Smith Micro Software, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial amounts below are in millions of dollars unless noted. Smith Micro develops mobile software and cloud services, principally for wireless and cable providers.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $16.4 | $12.6 | $43.7 | $38.9 |
| Gross profit / margin | $12.8 / 77.6% | $11.3 / 89.5% | $35.1 / 80.4% | $35.1 / 90.3% |
| Operating income (loss) | $(18.5) | $0.2 | $(26.9) | $3.5 |
| Net income (loss) | $(18.6) | $0.2 | $(27.0) | $3.6 |
| Diluted EPS | $(0.34) | $0.00 | $(0.54) | $0.08 |
- Q3 revenue increased 30%; nine-month revenue increased 13%. Management attributed the growth primarily to the April acquisition of Avast’s Family Safety Mobile Business, partly offset by lower SafePath subscribers.
- Revenue mix shifted: Q3 Family Safety Mobile revenue was $12.0 million versus $6.8 million; CommSuite was $3.5 million versus $4.5 million; ViewSpot was $1.0 million versus $1.2 million.
- Gross margin fell year over year in both periods, reflecting acquired-business costs and higher operating costs for the integrated SafePath/Circle platform, as well as higher SafePath platform costs.
- Operating expenses included a $12.9 million charge for the increased fair value of Avast earn-out consideration. The charge followed a customer contract extension becoming probable. The remaining earn-out was earned and paid in November 2021; no further earn-out payments were due.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $32.4 million, versus $25.8 million at December 31, 2020; working capital was $21.9 million. Current assets were $46.9 million and current liabilities $25.0 million.
- Nine-month operating cash flow was $2.3 million, down from $8.3 million. Investing used $57.5 million, primarily for the acquisition; financing provided $61.9 million, primarily from a $59.7 million net stock offering and $2.1 million from warrant exercises.
- The balance sheet reports no borrowings; it does report operating lease liabilities of $6.3 million, including $1.4 million current. The filing does not identify a separate debt facility.
- Shares outstanding rose to 54.6 million from 41.2 million at year-end, reflecting the offering, acquisition consideration and other equity activity.
Material changes, outlook and risks
- On April 16, 2021, Smith Micro acquired Avast’s Family Safety Mobile Business for a stated purchase price of $72.7 million: $63.2 million cash, $8.4 million in stock and initially $1.1 million contingent consideration. The preliminary allocation included $33.5 million of intangible assets and $27.3 million of goodwill. The business contributed $13.0 million revenue and $3.8 million cost of revenue from acquisition through September 30.
- Management expects overall family safety platform revenue to increase in future quarters, citing its position with U.S. Tier 1 carrier customers and the acquisition. The filing provides no quantified revenue or earnings guidance.
- Management reported reduced SafePath subscribers, which it attributed largely to reduced marketing initiatives by its largest customer. COVID-19-related disruption had also contributed to subscriber declines and ViewSpot customer decision delays; pandemic effects remained uncertain.
- Customer concentration is significant: two customers generated 82% of Q3 2021 revenue and 80% of nine-month revenue. Four customers represented 92% of accounts receivable at September 30.
- A Circle-acquired customer contract was terminated effective April 15, 2021. Smith Micro expected to provide wind-down services through Q2 2022 and recorded a $1.5 million impairment charge on the related contract intangible during the nine months.
- Other disclosed risks include acquisition integration and benefit realization, competition, technology and platform dependencies, security and privacy breaches, and the uncertain effects of COVID-19. The company also reported general litigation exposure but no specific material proceeding in the supplied filing text.
Important facts for investors to verify
- Whether the acquired Family Safety Mobile Business delivers the expected growth and can be integrated without sustained margin pressure.
- Trends in SafePath subscribers, customer marketing activity, and revenue dependence on a small number of customers.
- The cash and operating impact of the Avast earn-out payment and the extent to which reported losses reflect acquisition-related and other unusual costs.
- Cash generation and liquidity as acquisition-related costs, customer contract wind-downs and operating expenses continue.
- Potential further changes to acquisition purchase-price allocations, goodwill or intangible-asset values; the filing states the purchase-price allocation was preliminary.