Smith Micro (SMSI) Special Report: Part I

Opening Disclosure — 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 and context 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.

_________________________________

 

SMSI SPECIAL REPORT: Safe & Found Reads Into Sprint’s Retail Channel

PART I – Intro & Top Level Data

 

FYI, I’LL BE HOSTING MY NEXT STOCK RESEARCH & INVESTING LIVE Q&A ON WEDNESDAY AT 1PM ET. DON’T MISS IT!

First, I want to thank everyone who participated in this boots-on-the-ground research effort. The response was fantastic. The 50 or so investors who contributed to it have been rewarded by receiving this entire report last week.

Everyone else will benefit from their efforts, but will receive it in parts over the coming days. In the future, if you’d like to be among those who get it early,  please consider contributing to our next collaborative effort!

 

FYI, we gathered data on nearly 200 stores (nearly 5% of all Sprint stores in America!). That effort has provided us with valuable insight into the Safe & Found rollout at Sprint (and therefore, how well SMSI’s SafePath product is likely to perform in the months and quarters ahead).

Of equal importance, I have presented the findings to key people involved with the Safe & Found initiative. Based on the feedback, I believe that our efforts will contribute to its success (and therefore the success of our investment).

Speaking of which, please visit my Twitter page and Retweet as many of my Safe & Found Tweets as possible.
Spreading the word will help to raise awareness, adding value to our investment!

_______________________

 

Before we get rolling, here’s a statement regarding this study’s statistical significance. I want to note that it was contributed by the StoryTrading Research Group. They’re doing great work to advance the virtues of boots-on-the-ground fundamental research (which is dear to my heart), along with profitable trading strategies.

Jumping right in, while our data has provided extraordinarily valuable insight, it should be noted that the z-statistic (required to calculate C.I.) cannot be calculated on a non-normal distribution as seen below.

Therefore, here is the descriptive statistic on the number of sign-ups per week and its implications

Number of Sign Ups
Mean 3.557615894
Standard Error 0.403398846
Median 2
Mode 0
Standard Deviation 4.957048007
Sample Variance 24.57232494
Kurtosis 12.6745191
Skewness 2.994436243
Range 35
Minimum 0
Maximum 35
Sum 537.2
Count 151

 

This means that on average, based on our sample size, each store is signing up an average of 3.55 subs per week.  The mode here is 0 which is almost assuredly attributed to a timing issue where Sprint hasn’t fully rolled out the Safe & Found Initiative.

In fact, our hit-rate for in-store posters was roughly 25% just a few weeks ago… but is now over 60%. Once this gets close to 100%, I expect that things will really start rolling nicely.

For data process-ability, the StoryTrading group was kind enough to provide an analysis showing what happens if we eliminate the stores with 0 signups:

 

Number of Sign Ups (w/o “0” Stores)
Mean 4.671304348
Standard Error 0.485296807
Median 3
Mode 1
Standard Deviation 5.204228463
Sample Variance 27.0839939
Kurtosis 11.27981341
Skewness 2.858498894
Range 34.7
Minimum 0.3
Maximum 35
Sum 537.2
Count 115

 

As expected, the mean gets a nice bump with the most frequently appearing number (mode) being 1.  What this means is that, if a store does indeed roll out this initiative, on a national level, each store will see about 4.7 signups per week but don’t be surprised to see a store that is signing up at 1 per week.

The high standard deviation (5.24) is indicative of the fact that we are in the early stages with some highly successful signups to some just getting started.

_______________________

 

OK, with that said, let’s do some more diving into the numbers.

FYI, this analysis focuses on the original 151 store checks that were sent to me before the survey deadline. The subsequent data looked similar, so I’m not going to spend extra time to redo the entire analysis for the late-comers.

First of all, anecdotal feedback makes it clear that families are signing up at an extremely high rate. The average attach-rate in our survey was a whopping 69%. I should however caution that the sample size was very small. Among stores reporting an overall attach rate, the sample size was also small but came in at an extremely-strong 30%. Anecdotally, non-families have been finding novel ways to use Safe & Found (i.e. bosses in charge of small groups of workers). This has extended Safe & Found’s appeal beyond families, something we can expect to continue as its functionality expands (especially when its IoT capabilities are rolled out).

Of course, the key stat is that the average Sprint Store in our survey is doing 3.56 subscription sign-ups per week.

