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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.
Please forgive any issues with the formatting. I worked on this piece until 4AM and had no energy left to make it look pretty. Cheers.
Last night, Smith Micro Software (SMSI) reported its Q1 results. As I previewed, the numbers were fine, but unimportant because the meat of the Sprint ramp is happening here in Q2. All of the exciting stuff was discussed on the conference call… and there was no shortage of exciting stuff!
As you can tell from the title of this article, we got what we wanted (and more).
If you want to skip to the punchline, feel free to scroll down to the Quote of the Call.
Otherwise, strap yourselves in. This is going to be a doozy…
Let start by getting the obligatory metrics out of the way. SMSI reported revenues of $5.46M (roughly flat vs. last year) and a net loss of $2.38M, a $500,000 (17%) improvement over last year’s Q1, despite 1) increasing R&D for the second straight quarter and 2) the company’s annual participation in the Mobile World Congress in Barcelona.
These numbers were in line with my expectations. The ramp at Sprint is just beginning to gain stream, so revenues from that relationship will be more prevalent in the Q2 results. Management’s press release commentary confirmed this:
“We believe we are very well positioned to continue executing on our strategic initiatives, resulting in expanded revenues and a return to profitability in the coming quarters.”
Later in the call, CFO Tim Huffmyer stated that SafePath generated “several hundreds of thousands of dollars” in Q1.
This was ahead of my expectations.
Based on my review & download model (built in-part on data provided by diogenese19348 from the Yahoo message boards), I estimated that SMSI exited Q1 on a $600,000 run rate. Since Q1 encompassed Jan 1 through March 31, I expected that SafePath only generated about $250,000 in Q1.
Mr. Huffmyer’s comment implied a minimum of $300,000.
Adjusting for this, my tracking model now gives me confidence that SafePath is now on a run rate of about $1 million per quarter.
That’s excellent progress for a product that is just getting started, hasn’t yet benefited from a forced switch-over (which is slated to occur in the coming weeks, according to my due diligence), and is suddenly streaking up the Google Play download charts:
In other words, the company is now showing momentum, which explains why they’ve been exuding such confidence over the past couple of months.
A full transition of Sprint’s Family Locator installed base would drive $3.5 million in quarterly revenue for SMSI. However, a full transition won’t happen (because some % of customers will cancel Family Locator without transitioning to Safe & Found, a.k.a. “breakage”). Luckily, this breakage will be offset by new customers, which Sprint will aggressively target starting this month, according to SMSI.
In other words, the company is making great (and now, accelerating) progress toward generating $3.5 million per quarter from Safe & Found. With expected operating margins in range of 70%, the math says that we can expect over $1 million in SafePath revenue for Q2. A continuation of this momentum leads to profitability in the second half (which is exactly what management has guided us toward).
It’s always nice when the numbers line up with management’s comments (and when management’s comments line up with reality).
The conference call provided further confirmation (of several things).
For starters, it should be noted that I was one of only two analysts who asked questions on the call. I view this as positive for the stock because 1) the story is clearly still under the radar and 2) the other analyst was James McIlree from Chardan Capital.
McIlree is a sell-side analyst. The only reason for him to be on the call is to prep an initiation report… and he’s typically generous with his price targets.
“I am encouraged with the progress made during the quarter across several areas of the organization. The first quarter results were in line with our internal expectations as we continue to build momentum with the launch of our SafePath platform at Sprint……I also want to address our recent private placement that was announced last week. We believe this is very positive for the company, strengthening our balance sheet, allowing us to accelerate our product roadmaps and M&A activity for 2018.”
“The funding was completed on May 3 and provided $6.3 million of net cash to support the business, as we evaluate our product roadmaps, M&A opportunities and as the SafePath platform continues to grow subscribers……We are extremely excited with this new round of funding as we continue our journey back to revenue and profit growth.”
“The wireless segment reported quarterly revenue of $4.8 million, compared to $4.4 million last year. The increase in the wireless revenue was a result of growth in both SafePath and CommSuite revenues as customer adoption rates increased for both product families, offset by lower revenues from a legacy QuickLink connection manager contract that came to end of life.”
“Our graphics portfolio will continue to grow throughout 2018, as several more releases are planned. These additional releases will further energize our market expansion, as we seek to transform our graphics portfolio into our comprehensive toolkit for digital artists.”
