Smith Micro Software Inc (SMSI) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Smith Micro Software third quarter financial earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, November 10th, 2005. I would now like to turn the conference over to Mr. Bruce Quigley, VP of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining Smith Micro's discussion of its third quarter 2005 financial results for the quarter ended September 30th, 2005.

By now you should have received a copy of the news release. If you do not have a copy of the release, you may acquire it either at the company's website, which is smithmicro.com or by calling 949-362-5800 and we will fax or e-mail one to you immediately.

On today's call are Bill Smith, President and CEO; Andy Schmidt, VP and CFO; and myself.

During the course of this conference call, we may make forward-looking statements regarding future events or the future performance of the company. Actual events or results, of course, could differ materially. These forward-looking statements speak only as of today's date and are based upon the information currently available to the company. The company disclaims any intent to update publicly any such forward-looking statements, whether in response to new information, future events or otherwise.

We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically, the company's most recent Form 10-Q, which will be filed and available Monday, November 14th, and the 10-K filing. These documents contain and identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

At this time, I would like to turn the call over to Bill Smith, Smith Micro's Chairman and CEO.

Good afternoon, everyone, and thank you for joining us today on our third quarter earnings conference call. We appreciate your interest in Smith Micro.

Before Andy takes you through our third quarter financial results in detail, I'd like to share with you the highlights of the quarter. Following Andy's remarks, I will make some final comments and then turn the call over for questions.

I am very pleased to say that our third quarter results were very strong. Net revenues came in at $6.9 million, a 94% increase versus the third quarter 2004 when we recorded revenues of $3.6 million, and a 107% increase over the second quarter 2005 when we recorded revenues of $3.3 million. This is the first quarter in which our results include the operation of Alum Systems, our Watsonville group, which Smith Micro acquired and closed on July 1st, 2005.

Net income for the third quarter of 2005 was $1.9 million, resulting in an EPS of $0.08 per fully diluted share versus net income of $1.1 million or $0.06 per fully diluted share in the same quarter of last year. I should note that we accomplished this 33% increase in EPS despite the fact that our share count increased to 23.2 million common and common equivalent shares in Q3 '05 versus 18.6 million in third quarter of 2004.

On a quarter-over-quarter comparison, net income for the third quarter of 2005 was $1.9 million compared to second quarter 2005 net income of $764,000. The EPS of $0.08 per fully diluted share for the third quarter 2005 was up 200% from the $0.03 per fully diluted share reported in the second quarter of 2005.

We entered into the 2005 fourth quarter with a record backlog of $2 million, up from $1.3 million in the third quarter. The company finished the quarter with cash and cash equivalents of $20.4 million.

Looking at the third quarter, I am obviously very pleased by our revenue growth as it represents a record quarter for the company since we began offering wireless software products. Our EVDO software business is very strong and we continue to benefit from the carriers' increased advertising and price cuts for this rapidly expanding service offering.

I will go into more detail regarding what we saw from our wireless connectivity customers in the third quarter, as well as provide greater insight into the other 3 business sectors, which are also very exciting, after Andy concludes his comments.

During the quarter we also accomplished a record level of profitability. Our net income of $1.9 million or $0.08 per fully diluted share was largely the result of our combined 83% gross margin. Considering that we were in the midst of integrating the Allume acquisition during the quarter, we are very pleased with this gross margin.

If we were to exclude amortization and one-time expenses related to the acquisition, which would more closely map the Street estimates, our pro forma earnings per fully diluted share would have been $0.10, substantially higher than the First Call consensus estimate.

Overall, we are very pleased with our results for the third quarter. We were happy to see the integration of the Watsonville group move quickly and smoothly. We have already fully integrated their distribution channel, along with the Watsonville team, into our organization and look forward to their continued contribution.

Let me talk about the business that we conducted during the third quarter. As I was saying, the Allume acquisition has been very good for Smith Micro shareholders.

The Watsonville group announced several new-- several new upgrades to their product offerings. They began shipping a new version of StuffIt Standard Edition and the Deluxe Edition for the Mac that includes the new JPEG compression capability.

They released the Windows version of both in the spring of 2005, so now all versions of the product include the JPEG compression function. This validates that we have the technology to compress JPEG files up to 30% more than JPEG can do, which helps us with our initiative to sell the technology to the wireless market, which I will discuss later.

The Watsonville group also reported that they're shipping a new version of Aquazone Seven Seas Deluxe, which is a screen saver that creates a virtual aquarium on your PC or Mac. NPD, the company that tracks software sales in the channel, now ranks Aquazone in the top 10 of game and entertainment titles in the channel.

A new upgrade to Watsonville's popular Internet Cleanup utility added support in French, German and Japanese.