 

That implies an overall attach rate of 15% (suggesting that our aforementioned 30% data is indeed affluent-area skewed). But that’s still enough to add over 750,000 subscribers per year (Sprint added 1.275M new customers in Q1, which is 5.1M annualized).

 

Now, obviously we shouldn’t count on that. Indeed, there are mitigating factors that likely impacted our data set. However, what’s great about the number above is that they leaves more than enough room to overcome our affluent-area skew (something likely caused by the fact that we are all stock investors who likely called stores in nice areas, near where we live).

 

What does this all mean for SMSI and its future EPS?

Well, if you do the math, you can figure it out. If you want me to do it for you, I’ll tell that it leaves me bullish relative to my past research on SMSI. So, you can check out what I’ve written or…

Stay tuned for Part II, coming tomorrow!

 

ALSO, I’LL BE DISCUSSING MORE FINDING DURING MY NEXT STOCK RESEARCH & INVESTING LIVE Q&A

WEDNESDAY AT 1PM ET. DON’T MISS IT !

 

_________________________________

 

More Research:

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

23 thoughts on “Smith Micro (SMSI) Special Report: Part I

  1. With an implied overall attach rate of 15% (or around 750,000 subs from Sprint) — EPS = .80+ in just one year.

    It will prob take them awhile to fully ramp up and have all 4,000 stores running the way we want them to but this would be double the rate at which we first calculated to be.

    Heck even if we cut that attach rate in half, we are still slightly above the numbers we first calculated (350,000 subs annually).

    Either situation would be great! But this seems really bullish and I’d still love for us to solidify the data points some more, maybe an increase of sample size would help?

    Like

    1. Great post Saif. Way to do the math. I’ll release the info (and more) publicly in the days ahead. There are also one or two surprises that wasn’t in the original report (because it had nothing to do with our survey). New data points…

      As for increasing the sample size, or sample size is very good, especially considering the anecdotal/qualitative data points we received from my contacts in the field.

      That being said, more is always merrier, so feel free to lead an effort to expand the channel checks. As for me, I’m quite content with what we did. Time is money and that was time well spent. To me, spending more time on this particular topic would be whipping the winning horse past the finish line. 😂

      Liked by 1 person

      1. Lol I suppose so, i’m just being skeptical due to how bullish those numbers are! I’m not saying the numbers aren’t true but if theres anyway we can solidify those numbers more accurately, its worth all the time to me.

        I haven’t come across a stock thats going from negative cash flow to potentially $1.50 EPS in 2020 (with these numbers)!

        These numbers that make one tingle with excitement lol!

        Like

        1. I’m skeptical that the sky is blue, and yet it is. 😂 Seriously though, it took a long time in life to accept data for what it is.

          That hasn’t made the data right every time, but my returns improved significantly by trusting what my eyes see and my ears hear. I take the losses with the wins, because the wins are much more plentiful… and more importantly, rewarding.

          That’s how the big money is made.

          Like

  2. 15% sounds too bullish for me… unless they include Push-to-Talk ala Zello! That would be a killer feature. Then I would believe 15% or more. Just my meaningless qualitative opinion. Data talks.

    Like

    1. Hey Mark,

      I was trying to find a post of yours before where you mentioned other add-on services which had attach rates of 15% and higher. Mind sharing what those were — or where do I search on wordpress to find that — I couldn’t find the link.

      If others can do it, I don’t think its out of sight for SMSI to do the same and well the data seems to speak for itself.

      Like

      1. Stay tuned. The Special Report series will discuss many topics. I prefer not to discuss any of the report findings until they are made available to the public, except maybe in Wed’s LIVE YouTube Q&A session.

        Like

  3. Just to play devil’s advocate – Doesn’t that calculation ignore the fact that the 15% attach rate is for a free trial? The more significant data point is the % of users that continue the subscription after the free trial ends (so x% of that 15%). That number is an unknown at this point, but will certainly be less than 100%.

    Like

    1. Consolidated your posts into one for everyone.

      Great question. This should come as no surprise, since both companies are posturing and continuing to compete. It would be a shock if they didn’t add additional Family services. Would it be better if they signed SMSI? Of course, but SMSI has had its hands full with Sprint. So, yes, this lessens the likelihood of SMSI adding T-Mobile’s million subs in the near term, but that would have only added upside to what I’ve been discussing, not downside from not having having access to it.

      As I’ve said before, there are (and will be) lots of choices. SMSI will never be a monopoly in this space (otherwise the stock could be worth multiple billions; but we only need a couple hundred million to make multiple bags, IMHO).

