2023-08-10 16:28:42 ET
Summary
- Smith Micro Software, Inc. reported encouraging second quarter results with improved gross margins and substantially lower operating expenses benefiting the bottom line.
- Management expects the company to return to revenue growth and cash flow generation in the current quarter, largely driven by the launch of its SafePath family safety software by AT&T.
- On the flip side, dilution from required installments under the company's convertible notes continued unabatedly during the quarter with outstanding shares increasing by 7.6% sequentially to 65.2 million.
- Given strong progress in terms of margins and operating expenses as well as the expected return to sales growth and cash flow generation this quarter, I am upgrading shares from "Hold" to "Speculative Buy".
- Absent any major sell-off in the overall market, I wouldn't be surprised to see shares approaching the $2 mark going into the company's Q3 earnings release in November.
Note:
I have covered Smith Micro Software, Inc. ( SMSI ) previously, so investors should view this as an update to my earlier articles on the company.
After the close of Wednesday's regular session, mobile communications software provider Smith Micro Software, Inc. or "Smith Micro" reported encouraging second quarter 2023 results:
While sales slightly missed consensus expectations, improved gross margins and substantially lower operating expenses resulted in better-than-expected non-GAAP profitability.
That said, the company still used $2.2 million in cash from operating activities, partially due to accounts receivable increasing for a second quarter in the row.
Smith Micro ended the quarter with just $6.4 million in cash and cash equivalents but on the conference call , management projected cash flow to turn positive in the third quarter.
In addition, sales are expected to grow by approximately 4% to 8% on a sequential basis, mostly due to the eagerly-anticipated launch of the company's SafePath family safety product by AT&T this quarter.
As I noted in my opening remarks, our development efforts to support AT&T's migration to SafePath are complete, and we expect AT&T to launch the new SafePath based version of AT&T Secure Family during this quarter.
Our relationship with AT&T is strong, and we are getting enthusiastic support from AT&T at all levels. Our launch and growth plans across multiple marketing channels will be a template for future SafePath launches. More specifically, we are collaborating with AT&T Secure Family marketing efforts.
With current promotional activity, we believe that will lay the groundwork for a successful launch driving subscriber growth. As I noted in prior calls, I'm very bullish on the opportunity for AT&T to significantly grow Secure Family from a largely untapped subscriber base.
Moreover, Smith Micro managed to acquire a " significant North American cable operator " as a new customer for its ViewSpot solution which is expected to roll out in the current quarter.
On the conference call, management projected additional contract awards in the near-future:
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, as well as our field sales teams' increasing ability to identify and close deals with new and existing customers.
During the questions-and-answers session, CEO Bill Smith expressed his enthusiasm regarding the upcoming AT&T launch:
(...) we feel very bullish about what’s going on at AT&T. We look for a very strong launch and rollout and the result of that, we are definitely looking for some very strong sub count growth there as well. So everything is looking the way we would like it to look.
(...) I always try to point to prior history, and so I would ask you to maybe look back at how the rollout worked at Sprint. Sprint is half the size or was half the size of what AT&T is to today. It was a remarkable growth activity. We saw a big number of growth quarter-over-quarter. And frankly, that's what I'm looking for here too.
Management also projected the recent increase in accounts receivable to reverse during the current quarter which should benefit cash flows.
Furthermore, gross margins are expected to improve by another 50 to 100 basis points sequentially while operating expenses are projected to come down by an additional 2% to 5% quarter-over-quarter.
On the flip side, dilution from required installments under the company's convertible notes continued unabatedly during the quarter with outstanding shares increasing by 7.6% sequentially to 65.2 million.
Given this issue, investors should hope for Thursday's rally to have more legs as this would result in substantially less shares being required to settle the company's remaining obligations under the convertible notes.
Bottom Line
While not entirely flawless, Smith Micro Software Inc. delivered encouraging second quarter results with vastly improved gross margins and substantially lower operating expenses benefiting the bottom line.
Even better, management projected a return to revenue growth and cash flow generation in the current quarter, mostly due to the eagerly-anticipated launch of the company's SafePath family safety software product by AT&T.
While the convertible debt overhang remains a real drag, the company should have fully repaid the notes by year end.
Given strong progress in terms of margins and operating expenses as well as the expected return to sales growth and cash flow generation this quarter, I am upgrading shares from " Hold " to " Speculative Buy ".
Absent any major sell-off in the overall market, I wouldn't be surprised to see shares approaching the $2 mark going into the company's Q3 earnings release in November.
For further details see:
Smith Micro Software: Upgrading On AT&T Product Launch - Buy