Smith Micro Software Inc (SMSI) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Smith Micro Software fourth quarter and year-end 2006 financial results conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded on Wednesday, February 28, 2007.

I would now like to turn the conference over to Bruce Quigley, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us today to discuss Smith Micro Software's financial results for its fiscal 2006 fourth quarter and year-end December 31, 2006 results. By now you should have received a copy of the press release discussing our fourth quarter results and the year-end. If you do not have a copy and would like one, you may acquire it at Smith Micro's website at www.SmithMicro.com or by calling 949-362-5800 and we will fax or e-mail one to you immediately.

With me on today's call are Bill Smith, President and Chief Executive Officer and Andy Schmidt, Vice President and Chief Financial Officer.

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. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statements including competitive factors, technology and product development, market demand for our products and our ability to execute our business plans.

For further information on potential factors that could affect our results, 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 filed last November and our Form 10-K filings. These documents contain and identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as of today's date and are based on information currently available to the Company. Smith Micro disclaims any obligation to revise or update publicly any forward-looking statements.

At this time, I would like to turn the call over to Bill Smith, President and CEO of Smith Micro.

Thanks, Bruce. Good afternoon to everyone. We appreciate your interest in Smith Micro and thank you for joining us today on our fourth quarter and year-end conference call.

Again, I am pleased to report another very strong fiscal quarter and fiscal year for Smith Micro. We again achieved record results for the seventh quarter in a row with revenues for the fourth quarter of $17.2 million, up 115% over the $8 million we reported last year. For the fiscal year end, we reported record revenues of $54.5 million, up 169% over the $20.3 million reported in 2005.

Looking at the bottom line, our pro forma net income for the fourth quarter was also a record $7 million or $0.26 per share which compared to $2.6 million for the fourth quarter of 2005; and for the year we reported $17.5 million or $0.69 per share, again another record. Fiscal 2006 was an extremely productive year for us on many levels and in the end we believe we have positioned the Company appropriately to maximize our growth potential in the coming year of 2007.

Throughout fiscal 2006 year, we achieved several significant milestones, not only in our financial performance but with the development of new products, strengthening of our balance sheet, the acquisition of complementary companies and technologies which has positioned us to clearly be the leading wireless software solutions provider in the marketplace today.

We completed a successful secondary offering to the marketplace, which was led by UBS Investment Bank. The net proceeds from the offering to the Company in December was $55 million with an additional [chute] closing on January 18, 2007 for $5.5 million resulting in a total raise of $60.5 million. This significantly strengthens our balance sheet and positions us to become very aggressive on the acquisition front, which I am pleased to say we have been.

We closed the PhoTags acquisition in April of 2006. We just closed the Ecutel Systems acquisition on February 9, 2007, and lastly we announced the intent to acquire Insignia Systems PLC on February 11, 2006, which we anticipate will close in April. I will speak later in the call after Andy's remarks on how we plan to integrate these exciting new technologies into the Smith Micro family and some strategic changes we have made at the Company as we have realigned our business segments to better serve our markets and provide a scalable structure to allow us to continue our rapid growth throughout 2007.

At this point I would like to turn to call over to Andy Schmidt, our CFO and Vice President. Andy, take it.

Thanks, Bill. First, let me go over some customary introductory items. As we have in past quarters, we have provided pro forma results and reconciliation of pro forma results and GAAP results. The pro forma results provide a net-out amortization of intangibles associated with acquisitions, stock compensation related expenses and non-cash tax expense to provide comparable operating results. Accordingly, all results I refer to for both 2006 and 2005 are pro forma amounts.

All right, let's discuss our detailed fourth quarter results. As Bill noted, we posted record revenues of $17.2 million and earnings of $0.26 per diluted share. Total revenues of $17.2 million increased from revenues of $8.0 million for fourth quarter of 2005, an increase of 115%. Fourth quarter revenues consisted of $14.2 million from our wireless and OEM segment, $2.8 million from our consumer products segment, and approximately $200,000 of miscellaneous revenue.

In our OEM segment, music contributed $8.6 million, up from $8 million in Q3 of 2006, $7.2 million in Q2 and $3.9 million in Q1 of '06. Our connection manager product contributed a strong $4.9 million, up from $3.7 million in Q3 and $2.5 million in Q2 of '06. In regard to our connection manager product, PC card software sales represented 80% of connection manager sales with kits representing 9% and downloads and activations representing 11%. The balance of OEM revenue is contributed to miscellaneous engineering project revenue of approximately $600,000. Our consumer products group continues to deliver as expected results, posting revenue of $2.8 million.