And finally, I'm pleased to say that we were able to announce the long-awaited international carrier as Vodafone. They were-- they are using our technology we developed for a traveler's kit to support Vodafone's customers that are coming to the U.S. CDMA market.

Our software, branded to Vodafone as Mobile Connect, is the connection manager included in the kit. When the customer purchases the kit, they receive a CDMA PC card and our software to use on the CDMA Verizon Wireless network.

At the same time, Verizon Wireless announced a similar offering that includes a UMTS PC card and our software for customers traveling from the U.S. to Vodafone's UMTS markets.

With that said, I'd like to turn the call over to Andy Schmidt, our CFO, to describe the third quarter financial results in more detail. Go ahead, Andy.

Thanks, Bill. First off, our Q3 financial data includes a full 3 months of Allume Systems, which was acquired July 1st of this year. The comparative 2004 data on the financial statements included on our press release does not include Allume data, however, I'll provide some insight in that regard shortly and, of course, our 10-Q includes footnote disclosure of pro forma 2004 combined company data for both the quarter and the 9-month periods.

From a summary perspective, we saw strong financial performance from our wireless and OEM business and the recently acquired Allume Systems. From a Generally Accepted Accounting Principles perspective, which includes amortization of intangibles associated with the purchase of Allume, integrations costs and Sarbanes-Oxley costs, we recorded revenues of $6.9 million, a gross margin of 83.1%, operating margin of 25.6% and fully diluted earnings per share of $0.08.

Factoring out amortization of intangibles, stock comp expense, pro forma gross margins on the $6.9 million revenue was 87%, operating margin 31.9% and fully diluted earnings per share of $0.10. Sarbanes-Oxley expense for the quarter was $145,000 and integration costs are estimated to be approximately $100,000.

As Bill mentioned, it's important to note that our $0.08 per fully diluted share performance is based on 23.2 million weighted average shares. Our $0.06 per fully diluted share performance for the same period last year is based on 18.6 million weighted average shares.

In addition, our year-to-date earnings per share on a fully diluted basis of $0.11 is based on 22.5 million shares as compared with last year's performance of $0.10 based on 18.3 million shares. Clearly, the year-to-date performance demonstrates that we have solidly recovered from the slow Q1 revenue quarter and are outperforming last year's numbers, regardless of the increase in share count.

The clear message is that the investments we've made over the past 12 months are already paying off and we have some very exciting opportunities ahead, which Bill will discuss shortly.

From a detail perspective, revenues compared in the same period last year as follows. Total revenue of $6.9 million is a 94% or $3.3 million increase. On a pro forma basis, taking into account Allume's third quarter of 2004, total revenues of $6.9 million compares with 2004 pro forma Q3 revenue of $6.1 million, an increase of $800,000 or 13%.

Wireless and OEM products posted revenue of $4.3 million, an increase of 39% or $1.2 million from the same period last year. The increase is attributed to the continued success of our carrier customers' wireless LAN launches. Verizon remains our largest customer in that segment and represented approximately 50% of our total revenue this quarter.

Internet and direct solutions posted revenues of $339,000, $122,000 or 26.5% reduction from the previous period. As we have noted before, we have deemphasized our consulting business and continue to post lower revenues from that segment.

The Allume Division posted net revenue of $2.2 million as compared with pro forma revenue of $2.6 million for the same period last year. The slight decrease is due to expected integration inefficiencies, which resulted in the shifting of certain shipments from the end of September to early October. In addition, we benefited from only 2 weeks of the StuffIt Deluxe for Mac launch as this product launched in mid-September.

Switching to gross profit, overall, gross margins are very strong and continue to outperform last year's performance. Total gross margin in the third quarter of 2005 was 83.1%, up 2 points compared with third quarter of 2004 of 81.1%.

Product gross margin in third quarter of 2005 increased to 83.8% as compared with 83.2% for third quarter 2004. Product gross margin for the current quarter includes both the OEM products and the Allume retail products.

The OEM product posted very strong margins of approximately 87% for the quarter. This is reflective of a high proportion of PC cards to data kits for the period.

The Allume retail product posted gross margins of approximately 75%, which includes a $267,000 charge for intangible asset amortization and certain integration inefficiencies. Factoring out amortization of intangibles, Allume gross margin was a very strong 86%. This is an exception performance, given that we moved all assembly and fulfillment operations from IMSI to Smith Micro during this period and also successfully launched the new Allume product the last month of the quarter.

Services gross margin in the third quarter of 2005 decreased 3 points to 50% compared with the third quarter 2004. This is the result of changes in product mix and consultant mix.

