Smith Micro (SMSI) Stock Ready to Inflect When Revenue Flows From Deals with T-Mobile (TMUS), AT&T (T) and Verizon

– Fundamentals: Q1 revenue beat, net loss in line with expectations 

– Catalysts: Revenue from T-Mobile (SafePath7) expected in Q2, AT&T and Verizon to follow 

– Sentiment more positive with revenues from T-Mobile and other carriers coming online 

– Technicals: Trading below all key moving averages on daily and weekly charts, but RSI is indicating oversold levels Shares of Smith Micro Software Inc. (SMSI) have lost value since the beginning of the year, and yet analysts covering the stock are maintaining a “buy” rating. 

Earlier this month, the company reported that first-quarter earnings beat revenue estimates ($12.7 million vs. $12.3 million), while SMSI’s quarterly loss of 8 cents per share was in line with analyst estimates.

Even though SMSI is not a financial story right now, other developments may warrant a closer look, including the Pittsburgh-based company’s location services and parental controls platform that is slated to record revenue in the current quarter from a deal with T-Mobile TMUS. 

With investors waiting for an inflection point for SMSI, our StoryTrading community took a closer look at the company through the lens of our four pillars: Fundamentals, Catalysts, Sentiment, and Technicals.   

Overview SMSI was founded in 1982 by William Smith Jr., a developer and marketer of enterprise and consumer software. Smith is the current president, CEO, and chairman of the company. His first solution at SMSI helped people download stock quotes using an analog modem.

The company soon became one of the leading names in fax and modem connectivity. By the late 1990s, dial-up internet access was being replaced by higher speed cable, DSL and wireless broadband Internet technologies. 

SMSI responded by re-applying its network connection expertise to new wireless and mobility applications, including its first large-scale mobile network deployment of QuickLink Mobile with Verizon Wireless in 2001.

SMSI also expanded its consumer business with graphics applications that are used by hobbyists, professional artists, and design studios.

SMSI says 100 million devices worldwide are currently using its applications, which include SafePath, a provider of location services and parental controls, CommSuite, a voice-messaging solution, and ViewSpot, which delivers content to devices and live displays in retail settings. 

Fundamentals SMSI’s gross profit for the first quarter ended March 31, 2022 was $9.1 million, compared to $9.8 million for the quarter ended March 31, 2021.

Gross profit as a percentage of revenue was 71 percent for the quarter ended March 31, 2022, compared to 86 percent for the quarter ended March 31, 2021.

GAAP net loss for the quarter ended March 31, 2022 was $7.0 million, or $0.13 loss per share, compared to GAAP net loss of $3.2 million, or $0.07 loss per share, for the same period in 2021.

Non-GAAP net loss for the quarter ended March 31, 2022 was $4.3 million, or $0.08 loss per share, compared to non-GAAP net income of $0.7 million, or $0.02 diluted earnings per share, for the quarter ended March 31, 2021.  Non-GAAP net (loss) income excludes stock-based compensation, amortization of intangible assets, and acquisition costs.

Total cash and cash equivalents as of March 31, 2022 were $9.8 million and available borrowing capacity under the company’s revolving credit facility was $7.0 million.

Catalysts

Moving forward, SMSI is expected to record revenue for its new SafePath 7 family safety platform, which TMUS began utilizing recently under the name “FamilyMode.” SMSI launched an earlier version of SafePath in 2017 with its first major account, Sprint. A few quarters later, SMSI was generating close to $8 million in quarterly revenue from Sprint alone and produced 10 cents in quarterly EPS. The stock more than quadrupled (from a low of $1.60 to $7) on the strength of Sprint's customer base, which was just one-seventh the size of the top-3 carriers (TMUS, Verizon, & AT&T).

That’s important to note since Smith Micro has won all three accounts, with the latter two slated to launch later this year.

The combination of SafePath at TMUS, AT&T T and Verizon places SMSI on track to earn $1 of EPS as early as 2024, according to Analyst Scott Searle at Roth Capital Partners. Searle has a “buy” rating on the stock.

T-Mobile is expected to ramp up marketing of FamilyMode later this quarter or in early Q3.

SMSI CEO Smith said, "This [FamilyMode] launch should commence the drive to enhance subscriber growth beginning in the late Q2 or early Q3.

“With the resumption of growth, we can return the company back to our historical model of delivering strong growth, earnings power and cash generation."

T-Mobile recently updated its FamilyMode website to showcase its features, including real-time streaming location (similar to what you see while tracking an Uber), 7-day location history, and up to 20 geofencing location alerts that notify parents when their child arrives or leaves a designated location.

SMSI has improved its product and competitive positioning of these types of solutions by purchasing competitors’ (Circle and Avast) offerings, for a total of $100 million over the last two years. By comparison, SMSI's current market cap is currently just over $150 million.

