SMSI ER & CC Notes
A brief update following 2Q23
Smith Micro (SMSI) released its second quarter earnings report and hosted a conference call this past Wednesday. As I immediately shared in our Breakout Investors WhatsApp room, and in even more detail in the SMSI WhatsApp room run by Brian Perles, I have not been this bullish on SMSI in quite some time. I will share some of the highlights of the results and conference call below, which are further informed by my call with management yesterday afternoon.
“Body Language”: SMSI CEO Bill Smith is notoriously an SMSI perma-bull. No surprise, he was bullish on the conference call. That said, as our followers know, we try to ask the difficult questions of management when there is reason for concern. And over the past few quarters, management has been understandably defensive, while still promoting future opportunities. After all, SMSI lost Verizon (VZ) on the family safety side and ended up having to raise capital as a result. It hasn’t exactly been the best of times at SMSI over the past year.
On my call with management yesterday, however, it was quite the opposite. No defensiveness to even the hard questions, but rather a change of tone to not only optimism, but more importantly, confidence. Yes, there are still some difficulties ahead, but the SMSI team recognizes they now have some slack, some leeway to deal with those challenges. Their backs are no longer totally against the wall. Those who follow my work closely know I always analyze these types of qualitative factors as they can be as informative as—even predictive of—quantitative changes to come.
ViewSpot Hitting Its Stride: I’ve been as big of a critic of SMSI’s lack of apparent progress with ViewSpot as anyone. The product clearly has some potential, but for multiple reasons (including store closures during Covid), SMSI has just not been able to do much with the product in terms of growth. That appears to be changing as they announced a new customer, a “significant North American cable operator,” on the conference call. Further, CEO Smith noted: “I believe this is the first of several new contracts that we will be discussing over the coming quarters, and consider the completion of this deal an indicator of our ongoing value and health of our ViewSpot solution.”
I can tell you that SMSI management is absolutely fired up about the progress with ViewSpot, attributing this new win and increasing pipeline to its sales team figuring out how to better sell the product. While I certainly do not expect ViewSpot to ever eclipse the family safety SafePath product in terms of revenue and margins, I believe the product can still materially increase SMSI’s revenue and earnings.
CommSuite—Are You Serious?: We know that SMSI sees potential to grow CommSuite with DISH Network (DISH). But when will DISH’s postpaid business really flourish? That’s the million dollar question. I think if we could read SMSI management’s minds, they would have told us three months ago that winning any new customers to CommSuite was a silly proposition. Yet, here we are, and the sales team has a meaningful lead on CommSuite. Granted, this new deal has not closed and may never close. But there is certainly reason for cautious optimism here. The fact that this was so off anyone’s radar even a week ago makes it a quite fascinating development. A new CommSuite customer, quite frankly, could lead to multiples more revenue than even a few new ViewSpot deals.
AT&T Secure Family: Quite clearly AT&T’s (T) family safety product, Secure Family, is the engine for massive revenue and earnings growth. CEO Smith indicated that T remains on track for a “near term,” full-scale launch of the new Secure Family app, which is powered by SMSI’s latest and greatest iteration of SafePath. I would be absolutely shocked if said launch does not occur in the third quarter and if T does not put its full marketing capacity behind the launch.
SMSI continues to signal that T is not only following the old Sprint roadmap—which led to enormous success for both Sprint and SMSI—but has even more robust plans in terms of utilizing SafePath’s full capabilities. Combine this with the fact that T’s overall subscriber base is multiples more than Sprint’s and you can see how SMSI could have an enormous cash cow on its hands. Granted, we still need to see the launch and track its success, but it seems nearly inevitable that SMSI and T will succeed to such a degree that SMSI at the $1.50/share level is a bargain with multi-bagger potential.
Strong Guidance: For the first time in quite some time SMSI is guiding for revenues to be up sequentially, to the tune of 4-8%. This is positive not only because they are finally talking about revenue increases, but also because at this point, halfway through Q3, any meaningful revenue from the T launch will not be recognized until Q4. There is usually a lag of about a month between the time that a carrier adds subscribers to a family safety product and the time that this is communicated to SMSI and they are able to recognize revenue. So, I believe this 4-8% increase includes very little from any expected T launch.
In addition to revenue increasing, gross margins are expected to expand by 50-100 basis points. While this is obviously encouraging, we can expect even more meaningful expansion to gross margins as the VZ revenue tapers off since VZ is not using SMSI’s SafePath product which has more like 85-90% gross margins.
Finally, and perhaps most importantly, CEO Smith guided to be cash flow positive in Q3. This will help to stop the bleeding and significantly minimizes any lingering concern about another capital raise.
Risks: Two main risks that remain are related. VZ is reportedly near to launching its new, internally-developed family safety product. Currently, SMSI has projected they will lose all VZ family safety revenues by EOQ4. In a worst case scenario, this indeed happens (I think there’s a decent probability that VZ struggles out of the gate and that SMSI’s VZ family safety revenue trickles down even into 2024). The loss of that revenue, unless it is replaced by new sources, would clearly lead to SMSI not only losing money, but reverting back to negative cash flows. This leads into the second main risk: another dreaded capital raise.
Personally, I believe the scenario of another capital raise is highly improbable at this point. First of all, see the above points about new business/revenue. Second, given these new sources of revenue, even if SMSI reverts to cash flow negative, they have some leeway with over $6M in cash on hand at EOQ2, with over $1M in a late receivables payment that is almost certainly going to be paid, and with what should be cash generation in Q3 and Q4. Third, because SMSI will, outside of the VZ business, be growing revenue and income at a decent clip, they should be an attractive candidate for debt, if cash is even needed. The last time SMSI was in the situation of needing cash, they were not in the position to be taking on debt.
Conclusion: After a couple of years of having soured on SMSI, I have again turned bullish and, in fact, have become even more bullish after the recent earnings call and conversation with management. With so many variables right now, I do not have a long-term price target yet for SMSI, but I believe the current business progress justifies shares trading at or near the $2.50/share level. I will continue to track the company’s progress and update our followers.
Author’s Disclosure: I have a beneficial long position in the shares of SMSI either through stock ownership, options, or other derivatives. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.
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