“I think that we are the premier (distributor of these kinds of products). We have two lead products that are very, very well-received in the market. I think that we have traveled all over the world to find these products, and I think we can continue to do that. And it really just builds on this idea of having a digital portfolio for artists. And I think what you see is a complementary group of products being slowly brought on board more and more”
“There are some exciting content-based opportunities emerging for graphics business in the expensive online universe of digital comics and the emerging virtual-reality market. Needless to say, there are exciting changes on the horizon within our graphics lineup, so stay tuned for future announcements.”
“During the fourth quarter of 2017, we rolled out CommSuite product enhancements, which we’ve now seen positive results from, and we do expect will contribute to 2018 revenue growth. Revenue from the Sprint SafePath launch is expected to accelerate based on recent and expected Sprint actions.”
“As a reminder, the Sprint launch is unique and that Sprint has an existing base of subscribers using a legacy product. The legacy product was originally due to sunset in first quarter of 2018 but has subsequently been delayed for several months. This change was based solely on Sprint operations and was not a result of the SafePath application, or change of our contract status.”
“Operating expense for the first quarter was $6.2 million, a decrease of $700,000 or 10% comparing to last year. In the near term we expect our quarterly operating expense to be approximately $6 million, which excludes any unannounced restructuring plans.”
“Strategies to boost customer loyalty and reduce subscriber churn remain a high priority for all mobile service providers. Of course one of the most effective ways to combat subscriber churn and create stickier customer relationships is through value added services like our SafePath Family platform and our CommSuite messaging platform.”
The key word there is “sticky”. Traditionally, SMSI has produced products that have been more temporary in nature. They make good money for a period of time, but the carriers don’t need the products indefinitely.
“Let’s start off by talking about our SafePath implementation at Sprint, known as Safe & Found. Subscribers of the new Safe & Found service at Sprint continue to grow in correlation with the carriers increased marketing efforts. “
“Sprint continues to transition users of its legacy service to Safe & Found. There are several initiatives underway to acquire new users for the service as well. For example, Sprint is rolling out a new MMS-based acquisition campaign this month, targeted at its wider subscriber base.To support this initiative, they will also launch a retail-based campaign to build service awareness. To promote the Safe & Found service, Sprint is training and compensating retail associates and will be launching additional new promotional activities throughout the year.”
“With the next release, SafePath will evolve to a digital lifestyle management platform for the entire family that will provide enhanced location services, easy to use parental controls, powerful web filtering functionality and built-in support for new IoT products and services.This improved platform will extend the product’s capabilities to support a multitude of new consumer-oriented use-cases around wearable locators, pet trackers, onboard diagnostic devices (driver tracking) and home automation platforms.”
“It is also important to note the functional superiority of our SafePath platform on iOS devices versus the legacy service we’re focused on replacing. For instance, some large carriers such as T-Mobile still use the legacy platform, do not even offer an iOS version of the family location app. This lack of an iOS application leaves a significant portion of the user community without the access to a family safety platform. We see Sprint’s decision to replace the old service with the SafePath Family as a strong indicator that our vision for Family Safety services is directly on target.”
“Now let’s discuss the proposed merger of T-Mobile and Sprint. This will be a major change within the wireless world. First off, we have seen mergers many times over the years. I understand the process. I know how to develop and position our wireless solutions to take advantage of new opportunities as they arrive. In terms of the future of our business, I view this proposed merger as a stimulating and energizing opportunity. As you know, Smith Micro has always been very opportunistic, and I believe our ability to adapt and respond to the ever-evolving wireless marketplace is an advantage.
Our strength in balance sheet will allow us to accelerate roadmap development for both CommSuite and SafePath, products presently sold to Sprint…
…we have strong relationships with both Sprint and T-Mobile. Both carriers know our solutions and are confident in our ability to deliver valuable service offerings. As such, should Sprint and T-Mobile complete their merger, we are confident in our ability to leverage our relationships to expand our market position and support theirs.”
“I look forward to an exciting 2018. It promises to be a year of expanded revenues and a return to profitability in the coming quarters.”
Okay, good enough. When you talk about the $3.5 million full transition, what kind of profitability would you expect? Can you give us some color on how that might look?
Yes, Mark. The profit range for this product is set around 80%. So there – we’ve talked in the past about us not having to add much cost structure, necessarily to accommodate the scaling of this platform. So I think that probably will give you some good directional input from a modeling standpoint.
Okay. So nothing has changed there in the last several months?
Looking at the recent raise of $7 million, when might we hear more details about your M&A initiatives?
I think it’s fair to say that the company has been quite acquisitive. So as soon as we have things to talk about, we’ll announce that. I think this does put us in a much stronger position for all the different things that we’re working on.
