Smith Micro Software, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts below are in millions of dollars unless stated otherwise.
Business context
Smith Micro provides wireless and mobility software and services to mobile network operators, device makers and enterprises, as well as consumer productivity and graphics products. Wireless generated $7.2 million of Q3 revenue; Productivity & Graphics generated $1.5 million.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $8.7 | $11.0 | $30.8 | $31.3 |
| Gross profit / margin | $6.3 / 71.5% | $8.9 / 80.7% | $23.5 / 76.2% | $25.2 / 80.5% |
| Operating loss | $(13.0) | $(6.0) | $(26.3) | $(22.4) |
| Net loss | $(13.0) | $(4.8) | $(26.5) | $(21.3) |
| Basic and diluted loss per share | $(0.35) | $(0.13) | $(0.72) | $(0.59) |
- At September 30, cash and cash equivalents were $10.9 million and short-term investments were $7.2 million, totaling $18.1 million. Working capital was $12.9 million; the company reported no debt.
- For the first nine months, operating cash use was $13.4 million, versus $18.0 million in 2012. Investing provided $5.3 million, primarily from sales of short-term investments, while capital expenditures were $0.8 million. Cash and equivalents declined $8.0 million from year-end 2012 to $10.9 million.
- Total assets were $35.3 million at September 30, down from $54.4 million at December 31, 2012. Current liabilities rose to $14.3 million from $8.2 million, including accrued liabilities of $9.9 million versus $4.8 million.
Material changes and management commentary
- Q3 revenue fell 20.6% year over year, mainly because of lower sales of legacy connection manager and NetWise products; CommSuite growth partly offset the declines. Nine-month revenue decreased 1.5%: Wireless revenue was down 3.8%, while Productivity & Graphics revenue increased 13.1%.
- Gross margin contracted 9.2 percentage points in Q3 and 4.3 points for the nine-month period, reflecting lower revenue and product mix. Q3 cost of revenue increased 17.5% year over year.
- On July 25, 2013, the company approved a restructuring that reduced worldwide headcount by approximately 26% and included organizational realignment and facility consolidations or closures. It recorded $5.6 million of Q3 charges: $3.2 million for lease terminations, $1.2 million severance, $1.0 million asset write-offs and $0.2 million other costs. Management estimated annualized savings of approximately $14 million. About $1.7 million of cash costs were expected to be paid in 2013, with the remainder in future years.
- Management believed existing cash, equivalents and short-term investments would fund working capital and capital expenditures for at least 12 months. It cautioned that new wireless products were early in adoption and timing of future wireless revenue was uncertain; slower-than-expected acceptance could prompt further restructuring. Additional financing might be needed, with no assurance it would be available on acceptable terms.
Risks, contingencies and unusual items
- Revenue concentration is substantial: Sprint and affiliates represented 61.5% of Q3 revenue and 55.6% for the first nine months; Verizon Wireless represented 9.8% and 14.9%, respectively. The three largest named customers accounted for 88% of receivables at September 30.
- On November 7, 2013, Nasdaq notified the company that its share price had been below the $1 minimum bid for 30 consecutive business days. It had until May 6, 2014 to regain compliance, subject to possible extension; delisting remained a risk.
- Operating lease commitments totaled $15.9 million, and purchase obligations were $1.0 million. The company had accrued $6.7 million of remaining lease commitments under the restructuring plan, partially offset by estimated sublease income of $4.8 million.
- A Pennsylvania grant of $1.0 million carries an employment commitment through December 31, 2013 and potential repayment if conditions are not met. The IRS began examining the company’s 2009–2011 federal returns in April 2013. Management stated that various legal proceedings were not expected to have a material adverse effect, but noted litigation is unpredictable.
- Management reported effective disclosure controls as of September 30, 2013 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether new wireless products offset continued declines in legacy connection manager sales, and whether customer device launches sustain NetWise and CommSuite demand.
- Whether the restructuring delivers the stated approximately $14 million annualized savings without impairing customer service, product knowledge or future revenue.
- Cash burn, the timing of restructuring payments, and management’s stated liquidity runway, particularly if revenue or product adoption disappoints.
- Sprint-related exposure, including the effect of customer concentration and the completed SoftBank–Sprint merger on orders and pricing.
- Progress toward Nasdaq’s minimum-bid-price compliance deadline and any consequences for the listing.
- Compliance with the Pennsylvania grant employment terms, lease and sublease estimates, and outcomes of the IRS examination and legal matters.