SMSI Special Report: Part V

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.

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LIVE VIDEO ALERT!!

At 12:30PM ET on June 29 (today, in 15 minutes!), I’ll be going LIVE on YouTube to discuss the latest news out of MoviePass.

This 12:30PM ET LIVE Videocast will review what the company said and calculate what it means for shares of HMNY.

It will be a 30-minute session.

After presenting my findings, I will take Q&A, time permitting.

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

PART V – CONCLUSIONS

After going through all of the data from this report series, it’s now clear why CEO Bill Smith has changed his answer when asked, “What’s your #1 priority?”

For the past year or so, he has always answered, “To make Sprint a successful lighthouse account to attract new accounts.”

At LD Micro, he answered, “To obtain new accounts.”

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Thus, anyone who has kept up with my coverage of the story should not be surprised that they haven’t signed any new accounts to this point. They’ve ceded opportunities in favor of making Sprint a lighthouse account. Based on my experience with software vendors who sell into major accounts, this has always been the best approach.

Thus, anyone worrying about recent wins simply doesn’t understand how these types of businesses work. In my opinion, they’re doing the best job of operating since 2010 (when they closed the year with $35.3M in Q4 revenue and EPS of 37-cents).

With continued execution and a little luck, I see no reason why they can’t get back to those level. Of course, I’ll continue monitoring their progress.

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Getting back to the LD Micro conference, Mr. Smith went on to say that he aims to “make SMSI a growth stock again”.

That should come as no surprise, since his stake in the company has risen for each of the past three years, with the biggest increase coming earlier this year:

insider
Source: InsiderCow.com

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I don’t think there’s anything else that needs to be said that hasn’t been said already, except THANK YOU to everyone who participated in this effort. As you can see, it has yielded great insight into our investment!

Of course, this doesn’t guarantee success / victory, so please be careful with your money. See my disclosures below and consult with your financial advisor before taking any action on this information. A colleague recently remarked, “I hope you become a very rich man from this Mark. You deserve it with the DD you’ve done here.” 

To that, I replied, “This is just another in a long line. It’s like playing pocket kings every hand — some lose, but most win. I never know which will lose, so I play every time and don’t complain on the occasions when they get cracked.”

At the very worst, I think we can count on CFO Huffmyer to continue driving the rest of SMSI’s business toward profitability, something that should be quite doable considering the complexion of the company’s business (software), tenure (35 years), and customer base.

To reiterate what I said in Part IV, with better cost controls in place, I feel that Mr. Huffmyer might be able to make SMSI’s non-SafePath businesses profitable. If correct, our downside risk is shrinking with each initiative he institutes.

In my opinion, the downside risk is 1x revenue, plus SMSI’s net cash balance (which is about 50-cent per share). That adds up to $1.50 per share if things go wrong.

On the flip side, based on my latest calculations, I had to raise my EPS estimates to 51-cents for next year and 88-cents for 2020 (with room for upside). You can see this in my public SMSI profit model.

If that proves accurate, SMSI should end next year with $1.00 of cash on the balance sheet, which should be added to whatever P/E multiple you wish to apply to the $0.88 EPS estimate.

Pick your number.

Looking at the trading action, short interest has been on the decline and the stock has been in a pennant formation for a few weeks (just taking a breather after the big LD Micro Conference run up).

It looks ready to break out of that formation to the upside:

SMSI Chart

 

FYI, now that SMSI is in the Russell Microcap Index ups & downs in the index will impact ETFs like $IWC (not $IWM), which now impacts SMSI (because of its inclusion in the index).

This will present opportunities.

For example, when IWC is down (Wednesday it was down nearly 2%), it will pull SMSI with it. But that’s blind selling, which we can take advantage of. So, I like the idea of being long SMSI and short IWC for anyone who likes SMSI but is afraid the market might drop some more.

If SMSI merely outperforms that market, that move will produce a profit. Better yet, both sides of the trade could work.

Coming up on the fundamental front, we have the Q2 earnings call. Also, Chardan should be initiating coverage before long. They can do it at any time, but have no specific track record in terms of timing. Whenever it comes, I have reason (actually reasons) to believe that it will be a strong report.

Other than that, my due diligence has determined that the Location Labs sunset date is finally established and circulating around the Sprint organization. Assuming nothing changes on that front, I believe we can expect a nice spike in subs within the next 6 weeks.