Looking at Safe & Found, the Google Play reviews have risen from 2.1 stars before April to close to 2.7 for the month of April, and now over 3.0 for the month of May. To what can we attribute this?
“…we’re making changes in the product itself to better serve (our customers). That’s one aspect of it. Being extremely proactive with our reviews and a lot of it is actually teaching them and showing them how to use the product…
…the most important thing is also just getting more reviews. There is a very small number of reviews, and I think you’ll see that going forward it’s a very big focus of the company across-the-board. So there’s several initiatives underway to get that moving in the right direction.”
“(Sprint wants) to get to a single platform and it’s just a matter of time to get people to move across. I don’t think anything has changed on that I think some of the marketing that you’re going to be seeing coming out from Sprint, only reinforces what I just said.”
You talked about moving your development and M&A initiatives — accelerating those efforts. Is that a direct result of the success you’re seeing at Sprint…?
“…this is one of those moments where you have a great opportunity to seize the marketplace and really move beyond what any of the competition is up to. I think that really is something that works for both SafePath and CommSuite…
…these are two products that we make a lot of our revenue from and we see both of these products being significant revenue drivers for us in the coming quarters. We just would really like to get so far out in front of the competitors, there’s just no way anybody would look to anybody else but us…
…I think the Sprint implementation being the first Tier 1 carrier to roll out our software offering, has been a great opportunity for us to learn more about what it takes to compete, to fine-tune our product, to fine-tune our offerings, to understand the go-to-market strategy, to understand what the user base is really looking for and we’re leveraging off of that. And then we’re going to take those learnings to other Tier 1 carriers, be that in the other part of the Americas, or in Europe, or in Asia/PAC, where we already have presence, and really try to grow this offering.
I think Family Safety is subject area… that’s near and dear to the hearts of people no matter where you live in the world. And these are scary times. There are strange things happening and being able to monitor the safety of your loved ones is really critical. So I think, it’s a great opportunity, and we intend to seize it.
We have been fortunate in raising additional capital that makes that even more possible. And we’re going to move forward.”
“we actually have a very strong conversion of people trying the app and using it to free trial. We’re actually quite pleased with that at this stage.”
“I don’t think (carriers) have to wait for 5G. I think wearables work well just fine under 4G as well. But I think probably the most important thing that we need to point out is the fact that SafePath provides a platform for which all wearable devices can be commonly connected to the carriers’ network. So that’s a major differentiator between SafePath and many of the competitive offerings that are out there, is that when SafePath was designed, it was designed with this in mind.”
“we are actively developing integration pathways within our visual voicemail product, to tie in with other voice-centric devices, such as Amazon Alexa and Google Home.”
“Next, let’s talk about our, QuickLink IoT platform, which continues to grow and evolve. The continued expansion of the IoT market has created emerging useful cases that we are well-positioned to address…
…We’re currently in conversations with several device and chipset OEMs as well as IoT solution providers and operators who have active interest in using our lightweight M2M client to add substantial management functionality to these resource-constraint devices. In the coming quarters, our QuickLink IoT product development team will continue their effort to reduce the size and resource consumption of our client, which will increase our competitive advantage in this attractive and growing market.”
“Now for a bit about our Wi-Fi optimization and management solution, NetWise. In terms of license count, the number of installed instances of our NetWise client continues to grow across our three major customers. Additionally, during the first quarter, we also saw growth in policy counts. This is a positive and solid indicator of the utility and effectiveness of our NetWise solution as an enabling technology in the emerging market of Wi-Fi-first mobile service. We see a fresh upside with NetWise, as we expand our market presence on new device types.
We also enhanced our analytics engine during the first quarter to better capture important data metrics, central to network planning, cost-saving strategies and in-depth understanding of Wi-Fi usage trends in large device populations. From these developments, it’s evident that the cost-saving benefits and strategic insight, enabled by our NetWise solution, continues to have value across the mobile services industry.”
“I think it’s intriguing to watch the growth of the wireless business at the cable MSO’s. Comcast is long-term customer. We have added cable customers as well here in the U.S., a very large size. So we have a lot invested in the sector.I think the activities that are going on between Comcast and Charter only serve to move this along, and we see this as a good opportunity. We’re here to really focus and help them move their business case forward.”
- SMSI: Safe & Found Downloads Spike! Sprint Says Family Locator “could stop working at any time”
- “Top Ten Stocks” Update (and note to HMNY watchers): AMC & GAIA Report Stellar Earnings!
- Smith Micro Raises $7 Million (At A Premium) To Accelerate Its Momentum
- HMNY’s ATM Offering: Where’s The Stock Going Next?
- 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.