SMSI: Bridging the path for T-Mobile: Safepath 7.0

Summary

  • Smith Micro’s recent acquisition of Circle Media Lab’s mobile operator is showing a clear pathway to T-Mobile with the integration of the Safepath platform and Circle platform to form a new product, Safepath 7.0.

  • The Covid-19 pandemic has impacted Smith Micro however the impact may not be as significant or long lived as suspected but still poses a risk that’s uncertain.

  • The newly registered shelf registration is a standard that many companies follow and should not be seen as a negative.

  • Viewspot and Commsuite will continue their role going forward for the time being.

Smith Micro just recently reported their Q1 earnings report and with it came the guidance of a new product known as SafePath 7.0! In the previous quarter Smith Micro acquired the mobile operator business known as Circle Media Labs, Inc. It’s clear now from the earnings report that not only has the acquisition been a great success (it’s already producing cash for the company) but the integration of the code bases for Safepath and Circle is well underway! The merger previously seen as a major risk factor for the company is looking more and more like the catalyst to propel the company into future cash flows.

SafePath 7.0

The previous acquisition of Circle Media Labs was highly anticipated to be the bridge between Smith Micro and T-Mobile. On this earnings call it seemed clear from CEO Bill Smith that this plan to win T-Mobile is well underway and also laid out clear guidance on how the deployment of the product will take place. Bill mentioned that they have made good progress towards their goals of integrating the parental control feature set of the Circle product into the SafePath code base. They have now planned for the integration to be completed in mid summer of 2020. The completed integrated product will be known as SafePath 7.0 and first deployments are planned for the late summer time frame. 

To quote, CEO Bill Smith mentioned as follows:

“Once we have completed this integration effort, now planned for mid-summer of this year SafePath 7.0 will be the only digital lifestyle solution of its kind on the market to offer best-in-class family location services and parental controls functionality, both inside and outside the home. We see this as a significant competitive edge for Smith Micro that will enable us to realize our long-time vision of bringing to market the most comprehensive, white label family safety offering for wireless service providers. ” – CEO Bill Smith (Q1 Earnings Call)

Management seems confident and bullish as ever, again quoting CEO Bill Smith:

While we have seen very strong growth from Safe & Found under Sprint, we are even more bullish looking forward regarding the potential growth of our Family Safety platform at the new T-Mobile. In addition to having what we believe is the most complete product on the market; we will now also be supported by the marketing might of the new T-Mobile. This is exciting as we now have the opportunity to sell the next-generation of SafePath to a much larger subscriber base. CEO Bill Smith (Q1 Earnings Call)

It’s clear from Bill’s comments that management is very confident in their efforts at T-Mobile. Unlike previous quarters, we are now seeing management clearly being open about their relationship with the carrier.

However, speaking to management, it is to be noted that Smith still needs to work out a new contract with T-Mobile as the current ongoing Circle contract is a fixed based contract that does not replicate the same growth trajectory as the Sprint Contract. For the time being they are continuing with the two contracts for Sprint and Circle but management has commented that they plan to renegotiate once the new product is ready. 

It is to be noted however that Smith has been hiring a vast amount of people. You can see some of their openings on Linkedin or on the Smith Micro career page. Management is clearly dedicated to the T-Mobile effort and is planning on it paying off. The end goal of a revenue based relationship is still uncertain but I would believe it would be highly improbable for management to act in such a manner if they were not confident in their ability to renegotiate the contract in favorable terms.

Covid-19 Impact 

Smith Micro like others was not immune to the Covid-19 pandemic but surprisingly it didn’t translate to a big hit in Q1. However, management has guided for some reduced revenue in Q2. CFO Tim Huffemyer guided for the second quarter of 2020 and noted that he expects a 4-9% reduction in overall revenue compared to the first quarter of this year. The primary reason for this is directly related to the Covid-19 pandemic and the subsequent closing of the majority of the retail stores. The situation is also leading to an increase in the churn for subscribers as Tim pointed to increased financial distress/unemployment leading to a loss of subscribers. The increased sub loss is a cause of a concern and should be monitored going forward. In addition to this, AT&T Mexico had previously begun deploying ViewSpot however this deployment has been temporarily halted due to the Covid-19 situation and they expect to resume once the Covid restrictions are lifted regionally. 

