Business context and reporting period
Smith Micro Software, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company sells wireless and mobility software and services primarily to mobile network operators, device manufacturers and enterprise customers, and also sells consumer productivity and graphics software. Financial figures below are in U.S. dollars; income statement and cash flow comparisons are for Q1 2013 versus Q1 2012.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable / prior period |
|---|---|---|
| Revenue | $11.602 million | $10.114 million; up 14.7% |
| Gross profit and margin | $9.158 million; 78.9% | $7.919 million; 78.3% |
| Operating loss | $6.101 million | $9.615 million |
| Net loss / diluted loss per share | $6.158 million / $0.17 | $9.682 million / $0.27 |
| Cash used in operating activities | $3.886 million | $8.110 million |
| Cash and cash equivalents | $12.751 million | $18.873 million at Dec. 31, 2012 |
| Short-term investments | $15.513 million | $13.328 million at Dec. 31, 2012 |
| Working capital | $30.1 million | Prior comparable value not stated |
| Total assets / stockholders’ equity | $50.112 million / $37.441 million | $54.395 million / $42.662 million at Dec. 31, 2012 |
| Debt | None | As of March 31, 2013 |
Combined cash, cash equivalents and short-term investments were $28.264 million at quarter-end. Operating expenses declined to $15.259 million from $17.534 million; operating and net losses narrowed. The company reported no restructuring expense in Q1 2013, compared with $0.334 million in Q1 2012.
Material changes versus the prior comparable period
- Wireless revenue rose 18.3% to $10.221 million, driven by NetWise Director and higher visual voicemail and voicemail-to-text sales, partly offset by a $1.0 million decline in connection manager products.
- Productivity & Graphics revenue declined 6.4% to $1.381 million.
- Gross margin improved 0.6 percentage points. Selling and marketing fell 4.6%, research and development fell 16.4%, and general and administrative expense fell 10.2%, primarily reflecting lower headcount and other costs.
- Operating cash use improved by $4.224 million year over year. Q1 2013 cash and cash equivalents fell by $6.122 million; investing activities used $2.257 million, primarily for purchases of short-term investments.
- Shares outstanding increased from 35.873 million at year-end to 37.262 million at March 31, 2013. The company made no program repurchases during the quarter; 5,122 shares acquired in March were for restricted-stock tax withholding.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management said existing cash, cash equivalents and short-term investments should fund working capital and capital expenditures for at least the next 12 months.
- Management said adoption and deployment timing for new wireless products is uncertain. Slower-than-expected acceptance could prompt further restructuring; the company also said additional financing might be needed and could not be assured on acceptable terms or at all.
- Customer concentration is material: Sprint and Verizon Wireless represented 55.3% and 15.6% of Q1 revenue, respectively, and the two customers together accounted for 78% of quarter-end receivables. The filing notes uncertainty about proposed transactions involving Sprint, which could affect purchases or competitive conditions.
- Mobile hotspots, tablets and smartphones that provide hotspot functionality are reducing demand for the company’s core connection management products. Other cited risks include competition, product acceptance, execution, intellectual property, cybersecurity and service interruptions.
- Contractual commitments included $17.222 million of operating lease payments and $1.380 million of purchase obligations. A Pennsylvania grant requires the company to employ at least 232 people by December 31, 2013; failure to meet conditions could require pro-rata repayment of the $1.0 million grant.
- The IRS began examining the company’s 2009–2011 U.S. federal tax returns in April 2013. The company disclosed ongoing and potential litigation but did not identify a matter it believed would materially affect results; it cautioned that litigation outcomes are unpredictable.
- About $12.5 million of bank balances were uninsured at March 31, 2013. The company reported no material long-lived asset impairment and stated disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new wireless products can sustain revenue growth and offset continued weakness in connection manager demand.
- Whether revenue and receivables concentration in Sprint and Verizon changes, particularly in light of the proposed Sprint transactions.
- Cash-burn trends, the 12-month liquidity assessment, and whether further restructuring or outside financing becomes necessary.
- Progress toward the Pennsylvania employment commitment and any potential grant repayment, and the outcome of the IRS examination and legal proceedings.
- Share-count changes and equity compensation; confirm that tax-withholding share acquisitions are distinguished from repurchases under the company’s buyback program.