Smith Micro Software, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The company sells wireless and mobility software, as well as productivity and graphics products. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $9.586 | $9.448 | $29.501 | $26.425 |
| Gross profit / margin | $7.627 / 79.6% | $7.247 / 76.7% | $23.353 / 79.2% | $19.353 / 73.2% |
| Operating loss | $(0.768) | $(1.144) | $(1.991) | $(11.959) |
| Net loss | $(0.770) | $(1.142) | $(2.011) | $(12.004) |
| Loss per share, diluted | $(0.02) | $(0.03) | $(0.04) | $(0.31) |
- Revenue mix: Wireless revenue was $8.302 million in Q3 and $25.408 million for nine months; Productivity & Graphics contributed $1.284 million and $4.093 million, respectively.
- Cash flow: Operating cash use was $0.331 million for nine months, compared with $7.381 million in 2014. Investing activities used $1.330 million; financing provided $0.027 million. Cash and cash equivalents declined $1.634 million to $8.531 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $12.611 million; working capital was $14.4 million. The company reported no debt. Total assets were $24.849 million and stockholders’ equity was $14.149 million at September 30.
- Commitments: Contractual obligations totaled $11.720 million, including $10.054 million of operating leases and $1.666 million of purchase obligations. No separate interest-bearing debt was reported.
Material changes versus the prior comparable periods
- Q3 revenue increased 1.5%; nine-month revenue increased 11.6%. Nine-month Wireless revenue rose 14.4%, mainly from NetWise growth, including new Comcast business and increased Sprint revenue, and higher CommSuite revenue. Productivity & Graphics revenue declined 3.0% for the nine months.
- Gross margin improved 2.9 percentage points in Q3 and 6.0 points for the nine months, reflecting higher revenue and lower costs. Nine-month cost of revenue declined 13.1%.
- Nine-month operating expenses fell to $25.344 million from $31.312 million. The 2014 comparison included $2.435 million of restructuring expense; no restructuring expense was recorded in the first nine months of 2015.
- Despite substantial improvement in the nine-month loss, the company remained loss-making. Shares outstanding increased to 46.094 million from 45.001 million at year-end 2014; weighted-average shares were also higher year over year.
Outlook, commentary, risks and unusual items
- Management stated that existing cash, cash equivalents and short-term investments, together with its cost structure and prior financing, should fund operations for at least the next 12 months, based on current revenue and profit projections. This is not a guarantee; slower product acceptance could prompt further restructuring, additional financing, strategic alternatives, or curtailment of operations.
- Management said adoption and deployment timing for new wireless products was uncertain. No specific numerical revenue or earnings guidance was provided in the filing text.
- Customer concentration is significant: Sprint and affiliates represented 72.8% of Q3 revenue and 67.5% of nine-month revenue. Sprint and FastSpring together represented 86% of accounts receivable at quarter-end.
- The company had until March 8, 2016 to regain Nasdaq’s $1.00 minimum bid-price compliance, requiring the bid to meet or exceed that level for at least 10 consecutive business days. Failure could result in delisting and impair liquidity, access to capital and the share price.
- On October 16, 2015, the company adopted a shareholder rights agreement. Generally, it imposes a significant penalty on an unapproved person or group acquiring 20% or more of common shares and could discourage an unapproved takeover proposal.
- A Pennsylvania grant of $1.0 million carries an employment commitment, extended to April 30, 2016; failure to satisfy conditions could require repayment of a pro-rata portion. Litigation outcomes are inherently uncertain, and the company had not recorded liabilities for specified indemnities and guarantees.
- Approximately $75.7 million of U.S. deferred tax assets remained reserved. The company also disclosed $8.2 million of uninsured bank balances at September 30, 2015.
Important facts for investors to verify
- Whether wireless product launches gain adoption and offset declines in legacy connection-manager revenue, and how much growth depends on Sprint and Comcast.
- Whether operating cash use remains contained and management’s stated 12-month liquidity outlook holds, particularly given lease and purchase commitments.
- Progress toward Nasdaq’s minimum bid-price requirement before the March 8, 2016 deadline.
- Whether the Pennsylvania employment-grant conditions are met by April 30, 2016, and whether any litigation or indemnity exposure changes.
- The potential impact of share issuance, the shareholder rights agreement, and the adoption of the new revenue-recognition standard.