Smith Micro Software, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unless noted, amounts are in millions of dollars. The company provides wireless and mobility software and consumer productivity and graphics products.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $8.53 | $10.48 | $16.98 | $22.09 |
| Gross profit / margin | $6.08 / 71.3% | $8.08 / 77.1% | $12.11 / 71.3% | $17.24 / 78.1% |
| Operating loss | $(5.68) | $(7.25) | $(10.82) | $(13.35) |
| Net loss | $(5.70) | $(7.24) | $(10.86) | $(13.40) |
| Loss per share, basic and diluted | $(0.15) | $(0.19) | $(0.28) | $(0.36) |
- Q2 revenue fell 18.7% year over year; first-half revenue declined 23.1%. Wireless revenue was $7.00 million in Q2 (down 17.9%) and $13.85 million in the first half (down 26.1%). Productivity & Graphics revenue was $1.53 million in Q2 and $3.13 million in the first half.
- Gross margin fell 5.8 percentage points in Q2 and 6.8 points for the first half, attributed primarily to lower revenue and product mix.
- Operating expenses declined year over year, but included $2.44 million of restructuring expense in both Q2 and the first half of 2014. The filing describes charges under the 2014 plan as approximately $1.8 million and also records an approximately $0.6 million adjustment to the 2013 plan.
- First-half operating cash use was $8.54 million, versus $8.62 million in 2013. Investing provided $1.80 million, mainly from sales of short-term investments; financing provided $0.02 million. Cash and equivalents decreased $6.73 million to $5.04 million.
Liquidity, debt and balance sheet
- At June 30, cash and equivalents were $5.04 million and short-term investments were $1.22 million, totaling $6.26 million; working capital was $7.9 million. Total assets were $21.68 million, down from $31.54 million at year-end 2013; stockholders’ equity was $9.61 million, down from $18.17 million.
- The company reported no debt. Contractual obligations included $12.92 million of operating lease commitments and $1.27 million of purchase obligations. Existing cash and investments were expected to fund operations for at least the next 12 months, according to management.
Material changes, outlook and risks
- Legacy connection-management products continued to face lower demand as mobile hotspots, tablets and smartphones increasingly provide similar connectivity. CommSuite partially offset declines; new products’ adoption and deployment timing remained uncertain.
- A May 2014 restructuring targeted an approximately 20% workforce reduction and about $2.0 million in quarterly cost savings. Management said implementation was primarily during Q2; the plan had an approximately $0.4 million cash impact in the quarter. The prior 2013 restructuring had generated approximately $16 million in annualized savings.
- Management expressed hope that new products would gain market acceptance and restore profitability. If adoption is slower than expected, the company may further reduce costs, seek additional funding for operations beyond Q2 2015, or consider strategic alternatives. Additional financing may be unavailable or dilutive; inadequate funds could require substantial curtailment of operations or surrender of technology or market rights.
- Customer concentration is significant: Sprint and affiliates represented 70.5% of Q2 revenue (51.5% in Q2 2013); FastSpring represented 12.8%. The three major customers listed in the filing accounted for 92% of receivables at June 30, 2014.
- Other disclosed exposures include long-term leases, a Pennsylvania grant with an employment commitment deadline extended to February 28, 2015, and potential restructuring-related disruption to customers and operations. The filing reports no material change in controls and procedures and no subsequent event requiring disclosure.
Key facts for investors to verify
- Whether new wireless products gain adoption quickly enough to offset continuing declines in legacy connection-management revenue.
- Whether the restructuring achieves the projected $2.0 million quarterly savings without harming customer service, and how the reported restructuring charges reconcile across the 2014 and 2013 plans.
- Cash burn, available liquidity and funding needs relative to management’s stated 12-month runway and potential funding needs beyond Q2 2015.
- Sprint concentration and the effect of changes in demand from major customers on revenue and receivables.
- Progress on the Pennsylvania grant employment commitment and the company’s lease and other contractual obligations.