SMITH MICRO SOFTWARE INC SMSI
March 29, 2021 - 9:41am EST by
pat110
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 $M): -40 EBIT 5 18
TEV ($): 220 TEV/EBIT 44 12

Sign up for free guest access to view investment idea with a 45 days delay.

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
carriers 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 

 

    show   sort by    
      Back to top