Switching to gross profit. As we consistently point out, we manage our business to maximize our gross margin dollars rather than our gross margins as a percentage of revenues. Gross margin dollars of $11.9 million increased $5.7 million or approximately 92% from the same period last year. Gross margins as a percentage of revenue was approximately 69%, which makes fourth quarter our best quarter from a gross margin perspective for the year. The increase in gross margin is attributed to the introduction of the Ecast Music Essentials manager product launched in fourth quarter. As we have noted before, our margins are driven strictly by product mix as our pricing is stable.

Gross margins by segment were as follows. The connection manager product contributed approximately 94% gross margin, music approximately 51% and consumer products approximately 83% gross margin. Operating expenses for fourth quarter 2006 increased to $5.5 million or approximately $500,000 up from third quarter 2006. The increase is attributed to Sarbanes-Oxley compliance work, both consulting and auditor fees, seasonal marketing expenses related to the consumer group, as well as continued building of our product management and engineering infrastructure.

Operating margin for the current period was 37% as compared to 27% in Q3, 24% in Q2 and 28% in Q1 of '06. As follows, operating income increased approximately $2.4 million from Q3 of 2006 to $6.4 million in Q4 of 2006. Net income for the fourth quarter was $7 million or $0.26 per diluted share as compared to $2.6 million or $0.11 last year.

In [radio] fiscal 2006, it was a fantastic year. Revenues increased from $20.3 million to $54.5 million, an increase of 169%. Gross profit increased from $16.7 million to $35.3 million, an increase of 112%. Operating profit increased from $4.9 million to $16.2 million, an increase of 228%. Overall, operating margin increased from 24% to 30%.

Finally, net income and EPS increased from $5.5 million or $0.24 per diluted share in 2005 to $17.5 million or $0.69 per diluted share in 2006. From a balance sheet perspective, our cash position closed at $92.6 million at December 31, 2006, an increase of $71.3 million from the beginning of the year. Cash generated by operations for the year amounted to $14.8 million with our fully marketed secondary and stock option exercises contributing $59.2 million.

Accounts Receivable increases to $9.8 million on increasing sales. Networking capital increased $73.5 million to $98.8 million.

Looking forward to 2007, we expect continued significant improvement in our year on year financial performance. We expect revenue growth from all of our product groups and will be adding new products which will come by way of the Ecutel and Insignia acquisitions. While we cannot give specific revenue guidance in our businesses for which we have a high customer concentration, we estimate that the Ecutel Systems acquisition will add approximately $3 million in deal revenue in 2007. Insignia is estimated to be a $10 million business in calendar 2007. We expect to close the acquisition by second quarter of 2007, which will leave us three-quarters of 2007 Insignia revenue or an estimated $7 million to $8 million revenue.

Gross margins will continue to depend on product mix. Gross margins for existing products will range from 65% to 70% but products acquired via the Ecutel and the Insignia acquisitions come in around 80% to 90% gross margin.

In regard to operating expenses, based on the significant leverage of our business model, we expect to continue to invest in our business by adding new talent to our roster. The Ecutel acquisition will add approximately 17 employees or $650,000 per quarter of engineering expense, while the Insignia acquisition is expected to add 46 employees or approximately $1.5 million per quarter of operating expense, primarily in the sales and engineering areas. We expect operating margins for 2007 to be around 25% to 30% for the first half of the year while we integrate our acquisitions, and increase to 30% to 35% range in the last half of the year.

In regard to taxes, several significant events occurred in Q4 of 2006. First, based on consecutive quarters of profitability, we released our tax asset valuation allowance. Doing so results in a positive P&L effect, reducing tax expense.

Second, we have adjusted our taxes to take into account the total year profitability. In 2006, we've utilized all of our operating NOL's but not all of our equity NOL's. From a GAAP perspective, the net effect for the year is a non-cash tax expense of approximately $1.2 million. From a tax perspective, Smith Micro will not be paying taxes for fiscal 2006.

As we look forward to 2007, we have equity NOL carryforwards of approximately $15 million federal, and $12 million state. For modeling purposes, we expect a GAAP tax expense that would be calculated by applying a 40% tax rate to pro forma net income before taxes. However, we expect 60% to 80% of the GAAP tax expense to be non-cash in 2007.