As Bill is quoted saying:

Heavy in-store promotion of the service across Sprint’s nationwide footprint has been the major driver of Safe & Found subscriber growth over the last 18 months. And second, with the merger, we expect some disruption as we work with the new T-Mobile on how to integrate Sprint, Safe & Found, and the T-Mobile FamilyMode service offerings.” – CEO Bill Smith 

Although Smith is getting impacted by the pandemic, management is confident in the recovery in the second half of 2020. In addition to this, management believes the worldwide lockdown reveals the value and demand increase for products like Safepath going forward. 

As Bill is quoted saying:

“On the bright side, these challenges should be temporary, and we expect SafePath to return back to a growth trajectory in the second half of 2020. Additionally, the worldwide lockdown has underscored the universal relevance and societal value of products like SafePath.” – CEO Bill Smith

Ultimately, management’s confidence during the prevailing pandemic is shown in their actions. Contrary to the impact that the pandemic has and will have on Smith Micro, management has decided not to take the PPP loan even after meeting qualifications to do so. This clearly illustrates the clear confidence that management has in the business going forward. 

Luckily Smith is in an enviable position at this point with recurring revenue that will continue producing cash even in this environment. This will no doubt open up avenues of acquisitions that they may find enticing for the future or simply continue piling on more cash.

Shelf-Registration 

Smith Micro recently enacted a S-3 shelf registration. For those who are unaware, a shelf registration is a method for publicly traded companies to register new stock without having to issue them immediately. In other words, what Smith has done is gained the ability to raise funds through dilution at any point. It essentially allows the company to raise funds when they see fit. Most view this as a negative as it points to future dilution. 

However, when it comes to cash necessity there isn’t any cause for concern and thus I believe there is no apparent risk of dilution that would hurt shareholders in the near future. Smith Micro has plenty of cash at this moment with about $19.5 million worth of cash and cash equivalents. In addition to this, they have a great balance sheet with virtually no debt and expect to continue generating large amounts of cash flow. 

That’s not to say management won’t enact on the shelf however doing so should be in cases where management believes doing so will result in positive returns that benefit the company. Even at this point, the biggest shareholders of the company still include CEO Bill Smith and CFO Tim Huffmeyer. 

Management has expressed their view on the shelf as good corporate governance and the use of it in possible acquisitions. Speaking to management, they have no immediate plan or intent to use these funds. 

As quoted by CEO Bill Smith:

“I think you should view the shelf as just good corporate governance. It needs to be in place such that if we are presented with a very compelling opportunity, we can go and raise capital if we need it. Clearly, in the current times, as we sit here right now, there’s no chance whatsoever that we would want to pull down that shelf. And as such, it’s just there for the future. And I think that’s the way the market should see it.” 

There are many examples especially in the smallcap space where companies issue a S-3 yet never really act upon it. A recent example includes $ZYXI which issued a S-3 back in June of 2019 yet never acted upon it since then. $ZYXI similar to Smith had/has a significant cash balance, a clean balance sheet, and significant insider holdings. 

Updates on ViewSpot & Commsuite

Safepath is clearly the flagship product of Smith Micro however the other two major products of Viewspot and Commsuite are still in the works and continuously being improved. 

ViewSpot

Viewspot has made some significant product developments including new functionality such as content and URL filtering for in-store devices, improvements to the dynamic pricing portal, and finally a new self-service feature for content creation. The self-service feature seems to be most enticing and management is calling it Viewspot Studio. Previously carriers were not able to create and deploy their own in-store campaigns and needed to rely on others. Management believes this new feature will be able to bring to market a tiered solution that has a much larger pool of potential customers including smaller European carriers and MVNOs. 

Management is still expecting new carrier wins in the coming quarters and indicated they would have already announced these wins had it not been for the Covid-19 delay. CFO Tim Huffmeyer has guided Viewspot revenues to be flat to down for 2020.

