Smith Micro Software, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Smith Micro develops software and cloud-based services for wireless and cable providers, including SafePath, CommSuite, ViewSpot and NetWise. Wireless is its primary business segment; Graphics products are also reported. The company acquired Circle Media Labs’ operator business on February 12, 2020, adding two customer contracts and parental-control software.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12.629 | $11.782 | $38.883 | $31.068 |
| Gross profit / margin | $11.303 / 89.5% | $10.771 / 91.4% | $35.116 / 90.3% | $28.166 / 90.7% |
| Operating income / margin | $0.196 / 1.6% | $3.480 / 29.6% | $3.533 / 9.1% | $6.474 / 20.9% |
| Net income | $0.161 | $3.567 | $3.585 | $7.051 |
| Diluted EPS | $0.00 | $0.09 | $0.08 | $0.20 |
| Operating cash flow | Not presented by quarter | $8.276 | $4.828 |
At September 30, cash and cash equivalents were $25.872 million, current assets $36.998 million, current liabilities $7.788 million and working capital $29.2 million. The company reported no borrowings; operating lease liabilities totaled $6.528 million, including $1.407 million current. Nine-month investing cash use was $14.905 million, primarily the $13.5 million Circle acquisition payment; financing provided $4.233 million, largely from warrant exercises. Cash declined $2.396 million from year-end 2019.
Changes versus prior comparable periods
- Q3 revenue increased 7% year over year; nine-month revenue increased 25%. Growth was principally in Wireless, including SafePath and revenue from Circle. Graphics revenue declined 29% in both periods.
- Despite revenue growth, Q3 net income fell to $0.161 million from $3.567 million, and nine-month net income fell to $3.585 million from $7.051 million. Operating expenses rose substantially, including research and development, selling and marketing, and general and administrative costs. The 2019 nine-month comparison also included a $0.483 million gain on a software-product sale.
- Wireless revenue was $12.509 million in Q3 and $38.424 million for nine months. SafePath revenue was $6.755 million and $21.948 million, respectively.
- Intangible assets rose to $14.186 million and goodwill to $11.493 million, largely reflecting the Circle acquisition. Common shares outstanding increased from 38.475 million at December 31, 2019, to 41.295 million at September 30, 2020.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expects SafePath revenue to face pressure from COVID-19-related Sprint store closures and fewer marketing initiatives as Sprint is integrated into T-Mobile.
- Management expects research and development expense to increase in coming quarters to accelerate SafePath features for prospective customers; it cautioned that there is no guarantee of winning those contracts.
- The company reported a decline in SafePath subscribers during Q2 and Q3 compared with March 2020, which it attributed to the COVID-19-related economic slowdown. The duration and business impact of the pandemic remain uncertain.
- Customer concentration is significant: T-Mobile and related affiliates accounted for 76% of Q3 revenue and 85% of nine-month revenue; T-Mobile represented 70% of accounts receivable at September 30. The Sprint/T-Mobile merger and Boost Mobile divestiture create risk if customer use of the company’s solutions declines.
- The company retained a valuation allowance against $50.4 million of U.S.-based deferred tax amounts. It reported no goodwill impairment at September 30, 2020.
- Management described possible litigation and customary indemnities, guarantees and commitments, but recorded no liability for the latter and identified no specific material litigation outcome. Disclosure controls were deemed effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether T-Mobile and the divested Boost business continue using Smith Micro’s products, and the effect of customer concentration on revenue.
- SafePath subscriber trends, the impact of COVID-19 and Sprint integration, and whether planned product investment converts into new customer contracts.
- Whether operating expenses and acquisition-related amortization continue to pressure margins despite revenue growth.
- Circle acquisition performance and the carrying values and recoverability of related intangible assets and goodwill.
- Cash use, future liquidity needs, and the effect of share issuance and potential dilution.