      If you’ve been studying the various offerings, you’ll see that each one comes with different strengths and weaknesses. Family Mode is cool, but encourages folks to get a special Wifi box for home. This will NOT appeal to most parents (who are not tech savvy). Most want simple solutions and choices.

      FYI, T-Mobile’s feature comparison chart is also inaccurate. They gave SMSI five Xs that should be checks 😂 (Filtering, Usage, History, Pause, and Scheduling). It seems that they are trying to hastily respond to Sprint’s offering (perhaps realizing what Safe & Found is doing for cellular service sign-ups), but they are liable to confuse customers with their multiple Family offerings. Too many choices; too much complexity.

      In contrast, SMSI is app-centric and focused on its IoT device support. By next year, they won’t be competing with other Family offerings. It will be a broader-based product for tracking ANY valuable or loved one.

      Ultimately, I believe the worst likely scenario is that both end up coexisting for years to supply choice (particularly for tech savvy families). I think a more likely scenario is that the new solution fails to gain traction and they switch them over to SMSI a few years down the road.

      Either way, it will be YEARS. A few reasons:

      1) customers don’t like to switch. In fact, they HATE it. That’s part of the reason why it took SMSI almost 2 years to get this far. The further they get, the harder it is to get them out 😊

      2) regardless of customers, it takes years to enact such changes at a carrier (technically, operationally, etc). That’s the other main reason why it took SMSI almost 2 years to get this far.

      3) according to a contact of mine who is a carrier M&A expert, any changes will likely take a lot longer than usual, because both companies will be far too busy with more important merger-related assimilations (primarily the network and merging the customer bases… it going to take years).

      While that’s negative for how long we might have to wait to potentially get T-Mobile’s customer base (reward), it also lengths the risk time in case things don’t work in SMSI’s favor. In the meantime, SMSI could rake in more than enough profit to cover its entire market cap (more on this mañana) 😉

      Frankly, I’ll take it. SMSI just needs to execute at Sprint for us to win big.

      Bottom Line: Again there is and will be a lot of competition in this space. Luckily, SMSI only needs 1% market share to represent ~1M subs; and while Sprint is their largest customer, they have several others and are working to get into more.

      You’ll see what that math represents in tomorrow’s report. 😉 Then, I’ll discuss this in greater depth during the LIVE Q&A session on Wed at 1PM ET (link below!). 😊

      Liked by 1 person

      1. This is awesome, thank you for sharing your thoughts with me. Probably like many others, my initial reaction was this is not good for SMSI. Like you’ve mentioned: (1) Eliminate the opportunity for SMSI getting T-Mobile customers. (2) People don’t like changes, so IF T-Mobile is able to capture enough customers and IF two companies do merge, eventually it would probably be easier to switch people from SafeFound to FamilyMode. Perhaps SafeFound is ahead of FamilyMode right now, but I am sure T-Mobile will find a way to make it works. Many investors want to see long term growth in a company, I am a little skeptical about SMSI’s future outlook. However, “my opinion doesn’t matter”, I look forward to your report tomorrow. 😉

        Like

        1. Yep. There are risks and concerns with any investment, especially ones that have as much potential as this one. The trick is to avoid confirmation bias (overweighting the wrong data points) and recency bias (overweighting the most recent data point).

          But that’s exactly why I invest in companies like this. By doing the extra homework and properly weighting the positives and negatives, I can handicap the stock better than most investors (especially since I’m competing against retail investors / daytraders, not institutions) and make high returns year after year.

          Cheers!

          Like

  4. Hi Mark,

    I would be happy to analyze these data from a generalized linear model framework which would allow for non-normal statistical distributions. Count and percent data are usually fit on a negative binomial distribution. They could also be transformed. If there are dates and times associated with the data, we could analyze the ramp up as well. I could also produce a series of graphs that may be of interest.

    Cheers,
    Aaron Rhodes

    Like

    1. Hey Aaron! Appreciate the offer, but we have a six-sigma guy in our corner too. That being said, hit me once the entire series is out. I’m sticking to a strict publication schedule to respect the efforts of those who contributed to the effort, but after that I’m open to better leveraging the data, assuming we don’t decide to do it in-house here.

      Like

  5. I’ve done some digging and feel great about the balance of pros and cons. I even uncovered NEW bullish data points.

    I’ll discuss everything in greater depth in Tues and Wed’s reports, along with Wed’s Live Q&A, so stay tuned!

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s