Sprint & T-Mobile Agree to Merge! Implications for Smith Micro (SMSI)

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.

 

Investors are excited about this weekend’s news that Sprint and T-Mobile have agree to merge. Without a doubt, many of you have been expecting a wildly bullish article about it from yours truly.

So, my findings might disappoint you.

The reason is simple.

Wall Street experts don’t expect the Sprint / T-Mobile combination to be consummated for at least a year (and that’s only if it gets past regulatory and other hurdles).

Thus, according to Wall Street experts I interviewed this weekend, any direct impact on SMSI (positive or negative) is unlikely to manifest until late next year (at the earliest).

Despite that, I still came out of the weekend a lot more bullish than I went in. While researching the merger, I uncovered a stockpile of exciting new information about SMSI’s relationship with Sprint. There was so much info, I needed to write two articles to cover it all.

These data points lead me to believe that SMSI’s execs will have great news for investors on the company’s first quarter earnings call (which is next week — Wednesday, May 9th).

I have also determined that SMSI can indirectly benefit from the T-Mobile deal long before it closes, enhancing the stock’s potential (key word: potential) to beyond the $20+ outlined in my previous post.

Conversely, investors will be relieved to hear that I found no (zero) evidence of near-term risk for SMSI.

So, the stock’s the risk / reward profile received an upgrade this weekend, even if the T-Mobile impact isn’t immediate.

In this article, I will review the various scenarios.

Let’s jump in…

As expected Sprint (S) and T-Mobile (TMUS) have come to an agreement to join forces. According to ZDNet, “The new T-Mobile claims it will have the network capacity to rapidly create a nationwide 5G network… faster than either company could separately or than its competitors AT&T and Verizon.”

Based on the agreement, it’s clear that Deutsche Telekom / T-Mobile will have control over the merged entity. This presents an intriguing situation for Smith Micro (SMSI). Bears say that T-Mobile’s control poses a risk to SMSI’s relationship with Sprint. Bulls say it opens the door for SMSI to win T-Mobile (which is using the same outdated product by Location Labs, which Sprint replaced with SMSI’s offering) sooner than later.

If the bull scenario plays out, it should increase the deal value by more than 100%, based on market share figures:

SMSI9.png

So, which scenario will play out?

Nobody knows for sure, but professionals are very good at handicapping the odds. Because of this, I spent a chunk of my Sunday afternoon interviewing Wall Street professional / veterans for their take. Let’s review the various scenarios…

First, let me be clear about some things for anyone who hasn’t been involved with the integration process of a mega-merger:

 

1. It takes a long time. We’re talking several quarters at a minimum and usually several years.

May 1 Update: A prominent Wall Street firm has stated that they “do not see anything that provides enough protections for Sprint as they head into +1yr of regulatory discussions… and reiterate a 35% implied probability of deal closing.”

This is due to “the high hurdle of obtaining the necessary regulatory approvals”. They went on to say that they “would use an even lower implied probability (25%), but the change in FCC leadership gives us a little more comfort of receiving FCC approval”.

 

2. The lowest hanging fruit will be handled first. In this case, combining networks and reconciling retail locations will be the priority. Smaller revenue-generating applications (i.e. family protection apps) are likely to be left alone for a prolonged period, even if it means supporting multiple products (because it’s very difficult to merge offerings and switch customers over — and takes about a year of planning / execution).

 

May 1 Update: Because of all this, I believe that SMSI’s relationship with Sprint is safe for the next couple of years. Many on Wall Street believe the Sprint / T-Mobile deal has a less-than-50% chance of closing (and will require over a year to do so). Further, my research has revealed that Sprint has a Safe & Found product roadmap that extends over 1 year into the future.

In the meantime, I believe that T-Mobile may have already started investigating the benefits of the Safe & Found (separately, and unrelated to the Sprint deal).

If so, knowing that the Sprint offering is up-and-running may provide the impetus for T-Mobile to make the switch sooner. The Sprint team has gained invaluable experience in switching from Location Labs to SMSI’s product. This experience would directly benefit T-Mobile in most aspects of a transition, except for back-end integration (which will be a challenge, regardless of who they choose for their next-generation product).

