Smith Micro (SMSI): Knocking Down The Dominoes!

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.

The following article was authored by Spence Watson with contributions and editing by yours truly. This is what happens when a little blog fosters research collaboration and succeeds. Hope it inspires you to join the revolution. Enjoy!

After the SMSI Q1 conference call it became apparent there are five dominoes / catalysts that should be falling in quick succession:

1. New major release of Safe and Found

2. Nationwide PR campaign from Sprint

3. Final sunset of Family Locator

4. Initiation of Wall Street coverage

5. SMSI marketing their story to investors

Assuming these business-related dominoes fall, five investor-related dominoes should follow suit:

1. Television, text, email, social media, and aggressive in-store coverage, driven by Sprint and AAA promise to make SMSI’s Safe & Found service a household name among Sprint’s 60 million subscribers and AAA’s 58 million customers.

2. Of course, this will raise SMSI’s visibility among investors, just as Fortnite has propelled Turtle Beach (HEAR) and MoviePass made Helios (HMNY) a moonshot for early/nimble investors. Like $HEAR and $HMNY, I believe that the prospects for profitability will drive SMSI’s share price.

In that regard…

3. SMSI is following Turtle Beach’s path. Management has said that it will turn profitable within months. This, along with Sprint/AAA’s nationwide campaign, should spark a commensurate revaluation of SMSI shares.

4. A continuation of its recent Safe & Found momentum should give SMSI the bandwidth/cache to ramp its numerous other already-signed carrier wins. (a subject which was previously covered). With its high operating leverage, Management’s statements imply that SMSI can deliver at least $0.40 of SaaS-based EPS in 2019.

5. This would lend visibility to $0.80 of 2020 EPS, further multiplying its share price (the shares are currently just $2). This should put SMSI in the Russell 2000 discussion, taking its visibility on Wall Street to the next level.

As it stands, SMSI is already seeing increased institutional interest and ownership (a story to be covered later this week). Today, we will discuss our discovery that Sprint started rolling out its nationwide marketing campaign this week!

The first domino fell on May 15 with the release of version 1.3 of Safe & Found (which was discussed here a few days ago).  Immediately after this release Sprint began two new marketing campaigns around Safe & Found:

Marketing Campaign #1

Sprint obviously places a high value on their relationship with AAA and on May 15 they began aggressively marketing their relationship with AAA. As an AAA member you are entitled to the following perks with Sprint:
1) Member only pricing on phones and plans.
2) Sprint will pay your yearly AAA membership!
3) FREE membership into Safe & Found.

And in case you haven’t read Mark’s research, SMSI gets paid a flat fee, which he estimates at $3.50 per month per subscriber, regardless of whether Sprint sells it for $20 or gives it away for free!

To facilitate this marketing campaign, Sprint created the following landing pages:

• https://promo.sprint.com/AAA/NewOrExisting/
• https://safeandfound.sprint.com/subscription/AAA

These landing pages are for the 58 million people who are current AAA members or those considering AAA.  I don’t have Sprint or AAA but I have seen ads numerous times over the weekend on Facebook like this one:

When you click on these ads, you get taken directly to the landing page where after answering one question you are shown the three benefits of being with Sprint and AAA.
To make it even better, some AAA sites are sending their members directly to this landing page.  Take a look at the AAA website for all of the North and South Carolina (https://www.carolinas.aaa.com/).

That yellow bar across the top takes you directly to the mentioned landing page.

These are just two of the ads I have seen this weekend of Sprint aggressively promoting their relationship with AAA.

The most exciting thing is that Sprint will give you Safe & Found indefinitely as long as you know the magic word — AAA. You can go to the Sprint AAA promo site and read this:

“Sprint will pay Classic or Basic AAA membership renewal for as long as you remain a Sprint subscriber”

OK, so I pay for my first year of AAA and get Safe & Found for free. After that, Sprint will pay my AAA membership and give me Safe & Found as a perk.

In Summary: If you are one of the 58 million AAA members and one of the 57 million Sprint customers, Sprint will give you Safe & Found FREE OF CHARGE and pay SMSI a monthly license fee.

This is a benefit that Sprint and AAA are telling as many people as they can about! That in itself is exciting news. However, I promised two promotions, so here’s the second.
Marketing Campaign #2

Sprint upper-managers have officially started touring Sprint stores around the country to train associates on the benefits of Safe & Found. As part of this, they are decorating the stores with Safe and Found promotional material.

Judging from the efforts put out, one would assume they are training members to up-sell the service. However, it goes further than this. Due diligence has revealed that application attach-rate are going to become a focused metric in the near future.

In other words, reps will have incentives (carrot and/or stick; we don’t know yet) for pushing applications like Safe & Found to customers.

