With all the gloom surrounding the market these days, it's refreshing to see that things may not be so bad for some companies. In wireless software maker Smith Micro's (Nasdaq: SMSI) latest earnings report, investors were reassured by quarterly revenue that increased by 16% to $73.4 million, even though the bottom line was hit by higher expenses and other charges.
Smith Micro has been in an acquisitive mood, recently buying the mobility division of prime competitor PCTEL. The acquisitions boosted expenses in 2007, eating into operating income, which came in at $4.25 million for 2007, less than half the level of 2006.
This trend of declining income -- even in the face of rising revenue from acquisitions -- caused Smith Micro's stock to fall 70% in the six months leading up to earnings day. The company's outlook for revenue growth of $95 million to $105 million for 2008 helped buyers come back, though, and the stock jumped almost 30% on Thursday.
One beef investors have always had is Smith Micro's high dependence on revenue from prime customer Verizon Wireless -- a joint venture of Verizon Communications (NYSE: VZ) and Vodafone (NYSE: VOD). But the company noted that it's making progress in diversifying its offering with other carriers such as AT&T (NYSE: T), Alltel, and Sprint Nextel (NYSE: S). It's also expanding distribution channels that include online sales through Amazon.com (Nasdaq: AMZN) and Best Buy (NYSE: BBY).
Smith Micro's operating margins will continue to be hampered by integration, because of mergers and development work on new contracts in the first half of 2008. But management expects 30% operating margins to return in the back half of the year, and it's optimistic about the benefits the acquisitions bring.
If Smith Micro can indeed hit its operating goals and realize the benefits of the mergers, the financials would certainly sparkle. Investors need to keep in mind, however, that significant differences exist between Smith Micro's GAAP and non-GAAP numbers, and dilution with the mergers and stock options is significant (the share base increased nearly 23% in 2007). Even taken together, the company has a shot at significant growth and cash flow in the coming year.
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