While we experienced exceptional gross margin performance this quarter in terms of gross margin percentage, we'd like to point out that we manage our business based on gross margin dollar rather than gross margin percentage. This is an important distinction as we expect to launch new products in the near future that will post lower gross margins as a percentage of net revenue due to the hardware component incorporated in the product. However, we expect to post a higher gross margin dollar per unit for these new products than our average product mix.

Operating expenses for third quarter 2005 increased to $4 million, up $2.2 million compared with the same period last year. The increase is attributed to our acquisition of Allume Systems.

On a pro forma basis, operating expenses, including Allume, were $3.65 million for third quarter of 2004. On a pro forma basis, operating expenses increased $350,000 year-over-year, however, the current year operating expenses include $145,000 charge for Sarbanes-Oxley compliance work, $51,000 of stock-option compensation, amortization of intangibles associated with the Allume transaction of $119,000 and other integration expenses.

In regard to future operating expenses, we plan to ramp up our engineering staff to take advantage of the positive results of our recent StuffIt Wireless strategic meetings. We expect investment in R&D to precede the revenue stream we hope to derive from that product opportunity.

Other high points of our quarter include a very strong cash flow from operations. Factoring out the $11 million cash used for the July 1st Allume acquisition from our June 30th balance sheet number and comparing with our September 30th cash balance, we actually added to our cash balance this quarter, while having integrated a new business.

Finally, let me cover off a few key balance sheet items. Our cash balance at September 30th, 2005, is $20.4 million. Accounts receivable is very solid and current at $4.8 million. Accounts payable is current. Inventory levels are written down to net realizable amounts as related to the acquisition. And, of course, there is no long-term debt.

In closing, our third quarter 2005 was a great quarter, again a quarter with very strong fundamentals and one with a very, very successful business integration. I encourage everyone to read our third quarter 10-Q, which will be filed Monday with the SEC, which includes additional disclosure in regard to our acquisition of Allume and, of course, our current period results.

This concludes the review of our third quarter financial results and now let me turn it back to Bill.

Thanks, Andy. As we delve further into the events of the third quarter, I would like to go through our product lines and provide an update.

We of Smith Micro like to think of our business as having 4 strong and stable legs, each of which, we believe, has a tremendous opportunity for growth. The 4 legs of our business are as follows -- 1) our wireless connectivity software business; 2) our general software business, primarily from Allume, featuring the industry-leading compression software, StuffIt; 3) our enterprise wireless connectivity initiative; and 4) our wireless compression opportunity, StuffIt wireless. I would like to take you briefly through each of these opportunities and then I will provide my outlook for Q4 '05 and will open up the call for questions.

First, with regards to our wireless connectivity software business, in the third quarter we continued to see an acceleration of the momentum that started in 2004. Verizon Wireless continued to roll out its wireless broadband access or EVDO wireless data service, which is now serving 171 metropolitan markets and 68 major airports, as well as continuing to broaden the footprint in existing areas.

We believe Verizon's marketing campaign, as well as its price drop of its EVDO service from $79.99 to $59.99 per month, will continue to drive customer adoption of the service and will be an important factor for Smith Micro as we are the sole source for Verizon Wireless' data connectivity kits and PC card software.

We have always believed that as there becomes more competition in the emerging high-speed wireless market, the service will become a more competitively priced service for the consumer. We believe that the closer the price gets to that of DSL and cable service, there will be a significant increase in high-speed wireless subscribers as they opt for the more versatile service.

We believe that the continued service enhancements to the EVDO service and the dramatic higher speeds will continue to be a significant market driver for consumer adoption of the service. We are, therefore, very excited about the opportunities that lie ahead for Smith Micro and our wireless customers throughout the remainder of 2005 and into 2006 as they continue to expand their high-speed wireless data service offerings.

We are aggressively working towards adding more carriers to our customer base, both domestically and internationally, as we execute on our plan to be the preeminent provider of software to the wireless industry.

Now I'd like to touch on the second leg of the Smith Micro business, our general software business, primarily from the Allume acquisition, which is driven by its industry-leading compression software, StuffIt. This business continues to deliver consistent revenues and we continue to believe it represents a business line that is capable of delivering 5% to 10% revenue growth on an annual basis, as well as increased profitability.

This contribution to Smith Micro on a go-forward provides us a stabilizing influence by helping us become less dependent on our larger customers, as well as providing a predictable revenue base that bolsters both our top and bottom lines.

The third leg of our business is the enterprise sales opportunity for our QuickLink Mobile Enterprise offering. QuickLink Mobile Enterprise is a wireless data connectivity solution that takes advantage of high-speed mobile data networks and WiFi technology to create a powerful, seamless, secure, mobile business tool.

