Smith Micro Software, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Dollar amounts are in millions unless otherwise noted.
Business context
Smith Micro sells wireless and mobility software and services to mobile network operators, device manufacturers and businesses, and productivity and graphics software through consumer channels. Its reporting units are Wireless and Productivity & Graphics.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $10.5 | $10.2 | $22.1 | $20.3 |
| Gross profit / margin | $8.1 / 77.1% | $8.4 / 82.3% | $17.2 / 78.1% | $16.3 / 80.3% |
| Operating loss | $(7.2) | $(6.8) | $(13.3) | $(16.4) |
| Net loss | $(7.2) | $(6.8) | $(13.4) | $(16.5) |
| Loss per share, diluted | $(0.19) | $(0.19) | $(0.36) | $(0.46) |
- Q2 revenue rose 3.1%; Wireless revenue declined 2.9% to $8.5 million, while Productivity & Graphics increased 40.4% to $2.0 million. For the first half, revenue rose 8.9%, including Wireless growth of 7.6% and Productivity & Graphics growth of 16.4%.
- Q2 gross margin fell 5.2 percentage points, primarily due to product mix and higher cost of revenues. First-half margin declined 2.2 points for the same stated reason.
- First-half operating expenses declined to $30.6 million from $32.7 million, principally on lower R&D and general and administrative expenses. Q2 operating expenses were slightly higher year over year.
- Operating cash used was $8.6 million in the first half, versus $14.0 million in the comparable 2012 period. Investing activities used $1.1 million; financing provided $0.02 million. Cash and cash equivalents decreased by $9.7 million during the half.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $9.2 million and short-term investments were $14.3 million, totaling $23.5 million. Working capital was $24.7 million.
- Total assets were $43.5 million, down from $54.4 million at December 31, 2012; stockholders’ equity was $31.2 million, down from $42.7 million.
- The company reported no debt. Contractual obligations included $16.6 million of operating lease obligations and $1.5 million of purchase obligations.
Changes, outlook and risks
- Management said mobile hotspots, tablets and smartphones that can function as hotspots are reducing demand for legacy connection-management products in North America. New wireless products address this shift, but adoption and deployment timing remain uncertain.
- Management believed available cash, cash equivalents and short-term investments would fund working capital and capital expenditures for at least 12 months. It cautioned that slower-than-expected product adoption could require further restructuring and that additional financing, if needed, might not be available on acceptable terms.
- On July 25, 2013, after quarter-end, the board approved a restructuring expected primarily in Q3: workforce reductions of approximately 25–30%, organizational realignment and facility consolidations or closures. Estimated charges were $5.0–$6.8 million, including approximately $3.5 million for lease or rental terminations; these preliminary estimates excluded potential savings.
- Customer concentration is substantial: Sprint represented 51.2% of Q2 revenue and 53.3% of first-half revenue; Verizon Wireless represented 18.4% and 16.9%, respectively. The three major customers listed in the filing accounted for 91% of receivables at June 30. The filing also cited uncertainty following the completed SoftBank-Sprint merger.
- Other risks include execution and customer-service effects of restructuring, competition, product acceptance, intellectual-property matters, and potential litigation outcomes. The IRS began examining the company’s 2009–2011 federal returns in April 2013. A Pennsylvania grant carries a commitment to employ at least 232 people by December 31, 2013, with potential repayment if conditions are not met.
- No formal revenue or earnings guidance is provided. Management stated that Q2 and first-half results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether new wireless products gain adoption quickly enough to offset declining legacy connection-management demand.
- Actual restructuring charges, cash payments, savings, workforce impact and execution risks versus preliminary estimates.
- Cash use and liquidity runway, particularly given continuing losses and $18.0 million of disclosed contractual obligations.
- Revenue and receivable exposure to Sprint, Verizon Wireless and FastSpring, including any effects from the Sprint merger.
- Outcome of the IRS examination and compliance with the Pennsylvania employment-grant conditions.