Software Maker Whistles A Happy Tune After Shift In Technology
biz.yahoo.com
Investor's Business Daily
Thursday June 29, 7:00 pm ET
Marilyn Alva
By now, fax modems are but a distant ring for Smith Micro Software.
The firm's software was once bundled with 65% of fax modems shipped worldwide. Its 1995 initial public offering was built around the widespread use of faxes. Then fax modems began to fade into the annals of tech history with the arrival of the digital and Internet era.
The impact on Smith (NasdaqSC:SMSI) was substantial. The company bled red ink during the late 1990s and early 2000s.
Its stock price bounced from one extreme to the other -- trading for pennies in October 1999, rising to $32 the following March, crashing to less than $4 that same month and bottoming out at 17 cents in October 2002.
Smith's top managers didn't give up, however. Instead, they looked around for the next big thing. They found it in wireless applications and, more recently, cell phones that play music.
Smith sells to its top client, Verizon Wireless, the software and cable kits that let handset customers download songs from their laptops. Co-owned by Verizon Communications (NYSE:VZ - News) and U.K.-based Vodafone (NYSE:VOD - News), Verizon Wireless is the second largest U.S. carrier behind Cingular. It accounts for 70% of Smith's overall sales.
Verizon Wireless' V Cast Music product logged its first full quarter of sales in the first three months of this year.
It was no coincidence that Smith's first-quarter sales reached a high note as well. The company posted $9.9 million in revenue, up from $2 million a year earlier. Earnings reached 12 cents a share vs. a 1-cent loss the prior year.
Sales of Smith's Music Essential Kit made a big difference. Music kits generated 40% of Smith's first-quarter sales to Verizon Wireless. The other 60% came from Smith's data connectivity software, which lets subscribers connect their laptops to Verizon Wireless' high-speed Internet network.
"We anticipate music will definitely outpace our data connectivity business by year-end," said Bruce Quigley, Smith's vice president of business development.
The main reason: Music attracts a wider demographic, Quigley says. "Everybody likes music. Data connectivity is focused on the traveler."
Good Timing
After its fax business dried up, Smith tried a few other ventures, including videoconferencing and consulting. Those didn't click, so execs applied the company's software expertise to the wireless market.
"We walked in the door at Verizon at the right time," Quigley said.
As the number of cell phone users gets closer to saturation and the price of calls drops, carriers are trying to sell more value-added data services, such as wireless Internet, text messaging and music.
"Smith wants to position itself to provide a broad offering of wireless software products," said Chad Bennett, analyst with Miller Johnson Steichen Kinnard.
The company also wants to expand its customer base to reduce its reliance on Verizon Wireless.
"We do understand we have a customer concentration issue, and we're working on that," Quigley said.
He says Smith is working to land accounts from other carriers that want to launch wireless music services. "As soon as we have something to announce, we will," Quigley said.
Customer concentration isn't a huge problem right now. Analysts polled by First Call expect Smith's 2006 earnings to more than double from a year ago to 49 cents a share. They see next year's profit rising 41% to 69 cents a share.
Smith expects to generate new revenue from compression software sales to handset vendors beginning next year. The company is testing the technology -- which shrinks files to run on cell phones -- with four undisclosed handset makers.
The technology was being developed by Allume Systems when Smith acquired Allume last summer. Allume also brought Smith about $10 million a year in sales of consumer utility software.
A more recent buyout, of photo and music management outfit PhoTags, gives Smith other ways to expand product offerings.
Smith also is eyeing wireless connectivity software for enterprises, which would give it a recurring revenue stream through annual maintenance fees.
Gauging potential sales based on theoretical seat counts, analyst Kevin Dede of Merriman Curhan Ford estimated in a client note that the enterprise business could generate up to $15 million in one-time seat sales and $3 million a year in recurring revenue for Smith.
Seat sales are sales of each device outfitted with Smiths' connectivity software. Recurring revenue would come from maintenance fees.
Keepin It Real(istic)
While conventional wisdom says it's not a good idea to rely too heavily on a single customer, Dede says Smith and Verizon Wireless have a solid relationship. He expects Verizon Wireless to keep buying from Smith as the latter firm rolls out new software products.
"Given that Verizon Wireless is running a faster and more ubiquitous network, the chances are subscribers will be (motivated) to use its other applications," Dede said.
How big will the market for music-enabled handsets get? Some industry watchers expect that one day it'll pose a threat to the iPod.
That might be a ways off, however. One reason is that the amount of available memory and power on handsets limits the number of tunes that can be played. "We have a long way to go on the handset technology side to think about competing with the iPod," Bennett said. |