Many potential enterprise-level customers will rely on more than 1 wireless carrier, especially when traveling or if they have multiple business locations in various parts of the world. Our QuickLink Mobile Enterprise offering is the first product that allows the IT managers to deliver a connection manager application to their corporate employees that spans multiple carrier networks, wireless LAN, WiFi and dial-up connections.

We announced on last quarter's conference call that we have our first enterprise customer whose name we cannot disclose other than to say they are a very large U.S. insurance company based out of the Southwest. They have ordered twice, once in the second quarter and again in the third quarter, which means we are-- we have shipped enough seats of QuickLink Mobile Enterprise for them to conduct a significant test before deploying enterprise wide.

Although we continue to build the pipeline with this new product, we continue to anticipate the enterprise program to be a 2006 and beyond play. Anything before would be surprise upside. So we are very pleased to have secured our first customer and look forward to growing what we believe is another significant opportunity for Smith Micro.

Now let's talk about what we are calling the StuffIt Wireless initiative or the fourth leg of the Smith Micro business. The handset of today is much more than a wireless phone. Functions and technology are evolving quickly and the market is growing and recognizing that most handsets are already capable of processing still image photos, JPEG files, displaying full motion video, MPEG files, and soon competing with the iPod and other similar devices by playing high quality music, mp3 files.

Performing all of these multimedia functions requires storage of large amounts of data in the limited form factor of a wireless handset. Our largest customer, Verizon Wireless, says that customers sent or received more than 40 million picture messages in the first quarter of 2005, up from 30 million in the fourth quarter of 2004. This number grew further to over 60 million in second quarter of 2005. We believe this is a great testament to the need for the StuffIt Wireless product.

With the StuffIt Wireless technology, we'll be able to give our customers, both carriers and handset manufacturers, a product that will allow the consumer the ability to store up to 30% more JPEG files on their handset and free up the 30% bandwidth requirement over the wireless data networks for transmitting these files. In the future, we plan on expanding the product offering to include compression of MPEG and mp3 files, as well.

Additionally, having met with a number of large carrier and handset customers about this technology, we believe we have an opportunity to expand this product offering to include the compression of not only these multimedia files, but also all of the other data that resides in the handset, including the operating programs and associated resources. This, we believe, represents a massive opportunity for Smith Micro moving forward.

Again, the reception to this new technology by our carrier and handset clients that we have spoken to in our marketing efforts has been very encouraging and we believe that it should lead to StuffIt Wireless revenues beginning in 2007, with a possibility of early revenues in late 2006. We have a lot of work to complete before we can declare victory, but we are developing a strong execution plan.

To wrap things up, the high-speed wireless data market is gaining more and more attention from every service provider out there. While it is early in its deployment stage, it is simply an exciting space to be in right now.

Our strong arrangements with Verizon Wireless, the leading wireless data carrier in North America, Alltel, Telus and Dobson, among others, continues to stand as a great endorsement for the company as we attempt to add new carriers and continue to grow our revenue and our bottom line results.

I would like to finish by touching on our anticipated 2005 fourth quarter results. This quarter's results continue to leverage the positive growth momentum that began in the first quarter of 2004. This clearly appears to be the beginning of the wireless era. We are excited about the positive energy flowing from Verizon Wireless, as can be seen in a broadband access marketing campaign on television, in print, around airports and train stations, which they started during the third quarter.

As such, we remain positive about our performance for the fourth quarter. We are very pleased about the continued execution across the board by everyone at Smith Micro and look forward to delivering impressive results for the remainder of 2005.

We are also excited about our expanded-- our expanded business case, beyond the fourth quarter. Our fourth-- our 4-pronged business focus should provide continued growth, with balance, looking out into 2006 and beyond. We are particularly energized by the potential emergence of our enterprise and StuffIt Wireless initiatives. Both of these programs have the capability for impressive growth on the go-forward.

Our challenge is to maintain our focus and to deliver crisp execution in all 4 segments of our business case. Speaking for all of our employees, we are up to that challenge.

With that, I would like to turn the call over for questions. Operator?

[OPERATOR INSTRUCTIONS] Rich Church, Unterberg.

Thanks and congratulations on a nice quarter. Bill, did I miss the guidance or are you just saying-- was the guidance just for sequential revenue growth at the Q4?

I think we said that we are very, very bullish on Q4 and like our business case and we're looking forward to talking to you guys again in another 3 months.

OK. So you're not providing Q4 guidance.

You guys do a great job out there, so--

All right. Andy, maybe could you talk a little bit about when you commented that you plan to assess on the R&D side, could you give us some color on the OpEx model that we should be thinking about? Does that mean coming up from this quarter's levels or what do you think?

