Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
I have many pieces of news regarding SMSI and MoviePass to share today. I’ll start by revealing the big news for Smith’s Safe & Found product and discussing why it’s a major development for SMSI and its stock.
Let’s jump right in…
BIG NEWS: AAA & Sprint Team Up To Bundle SMSI’s Product!
It hasn’t been announced (yet), but I’ve discovered that AAA and Sprint have teamed up to offer three free months of Smith Micro’s (SMSI) Safe & Found product to its customers!
The promo page looks like this:
It doesn’t say anything about Safe & Found, but the fine print does…
… and then, the landing page makes it 100% clear!
This is a major development for multiple reasons:
1. It shows that Sprint is not-only committed to SMSI’s Safe & Found, Sprint is now actively promoting it.
I’ve previously reported the results of my personal product test which concluded that product-quality concerns were overblown. This move validates and corroborates our assessment of the product. Momentum is clearly building, finally moving SMSI out of “Wait Time” and into its “Gold Mine” phase.
2. The American Automobile Association (AAA) is an iconic federation of motor clubs member with over 58 million members in the United States and Canada. Sprint is America’s 4th largest carrier, with over 53 million subscribers.
The combination presents an opportunity that exceeds what the 90 million Costco members represented for MoviePass. This is accentuated by the fact the SMSI’s Safe & Found is not just being sold as a stand-alone product — it’s being bundled in with AAA and Sprint’s own offerings.
3. As I alluded above, this all validates what I’ve been saying about SMSI’s Safe & Found product. Negative online reviews represent less than 1% of total downloads. With the exception of this promotion, Safe & Found is a for-pay product… and yet more than 99% of people are offering no complaints.
But that’s not the only product validation I was able to dig up…
A few weeks ago, I had a call with Smith Micro. I was pleased with the outcome, but the company couldn’t connect me to anyone at Sprint (Sprint doesn’t want to discuss this product with investors, at least not yet).
That wasn’t good enough for me (shocking), so I started digging for information, hoping to find a good contact there. After several emails involving several Sprint employees, I finally worked my way up toward the top of the totem pole.
From what I’ve gathered, there are two C-Level execs working with the product head to make this initiative a success. When I asked about the negative reviews, I received the following response from one of those three key people:
Safe & Found is Sprint’s new family location and protection product that replaced an old product that had been offered for years. As with all things new, some users welcomed the changes and others not so much. The fact is that Safe & Found offers a lot more than the previous service did in a much more user-friendly interface. Still, some users still preferred the old way.
We listen to all our users’ feedback as we want the service to be a great experience for everyone and have already introduced changes to the address some of the concerns.
Why don’t you try the service for yourself and see how that goes? You can start your 15 days free trial and cancel anytime. We’d be more than happy to help you set it up on your uncle’s phone and hear your feedback on how well it worked out for you.
What Does It All Mean?
This all happened late last week, which didn’t leave me enough time to review it with my mentors and write a proper analysis.
After careful consideration to all of the facts, I delivered this email late Friday afternoon:
New data points regarding SMSI have surfaced, which combine to alleviate key concerns andprovide ample evidence that the Sprint relationship is now ramping up.
- It hasn’t been announced (yet), but I’ve discovered that AAA and Sprint have teamed up to offer three free months of Smith Micro’s (SMSI) Safe & Found product to its customers. That first page doesn’t say anything about Safe & Found, but the fine print does. Then, the landing page makes it 100% clear. Obviously exciting because it shows that Sprint is moving forward with its efforts to double its Family Safety customer base to ~700,000 (per SMSI) by next year.
- There have been concerns about the negative app-store ratings Safe & Found has received. I have acknowledged this, but have been contending that the negative reviews represent an insignificant % of the total downloads to date and are overshadowed by signs that Sprint is moving confidently forward with the Safe & Found roll-out / ramp-up (per SMSI management). I have since uncovered hard proof to back SMSI’s claims and my hypothesis.
The aforementioned AAA / Sprint relationship is obviously one piece of hard proof. The other comes directly from one of the key players at Sprint. FYI, I’ve learned that a handful of Sprint employees, including two C-level executives, are involved with this initiative. The company views it as a strategy means of fortifying (and further monetizing) its installed base via value-added services. Safe & Found is not viewed as just a single product, but a strategic platform, through which Sprint plans to launch many new services, some of which will include the use of wearables / Internet of Things (IoT).
I managed to get through to one of the key employees and received a response which addressed Safe & Found’s negative reviews and demonstrated Sprint’s confidence in the product.