This enhances the odds that SMSI will be chosen to replace Location Labs at T-Mobile and become the corporate-wide standard.

In addition to this, Sprint’s transition team has every incentive (their jobs) to make Safe & Found successful as soon as possible (to convince T-Mobile to utilize their skills for their upgrade).

The timing couldn’t be better for the Sprint team to ramp things up. Safe & Found’s reviews have been spiking in recent weeks, going from 2.14 pre-April to 2.89 since April 17th. Further, I believe that over 25% of Sprint’s Location Labs customers have already switched over to Safe & Found (and are now generating revenue for SMSI).

The fact that T-Mobile and Sprint have been using the same legacy solution would make this process relatively easy (and quickly pay for itself in the form of headcount reductions). Conversely, forcing Sprint customers to switch back to the older T-Mobile solution (immediately after being switched to the SMSI solution) would serve no strategic purpose, be very costly, and prove to be a PR headache.

FYI, it doesn’t matter (much) that T-Mobile (and Deutsche Telekom) will be the controlling entity. I consulted with several Wall Street professionals and the 100% consensus was that they will examine each company’s offering / synergies on a case-by-case / app-by-app basis.

Of course, politics will be involved… and of course, T-Mobile’s team will have the final say. However, as we can see, T-Mobile’s app is limited (in usability and functionality), outdated, and subject to competitive displacement (which is one reason why Sprint replaced the same product with SMSI’s product suite).

Further, Sprint has already gone through the process of moving their customer base from the Location Labs product over to the SMSI product. The experience from that transition will accrue to T-Mobile, making the experience faster and easier than any other option.

Best of all, if T-Mobile’s superior marketing engine is attracting $10 per month for its legacy offering, imagine how much it will be able to charge for Safe & Found. At the very least, they can charge the same price to foster customer satisfaction and loyalty (the latter of which has been a focal point for carriers lately).

Thus, I believe that the most likely scenario is for T-Mobile to adopt SMSI’s SafePath product… assuming that it’s good.

To get the latest read on that, I recruited a family to test SMSI’s latest version, which was only released a few weeks ago. I will release the results of that test later today. In the meantime, a great overview of the product and Sprint’s motivations were captured in Cheddar video, which was also posted to YouTube.

By now, it should be apparent that the most likely scenario is bullish for SMSI. While it’s true that the longer-term risks have increased a bit, the longer-term upside has increased significantly.

In a worst-case scenario, if SMSI is destined to receive bad news from T-Mobile, it would surely have plenty of lead time (and therefore revenue from Sprint) to shift its attention to one of the several other carriers with whom they have signed deals, as I discussed in a previous post. Specifically…

At the time of Smith’s acquisition, iMobileMagic had already won deals with O2 in the UK (owned by Telefonica, which has 25 million total cell phone subscribers), MEO (Portugal Telecom: over 6 million customers), and one of T‑Mobile’s territories in Europe (owned by Deutsche Telekom).

The company also had two Asian carriers in deployment, which were later revealed to be Digi in Malaysia (which has 12 million mobile subscribers) and AIS (with 40 million subscribers) in Thailand.

It didn’t take long for SMSI to accelerate SafePath’s momentum. During Q1 of 2017, Smith Micro signed a third Asian carrier in Malaysia. Then, during Smith Micro’s Q2 call, Bill Smith stated:

“We’re excited to share that we successfully launched our SafePath family offering in Latin America with one of the world’s largest Tier 1 carriers. This is Smith Micro’s first significant win for SafePath. We are bringing comprehensive location tracking and parental control services to subscribers through our SafePath Family platform. This service launched during the second quarter is offering subscribers innovative tools to combat the acute challenges of modern society, such as child safety, cyber bullying, mobile device and content controls, elder care and device theft.

And now things get even more exciting. I am very pleased to announce that we have signed our first Tier 1 carrier in the United States. As is the case with each of the U.S. Tier 1 carriers, this new customer relationship provides the opportunity to transition a large, already installed base of Family Safety users to our SafePath platform. This fact allows us to forecast a growing revenue stream of predictable recurring revenue over the contract term.”