I think the key takeaway right now is that as a combined business we've now established that we run at about $4 million. Items such as Sarbanes-Oxley will continue, of course, and they will continue into 2006 and then some, right? We are going to see some minor integration expenses as we continue to ramp up, if you will, and improve on our operations at Allume and then, finally, our goal here is to accelerate the StuffIt Wireless project due to the, again, the great feedback we've gotten and that's going to be a question of how fast can we do that, because that's all resource-based as far as human resource. If we can actually bring in the right people in a timely manner, we'll do so, which will increase op expense. If we can't, then op expense, again, should be pretty much at levels that we're establishing as we speak.

So-- so, once again, it's not a definite, but it's a goal. We're actually shooting to increase some R&D expense. It's a tough time of year to try to hire people, so it's going to be a challenge for us to actually accomplish that this quarter.

And could you talk about the-- on the gross margin you commented that the hardware component would be larger. Is this the connectivity kits? Can you just expand on that?

Not necessarily, but, again, one of our difficulties-- I'll let Bill talk a little--

Yes, I really don't want to preannounce product. Why don't we just say it is a type of kit and drop it at that. It does have a little larger hardware component than you've seen in the past.

This is specific to the EVDO network, though?

Yes, to 3G, in general, I'd rather leave it at that.

And what's the timing? Is that Q4 type of-- or are you thinking more in '06 for that?

I think you'll probably see it in the Q4 timeframe.

OK.

And, Rich, just as a final point on that, just to get the number out there, PC cards were probably 90% of mix, which is unusual mix for a particular quarter. Again, data kits are a very important part of the product mix and important to the carrier customers and so, again, that probably-- that type of performance, probably, will-- the skew will change. We certainly expect to see more data kits in the future and perhaps a greater part of the mix?

Have the EVDO data kits started shipping yet or has any-- has Verizon-- I assume they've taken care of the issues they had with the data kit?

Yes, you should assume that that's a correct statement and in that $2 million backlog there are EVDO data kits. They will ship in the current quarter.

OK, great. And then last question, on the $2 million backlog, is that all Verizon or do you also include Allume product in there?

It's everything. Yes, absolutely. It's everything that we've got.

So apples-to-apples with last quarter, I mean, could you break out what the Allume added?

Oh, it's up. It's up, guys.

Yes, last quarter was $1.2 and the $2 is close enough to apples-to-apples.

OK, great. Thank you. Nice quarter.

Chad Bennett, MJSK.

Just a question, first of all, can you reiterate again or let me know what was the one-time charge in the quarter related to Allume and what was total amortization of intangibles?

Sure. Total -- OK, intangibles work this way, $267,000 is charged to cost of sales. That's related to complete technologies that you'll see on the balance sheet and then the G&A component we have $119,000 that is related to customer lists and such.

OK. Are you going to-- are you going to continue to break those down going forward?

Absolutely. And, again, these are 5-year amortizations. They're accelerated, so the first year, very accelerated, so the first year's going to see the highest charge, second year it'll drop significantly and it'll fall off a cliff by year 5.

Right.

One-time charges we estimate integration charges at about $100,000.

OK and we're going to continue to see those? Did I hear that right?

We're going to see some. It won't be, I don't think, quite that high as we're basically, again, finishing off our production facilities. We're taking on building the new product, actually, internally.

OK. All right. And what was Verizon as a percentage of revenue last year this quarter?

OK. Let us look that up for you.

OK. That's fine. I can probably look it up, also. And with regards to Allume, you had a little bit of a revenue shift, you indicated, from the September month to the October month and you only had 2 weeks benefit from the StuffIt for Mac. Is there any way to quantify that kind of dollar amount there?

I can estimate. The shift in product was about $200,000. I can't necessarily estimate what the continued launch of the StuffIt Mac would be, except that it's been a very successful launch.

OK. All right. Then can you give us any indication outside of Verizon on the EVDO side, Alltel or any of your other OEM customers, how they performed?

Yes, we can say that Alltel order volume was higher than we had probably internally expected. They're performing very well. I think they've-- they've gotten through the Western Wireless acquisition and are moving back to growing their business and-- and they're doing a lot of good things on the data side. So we're very pleased with what we saw from Alltel.

OK.

Chad, Verizon last year was 59% revenues.

OK. Thank you. And then it sounds like, since you're going really well with your initial enterprise customer, any-- any idea of timeframe? I know you said shortly, I believe, but when you'll get a kind of full-fledged production order there? And if you can, quantify it?

We can't tell now. We do know that they are exceptionally pleased with the product. They're very happy. The IT folks are very pleased with its stability and its ease of installation over the network.

Things are going well. We have a building pipeline. The pipeline is getting some very recognizable names in it now. And we're very excited. We seem some deals that are very close, in very advanced test stages. We really believe that you're going to see very positive growth on the enterprise side throughout 2006 and maybe we'll surprise ourselves again and close another one before the end of the year and, then again, maybe it'll get shifted out into first quarter. Either way, we look forward to growing that business.