This confirmed my analysis of the situation. Specifically, there are a total of 350 bad reviews for Safe & Found. However, most of those referred to older versions of the product. Further, the 350 reviews represents less than 0.3% of total installations to date. Keep in mind, this is a subscription (for-pay) product! If it was working so poorly for the other 99.7% of people, we’d surely see a lot more than 0.3% bad reviews.
Further, I tested the product, along with a Wall Street colleague and we were happy with the product and experience. We incurred no real problems. Thus, I concluded that the negative reviews represented the “vocal minority” and that satisfied customers are simply not providing reviews (in fact, we didn’t either – shame on us).
The same thing happened to MoviePass early on. In recent months, MoviePass’ rating has been gradually creeping up, but they still have more 1-star reviews than 5-star reviews in the Apple Store. From personal experience, I can tell you that my MoviePass experience was similar to my Safe & Found experience. Getting it to work caused a little frustration, but that was quickly resolves and the service has been great every since.
Of course, from my past posts you know that I feel much better about SMSI’s operating model, earnings leverage, profit timing and stock valuation (though I like both apps).
So, yes… some people are having trouble with it. The same is still true for MoviePass… but it’s not stopping either from adding subscribers at a rapid rate.
Most importantly for SMSI, Sprint is clearly moving ahead, fully committed. They are well over 100,000 downloads and SMSI management says that uptake is accelerating. So, the minuscule percentage of bad reviews needs to be properly posed against these significantly more important positive data points.
FYI, the Sprint stores (sales people) are slated to be trained within weeks to accelerate the roll out to new customers ahead of the installed base sunset date (a few weeks after the store training).
In other words, the negative reviews are the only negative I can find in the SMSI story right now. This presents an opportunity in the stock because retail investors are over-weighting that data point because it’s the only visible data point. Well, now I’ve provided you with more visible proof… this time, overwhelmingly bullish.
As I’ve said a thousand times, software code can always be improved, especially when it’s not highly complex software. Most recently, I made a lot of money being short and then long WDAY because they had software issues. I only shorted it because I thought investors would panic.
They did. The stock went from 116 to 47. I didn’t catch the whole ride, but covered at a profit and later went long. The company has since had record quarter after record quarter. The stock rebounded from 47 to a new all-time high of 140. I made a lot more on the rebound than the drop.
Thus far, SMSI has gone from $3.50 to $1.50, a similar drop as WDAY experienced.
Based on my research and first-hand testing of SMSI’s software, the product has improved a lot from what it was at the time of acquisition. It wasn’t carrier-grade before, but now it is. They’re just working out a few final issues with a small percentage of customers. In the meantime, they continue to call the newest versions 1.0.XX, implying that they’re not ready to call it 2.X or even 1.1.X.
The next major release is due in June. Coincidentally, this coincides with Sprint’s current switch-over date, which I’ve ascertained from a company representative.
In the meantime, Sprint is moving ahead with their controlled rollout. With an estimated 160,000-200,000 downloads across Android / iOS platforms, Sprint is clearly committed and comfortable with the process and progress.
But 0.3% is still 0.3%… and that’s why they’re rolling out slowly. Standard operating procedure. Use the early adopters as beta testers. Once it’s good, do a broad rollout and solicit feedback to bury the small number of bad reviews with good ones.
Even if 10% of customers can’t get it to work or quit the service (not that we want that), they will still have 300,000+ customers growing to 600,000+ next year. That will have a massive effect on their income statement, because they get $3 of revenue per customer per month and 70% operating margins. That sends $2 per customer per month straight to the bottom line.
That’s $1 of EPS for every million subscribers.
FYI, GeoInvesting, a popular stock picking subscription service, met with management last week. Afterwards, they provided a write-up to its subscribers which validated my research.
It was good to see from someone who does very good work on small and microcaps… but he’s not yet aware of the information I’ve just shared with you. I’ll fill him in sometime on Monday.
So, what does this mean for SMSI’s stock?
As you can see below, SMSI has a very low float. That means that there’s aren’t many shares available to the public. This accentuates any big moves (up or down).
This is part of the reason why the stock has traditionally moved so aggressively (up and down). Here’s a chart of SMSI dating back to its IPO:
That chart makes it easier to understand why I first called Smith Micro “The Most Cyclical Stock I’ve Encountered“.
Recently, I shared this 18-month chart, depicting SMSI’s Risk/Reward channel:
Since then, it has started making progress toward a bullish breakout. All it needs is a catalyst. A push past $2 should establish a new bull trend that could quickly push it towards $4.
Would such a move be justified by the fundamentals?
Don’t take my word for it. Decide for yourself…
All you have to do is build an operating model (based on management commentary) to see how much profit the company could potentially generate over the next couple of years.
