Smith Micro Software, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company provides wireless and mobility software and services, alongside productivity and graphics products. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $11.0m | $12.6m | $31.3m | $46.5m |
| Gross profit / margin | $8.9m / 80.7% | $8.9m / 70.7% | $25.2m / 80.5% | $35.5m / 76.3% |
| Operating loss | ($6.0m) | ($128.0m) | ($22.4m) | ($154.0m) |
| Net loss | ($4.8m) | ($134.5m) | ($21.3m) | ($150.1m) |
| Loss per share, basic and diluted | ($0.13) | ($3.76) | ($0.59) | ($4.22) |
- Nine-month revenue fell 32.7% year over year; Q3 revenue declined 12.8%. Wireless revenue decreased 32.8% for the nine months, while Productivity & Graphics declined 32.5%.
- Gross margin improved, but the company remained loss-making. Lower amortization after 2011 asset impairments contributed to the margin improvement and lower costs.
- Operating expenses fell substantially, reflecting workforce and other cost reductions. The 2011 comparative operating and net losses included $112.9m of goodwill and long-lived asset impairment; 2012 had no impairment charge.
- Cash and cash equivalents were $10.1m and short-term investments $17.0m at September 30, for $27.0m combined. Working capital was $36.9m. The company reported no debt.
- Net cash used in operations was $18.0m for the first nine months, compared with $5.8m used in the prior-year period. Investing activities provided $21.3m, principally from sales of short-term investments; capital expenditures were $0.3m. Cash ended the period at $10.1m, up $2.6m from year-end.
- Total assets were $58.0m, versus $79.9m at December 31, 2011; stockholders’ equity was $45.9m, versus $64.9m. The company had $18.5m in operating lease obligations and $1.0m in purchase obligations.
Material changes and unusual items
- Management attributed the wireless decline mainly to lower demand for core connection-management products as mobile hotspots, tablets, and smartphones increasingly provide WWAN hotspot functionality. Growth in NetWise Director and visual voicemail/voicemail-to-text only partly offset that decline.
- The company recorded $1.2m of non-operating income after a favorable resolution of a disputed Core Mobility milestone payment. The related liability was removed after plaintiffs did not appeal the court victory.
- 2012 restructuring expense was $0.2m for the nine months; the Q3 statement recorded $19,000 of restructuring income from reserve adjustments. Earlier restructuring plans included workforce reductions and facility actions; a February 2012 plan targeted annualized savings of about $7.0m.
- Two Q3 wireless customers represented 46.1% and 19.4% of total revenue, respectively. Two customers represented 39.6% and 20.2% of nine-month revenue, highlighting customer concentration.
- In October 2012, after the reporting date, the company received a $7.5m federal tax refund related to carrybacks of net operating losses to 2009 and 2010.
- Federal securities class-action and related state and federal derivative actions were dismissed with prejudice in 2012. The company noted that other legal proceedings may arise; management did not expect their ultimate disposition to materially affect results, cash flows, or financial position.
Outlook, risks, and contingencies
- Management said existing cash, cash equivalents, and short-term investments should fund working capital and capital expenditure needs for at least the next 12 months. This expectation is subject to execution and market risks.
- No specific revenue or earnings guidance was provided. Management said adoption timing for new wireless products was uncertain; if acceptance is weak or slower than expected, further restructuring may be needed to align costs with revenue and slow cash usage. Additional financing may be sought, with no assurance it would be available on acceptable terms.
- Key risks include continued demand erosion in core connection-management products, uncertain acceptance and timing of new products, competition, cost-control and execution challenges, customer concentration, and the availability of third-party intellectual-property licenses. Management also cited potential impairment or restructuring charges if business or share-price declines continue.
- Lease commitments extend through 2022. The company also disclosed indemnities and guarantees for which it had recorded no liability, and a Pennsylvania grant carrying an employment commitment and potential repayment obligation.
- The company maintained a valuation allowance against U.S. deferred tax assets because of its cumulative losses and uncertainty about future taxable income. 2012 tax expense reflected state minimum and foreign taxes; tax benefits were not recognized.
Important facts for investors to verify
- Whether new wireless products gain market acceptance and offset the continued decline in connection-management revenue.
- Revenue trends and renewal or purchasing behavior among major wireless customers, given the high concentration of sales.
- Cash burn, working-capital needs, and the effect of the $7.5m post-period tax refund on available liquidity.
- Whether cost reductions and restructuring are sufficient to bring expenses in line with revenue, and whether further restructuring or financing becomes necessary.
- The timing and fulfillment of lease, purchase, grant-related, and other contingent obligations.