Smith Micro Software, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with Q1 2014. Unaudited consolidated financial statements. Smith Micro provides wireless software and productivity and graphics products.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Revenue | $10.529 million | $8.449 million; up 24.6% |
| Gross profit / margin | $8.411 million / 79.9% | $6.029 million / 71.4% |
| Operating income (loss) | $2,000 | $(5.134) million |
| Net loss | $(10,000); $(0.00) per diluted share | $(5.167) million; $(0.14) per diluted share |
| Operating cash flow | $735,000 provided | $3.598 million used |
At March 31, 2015, cash and cash equivalents were $9.977 million, short-term investments were $3.800 million, working capital was $15.0 million, and total assets were $26.285 million. The company reported no debt. Current liabilities were $7.194 million. Total contractual obligations were $13.136 million, including $11.161 million of operating lease obligations and $1.975 million of purchase obligations.
Changes and operating drivers
- Wireless revenue rose 34.5% to $9.219 million, mainly on NetWise growth, including Comcast and Sprint, and higher CommSuite revenue. Productivity & Graphics revenue fell 17.8% to $1.310 million, with no new releases in the quarter.
- Gross margin improved 8.5 percentage points, attributed to higher revenue, product mix, and restructuring-related cost reductions.
- Operating expenses fell to $8.409 million from $11.163 million. Selling and marketing, research and development, and general and administrative expenses declined, primarily due to restructuring and lower headcount; G&A also benefited from lower depreciation.
- Operating cash flow improved year over year, but included a $673,000 state income tax refund and working-capital movements. A $1.167 million reduction in deferred revenue partly offset cash inflows.
- Cash and cash equivalents declined $188,000 from year-end 2014; short-term investments increased from $2.880 million to $3.800 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said existing cash, investments, the reduced cost structure, and proceeds from a 2014 private placement were expected to fund operations for at least 12 months. Slower-than-anticipated product adoption could require further cost reductions, additional capital, or review of product-line strategic alternatives; additional funding may not be available on acceptable terms.
- Management cited material uncertainty around the timing of future wireless revenue because new products were early in market adoption and deployment. Sprint and affiliates generated 64.7% of Q1 revenue; Comcast accounted for 10.8%. The three identified major customers represented 90% of accounts receivable.
- The company had $11.161 million in operating lease commitments. It had accrued $5.4 million of remaining lease expense under the 2013 restructuring plan, partly offset by estimated sublease income of $2.8 million.
- A $1.0 million Pennsylvania employment grant remained a contingency: the employment deadline had been extended to February 28, 2015, and the company had requested another extension. Failure to satisfy grant conditions could require repayment of a pro-rata amount; the grant was recorded as a liability pending resolution.
- The company maintained a valuation allowance against $75.7 million of U.S. deferred tax amounts, citing its cumulative-loss history and uncertainty about future taxable income. It also disclosed ordinary-course litigation and unrecorded indemnities and guarantees; management did not expect litigation to have a material adverse effect, but noted outcomes are unpredictable.
- Other stated risks include customer concentration, competition, uncertain product-market adoption, potential Nasdaq delisting, dependence on key personnel and strategic relationships, intellectual-property and security risks, and possible need for additional capital. Management reported no material change in risk factors from its 2014 Form 10-K.
Important facts for investors to verify
- Whether wireless growth, particularly from Sprint and Comcast, is recurring and sustainable, and whether new products gain market acceptance.
- Whether reported operating cash generation persists without reliance on tax refunds or favorable working-capital changes.
- The status and potential repayment exposure of the Pennsylvania grant, and the realized offset from subleases against lease obligations.
- Whether the company’s cash and investments remain adequate to support operations for at least 12 months if revenue or product adoption disappoints.
- The effects of customer concentration, share issuance and equity compensation: shares outstanding increased to 46.190 million from 45.001 million at year-end 2014.