Below, I provide a 2019/2020 model (next to the Sept 2017 model I provided a few months ago). The 2019/2020 model assumes that SMSI ends the year with 350,000 customers (a full Sprint ramp, as discussed by SMSI) and grows 350,000 per year thereafter (in line with SMSI’s commentary regarding Sprint’s goals):
|Sept 2017 Quarter||Sept Qtr + Sprint||2019||2020|
|Cost of Revenue||1,159||1,859||8,100||9,600|
|Selling & Marketing||1,413||1,600||7,200||8,400|
|General and Administrative||2,220||2,300||9,450||10,200|
|Total Operating Expenses||5,587||5,934||25,650||29,100|
|Operating Income or Loss||-942||1,511||11,250||21,300|
|Loss on debt extinguishment||-405||-405||0||0|
|Interest & Other Expense||-317||-317||-300||-150|
You can apply whatever P/E you wish. The key considerations are customer concentration risk, juxtaposed against a 50%+ earnings growth rate on this subscription business. Regardless, if this scenario plays out, $4 will just be a stop on the way to something substantially higher.
This sheds more light on why SMSI’s founder recently raised his stake from 12% to 29% of the company.
Of course, all risks need to be taken into account. However, at the moment, the opportunity and price clearly appear to dwarf any downside concerns. Cheers.
MoviePass Update: Insider Clash Revealed!
MoviePass has now partnered with iHeartRadio to offer a bundled package. Customers can get three months of each for $29.95.
This is interesting in light of iHeartRadio’s recent bankruptcy filing (as well as the claims of fraud being levied against them).
it’s also interesting that customers only get seven days to activate the iHeartRadio portion of this deal. This implies (IMHO) that MoviePass is getting the lion’s share of the $29.95.
Bankruptcy drama and revenue split notwithstanding, the most interesting about this offering is that the MoviePass subscription imposes a four-movies-per-month limitation.
The response to this offer will be interesting. The timing is certainly right. We’re just weeks away from the start of the summer blockbuster season — a good time to test customer limitations. I personally think it’s a great move. Four movies per month is generous enough for the majority of movie goers… and you don’t want the others as customers!
Regardless, the company’s near-term goal continues to be focused around building an influential level of critical mass in the movie industry. In this regard, the key metrics to track are 1) subscriber penetration and 2) ticket purchases.
Here’s how things look so far:
1) Subscriber Penetration – There are 250 million moviegoers in the United States. Thus far, MoviePass has sign about 2.5 million of them, giving them a 1% penetration rate.
Clearly, 1% is a very small number, but the path to a big number always starts from zero. It’s a key metric to watch, but also one to keep in perspective. It’s not about how many millions of subscribers — it’s about what percent penetration they have / achieve.
2) Ticket Purchases – Depending on who you listen to (Ted or Mitch) MoviePass is currently buying between 6 and 8% of all movie tickets purchased in America on an average day.
This may seem like a lot of influence, but this also needs to be kept in perspective.
MoviePass believes it has a 2x effect on the number of movies its customers goes to see. In other words, 50% of the movies that customers see represent films which they would attend with or without the subscription.
It’s safe to say that industry participants (theaters and studios) should have no interest in rewarding MoviePass for those visits. It’s true that Costco gets discounted tickets, but you need to understand the arrangement between Costco and the theaters (volume, Costco’s commitment, when the theaters get paid, and what % of the tickets actually get used i.e. the gift card effect).
I’m not saying that MoviePass can’t negotiate something, but the devil is in the details. Costco can choose not to sell movie tickets. MoviePass has no such choice.
Getting back to the subject…
So, MoviePass has no influence on 50% of the movies that customers attend. However, the other 50% is a different story. Idealistically, MoviePass deserves some credit/compensation for driving this increased usage. However, convincing industry participants of that has been a slow, though ongoing, process.
In addition to the basic increased usage, some portion of the 3 to 4% of incremental movie visits (half of the 6-8% total) can certainly be influenced by MoviePass.
My personal experience (which doesn’t represent a statistically significant data point), is that 100% of the extra movies I’ve seen were ones I was already interested in, but on the fence about seeing in the theater.
In other words, I haven’t gone to see any MoviePass-recommended movies. However, I did rent and see “I, Tonya” at home (it was a good rental)! I just don’t see how they can monetize rentals until/unless they get into streaming, which is obviously a ways off.
So what does it all mean?
If you read the above carefully, it’s pretty clear that MoviePass does not (yet) possess sufficient influence in the industry… and they know this. This is why they continue to press for critical mass despite their funding issues. Those two things go hand in hand.
As I’ve said, they do have the ability to influence behavior on the 3 to 4% of incremental ticket purchases that they say they catalyze… but only to a limited (and undetermined) extent.
