Smith Micro Software, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results are compared with Q1 2013. Smith Micro sells wireless software and services and consumer productivity, graphics, and animation products.
Financial performance
- Revenue: $8.449 million, down 27.2% from $11.602 million. Wireless revenue fell 32.9% to $6.855 million; Productivity & Graphics revenue rose 15.4% to $1.594 million.
- Profitability: Gross profit was $6.029 million, with a 71.4% gross margin versus $9.158 million and 78.9% a year earlier. Operating expenses fell to $11.163 million from $15.259 million. Operating loss narrowed to $5.134 million from $6.101 million; net loss was $5.167 million versus $6.158 million. Basic and diluted loss per share was $0.14 versus $0.17.
- Cash flow: Operating cash use was $3.598 million, compared with $3.886 million. Cash and cash equivalents declined by $3.143 million during the quarter to $8.620 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled approximately $11.2 million; working capital was $11.1 million. The company reported no debt. Contractual obligations included $13.564 million of operating lease payments and $1.591 million of purchase obligations.
- Balance sheet: Total assets were $26.423 million, down from $31.538 million at year-end 2013. Stockholders’ equity declined to $13.712 million from $18.171 million.
Material changes and management commentary
- Wireless revenue declined primarily because of lower demand for legacy connection-manager products and NetWise; CommSuite partially offset the decline. Management said adoption and deployment of newer wireless products remained uncertain as mobile hotspots, tablets, and smartphones increasingly provide connectivity functions.
- Productivity & Graphics growth was attributed primarily to a new Anime Studio release and strong retail sales.
- Cost reductions lowered selling and marketing, research and development, and general and administrative expenses. However, gross margin fell, primarily due to product mix and higher royalty expense.
- Customer concentration remained high: Sprint and affiliates generated 64.2% of Q1 revenue, and FastSpring generated 12.6%. The three customers identified in the filing represented 90% of accounts receivable at March 31, 2014.
Outlook, risks, and contingencies
- Management said existing cash, cash equivalents, and investments were expected to fund operations for at least 12 months, and expressed hope that new products would gain acceptance and the company would return to profitability by year-end. These are forward-looking expectations, not assurances.
- On May 6, 2014, the board approved a restructuring targeting an approximately 20% workforce reduction and about $2.0 million of quarterly cost savings. The company estimated one-time charges of $1.6–$2.0 million in Q2 2014, including $1.2–$1.4 million of cash expenditures, and a negative cash impact of approximately $0.7–$0.9 million. Estimates were preliminary.
- If product adoption is slower than expected, management said it may pursue further cost reductions, seek additional funding beyond Q1 2015, or review strategic alternatives. Funding may be unavailable on acceptable terms; equity financing could dilute shareholders, while other arrangements could require relinquishing technology or market rights.
- Other material risks include reliance on a small number of customers, continued cash losses, execution and customer-service disruption from restructuring, competition, product-market acceptance, and potential NASDAQ delisting if the share price remains below $1.00 for 30 consecutive business days.
- The company disclosed leases extending through 2022 and a Pennsylvania employment-grant commitment, extended to February 28, 2015, that could require repayment of a pro-rata amount if conditions are not met. Litigation outcomes were described as unpredictable; no specific material loss estimate was provided.
Important facts for investors to verify
- Whether wireless revenue stabilizes and newer products gain customer adoption, particularly given the steep decline in legacy products.
- Actual restructuring charges, cash outlays, realized quarterly savings, and any impact on customer retention or operations.
- Cash burn, liquidity runway, and whether management’s stated 12-month funding expectation remains achievable.
- Customer concentration and collections, including Sprint’s share of revenue and the concentration of receivables.
- Progress against the Pennsylvania grant employment commitment and any material developments in litigation or other contingencies.