.1M; Net income ~$3.0M; FY23 guide ≥$190M and 13k stores YE23 .