Smith Micro Software, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results; financial 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 manufacturers, and enterprise customers. It also sells productivity and graphics software. Wireless is the dominant business segment.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $10.1 | $17.8 | Down 43.2% |
| Gross profit / margin | $7.9 / 78.3% | $14.0 / 78.8% | Gross profit down 43.5%; margin down 0.5 percentage point |
| Operating expenses | $17.5 | $27.0 | Down 35.1% |
| Operating loss | $(9.6) | $(13.0) | Loss narrowed |
| Net loss | $(9.7) | $(7.8) | Loss widened |
| Basic and diluted loss per share | $(0.27) | $(0.22) | Loss per share increased |
| Net cash used in operations | $(8.1) | $(2.3) | Cash use increased |
- Wireless revenue was $8.6 million, down 46.3%; Productivity & Graphics revenue was $1.5 million, down 15.3%.
- Cash and cash equivalents were $16.2 million and short-term investments were $21.4 million at March 31, 2012, totaling $37.6 million. Working capital was $44.9 million.
- The company reported no debt. Total assets were $69.7 million; stockholders’ equity was $56.1 million.
- Cash rose $8.7 million during the quarter, primarily because $17.1 million of net cash came from investing activities, including proceeds from short-term investments. Operating activities consumed $8.1 million.
Changes, outlook, and notable items
- Revenue declined mainly because demand for core connection-management products weakened as mobile hotspots, tablets, and smartphones increasingly provide hotspot functionality. Management said adoption and deployment of newer wireless products—and therefore the timing of future wireless revenue—remain materially uncertain.
- Lower headcount and other cost reductions reduced selling and marketing, research and development, and general and administrative expenses. The company recorded $0.3 million of Q1 restructuring expense. A February 2012 workforce and cost reduction was expected to produce approximately $7.0 million in annualized savings.
- Q1 2012 included $0.1 million of income tax expense, versus a $5.2 million tax benefit in Q1 2011. The company said it could not record U.S. income tax benefits amid consecutive quarterly losses; it had recorded a $53.2 million valuation allowance on U.S. deferred tax amounts in 2011.
- Management expected existing cash, cash equivalents, and short-term investments to fund working capital and capital expenditures for at least the next 12 months, and anticipated considerably lower 2012 capital expenditures than in 2011. No specific revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Customer concentration is substantial: two Wireless customers and their affiliates represented 32.1% and 25.7% of Q1 2012 revenue, respectively.
- Contractual obligations included $19.8 million of operating lease payments and $1.7 million of purchase obligations. A Pennsylvania grant of $1.0 million carries a commitment to employ at least 232 people within three years; failure to meet conditions may require repayment of a pro-rata amount.
- The company disclosed a securities class action and state and federal shareholder derivative actions, all seeking unspecified damages or other relief. Management intends to defend them; it warned that an unfavorable resolution could materially affect results, cash flows, or financial position.
- During the quarter, the company repurchased 125,000 shares for $0.3 million under its authorization to repurchase up to 5 million shares over as many as two years. The filing also lists a stockholder rights agreement dated April 24, 2012.
- Management reported disclosure controls were effective as of March 31, 2012 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new wireless products can offset continued weakness in connection-management revenue and customer concentration risk.
- Whether the cost reductions deliver the stated annualized savings without impairing product development or customer support.
- The sustainability of liquidity given operating cash burn, and the pace of any further share repurchases.
- Developments and potential financial exposure in the securities and derivative litigation, plus compliance with the Pennsylvania employment grant conditions.
- Whether deferred tax assets remain subject to a valuation allowance and how tax treatment affects comparisons with prior periods.