Smith Micro Software, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in millions of dollars, except per-share data. Smith Micro develops software and cloud services for wireless and cable providers, including family safety, messaging and retail-display products.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $15.9 | $12.9 | $27.3 | $26.3 |
| Gross profit / margin | $12.6 / 78.9% | $11.7 / 90.2% | $22.4 / 82.0% | $23.8 / 90.7% |
| Operating income (loss) | $(5.2) | $1.4 | $(8.4) | $3.3 |
| Net income (loss) | $(5.2) | $1.4 | $(8.4) | $3.4 |
| Diluted EPS | $(0.10) | $0.03 | $(0.17) | $0.08 |
- First-half operating cash flow was $1.5 million, down from $4.3 million; investing cash outflow was $57.1 million, primarily for the Avast acquisition, while financing provided $59.8 million, mainly from the stock offering.
- Cash and cash equivalents were $29.9 million and working capital was $34.2 million at June 30, 2021. Total assets were $137.4 million. The filing reports no conventional borrowings; operating lease liabilities totaled $5.7 million, including $1.4 million current.
Material changes and unusual items
- Q2 revenue increased 23%, largely because of the April acquisition of Avast’s Family Safety Mobile Business; first-half revenue rose 4%. Growth was partly offset by fewer SafePath subscribers, which management associated mainly with reduced customer marketing initiatives.
- Operating expenses rose substantially: Q2 total operating expenses were $17.8 million versus $10.3 million a year earlier. The company cited acquisition-related costs, increased headcount, intangible amortization and professional fees. Gross margin also declined, reflecting higher costs to operate the acquired business and integrated SafePath/Circle applications.
- On April 16, Smith Micro acquired the Family Safety Mobile Business for a stated purchase price of $72.7 million: $63.2 million cash, $8.4 million stock and $1.1 million initial contingent consideration. The preliminary allocation included $33.5 million of intangible assets and $27.8 million of goodwill. The agreement provides for earn-out payments of up to $14.0 million.
- The March 2021 public offering issued about 9.5 million shares at $6.85 each, raising net proceeds of approximately $59.7 million. Shares outstanding increased to about 53.6 million at quarter-end from 41.2 million at year-end 2020.
- A Circle-acquired customer contract was terminated effective April 15, 2021, with wind-down services expected through Q2 2022. The company recorded a $1.5 million intangible-asset impairment charge in the first half.
Outlook, commentary and risks
No quantified revenue or earnings guidance is provided. Management expects family-safety-platform revenue to increase with the Avast business, partly offset by reduced SafePath subscribers as its largest customer continues acquisition integration. Management also noted that COVID-19-related disruption had affected subscriber levels and delayed customer decisions, and that the duration and severity of its effects remained uncertain.
- Customer concentration is significant: two customers represented 82% of Q2 revenue and 79% of first-half revenue; three customers represented 86% of receivables at June 30.
- Other identified risks include realizing acquisition benefits, competition and rapid technology changes, customer and platform dependencies, cybersecurity and privacy incidents, software defects, COVID-19 effects, and access to future capital.
- The filing describes legal proceedings as potentially unpredictable but says management did not believe their disposition would materially adversely affect the company. Indemnities and guarantees are disclosed without a recorded liability; their maximum potential payments may be unlimited.
- Disclosure controls were assessed as effective at June 30, 2021, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether SafePath subscriber trends and customer marketing activity improve, and whether the largest customer’s integration affects revenue.
- Avast acquisition integration, revenue contribution, final purchase-price allocation, and any earn-out payments up to $14.0 million.
- Revenue and customer concentration, particularly the reliance on a small number of major customers.
- Whether margins and operating cash flow recover as acquisition-related costs and amortization affect results.
- The effects of the Circle contract wind-down and the remaining related intangible asset balance.