Smith Micro Software, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Smith Micro develops software for wireless and cable service providers. Its core products include SafePath family and connected-device services, CommSuite voicemail and messaging, and ViewSpot retail device demonstrations and analytics. Wireless was its sole reportable segment in 2019. The company divested or phased down non-core product lines, including Graphics, NetWise and QuickLink.
Revenue remained highly concentrated: Sprint and affiliates represented 84% of FY2019 revenue and 92% of year-end accounts receivable. Sprint and T-Mobile had announced a combination expected to close in 2020; the filing warns that reduced use of Smith Micro’s solutions by the combined company could materially harm results.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $43.35 | $26.29 |
| Gross profit / margin | $39.42 / 90.9% | $21.95 / 83.5% |
| Operating income (loss) | $10.11 | ($1.21) |
| Net income (loss) | $10.72 | ($2.74) |
| Diluted EPS | $0.29 | ($0.14) |
| Cash from (used in) operations | $9.99 | ($2.87) |
FY2019 revenue rose 65%; Wireless revenue increased 74% to $42.60 million, driven by SafePath subscriber growth, higher CommSuite demand and ViewSpot revenue following its acquisition. CommSuite revenue was $18.71 million, SafePath $17.78 million and ViewSpot $4.23 million. Graphics revenue declined to $0.74 million.
Fourth-quarter revenue was $12.28 million, gross profit $11.25 million, operating income $3.63 million and net income $3.67 million. Revenue and operating income increased sequentially from the third quarter; reported quarterly diluted EPS was $0.09.
At December 31, 2019, cash and cash equivalents were $28.27 million, working capital was $34.2 million, total assets $61.20 million and total liabilities $12.51 million. No notes payable were shown on the year-end balance sheet; operating lease liabilities were $7.00 million. Operating cash flow was positive, while investing activities used $5.26 million, including acquisition payments and capital expenditures. Financing provided $11.38 million, mainly from $11.46 million of warrant exercises.
Revenue growth and profitability coincided with increased operating expenses: R&D was $11.68 million, up 36%, and selling and marketing was $7.52 million, up 30%. The $10.72 million net profit included a $0.48 million gain on the sale of Poser software. The company reported a $50.4 million valuation allowance against U.S. deferred tax assets.
Material changes and unusual items
- Operating results turned positive: operating income was $10.11 million versus a $1.21 million loss in 2018; net income was $10.72 million versus a $2.74 million loss.
- The January 2019 Smart Retail acquisition, subsequently branded ViewSpot, had a stated purchase price of $9.10 million, funded with $3.97 million cash and $5.13 million in stock.
- The company received $11.46 million from warrant exercises, while common shares outstanding increased from 28.24 million at year-end 2018 to 38.48 million at year-end 2019.
- All outstanding Series B 10% convertible preferred shares were force-converted during the third quarter; none remained outstanding at year-end.
- In June 2019, Smith Micro sold certain Poser assets for $0.5 million and recognized a $0.48 million gain.
- After year-end, in February 2020, the company acquired Circle Media Labs’ operator business for $13.5 million cash and received approximately $2.2 million from warrant exercises.
Outlook, risks and contingencies
Management stated that it expected operating cash generation and existing resources to cover obligations for the next twelve months from issuance of the financial statements. The filing provides no specific revenue or earnings guidance. Management cited better-than-expected revenue growth, profitability and cash generation in 2019, alongside increased investment in hiring and strategic initiatives.
Key risks include dependence on Sprint, uncertain customer decisions following the Sprint–T-Mobile combination, competition and pricing pressure, rapid technology and platform changes, customer concentration in wireless markets, and the company’s history of losses. Management also identifies risks involving security and privacy breaches, service interruptions at hosting facilities, retention of technical staff, acquisition integration, intellectual property claims, access to capital and continued Nasdaq listing. The company noted prior operating losses and negative operating cash flow trends, although it concluded cash generation should meet near-term obligations. Legal proceedings are described, but management did not expect their ultimate disposition to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Whether the combined Sprint–T-Mobile business continued using Smith Micro’s products and maintained revenue levels.
- How much of FY2019 growth came from recurring SafePath, CommSuite and ViewSpot usage, versus acquisition-related or other revenue.
- Whether positive operating cash flow and profitability continued after 2019, and the cash impact of the Circle acquisition.
- The effect of warrant exercises, stock-based compensation and acquisitions on share dilution.
- Whether the company’s large deferred-tax valuation allowance, goodwill and acquired intangible assets remain appropriate as results and forecasts evolve.