OK. And then-- there hasn't been any-- any change, kind of, in your thought on the price per seat there?

Oh, no.

OK.

We seem to have a nice sweet spot and we're executing on the business case and just looking at getting the job done.

OK. Thanks, guys. Good quarter.

Ed Ching, Rodman & Renshaw.

Most of my questions have been answered, however I see a big jump in inventory from last quarter to this quarter. I was wondering if you could give us some more color on that, Andy?

Yes, sure. That's all Allume acquisition. Obviously, now we're back into retail and, again, that's-- in respect to a roughly a $10 million business that is a pretty low inventory value and certainly part of the purchase adjustment you're allowed to do, we've written everything down to net realizable value. So that-- this is a time that you can come in with a dead-on, clean inventory.

OK and I guess, since the Allume says are retail, what's the visibility there? I mean, it's not-- I would assume it's not back-end loaded. Is it mostly through downloads or boxes sold?

This last period we were about 55% download and the balance hard product. In this day and age, when you look at the primary players out there, we have complete visibility of the channel, so it's not like the bad days where you have a boomerang effect. We have very good visibility. We work with our auditors as far as reserving any of that retail channel by using a sell-through reporting.

So everything is now on the books, of course, reserved correctly and, like I said, when you do buy a company you do have that luxury to get everything put on your balance sheet at a very conservative, correct manner.

Kevin Dede, Merriman.

Thanks and congratulations, guys. Very nice job. Andy, would you mind-- I know you said an approximate $100,000 for one-time charges. Is that in G&A, as well?

Yes. Yes, it is. Basically, I'm assuming that's in G&A and then I'm just taking the roughly $200,000 revenue shift, associating that above the line.

OK. Can you run through the detail on that, because you lost me?

OK. What I'm saying is there's two things that occurred in the integration. One is we shifted $200,000 revenue from Q3 to Q4. OK? So we performed at $2.2 million. Again, if everything was running down smoothly as you would as a normal company mode, it could have been $2.4. Again, the orders were on hand. In other words, we could have shipped.

And then the $100,000 worth of integration expenses, those are hitting down in the G&A line.

OK. All right. So, Bill, if Jonathan Kahn was on the call, what would he say about his progress of marketing older Smith Micro titles on the Internet?

He'd say, probably, he's really looking forward to launching as a line of CheckIt product, both on the Macintosh platform as well as on the Windows platform and he's quite excited about that. So you can give him a call and ask him yourself.

Do you think he'd give me a timeframe?

No, he probably wouldn't because he probably would like to wait until he's made a shipment and put a press release out.

Anthony Stoss, Craig-Hallum Capital.

I don't know if I missed this, but, Bill, could you tell me if there was any data kit revenue in Q3?

Oh, yes. Oh, big time. Yes, the data kit sales were strong and it's just that PC card sales were even stronger. I guess we didn't mean to give you the thought that we didn't sell a lot of data kits, because we did. They had a very, very strong, strong number.

Can you give me a sense of how much that was? Andy's got it available.

Yes, I was going to say, PC cards were about 90%, so 10% of the OEM revenue came from data kits.

OK. And then, Bill, I missed this also. What percent of your $2 million backlog was Allume or is Allume?

Well, you got-- basically the $200,000 worth of business that we couldn't get out the door at the end of the quarter would have gotten shoved into the next quarter, so that's it.

OK. And then lastly, can you tell us, did you record any revenue from your Vodafone Passport relationship?

No. Our first-- first product will ship this quarter. As a matter of fact, it already has.

Ian Gilson (ph), Research International Associates (ph).

First, a minor criticism. On the balance sheet on your website for third quarter you left out, I believe, it's intangibles.

Oh, yeah? Well, we'll check on that, Ian, and fix it up if we made an error. But we'll take a peek.

Well, then, and then can you go through me, again, did you-- when the product for Vodafone comes out is that only Vodafone customers in the U.S. or does it support Vodafone's data systems in the rest of world, primarily Europe, to start with, I guess?

Yes, right. OK. What it is is that Vodafone will offer a traveler's kit to its customer base in the rest of the world. The traveler's kit will include an EVDO PC card and a copy of our software that is branded to Vodafone and it's called Mobile Connect. It will be localized into a number of different languages, of which I think we've announced 2 or 3, one of which I'm not sure you really call a foreign language. It's called English English. So--

That's a foreign language.

OK. There you go. You can say it. I wasn't going to do that. But anyway, the-- people would purchase the traveler's kit before they left Europe or Asia or the other parts of the world, travel into the U.S. and when they land they're off and running to plug in the card and the software and away they go.

