The 4G wireless revolution is happening, but perhaps at a slower pace than Aliso Viejo’s Smith Micro Software Inc. would like.
That realization is sinking in with investors who have taken some wind out of Smith Micro’s shares after a run-up in the second half of last year.
“People are just now coming to grips with the reality of how long it will actually take,” said Tom Matthews, Smith Micro’s chief strategy officer.
The maker of connection management software—which hooks up mobile devices to the Internet via the networks of wireless carriers—has seen its shares fall some 20% since the start of the year.
Smith Micro had a market value of about $435 million last week.
That’s after a surge in 2010, when the shares more than doubled.
The stock’s still up more than 60% in the past 12 months, thanks largely to high expectations that came last year ahead of wireless carriers launching 4G, or fourth generation, networks.
4G promises to boost download speeds, allowing people to do more with their smartphones.
Rollouts started at the end of last year. Verizon Wireless, a unit of New York’s Verizon Communications Inc., is in the lead with what it calls its long-term evolution 4G network.
Verizon is a major Smith Micro customer, accounting for about 30% of its sales last year.
Chief Executive Bill Smith talked up Verizon’s push into 4G in a call with analysts last fall.
“I have to say we are pretty excited about what we see ahead of us,” he said.
Early Wins
Smith Micro scored early wins by getting its software in two initial Verizon 4G modem cards for portable computers.
But it didn’t get in the latest generation of the cards, dubbed MiFi, by Verizon.
More wins could be down the line, according to analysts.
“Despite an uneven start with Verizon’s 4G network launch, we believe Smith Micro stands to benefit from the overall industry move to broadband wireless connectivity,” said Scott Sutherland, an analyst at Wedbush Securities Inc. in San Francisco.
Verizon said it expects its 4G rollout to stretch into 2013.
“There was a lot of excitement around 4G going into the end of the year,” Sutherland said. “Yet management explained very carefully that it’s a multiyear play. So people may have eased off their expectations” for Smith Micro.
The company saw another small blow last month when it gave its outlook for 2011, indicating that most of its sales will come in the second half.
Smith Micro projected sales of $150 million to $160 million this year, which would be up about 20% from a year earlier.
It didn’t give a profit outlook.
Analysts, on average, are looking for yearly profits of $33 million, up about 14% from a year earlier.
The big driver this year is a product set to be launched in the second quarter. It’s billed as a mobile hot spot manager that lets mobile phones act as Internet connection points for up to five other devices.
That wasn’t enough to keep the stock humming. A flurry of downgrades came last month.
JPMorgan Chase & Co. analyst Lauren Choi lowered her rating to “neutral” from “overweight.”
“We do recognize the bull case on the 4G mobile broadband devices upgrade, but we believe it’s priced in and the ramp may be slower than previously expected,” Choi said in a research note.
Along with others on Wall Street, she cited concerns that Verizon’s planned launch of the Apple Inc. iPhone this month could hurt Smith Micro.
Verizon, perhaps in a bid to differentiate its own iPhone offering from that of AT&T Inc., is touting its own “tethering” service that effectively makes the do-all smartphone an Internet hot spot.
This treads close to Smith Micro’s growth play.
“In our view this will be a long-term overhang for the stock,” Choi said. “Hence, we are stepping aside for now.”
