Smith Micro Software, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Smith Micro sells wireless connectivity and communications software, alongside consumer productivity and graphics products.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $57.8 million | $130.5 million |
| Gross profit / margin | $44.0 million / 76.2% | $115.0 million / 88.1% |
| Operating income (loss) | ($165.7) million | $18.4 million |
| Net income (loss) | ($159.6) million; ($4.48) per diluted share | $12.3 million; $0.36 per diluted share |
| Cash from (used in) operations | ($13.5) million | $24.7 million |
- FY 2011 revenue fell 55.7%. Wireless revenue declined 59.0% to $48.7 million; Productivity & Graphics revenue declined 22.7% to $8.8 million.
- The company recorded $112.9 million in goodwill and long-lived asset impairment charges: $94.2 million for goodwill, $13.4 million for intangible assets and $5.3 million for fixed assets. Goodwill and intangible assets were fully written off by year-end.
- At December 31, 2011, cash and cash equivalents were $7.5 million and short-term investments were $38.5 million; working capital was $52.7 million. The company reported no debt. Total liabilities were $15.1 million.
- Capital expenditures were $13.4 million, compared with $6.3 million in 2010. Investing activities provided $2.7 million, largely from sales of short-term investments.
- Q4 2011 revenue was $11.2 million, gross profit $8.5 million, operating loss $11.6 million and net loss $9.5 million. Q4 2010 revenue was $35.3 million and net income $5.8 million.
Material changes, outlook and risks
- Management attributed the sharp revenue decline mainly to mobile hotspots, tablets and smartphones reducing demand for core connection-management products, particularly in North America. New wireless products were launched, but adoption and deployment timing remained uncertain.
- Management said 2012 capital expenditures were expected to be considerably lower than in 2011 and believed available cash, equivalents and investments would fund working capital and capital needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Restructuring charges were $3.2 million in 2011, including facility closures and workforce reductions. A further post-year-end restructuring was expected to reduce headcount by 7–8%, with approximately $7.0 million of annualized savings and $0.3–0.4 million of additional one-time costs.
- Three customers—Sprint, Verizon Wireless and AT&T—accounted for 54.9% of FY 2011 revenue and 63% of accounts receivable. The Verizon agreement may be cancelled at any time.
- Operating lease commitments totaled $20.8 million, including $2.8 million due within one year. The company also disclosed securities class-action and shareholder derivative litigation seeking unspecified damages; it said it intended to defend the claims.
- Other significant risks include rapid technology shifts, intense competition, uncertain acceptance of new products, customer concentration, potential further asset impairments, and possible difficulty obtaining additional financing. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Whether new wireless products gain commercial adoption and offset continuing declines in legacy connection-management revenue.
- Whether customer concentration—particularly exposure to the three largest carrier customers—changes, and whether the Verizon agreement remains in place.
- Cash use, investment liquidity and capital spending against management’s stated 12-month funding expectation.
- Execution and realized savings from restructuring, including any further costs or workforce changes.
- Developments in the shareholder litigation, insurance coverage and any resulting financial exposure.
- Tax-asset realizability: the filing records a $53.2 million valuation allowance against U.S. deferred tax amounts while reporting a $5.9 million overall income tax benefit for 2011.