FYI, one Regional President at Sprint has been documenting his ramp-up activities. He started his tour on May 15th and has detailed many of his stops on his twitter. Some of his tweets from the past few days include:

• “Sprint offers great services such as Lookout (security on mobile device)/Safe and Found(family location service). Come and visit Sprint stores near you.”
• “Sprint offers great services such as Lookout (security on mobile device)/Safe and Found(family location service). Come and visit Sprint stores near you.”
• “Store in Campbell has great partners so that customers have great customer services. We have new services: Lookout and Safe & Found. Please visit Sprint stores near you.”

His twitter images are filled with Safe & Found promotional material. Here’s a nice shot of the Safe & Found poster in store:

It reads: Subscribers now get their first month FREE. Ask as sales rep for details.

Proof Is In The Pudding

These campaigns are less than a week old and just getting started.  What are the results thus far?  Let’s look at the app rankings:

Safe & Found spiked at the beginning of the month on Google Play, but eventually drifted a bit lower after that initial spike.  However, starting on May 14, it has been back on the rise (ranked in category):

• #64 on Monday –> #66 –> #65 –> #62 –> #60 –> #57 on Saturday.  A very nice steady climb back up to the 50’s.

Safe & Found has always been ranked low on iOS, but the new marketing initiative is paying off. The app was recently trending around #300 in category. But again, starting on Monday, May 14:

• #361 on Monday –> #299 –> #308 –> #243 –> #245 –> #221 on Saturday! On iPhone, Safe & Found has spiked from below #300 to low 200’s. This is an incredible jump.  The data speaks for itself.

If I’m right, Family Locator will soon be done away with, forcing subscribers to switch to Safe & Found. For now, they are gradually pushing for voluntary switch-overs and training employees before pulling the plug.

As we can see, they are being trained right now!

By the way, Sprint’s methodical approach to rolling out Safe & Found has many benefits. For one, they can retain as many subscribers as possible by making it their choice to switch.

Also, their support staff can handle the inevitable influx of calls that occur when a new app gets installed (even I have done my fair share of calling into their customer service call center!). Anyone who experienced the customer service issues during HMNY’s ramp-up can understand why a methodical approach is optimal.

As a result, until we see concerted nationwide coverage on Safe & Found, I will be quite happy to see the download numbers float in a range around the recent levels. It’s likely an appropriately manageable level for their support organization.

Adding customer service staff that you won’t need in a few months is unwise (especially for a new and highly strategic application like this one). Besides, as it stands, I estimate that the Safe & Found subscriber base will grow by roughly 100% per quarter through year end. That’s more than enough to keep the momentum rolling.

One Final Note on Reviews

My hunch is many negative reviews are being manipulated by someone or group with an interest in keeping Family Locator in place instead of Safe & Found.  Over the course of development there have been some known issues with the app, but Mark’s product trials weren’t able to confirm many of them.

For example, the app tends to drain the battery, according to some people. However, Mark’s phone showed that Safe & Found only represented a small percentage of his battery use (even though he was testing it heavily).

Further, the 1-star reviews almost always cite no issues and only say, “I want Family Locator back”.  It’s becoming clear that most of these 1-star reviews have never used Safe & Found.  They take the time to leave a review but can’t give a single reason why they hate it so much?  Sorry, I’m not buying it.

A Note Regarding The Competition:

1) Life360 (which was valued at about $250 million in 2014) has a locator app that has some automobile features that S&F doesn’t offer. However, S&F + AAA offers all of this and more. Adding AAA (paid for by Sprint) beats all of the competition (including all of the other U.S. tier-1 carriers).

Now I understand the significance of Sprint paying for AAA memberships. I wouldn’t be surprised to see insurance companies follow suit.

2) The Family Locator app is getting major manipulation right now: 40+ reviews per day, most of them 5-stars and no explanation. Someone is obviously manipulating the date against S&F and for Family Locator (though it’s shouldn’t be a surprise to see SMSI or Sprint counteracting).

I estimate that I’ve done about 500 hours of research on this one company. However, at least this time, it appears that Spence Watson has outshined Sherlock Gomes (sorry, couldn’t resist).

Great job, Spence… and great job SMSI. Stay tuned!

More Research:

• SMSI Q1 Results: Sprint Ramp Confirmed & T-Mobile Discussed!
• “Top Ten Stocks” Update (and note to HMNY watchers): AMC & GAIA Report Stellar Earnings!
• Are SMSI’s Unlocked / Hidden Assets Worth Over $20 Per Share?
• HMNY’s ATM Offering: Where’s The Stock Going Next?
• Smith Micro Raises $7 Million (At A Premium) To Accelerate Its Momentum
• 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

To get my posts in real-time, just follow/subscribe to this free blog.

If you only want to receive my most critical reports, simply sign up for my MailChimp mailing list instead. If you’re on that list, you will only get key articles and occasional recaps of all the work I’ve recently done.

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.