All things considered, I’m happy to have this as a part of my portfolio and look forward to seeing how it plays out. Filling my portfolio with risk/reward opportunities like these enabled me to retire young and continue earning 7-figures annually.

Hopefully, you can see from these reports that our research has been comprehensive. THAT is how money is made… not by staring at charts on a screen.

Trust me, I used to be focused on technicals, but I simply couldn’t outperform the market that way. With fundamental research, I can now buy, hold, and trade stocks better than most investors and beat the market consistently. Best of all, I don’t need to be a slave to the screen.

In fact, after my 12:30PM ET LIVE Videocast, it’ll be time to head out to the beach.

It doesn’t get much better than this.

Cheers!

 

Appendix A: Anecdotal Feedback & Notes

Notes:

* 4,000 Sprint stores each add ~3.5 new cellular subscribers/day

* Total customers = 32M post-paid subs w/1.7% monthly churn

* 12% U.S. market share

* U.S. population = 324M people, 250M adults, 83M Families, 73.6M children

 

Selected Anecdotes (selected based on level of detail provided):

Stores were targeted based off higher than above avg income and strong school systems. 7 of 8 had posters and one even estimating a signup rate of 90% (yes that is the number I was given in that store). The sprint employee who mentioned the 90% said it was easy in her opinion because of the free trial. The knowledge of the sprint employees in the targeted stores vs the first batch of random calls was far superior. Even more so, I got numbers at 15%,25%,60%,90% and in between.

 

Rep that answered phone knew all about it. Knew it was replacing the old app cause this one was better. Said several of the Sprint associates were using S and F and loved it. She said there were sales, but not able to quantify the number.

 

Going well with some small biz customers and many individual customers. They talk about the program benefits with customers along with the “lookout program.”

 

Actively sold it and knew product well. he store manager greet me and as soon as I said phones for my girls he walked me to the sign and started explaining the safe&found service. Asked him if this is something a lot of people get and he said 15% of new customers got it in the last month. Then a little later after some more questions he said “almost all family plans signed up for it”. The 15% included everyone and the way he responded to my question I’m confident he had recently seen a sales report and knew the number.

 

Inside a mall. The employee greeted me immediately. He pointed me right to the poster for Safe & Found which was in a poster that integrated the program with both Lookout Premium Plus and the Total Equipment Protection Plus. He stated that they try to sell all three at once to interested customers and explained the Sprint bonus program for employees that are able to up sell. I spent about 15 minutes talking to these two guys and told them that the other store said they were selling 5/day. He gave a cynical laugh and said that the other store always embellishes their numbers. When I asked them about their success rate, they indicated that about 1 in 25 customers purchase Safe & Found (3 to 4 a week), but they have been only promoting the program for the last week or so. I asked about their sales training and if someone from corporate had come out to educate them. There response was no, but they took digital training and taught themselves. The sales guy that initially approached me had a really good pitch and sounded like he knew what he was talking about so I think Sprint’s on line training about Safe & Found must be pretty good for motivated employees who want to push the product.

 

Staff well educated. They have no formal incentive to sell but it reflects well on them if their numbers are better. They sign up 10 or so new customers every week to Sprint service. They also offer it to present customers who may come into the store to upgrade a phone or change their plan, etc. They do not have exact numbers or reporting, so this was all their estimates. Commented that all sales were to moms with multiple lines.

 

They said that is has been available for 6 months. Just in the last 3 weeks she has started pitching the product. She said that they pitch it to everyone that signs up that has a family. She told me that around 50% are signing up in their store. She also told me that people have commented that they really like it. No negative comments whatsoever at this location.

 

He confirmed that if they have multiple lines or families they pitch the product to them. He also said that 75% of the people that he pitches it to sign up for it. A few of those people have come back in and expressed that they really like the product. Very positive no negativity toward the product.

 

They do have pamphlets though. This location didn’t know too much about the app. She said she just got an email about it and she had to pull up that email to give me any information about it. No one in this store has sold it yet. He said that it became a focus two weeks ago but didn’t have anyone yet that he thought could benefit from it so he hasn’t pitched it at all. Nothing negative here about the product, but they are also not pushing like the other stores either.

 

(Dealer not corporate) Yesterday just sold to a mom who reduced her daughters cell phone to just calling and texting – removed everythingelse from Android Phone. (This store is in the middle of residental community and goes after consumers).