Finally, our Sarbanes-Oxley work progresses as expected and we expect to file our 10-K on time, which is on or before March 16 this year.

At this point, I'll turn the call back to Bill.

Thanks, Andy. Going forward, we have established four business operating segments within the Company. Each division will be run by a Vice President in charge of this operations and each will report directly to me. Each operating segment will also have their own business development staff. This staff will be the hunters in an effort to search for new customer opportunities. These individuals will identify and cultivate the opportunity. Once the opportunity starts to mature, the business development person will hand over the account to the appropriate sales team who will then take over the account and close the deal. This will then allow the business development people to move on to identify the next new opportunities.

The operating segments will be broken down as follows. Number one, connectivity and security; two, multimedia; three, compression and consumer; and four, mobile device management. We see this giving the Company a more focused approach for the ability to better cross-sell our customers the full Smith Micro solution.

Now let me add a little bit of color on each segment. First off, connectivity and security. Our connectivity and security operating segment shows strong results for the year ended quarter. We very much believe we are on an upswing of the sales curve as these solutions become more and more adaptable. We expect this growth trend to continue through 2007 as CDMA carriers begin to rollout their new EV-DO Rev. A service and GSN carriers begin deploying HSDPA.

These expanded services, which should offer speeds up to four times faster than prior services, is an exciting thing for us as it requires a new device to supports Rev. A or HSDPA and therefore requires a new copy of our connectivity software and yields another royalty fee. We see all this as a good growth opportunity for us. I also see an excellent opportunity for us this year as we work to add new carriers, both domestically and from an international point of view.

On February 6, 2007, we announced the acquisition of Ecutel Systems Inc. Ecutel brings us several synergies with our core competency as we continue the roadmap for our connectivity solution. Ecutel technology's strength lies in its solution that enables seamless network roaming, [a session] persistence providing the worker with always on, secure wireless access.

We also see the natural fit with our Enterprise solution as this technology truly broadens our footprint in the security and device management sectors. The combination of our Enterprise connectivity and Ecutel security protocols gives us a unique advantage in the marketplace. Ecutel also brings us several large customers including Siemens, Baylor Medical, and several government agencies to name just a few that we will now begin to cross-sell. With the acquisition we also get additional R&D and sales teams to further penetrate this market.

Now switch to multimedia. The next business segment is multimedia, which continues to be the largest contributor to our financial results. The launch of the QuickLink Music solution has been a smashing success over the last year and I believe we have only tapped the surface in this marketplace. To date we have signed two carriers with Verizon Wireless being the largest. We anticipate we will continue to see strong sales growth during fiscal 2007 as well as the continued migration path of adding other multimedia capabilities including still images, videos, ringtones and basically anything that needs to be managed on the handset.

We also are starting to see potential customers who want the music offering begin to look at other offerings such as connectivity. The carriers continue to want to streamline their offerings with a seamless solution provider and as we roll out additional functionality, they keep coming back asking for more solutions. A key component to this, I should add, is our financial strength and stability where we have the backing to deliver this solution as promised.

During fiscal 2007, I also expect to see an increase in our international presence, specifically we now have a stronger sales force on the street in both Europe and Asia Pacific which has already begun to open up new opportunities that they haven't had in the past. I see a lot of synergies with the new sales force structure, which I will talk about later in the call.

Briefly I would like to mention our progress with our Active Images patented technology where we continue to promote this as we did with the December 12, 2006 announcement where [Atlife] is running a paperless and wireless sweepstakes with a large fast food chain in Singapore. I see this becoming more important as images are becoming more and more prominent in our everyday activity in the mobile world.

Switching to the compression and consumer operation. Looking at our compression and consumer segment, I saw encouraging results. We are currently in deep discussions with handset manufacturers that would design our StuffIt Wireless compression solution into the handsets. We originally anticipated that this initiative was a 2007 play and we believe we are still on plan to announce some design wins this year. We currently believe that our first announcements will be compressing the resource files that exist in the handsets.

I also want to mention that yesterday the US Patent Office issued our first patent for improving lossless image compression techniques. This patent is the first of several patents filed by Allume Systems prior to the acquisition.

As I look at our consumer side of the business, it continues to contribute profitability to our results but importantly it also gives us a strong development team for future product development. I also see in the future as more and more smart devices enter the marketplace, there may be some future consumer applications for us to offer. But that is all I'm going to say about that at this time.