Conversely, Verizon Wireless is offering the same type of an opportunity for those of us that live in the U.S. and wish to travel to the rest of the world. You purchase a traveler's kit from them. It includes a UMTS PC card and a copy of our software, as well. When you land in London or Paris or Munich or Tokyo, you plug the card in and away you go. You're all signed up. You don't have to do anything else.

OK. So Vodafone is not actually offering a kit for their home country use?

Yes, they are, but that's not the business that we-- that we were awarded. That product is built by another company, a competitor out of Holland called Diginex (ph).

OK, but if I buy the Verizon kit, I'm essentially capable of running on the Vodafone network in Europe?

That's correct. Absolutely true. You can head on home for the holidays and stay in touch.

OK, now, is the Vodafone traveler's kit in the same type of pricing arrangement as that for Verizon?

I don't know the answer to that. I'll have to get an answer and get back to you. I don't know how they're pricing it.

Carl Wills (ph), North Point Capital (ph).

Great quarter, guys. Hey, Andy, on the sales and marketing line, it was about 18% of revenues this quarter. That's up substantially from last quarter. Is that the new run rate on a going-forward basis with the Allume acquisition?

Yes, there's a-- there is a variable component that is similar to an external sales rep type that varies with volume of sales that's associated with Allume. Now what helps, Allume is a very steady-state business, so we should see numbers that are very similar, but, again, if those numbers-- if their numbers go out the ceiling, the sales and marketing line will go up in a variable manner.

So on a going-forward basis, is it safe to assume-- this quarter you had operating margins of about 25% and you had some charges in there on the G&A line, that we should probably stay between a 25% and 30% operating margins?

I think that's a safe assumption.

Joe Hudak, Wachovia Securities.

I don't mean to sound redundant, but great quarter, guys. A question, going forward, do you see gross margins to stay in the low to mid 80 range?

Again, a lot of what we're trying to communicate here is, I'd say our baseline business runs in, we usually say, an 80% range. We don't want people to get caught up with the gross margin percentage. We want them to get focused on gross margin dollar, primarily because as new products come available, there may be a situation where we're producing a great gross margin dollar because the retail price is very high on the product, but it's going to produce a lower gross margin percentage.

Again, what we're trying to do is put gross margin dollar down, regardless of the percentage. So, once again, we've been-- we always refer to our business as an 80 point business and it's kind of a starting point for us, but we don't want to kind of get tied into that type of philosophy.

OK. Where do you see cash levels going forward at the end of Q4 and what would be a fair assumption for cash levels in '06?

Good question. They're going to go up.

Yes, they're going to go up. We're in the business of making money and printing money, however, if we find a particularly attractive acquisition that we want to use cash on, we may spend some of it, but that's really just taking one asset class and moving it to a new one. And, hopefully, what we're doing is buying something that's going to make our shareholders a lot more money.

Super. Great job. The other question was, where do we stand with headcount and can you give us, barring an acquisition in '06, where do you see headcount going in '06?

I just go through doing about 8 back-to-back presentations at AEA and last week I was in Minneapolis with Bruce and we did a bunch there. I know my charts say 87. It could be a little dated. It could be closer to 90. We have a number of open reqs. Andy's already talked about the fact that we want to hire more engineers and invest more in the StuffIt Wireless rollout and bring the product to market quicker. There seems to be strong demand. The concept seems to resonate very, very well and we are aggressively out looking to expand our force.

I still say that our OpEx is not going to drastically change from what you see now, but you'll see top-line growth and OpEx growth. Obviously, we think the top-line growth's going to be a lot stronger than the OpEx growth.

OK, great. And also, to get back to Ian's question, the intangible asset and that was $4,478,000. Thanks, guys.

Orin Hirschman, AIGH Investment.

Once again, congratulations. Just a few random questions. Included in that $2 million of backlog, does that include the $200,000 worth of Allume products that didn't ship until this quarter? Or that does include it?

It does.

It does. That is the contribution to backlog that came from the Allume business.

OK. And in terms of the enterprise product, you mentioned you're-- that you have a good idea on pricing. Can you talk a little bit, even if it's more general terms? Is it going to be first plus server, first seat by itself and any ideas what the general range?

OK, I'm sorry. We actually do talk about that. The first seat prices start at $30 a seat. The money in the business case is really focused on selling clients on a per seat basis. We do support all the standard server products that are out there from folks like Cisco and Microsoft and we did OEM a software server product that we call QuickLink Server. It's just that when you look at the balance, you could have 5-6-7 servers and tens of thousands of clients, so the real focus in the business is in selling clients.

Now you mentioned that one beta customer. Can you just indicate what the size of the site was so we can get a feel for--?