He went on to say:

“But there’s more. We have been awarded another SafePath win, this time in Europe with a Tier 1 carrier with a global business platform. We are working to have a signed contract with this new customer in Q3 and begin deployment as soon as possible.”

Two months later, in October, Smith announced that its Tier-1 U.S. customer was Sprint (S), which boasts 55 million wireless customers. The deal promises to bring $14 million in annual subscription revenue, a number that should grow as market acceptance expands.

On the Q2 call Bill Smith hinted that the Latin American win was with “one of the world’s largest Tier 1 carriers”. He also hinted that supporting Spanish was an area of focus. Triangulating these data points against the list of Tier 1 carriers on Investopedia, we can speculate (only speculate) that the other two wins may be with Telefonica (possibly an expansion of iMobileMagic’s win at Telefonica’s O2) and Carlos Slim’s America Movil.

That would be potentially exciting news, since those two carriers have a combined 10x more subscribers than Sprint.

As you can see from the list of the world’s largest carriers below, Smith’s eight-figure win at Sprint might merely represent a tip-of-the-iceberg type of deal. Indeed, Sprint garners just 3% of the wireless carrier market worldwide.

  1. China Mobile (China: ~850 million customers)
  2. Verizon (US: ~150 million customers)
  3. AT&T (US: ~140 million customers)
  4. Vodafone (UK + 25 countries: ~450 million customers)
  5. Nippon Telegraph & Telephone (Japan)
  6. Softbank (Japan)
  7. Deutsche Telekom (Germany & 50+ countries: over 100 million customers)
  8. Telefonica (Spain + 20 countries: over 300 million customers)
  9. America Movil (Mexico / Latin America: ~280 million customers)
  10. China Telecom (China: ~200 million customers)

FYI, the overall wireless market is $250B in the U.S. and $1T globally.

The $14 million in annual subscription revenue for SMSI is the estimated payday for Sprint’s current Location Labs users. My sources say that Sprint will push a complete switchover on May 31, spiking SMSI’s revenue (and profitability). Obviously, this should be viewed as great news.

From there, I hear that Sprint aims to ramp a marketing campaign to double its customer base within one year. That creates easy math for SMSI — and very bullish for the stock if they even approach that goal.

May 1 Update: For now, I estimate that about 25% have already switched on their own. Further, the latest version of Safe & Found was recently released and is taking its relationship with Sprint to another level. I tested the product and discussed the implications in a separate article.

All of this should become apparent to investors when management conducts it SMSI’s Q1 earnings call next Wednesday (May 9).

Perhaps this is why the stock has been rising steadily in a newly-established uptrend…

smith

 

One Last Data Point: Last week, Comcast and Charter, the two largest U.S. cable companies, announced an extended partnership to develop products and services.

I saw the following amid the fodder in one of the public investment forums:
“I strongly suspect SMSI will be involved with the launch of the Charter wireless WiFi first service due to launch this quarter. They have already secured Comcast and with Comcast and Charter cooperating with their wireless services, it seem inevitable that SMSI will be involved with Charter.”
When coupled with management’s plans to divest its non-strategic product lines, it’s clearly going to be a busy summer for Smith Micro. I look forward to their earnings call next week and meeting with management on June 4-6 in California.

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Disclosures / Disclaimers: I am long SMSI. However, 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.

55 thoughts on “Sprint & T-Mobile Agree to Merge! Implications for Smith Micro (SMSI)

  1. Sprint and T-Mobile both down — I’m assuming investors don’t believe the deal can make it through regulations.

    In either case though, is there any evidence that anyone has found that T-Mobile may already be looking into SMSI on its own?

    Like

    1. Today’s reports will tell you all I know. Complete brain drain. Anywhere that I’m vague is vague for a reason. Nothing illegal, but I to defend / protect my sources. #MyAdvatage

      Like

  2. Mark, is there any indication when SMSI will begin recognizing any significant revenue from the various other carriers that are adopting Safe & Found? Are you expecting a surprise in the Q1 earnings from this?

