Smith Micro (SMSI) Stock: Looks Like Another Tough Year Ahead

Smith Micro Software, Inc. (NASDAQ:SMSI), a company that develops and markets software to improve the mobile experience to wireless and cable service providers, is coming off another challenging quarter, and while the company is pointing to the near completion of the transition to its SafePath platform, it doesn’t appear that it’s going to have a meaningful impact on the performance of the company in the short term.

Taking into account there isn’t likely to be much subscriber growth in the fourth quarter, along with uncertainties in regard to how consumers are going to respond to growing concerns over the economy and the labor market, and it’s not looking good for SMSI to turn things around and regain momentum in the near future.

In other words, while its SafePath platform has long-term potential, it’s ready for primetime at a time when economic conditions are likely to dull the impact in the short term, i.e., over the next year or so.

Outside of gross profit margin, just about every metric associated with profitability is extremely weak in general, and also as measured against the sector median. Outside of scaling, I don’t see much more the company can do to improve margins after already taking steps to remove costs out of operations.

In this article we’ll look at some of its latest numbers and the ongoing trends they confirm, the hope for SafePath platform to turn things around, and what the prospects are for 2023.

Some of the numbers

Revenue in the third quarter of 2022 was $11.7 million, compared to $16.4 million in the third quarter of 2021. Revenue in the first nine months of 2022 was $37 million, compared to revenue of $43.7 million in the first nine months of 2021.

The decline in revenues was attributed to lower sales contributions from CommSuite and Family Safety in relationship to subscribers transitioning off the Sprint network to the T-Mobile network.

Gross profit in the reporting period was $8.1 million, compared to gross profit of $12.8 million in the third quarter of 2021. Gross profit in the first nine months of 2022 was $26.2 million, compared to gross profit of $35.1 million in the first nine months of 2021.

Gross margin in the third quarter of 2022 was 69 percent, compared to 77.5 percent in the third quarter of 2021. The company expect gross margin to be around 69 percent in the fourth quarter as well.

Total GAAP operating expenses in the quarter were $16.4 million, compared to $31.2 million in the third quarter of 2021.

Net loss in the third quarter of 2022 was $(5.8) million or $(0.10) per share, compared to a net loss of $(18.6) million or $(0.34) per share in the third quarter of 2021. Net loss in the first nine months of 2022 was $(21.3) million or $(0.39) per share, compared to a net loss of $(27) million or $(0.54) per share in the first nine months of 2021.

Cash and cash equivalents at the end of the third quarter of 2022 was $19 million, with long-term debt of $3.9 million.

Subscriber growth and SafePath platform

A lot has been made of transitioning its Tier 1 customers to its SafePath platform, and the company said the process is close to being completed. Management sees this as providing new marketing opportunities for SafePath Home, SafePath IoT and SafePath Drive going forward.

While only time can tell if the SafePath platform will deliver on optimistic expectations, in the near term it doesn’t look like it’s going to have much of an impact on the performance of the company.

In its earnings report management said it didn’t expect much in the way of new subscribers in the fourth quarter, meaning there probably won’t be enough growth to offset the decrease in revenue expected from its Safe & Sound product line in the quarter. When investors discover that, more than likely the response will be to further punish the stock until it’s proven that expectations for the SafePath platform are in alignment with reality. That is probably going to take through the end of 2023 before we’ll know, depending on the impact of macro-economic conditions on the performance of the platform.

Even the idea that the three major carriers may hit the market at the same time may not be enough to move the needle in the near term, by which I mean through the first half of 2023.

Macro-economic challenges

I don’t think there can be any doubt that as 2023 unfolds and the economy gets more challenging, that consumers are going to be forced to further prioritize their spending.

When asked about the potential impact of the economic environment on the performance of the company in 2023, management acknowledged there could be some negative effects on growth over the next year or so.

However, the company thinks it can differentiate itself because its products are associated with safety of family and friends, meaning they are probably going to prioritize there before most other things they spend money on.

For that reason it is thought pricing is not going to be the key driver of consumer decisions in the market it competes in. While that may be true with some consumers, I’m not convinced it’s the first thing consumers will think of when deciding where to allocate their spending.

Buying food, gas, and paying bills and for medical expenses will probably be more at the front of the line that mobile safety.

That said, it really depends upon how bad the economy gets and the accompanying economic fear level consumers embrace. If it gets tough economically in 2023, I believe it’ll have a detrimental impact on the performance of SMSI; I don’t think the safety factor will overcome concerns over having the basic necessities of life if that’s where we economically end up in 2023.

Conclusion

Smith Micro Software appears ready to finally start to turn things around, yet it looks like it’s going to take longer than anticipated, based upon an expected weak fourth quarter and a challenging macro-economic environment in 2023 that doesn’t look like it’s going to cooperate with the company as its highly anticipated SafePath platform is ready to go.

It is thought that the three major mobile carriers could be key growth catalysts in 2023 at close to the same time, but I’m not sure that’s how it’s going to play out. Even if they were to come on board all at the same time it doesn’t take away the time it’ll take to do so or how much consumers will cooperate by being willing to pay higher prices.

Unfortunately for SMSI, I think consumer sentiment is going to continue to erode in 2023, especially in the first half as the Federal Reserve continues to raise interest rates and inflation remains high. If that’s an accurate assessment, then there will be a prioritizing of spending by consumers which would result in examining higher-cost products and services and making decisions on where to allocate their capital in light of a reduction in buying power.

So, in the near term I think there is a higher percentage chance the share price of the company will continue to drop. Further out it looks like it should start to produce a period of sustainable growth that should improve its performance and move it toward profitability.

The major question at this time to me is how good of an entry point investors can get in at, based upon what looks to be continual weakness in the near term. I’m not talking about trying to time the bottom, only that if the company performs as expected in the fourth quarter, and remains under pressure in the first half of 2023, its share price will fall a lot more than it has.

In other words, I don’t think the downside in relationship to the short-term headwinds have been fully priced in, and I expect its share price to fall until there’s more clarity on how quickly its SafePath platform is adopted.