Smith Micro Software, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance sheet compared with December 31, 2011. Amounts are in millions except per-share data. Smith Micro sells wireless software and services and productivity and graphics software.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $10.2 | $16.1 | $20.3 | $33.9 |
| Gross profit / margin | $8.4 / 82.3% | $12.5 / 77.9% | $16.3 / 80.3% | $26.6 / 78.4% |
| Operating loss | $(6.8) | $(13.0) | $(16.4) | $(26.1) |
| Net loss | $(6.8) | $(7.8) | $(16.5) | $(15.6) |
| Loss per share, basic and diluted | $(0.19) | $(0.22) | $(0.46) | $(0.44) |
- Q2 revenue fell 36.8%; six-month revenue fell 40.2%. Wireless revenue declined 36.8% in Q2 and 41.9% for the six months, principally from lower connection-manager product sales. Productivity and Graphics revenue also declined, amid weaker retailer sell-through and lower demand.
- Gross margin improved year over year, but management attributed much of the increase to the absence of amortization after acquired intangibles were fully impaired in Q3 2011. Operating expenses fell substantially, reflecting lower headcount and other cost reductions.
- Q2 net loss narrowed year over year, while the six-month net loss increased. The 2011 periods included income tax benefits of $5.2 million for Q2 and $10.4 million for six months; 2012 tax expense was limited to state minimums and foreign taxes because the company did not recognize tax benefits amid continuing losses.
Cash, liquidity and balance sheet
- At June 30, cash and cash equivalents were $11.0 million and short-term investments were $20.3 million, totaling $31.3 million; working capital was $39.8 million. Total assets were $62.5 million, down from $79.9 million at year-end 2011.
- Six-month operating cash flow was negative $14.0 million, versus positive $0.3 million in 2011. Investing activities provided $18.2 million, mainly from sales of short-term investments; financing activities used $0.7 million, including share repurchases. Cash and cash equivalents increased to $11.0 million from $7.5 million.
- The company reported no debt. Contractual obligations included $19.2 million of operating leases and $1.3 million of purchase obligations. Cash and investments declined from $46.0 million at December 31, 2011, mainly reflecting the reduction in short-term investments.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and short-term investments should fund working capital and capital expenditures for at least the next 12 months. It expected 2012 capital expenditures to be considerably below 2011 levels.
- New wireless products address the shift toward mobile hotspots, tablets and smartphones, but adoption and deployment timing were uncertain. Management warned that slower or insufficient acceptance could require further restructuring; additional financing might be needed, with no assurance it would be available on acceptable terms.
- Restructuring actions included a 2011 plan affecting approximately 20% of the workforce and a February 2012 reduction of a further 7–8%. The latter was expected to produce about $7.0 million in annualized savings. Six-month 2012 restructuring expense was $0.3 million; the remaining $0.2 million reserve was expected to be used by the quarter ending September 30, 2012.
- Customer concentration was material: two Wireless customers represented 39.9% and 15.6% of Q2 revenue; for the first six months, two customers represented 36.0% and 20.6%.
- A securities class action and related state and federal derivative actions had stipulations for dismissal with prejudice filed after quarter-end; court orders had not yet been entered as of the filing. Management said other litigation outcomes are inherently unpredictable.
- Other risks include competition, product-market adoption, customer demand, intellectual-property protection and dependence on third-party IP licenses. The company disclosed that some bank balances were uninsured and that it did not hedge foreign-currency exposure.
Most important facts for investors to verify
- Whether new wireless offerings can offset continuing declines in connection-management revenue and whether customer adoption improves.
- The pace of operating cash burn relative to the $31.3 million cash-and-investment balance, and whether management’s 12-month liquidity assessment remains supportable.
- Whether announced restructuring savings are realized without impairing product development or revenue prospects.
- Customer concentration, long-term lease commitments and the final court disposition of the derivative-action dismissal stipulations.
- The sustainability of reported gross margins, given the stated effect of prior intangible-asset impairment on amortization expense.