- Management clarifies there is “no change” in merger risk.
- Differing language was not intended to send a message to the market.
- Merger outcome is not all-or-nothing. Sprint could continue to offer Safe & Found under ‘Sprint by T-Mobile’ brand indefinitely.
- Significant new color added regarding ViewSpot growth opportunities.
SMSI stock has dropped sharply since handily beating Q3 earnings estimates on October 24th. Despite what was universally seen as strong financial performance, the stock has faced relentless pressure, dropping 25% in the first 7 days after the report. Much of the market has been perplexed by the price action but thanks to collaboration with over 300 SMSI investors in our SMSI Research Group, StoryTrading is able to provide some insight into the story behind this trade. While many of our participants believed there was no justification for the price drop, others pointed out that comments on the conference call left investors worried about the sustainability of earnings. Specifically, two areas of note may have led to negative investor sentiment.
- Language regarding Sprint (S) and T-Mobile (TMUS) merger risk was substantially different in Q3 vs Q2 seeming to be less positive. For many, who were parsing the language as they would Fed Notes, they believed SMSI management intended to send a clear warning and message to investors that the risk to SMSI post-merger has significantly risen.
- The market was likely anticipating a new ViewSpot win, and perhaps in particular the signing of Orange Telecom, due to bullish comments from management in Q2 combined with what appeared to be an inadvertent leak by SMSI to the market regarding the possible signing of Orange.
Perceived disappointment over merger risk and the lack of signing a new ViewSpot customer could have been the reason for the sharp decline in price – particularly in light of ongoing concentration risk which analysts, including Roth, suggest could keep multiples down.
It should be noted, despite this, Roth raised their price target to $7.25 after the Q3 report as SMSI is now sporting a trailing PE of just 16 while most operating models shared within the StoryTrading network anticipate growing earnings at 100%+ in 2020 without the addition of new customers. The bull perspective post-Q3 can be read in this SeekingAlpha article by Shareholder’s United or by seeking out the 3 analyst reports who all have buy ratings and an average price target of $7.42.
Armed with the collective insights of 300+ shareholders, StoryTrading contacted management for an exclusive interview to give the company an opportunity to respond to investor concerns and clarify statements made on the Q3 call. The focus of the call was merger risk and the ViewSpot business. The call took place at 5pm EST on November 6th and StoryTrading members enjoyed exclusive access to the call notes for 24+ hours before publication of this blog.
Across the board, StoryTraders, even those who were concerned about merger risk and the ViewSpot business found the company’s comments to be a largely positive and bullish development. We’re releasing the notes in full and un-redacted (below) to the public so you can decide for yourself.
With the company now clearing the air over the Q3 conference call, will the stock begin a sharp recovery? We’ll soon find out.
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StoryTrading Interview with Tim Huffmyer, CFO of SMSI
Wednesday November 6th, 2019 5pm EST
On Sprint/T-Mobile Merger:
- Regarding different language used in Q3 vs Q2 to characterize merger risk, the company said it was not their intention to send a different message and there is “no change” from their perspective on the risk/reward. The language chosen was mere happenstance and was not purposely chosen to send a message and was not a reflection of any changes in the opportunity.
- As far as SMSI knows, TMUS has not made a decision yet. This is not a case where the decision is already made but is being embargoed until the merger is complete.
- One of the possibilities post-merger is Sprint indefinitely retaining it’s brand as “Sprint by T-Mobile” or similar allowing for the possibility that TMUS could indefinitely offer two separate family safety apps. The merger therefore does not represent an all or nothing scenario.
- SMSI expects to know the decision by TMUS within the quarter following the close of the merger and the timing of the roll-out (if any) shortly after that.
- TMUS is contractually required to retain the terms of the Sprint contract with SMSI.
- In the worst case scenario, it would take years for any negative impact to be felt by SMSI.
- The quarter and guidance met the CFO’s expectations despite language which may have been interpreted differently from the call.
- Professional services revenue is related to content creation for specific campaigns. This is the area they are working to automate.
- The impetus to work on this automation came from SMSI before any customers mentioned it – and it was already in the works. SMSI wants this automation in order to make this product segment more efficient and scalable.
- There is no indication or promise a customer will immediately sign once they have this automation but the company expects it will make it much easier to sell and to scale.
- The license fee will not rise because of this additional feature. The company is willing to give up the professional services revenue because they expect the scalability benefit to more than make up for it.
- It will take the company one quarter or a bit more than that to complete building this automation.
- (not clear) Reference was made to competition which already has this automation. The company will follow-up with competitor names.
- The company made a commitment to StoryTrading that they will release significant product updates via a blog or social media postings.
- There is an app in the app store which can be monitored for product updates. The company will follow-up with us with the app name.
- The company does see ViewSpot as an opportunity to decrease concentration risk but mainly sees ViewSpot as a foot in the door to cross-sell carriers to their other products.
- Expansion to non-carrier retail was not their primary motivation for making the acquisition and it is not yet a current focus but it would be a nice future opportunity.
- The full suite of 2020 IoT products mentioned on the call was a general commentary about where the industry is going but one can extrapolate from there that SMSI is likely to add 1-2 new devices in 2020.
- When talking about “adding devices”, it is not just a product integration like with Gryphon router… they mean a sales channel relationship with a carrier. (for comparison, the Gryphon router is currently more of a “demo” and is not expected to become a material revenue line until a carrier joins the partnership to sell it. Smith is actively looking for a carrier to sell that router).
- The company will look into reports that the tracker-only version of the app has no upgrade path to Family. The company believes this may be a significant opportunity to drive further revenue if it is infact found to be an issue.
- The company is very happy with SafePath churn rates and it is not an issue at all at this time.
- It’s not accurate to read into differing language between Q2 and Q3 to conclude that the next customer signing will now come from Commsuite instead of ViewSpot. The company believes there was no material change in opportunities since last quarter
Other Key Comments
- SMSI has traditionally announced new contract signings in 10Qs, on conference calls, or issued PRs only upon marketing launch. StoryTrading encouraged the company to issue PRs upon contract signings and to keep the client name confidential. The company positively responded to this and indicated they would strongly consider this.
- The company re-affirmed that any job listings which are removed from their website are because they are being filled. There has been no cut-back in their hiring activities.
- The company acknowledges institutions may be concerned about concentration risk but believe that this is already built into the analyst price targets of $6.50, $7.25, and $8.50 and they believe the stock should recover soon.
- The company acknowledged they need to get in front of more institutions and participate in more investor conferences.
- StoryTrading passed on word from investors in our network that insider buys speaks louder than words.