This is a-- so I can say that our best indication is that this particular customer could take thousands of seats, probably less than 10,000 on this case, but approaching that.

And what are they-- what are they finding that is most important for them? Just to know how people are connecting in through the different mobile devices?

The major driver is that it provides the data security and the secure access that the IT makes his whole life, spends his whole life doing. And it maintains that by implementing on the case of WiFi access all the 802.1x security protocols, in the case of wireless LAN or cellular access, by seamlessly launching the corporate VPN. It builds the appropriate fence around that-- those wireless users so that there is no compromising of the corporate security structure.

Out of curiosity for the WiFi part of it, for the security part, are the-- are they actually-- who would you consider the competitor there? Are they using you to replace hardware type of security that exists on a router or something or on a-- I shouldn't say on a router, on a connection point, and then you're just providing that as almost one of the many features here?

Well, the 802.1x security provides security between the remote user and his laptop, if you will, and the hardware concentrator you're talking to. I mean, that's where the eavesdrop could happen and could result in a breach of security for the corporate infrastructure. Once it reaches the concentrator, then you have all the other hardware things and firewalls, et cetera, that they have built and are in place, but the wild card in it is that wireless link between the-- the remote PC and the hard-wired line.

And there was another part to your question and I lost it, so help me.

What were they using instead, just compliance?

They actually weren't using anything and this was actually one of the things that we kind of really were betting on when we said we would enter this space a year ago and that is that we saw a lot of corporate users purchasing PC cards and using the OEM software that comes with it, which is great software but includes no data security capabilities. And we knew that the IT guys, once they caught on, would make a move to establish a standard client to be deployed across the corporate enterprise and they're doing it.

OK and I assume that that $30 price you gave out was for a small number of clients?

Yes, but that's as far as I want to talk about here. I like to keep some competitive edge.

OK, lastly, is there any recurring revenue stream from this?

Yes, there is. There's a 10% per annum maintenance fee. That maintenance fee provides the corporate account with all the updates throughout the year. We can say that the hard-- or the software that you get right now will work with all the hardware that's in the market place, but every month new hardware enters the wireless world, new PC cards. You're going to start seeing in first quarter a whole raft of embedded modules in laptops. The software you get now, most likely, will not work with all that new hardware, so you will constantly need to be able to update the software offering to match the hardware that you, as the IT guy, decides he wants to purchase for his enterprise.

Chad Bennett.

From what I understand, Allume has some seasonality in the fourth quarter, the December quarter, of the year. Can you give us a sense, either percentage-wise or dollar-wise, what to expect there?

When I look in the past, the seasonality is more in the 6-- the June 30th quarter. The June 30th quarter is the lowest quarter of the year and the rest are fairly consistent.

OK, so the rest are fairly flat?

Yes.

Anthony Stoss.

Andy, if you could comment on your cash flow for operations and also, I'm not sure you guys brought this out last quarter for the second quarter, what the data kit revenue was back then, as well? Thank you.

Well, sure on the data kit revenue, we just basically give percentages. We don't give exact dollars and, again, in this mix this quarter we were 90% PC card, 10% data kit.

Q2, the prior quarter, is what I'm looking for.

Oh, year-ago prior quarter?

No, just this prior quarter.

The sequential? I think last quarter was about 60% PC card and 40% data kit.

OK.

Prior to that I think we talked about about a 50/50 split. So you're starting-- and I think we've always said that you would see an accelerated growth of the PC card sales and that it would kick in. Now we have a new wild card entering the market place in first quarter of 2006 when you'll start to see the embedded modules. I wouldn't know how to really model that.

I'm just trying to figure out, because I thought you said Verizon, for the first time, was just starting to take data kits after they had that issue.

Oh, they did. It's just that they took so-- so many more PC cards that it--

Overshadowed it.

It overshadowed it. The data kit sales are great. Don't-- there should be no takeaway from this call, whatsoever, that there's a problem on the data kit side, because there is not.

OK. And then, Andy, the cash flow?

Yes, the cash flow for the 9 months ended September 30th from operations is about $2 million positive, obviously.

I'm looking for the quarter.

We don't have the quarter broken out here, we just have a 9-month, but on the 9-month the $2 million and then what's important is capital expenditures to run the business are just $44,000, so obviously there's-- this is all free cash flow.

But you don't have the quarter broken out?

No, we don't. We report just the 9-month in our Q.

At this time, I'd like to, once again, thank everyone for attending the call and I look forward to the call in February of 2006 and everyone joining us then when we report our 2005 annual results. Good day.

Ladies and gentlemen, this concludes the Smith Micro Software third quarter financial earnings conference call. Thank you for participating in today's conference and at this time you may now disconnect.