Business context and reporting period
Smith Micro Software, Inc. filed its Form 10-K for the fiscal year ended December 31, 2013. The company sells wireless connectivity, device-management and communications software, alongside consumer productivity and graphics products. Its reportable segments are Wireless and Productivity & Graphics.
Unless otherwise noted, financial amounts below are in millions of dollars. The filing also reports fourth-quarter results, but this is an annual filing.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $42.7 | $43.3 |
| Gross profit / margin | $33.0 / 77.3% | $34.9 / 80.5% |
| Operating loss | ($27.8) | ($27.0) |
| Net loss | ($28.0) | ($25.5) |
| Loss per share, diluted | ($0.76) | ($0.71) |
| Cash used in operations | ($16.6) | ($12.8) |
| Capital expenditures | $0.8 | $0.3 |
- Wireless revenue was $35.9 million, down 3.5%; Productivity & Graphics revenue was $6.8 million, up 10.5%.
- Operating expenses totaled $60.8 million, including $5.6 million of restructuring charges. Research and development expense was $21.3 million.
- At year-end, cash and cash equivalents were $11.8 million and short-term investments were $3.1 million, totaling $14.8 million, versus $32.2 million a year earlier. Working capital was $14.5 million. The company reported no debt.
- Total assets were $31.5 million, total liabilities $13.4 million, and stockholders’ equity $18.2 million at December 31, 2013.
- Operating lease and purchase obligations totaled $17.1 million, including $15.3 million of operating leases. No off-balance-sheet arrangements were reported.
Fourth-quarter 2013 revenue was $11.8 million, gross profit $9.5 million, operating loss $1.5 million and net loss $1.5 million. In fourth-quarter 2012, those figures were $12.0 million, $9.7 million, $4.6 million and $4.1 million, respectively.
Material changes versus prior periods
- Annual revenue declined 1.5% from 2012, following a 25.0% decline in 2012 from 2011. In 2013, lower legacy connection-manager sales reduced Wireless revenue, partly offset by higher CommSuite and NetWise sales; Poser and Manga Studio growth lifted Productivity & Graphics revenue.
- Gross margin fell 3.2 percentage points in 2013, primarily due to revenue and product mix. Operating loss widened by $0.8 million and net loss by $2.5 million year over year.
- Selling, research and development, and general and administrative expenses all declined, but the $5.6 million 2013 restructuring charge was substantially above the $0.2 million charge in 2012.
- Cash used in operations increased by $3.8 million. Cash and short-term investments fell by $17.4 million year over year.
Outlook, management commentary and risks
- Management said existing cash, cash equivalents and short-term investments, together with expected operating cash generation, should fund working capital and capital needs for at least 12 months. The company cautioned that slower-than-expected adoption of new products could prompt further restructuring; it gave no quantified revenue or earnings guidance.
- The July 2013 restructuring reduced worldwide headcount by approximately 26%, consolidated or closed facilities, and was expected to produce approximately $16.0 million in annualized savings. The company recorded $5.6 million in charges; approximately $1.4 million had been paid in cash by year-end, with remaining cash expenditures due in future years.
- Legacy connection-management demand continued to weaken as mobile hotspots, tablets and smartphones changed connectivity patterns. Adoption and deployment of newer products remained uncertain.
- Customer concentration is significant: Sprint and affiliates contributed 53.1% of revenue, Verizon Wireless and affiliates 13.0%, and FastSpring 11.4%. These customers represented 83% of year-end receivables. The filing also identifies dependence on a key outsourced IT service provider.
- Other stated risks include competition and pricing pressure, technology and platform changes, customer order volatility, possible further asset impairments or restructuring, access to capital, intellectual-property claims, security or service interruptions, and potential NASDAQ listing compliance issues. The company regained compliance with the $1 minimum bid-price rule in November 2013, but said future noncompliance could result in delisting.
- Management considered litigation’s ultimate disposition unlikely to materially affect consolidated results, cash flows or financial position, while acknowledging that an unfavorable outcome could affect a particular period. The company had a $1.0 million Pennsylvania grant liability tied to an employment commitment ending December 31, 2013; the filing does not clearly state the final resolution of that commitment.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Whether Wireless revenue stabilizes and newer CommSuite and NetWise products gain sufficient adoption to offset continued legacy-product declines.
- Whether the restructuring achieves the expected $16.0 million annualized savings, and how remaining lease and restructuring cash payments affect liquidity.
- The pace of cash burn and the adequacy of liquidity given $16.6 million of operating cash use in 2013 and no debt facility.
- Ongoing exposure to Sprint, Verizon Wireless and FastSpring, including customer receivables concentration and the consequences of any order reductions.
- The outcome of the Pennsylvania grant employment commitment and any associated repayment obligation.
- Whether the company maintains NASDAQ listing compliance and avoids additional restructuring or long-lived-asset impairment charges.