Smith Micro Software, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; filed November 3, 2011. Unaudited consolidated financial statements. The company develops software primarily for wireless operators, device makers and consumers.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $12.6 | $34.0 | $46.5 | $95.2 |
| Gross profit / margin | $8.9 / 70.7% | $30.2 / 88.9% | $35.5 / 76.3% | $83.8 / 88.0% |
| Operating income (loss) | $(128.0) | $5.9 | $(154.0) | $12.5 |
| Net income (loss) | $(134.5) | $3.1 | $(150.1) | $6.6 |
| Diluted EPS | $(3.76) | $0.09 | $(4.22) | $0.19 |
| Operating cash flow | Not separately provided for the quarter | $(5.8) | $15.4 |
- Q3 revenue fell 62.9% year over year. Wireless revenue declined 67.4% to $10.2 million; Productivity & Graphics revenue declined 9.6% to $2.4 million. Nine-month revenue declined 51.1%, with Wireless down 53.8%.
- Q3 gross margin fell 18.2 percentage points. Management attributed the decline primarily to lower revenue and fixed-cost absorption, datacenter costs for backup and messaging products, and higher third-party royalties.
- Q3 operating expenses include $112.9 million of impairment charges: $94.2 million for goodwill and $18.7 million for long-lived assets. The company also recorded $1.0 million of restructuring expense. These unusual charges drove the reported operating and net losses.
- At September 30, cash and cash equivalents were $20.1 million and short-term investments were $34.0 million, totaling $54.1 million. Working capital was $60.6 million. The company had no debt; current liabilities were $12.6 million. Total assets were $89.8 million versus $234.9 million at year-end 2010, and stockholders’ equity was $73.4 million versus $218.3 million.
- Cash from operations was negative $5.8 million for the first nine months, compared with positive $15.4 million in 2010. Capital expenditures were $13.1 million, largely for datacenter and Pittsburgh facility expansion. Cash and cash equivalents increased $2.2 million during the period, partly because the company used $20.7 million of short-term investments.
- Contractual obligations included $20.5 million of operating leases and $0.7 million of purchase obligations. Approximately $15.9 million of bank balances were uninsured.
Material changes and management commentary
- Management attributed the sharp Wireless decline to reduced demand for core connection-management products as mobile hotspots, tablets and smartphones increasingly provide connectivity functions. New products intended to address the shift were in trials but had generated no revenue by quarter-end.
- Wireless customers accounted for 24.8%, 20.6% and 11.6% of Q3 revenue; for the first nine months, the three largest customers accounted for 23.5%, 19.6% and 11.9%. The filing identifies customer concentration and customer purchasing decisions as material risks.
- Research and development expense increased 8.0% for the first nine months as the company invested in new products. General and administrative expense rose 10.8%, primarily reflecting facility costs and legal expenses.
- After three consecutive quarters of declining revenue and profitability and a depressed stock price, the company tested both reporting units for impairment. It recorded the full $94.2 million goodwill impairment and $18.7 million long-lived-asset impairment; goodwill and acquired intangible assets were reduced to zero.
- The company recorded a $48.1 million valuation allowance against U.S. deferred tax amounts, citing cumulative losses and uncertainty about realizing future tax benefits. The nine-month income tax result was a $3.9 million benefit; Q3 tax expense was $6.5 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said existing cash and investments should fund working capital and capital expenditure needs for at least the next 12 months, while cautioning that additional financing might be needed and may not be available on acceptable terms.
- An October 18, 2011 restructuring plan targets organizational realignment, facility consolidation or closure, and workforce reductions of approximately 20% worldwide. Management estimated $2.0–$2.5 million of charges, primarily in Q4 2011, mostly cash expenditures.
- On November 2, 2011, the board authorized repurchases of up to 5 million shares over as long as two years. The authorization does not require repurchases and may be changed or suspended.
- The filing describes a purported securities class action and state and federal shareholder derivative actions alleging misleading statements about business prospects and financial results. The company intends to defend the cases; potential damages are unspecified, and the filing says an unfavorable outcome could materially affect results or cash flows.
- Key risks include continued declines in core product demand, failure of new products to gain adoption, intense competition and rapid technology change, reliance on a small number of customers, possible further impairment or restructuring charges, litigation costs and uncertain financing needs. The company reported effective disclosure controls as of September 30, 2011.
Important facts for investors to verify
- Whether new wireless products move from trials to commercial adoption and offset continuing declines in legacy connection-management revenue.
- Customer concentration, order timing and any further change in revenue or gross margin.
- Cash burn, capital spending, liquidity against lease obligations, and management’s stated 12-month funding outlook.
- The assumptions supporting the impairment analysis and deferred-tax valuation allowance, and whether further write-downs are required.
- Execution, costs and cash timing of the workforce and facility restructuring; litigation developments and insurance coverage.
- Whether the announced share repurchase is carried out, given negative operating cash flow and the company’s other funding needs.