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    1. Cheers buddy. 👍🏼

      I’ve done my best to give all the info and analysis I have, along with hints regarding any other things.

      For anyone willing to invest an hour to read my last several posts, SMSI’s paths should be very clear now. 😎

      Liked by 2 people

  3. While this is a very long and informative article, I question this from the very beginning:
    “Nobody knows for sure, but professionals are very good at handicapping the odds. Because of this, I spent a chunk of my Sunday afternoon interviewing Wall Street professional / veterans for their take.”

    If nothing else we both agree that the analyst community as a group can be extremely insightful and accurate, we’ve both seen news announced and a stock react within minutes to that news and the new value of the shares. Having said that I expected the share price would adjust to an accurate value with this news, yet we sit at $2, and as I pointed out the $2.50 PUTS for next OCT.? value the shares at ~$1.75, I greatly respect your DD and insights and ask, why the analyst community is so very wrong? Respectfully yours…..Me

    Like

    1. Hey Greg,

      As I said before, the October puts do NOT value the company stock at $1.75.

      The ASKING price is $.90 which requires the stock to go below $1.60 for a buyer to profit.

      The $.75 you are using to value SMSI at $1.75 is the price for someone to SELL the put, which would give the buyer the right to sell the stock for $2.50, BUT NOT THE OBLIGATION.

      That’s critical to understand. I make money on these strategies all the time and see nothing abnormal about this particular option.

      Regarding Wall Street’s handicapping, they’re not always right, but they know how things work. Look at my SMSI article from yesterday and hit refresh. I just updated the article with new info.

      Cheers

      Like

      1. I was calculating the value of the puts with selling them naked and your NET cost if assigned, you’re right though, different than placing a value on the stock, my mistake, thx

        Liked by 1 person

  4. Mark, I know in an above post you said to look at your report about revenue from other carriers. But your report only says who they signed but not when to expect revenue from these other carriers. You also keep talking about 3.5 million a quarter from sprint so what kind of revenue do you think will come from all the other combined carriers over the next year. Thanks

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    1. I wouldn’t expect much tho. They’re laser focused on making Sprint a success so they can be efficient in ramping others.

      That’s much smarter than spreading themselves thin and having a bunch of fires to put out. #reputation #process

      Like

  5. My interaction with Sprint because I like to hear it for myself.
    =====================
    Hey SpenceWatson! Starting 2/1/2018, Sprint Family Locator is no longer available for download, and will be decommissioned.

    Also, special price for current Sprint Family Locator Customers- only $5.99 when they migrate to Safe & Found!

    Ciara
    Sprint Social Care
    =====================

    Rock and Roll baby!

    Liked by 2 people

        1. Update to my conversation with Sprint. I asked about my “friend” who didn’t want to switch over to Safe and Found and I received the following reply from the Sprint rep:
          =========================
          Hey there SpenceWatson! Since Sprint Family Locator has already being decommissioned, it could stop working at any time.

          We do not have a specific date as to when it will stop working.

          Ciara
          Sprint Social Care
          ===========================
          At first the Sprint reps were quick to get back to me. This question took 4 days. Guessing the rep asked her manager for feedback b/c she couldn’t answer.

          Like

          1. “It could stop working at any time”

            😂 Hilarious answer, but bullish (if anything). The mere notion of it “stop working” implies that it’s (still) their intent.

            Nice work! 🙌🏼🙌🏼👍🏼

            Like

  6. Hi Shockexchange,

    I believe SMSI already had a customer for this product, specifically the Rebelle 3 software SMSI specifically called out in the PR. SMSI most likely went out and found a software provider (Escape Motion) who sells the product their customer wants to buy. In this case, they’re simply acting as a broker.

    I don’t expect this deal to be much bigger than servicing one or two customers. SMSI is selling Rebelle 3 for the same price Escape Motion is selling on their own website, so I don’t see retail customers buying this from SMSI when they could buy directly from the creators. I imagine SMSI is servicing a larger customer and the only reason that customer is buying from SMSI rather than Escape Motion is because SMSI already services this customer and is providing some sort of account level support.

    I’d love to hear other views on this.