 

Corporate store. Never sold S&F himself. Didn’t know much about it. Did know S&F was to be marketed to parents getting a phone for their child and it would allow the parent to know where the child was, limit what the child could do on the phone. (This store is big on small small business)

(southwest suburbs) (Dealer not corporate); Terrible sales job – he didn’t have a clue about S&F unlike the other two I spoke with.

 

3rd party store. When I asked about the app they did know what I was asking about. Still they pulled up a web page to read off of versus explaining what the app could do. However while I was in another person was told to go to a corporate store in order to have some sort of service done.

 

Actively selling the product. Even those who I talked to though still couldn’t tell me much about the app without first pulling up a web page and essentially reading off the computer.

 

Very knowledgeable about “Safe & Found”. Don’t know the statistics on sales, but he says the product is a pleasure to sell. That it’s a good/needed product and thus makes his job as a salesman more enjoyable. Saleman has worked at sprint for over 5 years and says you don’t really know how a product will fair until about 6 months into sales”.

“Says it’s a smaller store and the company is striving to be “green” (cut down on posters). Very knowledgeable about “S&F”. Don’t know the statistics on sales. Just started selling the product.

 

Poster displayed fairly prominently. As I was walking in, a father with two teenagers was walking out 😉 Very knowledgeable about “S&F”. Don’t know the statistics on sales. Just started selling the product. Employees seemed to like the product. When I pushed “why don’t i go with “find my friends” they all had a quick comeback with why “Safe & Found” is better.

 

Anthony said he has personally sold about 5 subs over the past two weeks and added that they have about 6 sales people in the store. (my impression is that he had no idea how many subs were sold by other sales people, so I’m guessing it’s more like 2 per day. He also said that about half of the sign ups were from existing customers who wanted a more thorough way of tracking their kids. He also mentioned that other carriers had similar apps but felt the SF provided more bells and whistles.

 

He had to ask another associate. The promo only started a week ago but I was disappointed that they guy did not know about it. He said he sold about 5 this past week. Overall, I trust the data from the first two stores over the last one in Mission Valley.

 

He said a very high percentage of parents are signing up. I tried to press him on the percentage and he said almost all of them sign up……probably because it’s free. He also said the app works great and hasn’t received any complaints.

 

 

Appendix B: Sprint Stores Posting On Twitter (see my retweets @PipelineDataLLC)

Personnel is selling aggressively S&F. “While your at it get some value added services by getting a second one for free with the Safe & Found app on us for the first 30 days.”

“Explaining the benefits of Safe & Found: real time gps.. locate/lock a lost phone.. AND parental controls. Amazing value for only $6.99/mo.”

“Come in to your local Sprint store and ask about adding #SafeAndFound today!”

“Team Sac just committed to selling 8 VAS (MG note: VAS = “value-added services”, like S&F) this weekend!!! This team is all about adding even more value to their already happy customers! #Lookout #Safe&Found”

They have a poster in the picture with S&F.

“Don’t forget Sprint has #SafeAndFound for #Families to have #Peace of Mind.  Come asl us how!”

X (an employee) sells the Safe&Found application;
Y adds Safe&found application to her new line of service;
Z gets another Safe&found out

“Having a party, stop by and see Steve and team for #platinumservice & check out the new #LGG7ThinQ with #safeandfound”.

“Good thing I have #safeandfound to make sure the kiddos stay safe!”

“1st Safe&found on the board via Amadeus Carter”.

“W adding a safe &found and lookout to her upgrading customer”.

“”Kids 1st phone? When is your child ready 4 a cell phone? With “Safe & Found” by Sprint keep your family always close & connected. Location & parental  controls made easy for all fam members. Stop into one of our 29 locations”

“Stop by and say hi to @8Jwwalker and team! Ask about #safeandfound.”

“Stop by and say Hi to @ShelbyLeeCrouch and team! @BstarWireless ..ask about #safeandfound.”

“Stop by and say hi to Kassandra and her team! @BstarWireless ask about #safeandfound.”

“Connect and Protect your digital life with these essential Sprint services. #SafeAndFound #LookoutPremiumPlus #TotalEquipmentProtectionPlus Visit our store for more information.”

“Visit Sprint by Swireless at 1124 Oro Dam Blvd to learn more. S&F.”