Further, proving how many incremental purchases they’re stimulating is no easy task. Total box office receipts for 2018 have yet to show ANY improvement versus last year. So, exactly how many movies can we really attribute to MoviePass?
Should theaters and studios simply trust MoviePass when they say they double movie going? If so, why is the industry down year to date? I haven’t doubled my movie going (again, not statistically significant)… and MoviePass says that customers go to less movies after 4-5 months!
This is why they need more critical mass.
And that is why management’s rhetoric has been clear in communicating their intention to double their customer base by year end… and then double it again. Ted and Mitch are on the front lines with prospective partners and are quickly gaining an understanding of how much influence is needed to earn (or take) a piece of the pie.
Their rhetoric is also clear in comparing themselves to companies that have required billions of dollars in funding to achieve critical mass. In contrast, MoviePass has only received $100 to 200 million in funding (so far).
According to the models I have publicly shared (which are almost 100% based on management public statements + reputable industry data sources), it appears that management’s rhetoric is genuine! The models predict at least a billion dollars in funding requirements.
This is a point that smart bulls and bears have both acknowledged.
In fact, Ben Rabizadeh and I have been in communication are in total agreement about the facts and investment considerations regarding MoviePass. We simply disagree about the proper timing and catalysts for justifying an investment… which is 100% OK. So far, my approach has proven more profitable, but Ben’s day may soon come. If the right time comes, I’ll be fine with being a little late, having avoided most of the ride from 34 to 3. It’s classic “Great Find”, “Wait Time”, “Gold Mine” mentality.
The difference between the bulls and myself began after reading an SEC filing detailing the compensation bonus package for Helios CEO Ted Farnsworth. You can see my previous posts for details on this, but the short story is that the compensation package made it clear to me that Helios was planning on financing MoviePass via an aggressive expansion in its total share count, creating extreme dilution to the detriment of common shareholders.
In my opinion, this killed what was already a small chance that institutions would give MoviePass the valuation necessary to conduct a billions-of-dollars critical mass campaign. Indeed, VERY FEW companies are given such a “unicorn license”. I’ve analyzed (and owned… i.e. FB, WDAY, etc) many in my career and don’t feel that MoviePass qualifies.
That belief has been proven accurate (in spades) to this point. Tier one investment banks and institutions have shunned MoviePass/HMNY, resulting in a 75%+ decline in Helios share price (and counting) because the company has decided to move forward with its aggressive plans without the valuation support of a major backer (something I’ve never seen succeed before).
Speaking of which, I have to give due credit to Ben Rabizadeh. On Friday, he presented an absolutely fantastic piece of journalism on MoviePass via Seeking Alpha. It went well beyond the basic information gathering that permeates most Seeking Alpha articles. Rabizadeh’s article demonstrated professional-level investigative journalism and analysis.
I’d be remiss if I didn’t admit that it showed the proxy issue to be of far greater concern than I previously believed. Of course, it’s not the only issue, but Ben revealed its true severity. Kudos Ben.
His findings are disconcerting (for now). His info tells me that Ted has the upper hand in MoviePass’ financing negotiations, at least until August 15th (read his article to find out why). This is forcing MoviePass into a challenging situation with very heavy funding requirements coming between now and then.
If that situation can be resolved, the picture will brighten a but, especially if Rabizadeh is right about there being entities willing to fund MoviePass at a high-enough valuation for them to execute their plan.
Either way, the business will still require quite a bit of dilution, t through August, barring a major change to the business model (which is possible, but not likely until the company gains more influence to force concessions from major industry constituents — an area where they’ve shown almost zero progress to date, due to the need for more influential critical mass).
Because of this, I still sit in the bearish camp (after being one of the original bulls during HMNY’s run from under 3 to 38+). I turned neutral at $34.32 and turned bearish around $12. Since then, I’ve been warning investors about the implications of the company’s strategy for common shareholders.
I see multiple major rounds of funding coming over the next two months, which produces a high likelihood that Helios shareholders will once again be subjected to significant dilution and share price erosion.
To be clear, I do believe that the company DOES HAVE A CHANCE to succeed. However, financing that success has been predicated on highly dilutive rounds of funding which punish (instead of rewarding) shareholders for their loyalty.
Accordingly, I will continue to caution investors and steer clear of the stock until these critical issues are rectified (though don’t blame those who choose to “take a chance” on it happening before another ugly round is needed).
- Videocast: AEHR 10-Q, MoviePass Update
- AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Major Update on SMSI
- SMSI’s Safe & Found App: 100,000 Downloads & Counting
- MoviePass Projected To Burn $600M In 2018
- SMSI: Riding A New Trend & Making Its Latest Comeback
- Mark Gomes Research
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Disclosures / Disclaimers: I am long SMSI and have no position in HMNY. Either way, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.