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:
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.
- China Mobile (China: ~850 million customers)
- Verizon (US: ~150 million customers)
- AT&T (US: ~140 million customers)
- Vodafone (UK + 25 countries: ~450 million customers)
- Nippon Telegraph & Telephone (Japan)
- Softbank (Japan)
- Deutsche Telekom (Germany & 50+ countries: over 100 million customers)
- Telefonica (Spain + 20 countries: over 300 million customers)
- America Movil (Mexico / Latin America: ~280 million customers)
- 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…
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.
- Are SMSI’s Unlocked / Hidden Assets Worth Over $20 Per Share?
- Sprint FINALLY Ramping Up SMSI’s Product!
- 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. 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.