Commsuite

For Commsuite, investors have been wary of the uncertainty that may come from the merger and although SafePath is seeing a more clear path forward, Commsuite’s role still seems uncertain. T-Mobile has an already established visual voice-mail product however management still believes they have the opportunity to get a win in Commsuite at T-Mobile. 

For Commsuite’s role at T-Mobile, Bill is quoted saying the following: 

“On the Sprint side, we think that there will be a steady base that will continue to use CommSuite for the foreseeable future. There will be a transition that may take a year, may take two years, I’m not sure how to really picture that, could take longer where these users will be moved from the Sprint system and the Sprint billing system, et cetera, to a T-Mobile offering. And at that time, the base would start to decline.

On the T-Mobile side, they have an offering that was built for them by a contract house, and we think there’s an opportunity to improve upon that. So we’ll wait and see. We are in conversations, and that would be a very, very nice win for us”

Management however did mention that they still believe Commsuite to be a relevant product and are confident in its role in places like Boost where they believe it could be a great growth area as it expands to become the new T1 carrier in Dish. The short term risk of losing Commsuite is low. If we do indeed see a loss of Commsuite at Sprint/T-Mobile, it will be a slow gradual loss with the subscriber base continuing to transition over the next 1-3 years. 

Valuation

Smith Micro’s financials continue to improve every quarter although we should see a minor set back up this year in 2020 due to the Covid-19 pandemic.  My current assumption includes no new customers in the year 2020 and all outstanding warrants being used up. Based on the current Covid-19 pandemic and expected uptick in hiring/expenses/ramp up of products I am going forward predicting SMSI’s EPS for FY 2020 to be roughly around $.33/share. However due to many uncertainties including potential new customers and/or increased/reduced lockdowns from Covid-19, this could change dramatically.

2020 FY Estimate

Total Revenues

53,332

Cost of Revenues

4,992

Gross Profit

48,340

Total Operating Expenses

34,445

Operating Income

13,895

Non-Operating Income (Expense)

335

Net Income

14,230

Shares Outstanding (Fully Diluted)

43,194

EPS

.33

Looking at the balance sheet for Q1 of 2020 we get a book value close to $53 million dollars! With the market capitalization hovering in the 180-190 million range, I believe this to be an enticing opportunity with a conservative estimate of potential earnings of up to .33 cents/share. If the T-Mobile contract is indeed renegotiated to terms similar to Sprint and a full ramp is done in a timely manner, I project that 2021 EPS could potentially be close to $1.00 in EPS.

A simple forward P/E calculation using a reasonable multiple of 20 would value the current company at approximately $6.60/share (a 50% upside from these levels).

*Note that this does not take into account any assumption of the balance sheet, NOL assets, future cash flows, or any additional metrics. I leave those assumptions up to you.

 

Conclusion

While uncertainty loams with the current Covid-19 pandemic, current actions and guidance from management leads me to believe that Smith Micro continues to be greatly undervalued and that the company will continue executing during the pandemic. 

Safepath is continuing to grow and although it will likely see a hit from Covid-19, I believe that going onward from q3 we will begin to see a resumption of the previous growth trend as management has stated. 

Meanwhile the new Safepath 7.0 product will continue to be integrated in anticipation for the eventual launch of the product at New T-Mobile in the later parts of summer. 

Given the current operating leverage, current cash balance/balance sheet and anticipated future customer rollouts, I continue to believe Smith Micro is a great investment opportunity at these levels. 

Disclosure: I am/we are long SMSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

One response to “SMSI: Bridging the path for T-Mobile: Safepath 7.0”

  1. Nice job on the story, Saif. I adjusted my model after the call to incorporate all the new feedback and came up with 54.4m revenue, 34m Opex, 15.6m net income for 35c/share (non gaaap). YoY that’s a +30% EPS, +86% SP Rev, +26% Total Rev. Assuming the additional expense pays off with TMUS contract, I think you’d have to assume we could get a $10 share price as an absolute minimum by end of this year since we will have to model out 2021 and beyond with TMUS. Again, nice article and thanks for writing it.

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