TMUS charges $10 a month for FamilyMode, which also includes a free subscription to Family Allowances. That service allows parents to block phone numbers and restrict downloads of apps.

CEO Smith mentioned that he is unable to speak in detail about TMUS’ marketing plan, as it is confidential, but he noted that both teams have been in contact and "it's all positive." On a previous call, Smith indicated that TMUS would follow the Sprint blueprint, which was incredibly successful.

This included offering incentives to in-store employees who sold the add-on product, which could lead to a significant increase in revenue for SMSI during the second half of the year.

Besides having all three major carriers set to sell its improved product, SMSI will also reap the benefits of significant cost savings once all the partners are on a single platform. 

SMSI expects gross margins to improve from 70 percent to between 80 and 90 percent as early as Q1 2023, thanks to eliminating the excessive cost of running concurrent platforms (currently, Verizon and AT&T are running on the old Avast platform). Verizon's family safety product is called "Smart Family." The company posted a video a couple weeks ago on their YouTube channel regarding the solution’s driver safety feature. Verizon will charge $9.99 a month for their premium Smart Family offering.

Current basic Smart Family subs who pay $4.99 a month for the parental control features will be pitched to upgrade for an additional $5 a month. These upgrades could provide substantial revenue upside for SMSI. SMSI CEO said on a recent call that "We are entering Phase 2 in the coming months when we will enhance the Smart Family promotional content to capitalize on the launch of a new retail sales incentive program, as well as some new marketing initiatives for the stores.

“We have also delivered several new awareness and training campaigns that were targeted to the entire Verizon organization, a critical step in our multichannel marketing approach."

AT&T is also expected to launch SMSI’s platform by the end of the year under the name “Secure Family.”

It is unknown publicly if driver safety will be offered when AT&T launches the platform but the location and parental controls will be similar to the TMUS and Verizon offerings. Smith said "We are bullish about the opportunity for us, as we continue to work together on plans to launch on the SafePath platform before the end of the year. The progress to date on the migration has been tracking with our expectations and AT&T continues to work with us towards a successful launch. 

“As is the approach with our other carrier partners, a strong and continued awareness campaign across several key areas of the organization are ongoing. With an emphasis on the customer care and Retail Divisions which clearly have a significant amount of contact with potential subscribers for our product. 

“These efforts should drive awareness of the features and benefits of the app among AT&T employees, so they can better sell this service to their customers." Once all three carriers launch and are on SMSI’s platform, the company may be able to sell other products to the carriers.

TMUS recently had a major promotion to attract subscribers to its home internet service. As more users switch from cable to 5G, this could make SMSI’s SafePath Home product even more valuable. SafePath Home would extend parental controls to game consoles, computers, etc.

SafePath IoT would allow carriers to offer any IoT device (pet trackers, kids watches, senior watches, etc.) to the family safety platform. According to Analyst Jim McIlree at Dawson James, “Revenue growth is expected to respond beginning Q3. We expect sequential revenue growth thereafter as T-Mobile, then Verizon and AT&T begin deployment of SafePath to their customer bases.” 

In his Q1 assessment, McIlree went on to say that the take-rate from Sprint “implies quarterly SafePath revenue potential of almost $70 million, or annual revenue over $250 million.”

That level of revenue could produce upwards of $3.00 in pre-tax earnings per share.

Sentiment Investors have been patiently awaiting revenue growth from the company’s SafePath solutions, and delays from Covid and T-Mobile’s acquisition of Sprint certainly didn’t improve sentiment.

The company has been investing heavily in its platform and personnel at the urging of clients Verizon and AT&T who want to launch the new family safety product as soon as possible. After the two customers launch later this year the company expenses should drop considerably.

Investor sentiment is more positive now that SMSI’s deals with T-Mobile, AT&T, and Verizon are poised to bear fruit. 

Technicals SMSI is trading below all key moving averages on the daily and weekly chart. While the RSI is indicating oversold levels, the stock may require a catalyst to challenge overhead resistance levels, the first being ~$3 at the 20DMA. 

Summary 

The StoryTrading community empowers individuals to make the best-informed trade and investment decisions through a holistic view of stocks based on the four pillars of Fundamentals, Catalysts, Sentiment, and Technicals. Analyzing all four pillars together can also help identify key inflection points.

Recent catalysts at SMSI are generating more excitement in the company, coupled with a bullish outlook on Wall Street. Technically, SMSI is trading below all key moving averages on daily and weekly charts, but the RSI is indicating oversold levels.

The question is whether SMSI can make good on its deals with the three major carriers and continue to sell solutions to these companies. That's for you and the rest of the market to determine. We'll be here to tell the story as events develop!

Disclaimer: The Author has a LONG position in SMSI.