    Like

    1. I don’t see this as important news. Nice, but not important. The best thing about it is seeing them put out some PR (would like to see that accelerate for many reasons).

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      1. We’ll see where this takes us. Might be a great opportunity to buy shares for less. I almost hope it drops more than 10% but looks like it is finding footing around 1.90 area.

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        1. It’s a good thought, but I don’t think so. They have Sprint up and running, so they can redeploy those resources to other customers.

          I spoke to mgt about replicating the imobilemagic acquisition. There are lots of small companies out there that don’t know how to sell to carriers, so SMSI can buy many if them cheaply and make more deals like the one they made with Sprint.

          Like

          1. Well, they did say planned M&A so you are probably right. I also noticed the comment about accelerating their product road map, which is what drove my speculative comment. Perhaps T-Mobile has shown interest or something like that which would require them to get on their horse and run faster.

            Like

          2. Yes. Additional functionality will come with additional cost. I already discussed this with them.

            T-Mobile is charging $10 a month for a fraction of the Smith Micro functionality. The delay at Sprint related to the legality of migrating Location Lab’s customers to the Smith offering and charging more for it (something like bait and switch).

            That’s why they are offering existing customers the same old price for Safe & Found, but charging a dollar more to new customers.

            They will use new functionality to add revenue to both constituents.

            Like

          3. I do like how the stock is reacting to the news even though I would have loved the opportunity to load up at a much lower price. Are people finally getting smarter and understanding what is going on? Seems like we are starting to hit a turning point finally.

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          4. Yes. That’s exactly what’s going on. I’ve put enough out there for everyone to understand what’s happening…

            …now Management has come out in the press release and confirmed that they are going to be profitable in the second half (which starts in less than two months).

            This may prove to be the last chance to get shares at anything close to $2. I placed a bunch of limit orders before the market opened, but got no fills. 🤷🏻‍♂️

            Like

  7. Seems to be good timing on their part, to do this just before the Q1 conference call/earnings. Probably will announce something then in regards to what they are planning with the offering. Above market offering should tell you that there’s something good coming up that the institutional investors know that participated in the offering!

    Liked by 1 person

      1. I am really surprised by the market reaction. By the way Mark one risk which I’m not sure you covered is 70% of business from Sprint… that’s a significant risk in any business. Maybe this keeps valuations lower?

        Like

        1. Relatively speaking, definitely.

          If they can do 50-cents of high growth Recurring EPS, they could attract a PE of 50+, but with the customer concentration risk, they might only get a PE of 20 until they sign additional carriers (I mean “ramp”… they’ve already “signed” many carriers).

          As for the market reaction, there aren’t a ton of institutions involved here yet. Retail investors always react negatively to an offer, despite what I’ve written to the contrary. https://seekingalpha.com/article/3976652-radcom-power-buying-low

          Got RDCM @ 11 that day and doubled my $$ in a few months. It just comes out with simple question, “was the money needed (bearish), or was it for expansion (bullish)?”.

          This is clearly for the latter.

          Like

    1. It doesn’t make much sense to sell the stock for this particular deal. They won’t make a profit unless the stock gets and stays measurably above $2.16 (midpoint of the stock and warrant price).

      Like

        1. Yeah, but I would have preferred the deal by a small margin due to the warrants and ease of purchase. It’s not easy to buy hundred thousand dollar blocks of the stock!

          Like

          1. That’s right. I forgot you were loaded! I am thinking in terms of what I can afford! 🙂

            Like

    1. I’ll check the SEC website.

      That being said, the better question is, do you want to be out of the stock if things are going so well, they are likely about to announce another accretive acquisition, could ramp another carrier deal, or anything they might bring up on Wednesdays earnings call?

      It’s one thing when a company like HMNY is forced to sell shares to fund operations. in that instance, we know there will be selling. But guessing whether or not institutional investors will sell any shares they picked up on an offering (especially when they paid a premium) is not a wise game.

      Again, I point investors to what happened to RDCM. At times like these, the best decision is to focus on the risk/reward and what you think the stock is worth to YOU.

      Hope that helps. Cheers.

      Like

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