Value Investors Club / SMITH MICRO SOFTWARE INC (SMSI)

Description

Smith Micro

Smith Micro is a company that has the potential gain 2X to 3X plus over the next three years.

Smith is a saas company with the following products serving wireless carriers in the US and

Internationally. The company partners with the carriers to deliver the software as part of the

carrier’s suite of services. Recent carrier wins, with more to come, and a transformational

acquisition provide the basis of a potentially bright next few years for the company, with strong

growth and very high margin incremental recurring revenue.

This is Bill Smith from the 2020 Q2 earnings call in August.

Josh Nichols

So then, clearly, you're pretty optimistic about the future and securing some new carriers on

multiple fronts. Outside of the clear T-Mobile opportunity that most people on the call are

aware of. Could you help frame the size in some of these potential customer opportunities that

you're in late stage negotiations with, I mean, compared to the company's current revenue

base?

Bill Smith

Yes, I would say to you that as I said in my prepared comments that this list of new customers

includes some of the biggest names in the carrier world. These are substantial opportunities

feathered in with that then with the other wins, which would be more midsize carriers and

there will be some smaller ones as well. But collectively, when all this is said and done and

launched in public hand, you're going to see a very nice and broadened customer base that will

reduce risk from an investment standpoint. Yet, also provide us with upside opportunity

through which we can really look to grow our revenues and profitability going forward. This is a

very exciting time and these things don’t happen a lot in one's career. I am glad I’m here to

experience these things, this is going to be a lot of fun.

Smith has three key product suites with Safepath being the largest and the biggest opportunity

for growth.

Products

SafePath –The SafePath product suite provides comprehensive tools to protect digital lifestyles

and manage connected devices both inside and outside the home. SafePath empowers

wireless service providers and cable operators to bring to market full-featured, on-brand family

safety solutions that provide in-demand services to mobile subscribers such as location

tracking, parental controls, and driver safety functionality. Delivered to end-users as value-

added services, SafePath-based solutions activate new revenue streams for wireless service

providers while helping to increase brand affinity and reduce subscriber churn.

CommSuite – The CommSuite premium messaging platform helps mobile service providers

deliver a next-generation voicemail experience to mobile subscribers, while monetizing a legacy

cost-center. CommSuite Visual Voicemail (“VVM”) quickly and easily allows users to manage

voice messages just like email or SMS with reply, forwarding and social sharing options.

CommSuite also enables multi-language Voice-to-Text (“VTT”) transcription messaging, which

facilitates convenient message consumption for users by reading versus listening. CommSuite is

installed on more than 10 million mobile handsets and is available to both postpaid premium

subscribers as well as prepaid subscribers.

ViewSpot

– Retail display management platform provides wireless carriers and retailers with a

way to bringpowerful on-screen, interactive demos to life. Wireless carriers and other

smartphone retailers can easily customize and optimize the content loops displayed on demo

devices so that it resonates with in-store shoppers. ViewSpot was enhanced with new

capabilities that enable consumers to navigate demo experiences in a touch less manner. The

ViewSpot platform also offers powerful analytics capabilities that provide carriers with valuable

insights into their consumer base and its buying behavior as well as their overall retail

operations.

Regarding revenue. For example a carrier, Sprint, provides SafePath as a white label product

and the charge for the software app shows up on a customer’s Sprint bill. Sprint is priced at

$9.99 per month for a family.

Recent Background

Sprint represented 81% of Smith’s revenue in 2020. Sprint sales growth hit some an air pocket

due to Covid and limited in-store-marketing activities of Sprint based products in the combined

Sprint/T Mobile network. This drag continues to affect Smith and will for the first half of 2021.

The good news is that T Mobile will be rolling out SafePath to the combined store network later

this year. Here is Bill Smith describing the situation.

