Smith Micro Software, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The unaudited filing covers Smith Micro’s wireless and mobility software and productivity and graphics businesses.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $9.386 million | $8.528 million | $19.915 million | $16.977 million |
| Gross profit / margin | $7.315 million / 77.9% | $6.077 million / 71.3% | $15.726 million / 79.0% | $12.106 million / 71.3% |
| Operating loss | $1.225 million | $5.681 million | $1.223 million | $10.815 million |
| Net loss | $1.231 million | $5.695 million | $1.241 million | $10.862 million |
| Basic and diluted loss per share | $0.03 | $0.15 | $0.03 | $0.28 |
- Q2 revenue increased 10.1%; first-half revenue increased 17.3%. Wireless revenue was $7.887 million in Q2 and $17.106 million for the half; Productivity & Graphics revenue was $1.499 million and $2.809 million, respectively.
- First-half operating cash use was $1.506 million, compared with $8.542 million in the prior-year period. Cash and cash equivalents were $7.174 million at June 30; short-term investments were $4.321 million.
- Working capital was $14.5 million, as reported by management. Total assets were $24.914 million and stockholders’ equity was $14.502 million. The company reported no debt.
- Current liabilities were $6.786 million. Contractual obligations included $10.624 million of operating lease payments and $1.668 million of purchase obligations.
Material changes versus prior year
- Wireless growth drove the revenue increase. For the first half, the company cited new NetWise business at Comcast and increases at Sprint, along with CommSuite growth; Productivity & Graphics revenue declined 10.2%, partly due to a planned reduction in the low-margin retail channel.
- Gross margin improved 6.6 percentage points in Q2 and 7.7 points for the first half, reflecting higher revenue, lower third-party royalties and savings from restructuring.
- Operating expenses fell year over year, including lower selling and marketing, research and development, and general and administrative costs. No restructuring expense was recorded in 2015; 2014 included $2.435 million for restructuring.
- Cash and cash equivalents declined from $10.165 million at December 31, 2014 to $7.174 million at June 30, 2015, while short-term investments increased from $2.880 million to $4.321 million. Combined cash and investments decreased by approximately $1.550 million.
Outlook, risks and contingencies
- Management said existing cash, cash equivalents and short-term investments were expected to fund operations for at least the next 12 months, based on current revenue and profit projections, the reduced cost structure and prior private-placement proceeds. This is a management expectation, not formal revenue or earnings guidance.
- Management cautioned that adoption and deployment rates for new wireless products were unknown, creating uncertainty about the timing of future wireless revenue. If market acceptance is slower than anticipated, the company may need further cost reductions, additional financing or to review strategic alternatives. Additional capital may be unavailable on acceptable terms and could dilute shareholders.
- Customer concentration is significant: Sprint and affiliates generated 65.2% of Q2 revenue and 64.9% of first-half revenue. The two disclosed major customers represented 85% of accounts receivable at June 30, 2015.
- Operating lease commitments total $10.624 million through 2022. The filing says $5.2 million of remaining lease commitments had been accrued under the 2013 restructuring plan, partly offset by estimated sublease income of $2.8 million.
- A $1.0 million Pennsylvania grant remains subject to an employment commitment, extended to April 30, 2016; failure to meet its conditions could require repayment of some or all of the grant. Management said litigation was not expected to have a material adverse effect, while noting outcomes are inherently unpredictable.
- The company had a $75.7 million U.S. deferred-tax asset reserve as of June 30, 2015, reflecting its cumulative loss history and uncertainty about realizing deferred tax assets. It also noted potential risks from customer demand, competition, Nasdaq listing requirements, capital availability, intellectual property, and security or service interruptions.
Important facts for investors to verify
- Whether wireless growth, particularly business tied to Sprint and Comcast, is recurring and can offset declines in Productivity & Graphics.
- Whether cash use, deferred revenue trends and the stated 12-month liquidity outlook remain consistent with subsequent results.
- Progress in adopting and deploying new wireless products, and any effect on revenue timing or customer concentration.
- Execution of subleases and restructuring-related lease assumptions, as well as the Pennsylvania grant employment deadline and any repayment exposure.
- Share-count changes and potential dilution: shares outstanding were 46,200,940 at June 30, 2015, compared with 45,000,891 at December 31, 2014.