“Come down to @SprintStore2189 to get your full details about our Safe&Found.”

“Come to your local @sprint store and check out and ask for a demo of #safe&found. A great way to be in the know and have more flexibility with your children’s phones. Works cross carrier with the parent phone with #sprint  #geofence  #beintheknow.

 

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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.

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14 thoughts on “SMSI Special Report: Part V

  1. Love the structure of these updates by the way. Breaking it into the smaller reports made it easy to digest.

    Hmmm, on track to be similar to Q4 2010…[looks back at chart]…I see what you did there 😉

    Liked by 2 people

      1. Unrelated to SMSI but I know you had mentioned Cobalt in the past. My two US/Canada holding FTSSF (acquired my US Cobalt) and ECSIF look to have technically bottomed or are close to it.

        FTSFF nose dived after acquiring US Cobalt (although I’m still up 50%).

        ECSIF had a huge sell off on 6/26 and is breaking back in BB/KB and looking to the 20dema.

        No real fundamental changes in either, I still believe they are the best US plays in Cobalt but multi-years off. No specifics off take buyers listed in ECSIF’s PR but they do mention needing capital which I believe caused the sell off on 6/26.

        6/25 ECSIF PR:

        “Significant progress has been made on project finance and off-take arrangements.”

        “The Company has also received preliminary project finance term sheets from multiple counterparties including strategic investors, private equity lenders, fixed income securities and commercial banks to finance the capital requirements of the ICP.”

        Like

  2. Mark, sorry I missed you video conference on SMSI today, but I did review the replay. Many thanks for your hard work and willingness to share you insights with us. It’s been an excellent educational experience for me to say the least.

    Here is a cut and paste from the last conference call. I’m quoting a paragraph from the CFO:

    “Now let’s review the numbers for the first quarter. For the first quarter, we posted revenue of $5.5 million, compared to $5.6 million for the same quarter last year. 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.”

    Will they continue to lose more revenues each quarter from the loss of the legacy QuickLink connection manager contract? I don’t know exactly how much that contract was worth, but I’m concerned that even though SafePath will be coming on like gangbusters, I’m not so sure they won’t lose more money than anticipated because of the loss of revenue from this contract. It could be a non-issue as the contract loss might be minimal. Just thought I should check with you.

    Other than that, the company seems to be in the sweet spot of where the industry is going and just as important they have a long history of doing business with the Tier 1’s.

    Like

    1. They guided to become profitable right about now. I think we’ll hear more about that on the Q2 call.

      Either way, why WORRY? We know Safe & Found is going well, so whether they turn profitable in July or August, who cares?

      Valuation is NOT so much about timing.

      The rest of what you said was spot on IMHO 👍🏼

      Liked by 1 person

  3. Hi Mark,

    Two questions:

    Question #1: How are you getting the 4.5k/day download? Can you share where this is this data coming from?

    Your Googledocs model indicates 4.5k/day and a total of 130k downloads last month.

    My own estimate puts their June download to be around ~35k. Crossing checking this against some app trackers (i.e., apptopia), and I see they also estimate ~30k for the last month. In fact. This is lower than May (50k) and Aprils (60-70k) download rate. It’s decreasing based on all the evidence I’ve seen. What data are you basing such high download rates from?

    source: https://apptopia.com/search/view-all?assets%5B%5D=apps&store%5B%5D=google_play&category_id%5B%5D=18&kind%5B%5D=free&kind%5B%5D=paid&by=name&term=sprint+safe+&+found=

    Question #2: In your 5 part series, you mentioned that Sprint will be releasing an incentive plan to their sales reps once most of their 4,000 stores are ramped up. I would have thought their incentive plan would be in-place once each individual store ramps up. Why wait for the 4,000 stores before providing incentive to sell S&F, and where did you hear that they’re waiting for a near full rampup before providing incentive? I ask because their current download (read signups) have been far lower than your predictions.

    Sorry if these questions seem a bit pointed, I’m hoping you can share the source of question #1, and 2 so I can judge them merit of your conclusions.

    David

    Liked by 1 person

    1. Hey David, I like the pointed questions. I also like the research. It’s not about who’s right… it’s about getting it right.

      Anyways, I’ve been triangulating various sources, mainly the survey I did, accounting for the declining 1-star reviews, last month’s rise in the app rankings, and feedback from management.

