Smith Micro Software downgraded to "neutral"
Smith Micro Software Inc. (Nasdaq: SMSI) was downgraded today by JP Morgan to “neutral” from “overweight” due to concerning remarks by the company’s CEO, exposure to the consumer discretionary environment and a greater-than-anticipated negative impact from Verizon Communications Inc.’s (NYSE: VZ) shift toward more of a software model.
“These new concerns are enough to motivate us to step aside after a frustrating few months to wait on clarity of improvement before re-assessing,” JP Morgan analyst Lauren Ye wrote in a research note today.
The downgrade sent shares barreling to a 52-week low on high volume intra-session. Shares skidded 16.77%, or $1.08, to $5.36 at 2:22 p.m. ET. Shares of Smith Micro Software have been trading in the range of $5.82 to $21.20 for the past 52 weeks.
The analyst also cited the company’s inability to drive instantaneous accretion from its PCTel and E-frontier acquisitions last year and what appears to be a more “back-end loaded 2008.”
Smith Micro acquired E-frontier’s 3D graphic and animation software solutions in November, and telecommunications software and hardware manufacturer PCTel in December.
According to Ye, Smith Microware’s CEO indicated at an investor conference that 2007 revenue would be in “the low 70s.” As a result, the analyst has lowered her fourth-quarter revenue estimate to $20 million from $21.8 million.
“We now think multimedia got an even worse hit from the software transition at Verizon,” wrote Ye.
The analyst also said she is concerned that the company’s e-frontiers acquisition may pressure fourth-quarter margins, and as such has lowered her fourth-quarter EPS estimate to $0.14 from $0.19.
Looking to 2008, Ye has also lowered her 2008 full-year revenue estimate to $99 million from $105 million on account of lower expectations for Verizon software and a shift of revenue from Verizon’s multimedia player and Real Network to the second half of 2008.
Additionally, the analyst has lowered her fiscal 2008 first-quarter earnings estimate to $0.56 per share from $0.83 per share due to perceived higher expenses from PCTel.
“With the cash used on the acquisition we do not believe the deal will be immediately accretive to EPS,” Ye wrote. “Those expenses could cause margins to be less than what the Street expects for first quarter of 2008.”