Bill Smith Q4 Earnings Call March 8th, 2021

Sure, Josh. Things are going really well with T-Mobile. A lot of planning going on, lots of joint

meetings between our team and the T-Mobile team. We continue to look for a launch of the

new SafePath 7 offering, which will be called FamilyMode, and that that product will launch

midyear as planned. We are quite excited about it. We think that this will allow T-Mobile to

really start to focus on a single family safety offering going forward. I think the fact that we

have now just announced the acquisition of the Avast product as well will make it even simpler

from the Ts-Mobile standpoint to get all their various offerings unified with the new SafePath 7.

I think, this is going to be just a great opportunity.

We look for super growth out of T-Mobile as we head into the back half of ‘21, and we expect

some really big outcomes going forward. Clearly, T-Mobile is a carrier with a lot of energy, a lot

of excitement, a lot of growth. And we’re really pleased to be part of it. And we think that the

FamilyMode 3.0 is just going to be a fabulous offering.

Location Labs Acquisition

On March 9th, Smith announced the acquisition of their largest competitor, Location Labs from

Avast (AVST in London). The purchase price is $66 million. Avast is a $5 billion digital security

firm. Smith did a stock offering priced at $6.85 a share, which was near the yearly high raising

$65 million. It is interesting that Avast received both cash and stock in the sale, with stock

making up about $10 million of the total. We heard that Avast wanted more in stock but Smith

rejected that structure. A positive sign, possibly, that a $5 billion company wanted to invest in

the upside in the combined company.

Location Labs brings five mobile operator contracts to Smith, including Verizon and two

European Carriers, along with a set of legacy products supporting T Mobile/Sprint and AT&T.

For 2021 the core recurring Location Labs revenue (excluding legacy products) is expected to be

$19 million. Importantly, in addition to recent new contract wins, this will diversify Smith away

from its concentration of business with Sprint-T Mobile.

With this acquisition, Smith becomes the dominate Safety software partner for wireless carriers

in the US. Once integrated with a carrier, the software has significant barriers to being

replaced.

Smith New Contracts

In early 2021 Smith announced four new contracts, three are SafePath and one ViewSpot. So

far Smith has announced that one of the contracts is with a major mobile network operator

in Spain and another with Ooredoo Oman. Speculation is that U.S. Cellular could also be one of

the new contracts. Then on March 24th, Smith announced that Boost Mobile (owned by Dish)

has included its Premium Visual Voicemail (PVVM) value-added service in a new ‘Privacy

Premium’ offering that provides Boost Mobile customers with full digital protection.

Valuation

Smith current market cap, including new stock offering, is $260 million with $40 million in cash

making the EV $220 million. EBITDA in 2020 was $7.8 million.

Smith estimates that the total annual carrier revenue from digital safety solutions was

approximately $1.1 billion in 2020. This value is projected to nearly double to more than $2

billion in 2023. Tim Huffmyer, Smith’s CFO, estimates 90% incremental margins from growth

revenues. With the market growing at 25%, I assume that Smith can grow revenue at that

same rate. With T Mobile not getting sorted out until back half of this year, I assume no growth

(other than the acquisition) in 2021 and then 25% for the next three years. That put’s Smith at

about $135 million of recurring revenue in 2024. I assume 70% of new sales drop to the

bottom line. This combined with current cash flow would put it slightly north of $50 million.

Apply a 15X multiple and the value is $750 million. I add $125 million of cash for an EV of $975

million. With 45 million shares the stock price comes out at $21.65 or roughly 3.7X in that time

frame. EBITDA to free cash flow conversion should be very high given this is a software

business and Smith has NOL’s of approximately $160 million.

Risks:

High customer concentration with Sprint currently

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Roll out of new SafePath product at T Mobile later this year

Ramp up of recent new contract wins

More potential contract wins

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			2021	2022
Price:	5.75	EPS	.10	.4
Shares Out. (in M):	45	P/E	57	14
Market Cap (in $M):	260	P/FCF	44	12
Net Debt (in $M):	-40	EBIT	5	18
TEV (in $M):	220	TEV/EBIT	44	12