      I also have a call into AppAnnie. I’m looking to pay for pinpoint accurate data. Waiting for the salesperson to call me back.

      As the incentives, I won’t reveal my sources, but they are very good and reliable. 4,000 stores is a lot to ramp up. That’s a boots on the ground effort, but they ultimately want communication to be centralized and synchronized. That means ramping everyone up and THEN communicating the marching orders in unison.

      I get the sense that they were also waiting for that to sunset LLabs because the incentives and the LL sunset are both slated for a few weeks from now.

      Personally, I’ve been VERY tied into the process (via numerous contacts) and like how they’ve been doing it. Very organized and methodical. I won’t knock someone if they disagree, but regardless of opinions, it is what it is.

      I think it’s going to work nicely. More importantly, I think SMSI Now has something that’s replicable across multiple carriers AND with multiple applications (which I have a high degree of confidence they are seeking to acquire).

      So, there are many ways to win, few ways to lose, relatively low downside risk, and very high upside potential.

      Perhaps what I like best is that everybody seems nervous about it. Those of the situations where I usually make the most money. No guarantees, but it has worked well historically.

      Makes sense if you think about it. 🤔

      Thanks for your input. Finding people like you are one of the key reasons why I do this. #GiveBack & #Collaborate

      Like

      1. Thanks Mark,

        I’m not sure how accurate your existing data points were to provide a 4.5k/day download rate, so I guess we’ll have to go with our own models for now until management release more information that can help us better triangulate the data. I’m curious what appannie would provide you in terms of some download numbers for S&F, please keep us posted.

        I really appreciate your input on the incentive plans. You’ve been on the forefront of reaching out to management, stores, and other investors and I know many of us have placed a high degree of confidence with you in this regard. I questioned this as the download rates hasn’t increased but if insiders are targeting a ramp up on incentives over the next 1-2 months, then we’ll have to go with that for now.

        Thanks again for all you do. Once this is over, perhaps I’ll contribute by pitching some ideas for future multi-baggers.

        Cheers,
        David

        Like

        1. Agreed. I think we’ve done the best we can do for now (until I hear from AppAnnie).

          To me, the most important thing is that the people at Sprint are very happy with the product and the response it is getting from customers.

          Whether it generates $10 million a year or $50 million a year at Sprint, their satisfaction is a clear sign that SMSI can replicate this with multiple customers AND more importantly, multiple products.

          I think about it this way — even at $10 million per account, if they can get three different products into three different carriers, that’s $90 million in revenue and over $2.50 of EPS. That’s a $50+ stock.

          Of course, NOBODY Should bet the farm hoping for $50, but the potential is there. In between, there are many different / credible scenarios to get us to $6, $10, $20, etc.

          When compared to the downside risk being about 33% (thanks to their cash and cost-reduction initiatives) it seems to me that this story warrants a place in any portfolio, even if it’s a speculative little 1% position.

          Set it, forget it, then unwrap it at year end and see what we have.

          #Risk/Reward

          Liked by 2 people

  4. Question for anyone willing to answer. I just plain don’t understand this…..

    I have heard many times that warrant holders short the stock. If I were a warrant holder wouldn’t I want the stock to increase in value so that my warrants were worth more? I don’t understand why I would want the stock to decrease in value (shorting) when that would in turn decrease the value of the warrants. Sorry for the ignorance. I know Mark has had this question multiple times and has responded to it but I still don’t get the answer to this question when he is done answering it. Sorry.

    Like

    1. Warrant holders who short the stock either 1) don’t know anything about the true value of the company… and don’t care or 2) feel that they have too many warrants and wish to hedge out.

      They are simply running the math and figuring out how to make a sure profit on an optimally-constructed position.

      Any good professional investor does the same. I can often be found owning a stock and yet shorting the calls, shorting the puts, and anything else that provides attractive odds of a profit.

      With SMSI, I own a LOT of stock, but separately I also own additional shares in conjunction with a covered call position (short the calls), Because I get to collect premium and/or effectively own additional shares at a lower price.

      Hope that helps. If not, I recommend doing a Google search for lessons on options… and then basic hedging strategies… and then advanced hedging strategies. Learning all those things (Delta, Gamma, etc.) Can elevate and investors game.

      99% of retail investors have no idea what they don’t know. Staring at charts and the computer screen is holding them all back from becoming millionaires.

      Liked by 1 person

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