Smith Micro Software, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019. Smith Micro develops software and cloud-based services, primarily for wireless and cable providers. Its reported operating segment is Wireless; Graphics revenue is also disclosed separately.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $13.322 million | $8.432 million |
| Gross profit / margin | $12.149 million / 91.2% | $7.516 million / 89.1% |
| Operating income / margin | $1.959 million / 14.8% | $0.062 million / 0.8% |
| Net income | $2.045 million | $0.048 million |
| Diluted EPS | $0.05 | $0.00 |
| Cash from operating activities | $2.261 million | $(0.654) million |
| Cash from investing activities | $(13.136) million | $(4.084) million |
| Cash from financing activities | $2.063 million | $(0.043) million |
At March 31, 2020, cash and cash equivalents were $19.456 million, down from $28.268 million at year-end 2019; working capital was $22.9 million. Total assets were $68.350 million and stockholders’ equity was $52.853 million. The filing reports no borrowings; operating lease liabilities totaled $6.821 million, including $1.273 million current. The company reported no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue increased 58% to $13.3 million. Wireless revenue rose 62% to $13.215 million, mainly from SafePath subscriber growth at Sprint; this included $0.6 million from the newly acquired Circle operator business. Graphics revenue decreased 28% to $0.107 million.
- SafePath revenue was $7.848 million, compared with $1.987 million; CommSuite revenue increased to $4.539 million from $4.357 million. ViewSpot and NetWise revenues declined.
- Gross margin improved to 91.2% from 89.1%, primarily because of lower variable costs and revenue mix. Operating expenses rose to $10.190 million from $7.454 million, including higher staffing, product development and acquisition costs. General and administrative expense included $0.9 million of acquisition expenses.
- Net income increased to $2.045 million from $0.048 million. Operating cash flow improved to $2.261 million from a $0.654 million outflow.
- Cash declined by $8.812 million, primarily reflecting the $12.150 million cash payment for the Circle acquisition, partly offset by operating cash generation and $2.045 million of warrant-exercise proceeds.
Outlook, risks and unusual items
- Circle acquisition: On February 12, 2020, Smith Micro acquired Circle operator-business assets, including a parental-control software license and two customer contracts, for $13.5 million total consideration ($12.150 million cash and a $1.350 million holdback). The preliminary allocation included $11.256 million of intangible assets and $3.696 million of goodwill. Goodwill impairment was not identified at March 31.
- COVID-19: Management said the duration and severity of effects were unknown. In April, SafePath subscribers declined compared with March, which the company believed was related to the economic slowdown. Management said it could defer nonessential capital expenditures, reduce operating costs and materially reduce discretionary spending if needed.
- Customer concentration and merger exposure: Sprint and affiliates generated 88% of Q1 2020 revenue and represented 84% of accounts receivable. Sprint and T-Mobile completed their merger on April 1, 2020; the filing warns that reduced use of the company’s products by the combined company or the planned Boost Mobile divestiture could materially hurt revenue and profitability.
- Other risks: The filing highlights competition, technology and product changes, customer relationships, acquisition integration, cybersecurity and privacy, employee retention, access to capital, profitability and going-concern risks. Litigation outcomes are described as unpredictable, although management did not expect current matters to materially affect results. Indemnities and guarantees are generally unrecorded and may have no stated payment cap.
- The company recorded no income tax expense for Q1 2020 and continued to reserve U.S. deferred tax assets; the disclosed U.S. reserve was $50.4 million. The company was assessing potential effects of the CARES Act.
- There was no specific financial guidance in the provided filing text. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- After quarter-end, warrant exercises in April produced approximately $2.3 million in cash proceeds for approximately 1.0 million shares.
Important facts for investors to verify
- Retention and expansion of Sprint/T-Mobile and Boost-related business, given the customer concentration and merger-related risks.
- Whether the April SafePath subscriber decline continued, and the resulting effect on usage-based revenue.
- Circle contract performance, acquisition integration, final purchase-price allocation and the expected contribution of acquired assets.
- Cash use, operating cash-flow sustainability, and the company’s capacity to fund operations and commitments without additional capital.
- Share dilution from warrant exercises and equity compensation; weighted-average diluted shares rose to 42.194 million from 31.323 million.
- Potential tax effects of the CARES Act and the recoverability of deferred tax assets.