The last operation, mobile device management. Now I'm going to spend a little time on our mobile device management operating segment, which is a direct result of the recent announcement on February 11 to acquire the assets of Insignia Systems PLC.

Insignia brings to us a true pioneer and mobile device management and a key provider of provisioning infrastructure software to mobile operators and device manufacturers around the world. Their device management suite is an intelligent device management system that enhances subscriber satisfaction with increasingly complex mobile services. The suite also features a powerful configuration tool we call ICE, which provides intelligent targeted provisioning and automated device management to further improve the end user's experience and drives new revenue generating services for the carriers. We see this as a key differentiator between the Insignia line and other competitors.

The synergies with Smith Micro are very extensive as it takes the device management to the next level. Insignia's technology offers management of device directly from the carriers. This offers carriers and device manufacturers a significant support cost savings and gives the end user a better overall experience. This added functionality opens up several new doors for Smith Micro as Insignia has several flagship customers which we can begin to penetrate with other Smith Micro solutions.

Insignia currently has a strong European and Asian Pacific region sales team in place that will tie in nicely with our new sales strategy to better cross-sell the entire Smith Micro line-up. I also believe that Insignia, due to its weak balance sheet, missed out on other opportunities with large customers. Since our announcement, we have already begun to reopen these doors and we expect to see some significant opportunities in the near future.

I would like to speak a little bit about our new structure of our sales force. For the Ecutel and Insignia acquisitions we have strengthened our overall sales force. Now we are going to take a new sales approach to better optimize our cross-selling opportunities. The new approach will be more focused on market segments as compared to a product focus.

As I said earlier in the call, we are now seeing that when we have a sales discussion with a customer about data connectivity or multimedia solutions they are beginning to ask about some of the new technologies we acquired. The same (indiscernible) exists when we start approaching the Ecutel and Insignia customer base. We have put in two (indiscernible) [and approach] with three separate sales force teams.

The teams are as follows. Wireless OEM sales team, enterprise sales team, and channel and consumer sales team. Each team will be headed by a Vice President and report directly to me. Each team has a respective focus on a specific customer base or channel. They will have the ability to sell any of our products to any particular customer. They will work with the business development personnel in the appropriate operational units and use the resources of that unit to close the deal.

As an example an OEM sales executive can now present everything from data connectivity solutions to multimedia offerings to wireless compression solutions to mobile device management technology when calling on a target carrier. The breadth of our product line enhances our ability to convert a target carrier into a customer and grow our penetration in the account going forward. We believe this is a position unique to Smith Micro.

Because we now have an international sales presence, we believe this new sales structure will give us the proper reach worldwide to better close deals with carriers, handset and digital camera manufacturers, the Enterprise and others in the wireless market.

In conclusion, as we look forward to fiscal 2007, we remain extremely excited about the opportunity. We have built a strong platform for growth that we are just beginning to see come to light as our full suite of products come to market. We look forward to significant growth on both our top and bottom lines in 2007; a year of potential expansive growth for the Company as we continue on our path to become the dominant provider of software solutions to the worldwide wireless industry.

With that, operator, I would like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Rich Church, C.E. Unterberg, Towbin.

Tremendous quarter. In terms of -- can you talk about the outlook for new carriers still? I know we've talked about this in the past but in terms of the timing and how important is having the new wins in terms of achieving the outlooks for growth that you have talked about?

New carriers are happening and as soon as the carriers give us the greenlight to come to the street and tell you about them we will most certainly do so. They are in the end our customer and therefore they're in the driver seat. We expect to see a number of carriers announced throughout 2007 and we expect to see them in all different parts of our business case. You know as you look the growth for 2007, yes, new carriers, new customers will be an important driver. And we think that we're on track. We have a very clear vision of where we are going and as I have always said in the past, if you like what we've done so far the best is yet to come.

If I could with regards to going forward I understand the impact of the acquisition. I appreciate the color on that. Could you talk about the topline though, in terms of obviously you're coming off of a very strong Q4. Should we expect to see some seasonality in Q1? Or do you think we will continue to see sequential growth from here?

Well, you know I think our focus -- really because first off, we're so deep into Q1 I don't really want to talk that much about Q1. I think our focus is on delivering strong growth both the top and the bottom lines for the total year. I think Andy gave you some color as to the kind of revenue that we expect to see from the two acquisitions announced so far. We're looking forward to strong quarters for all four quarters of the year, and we are busy executing it. And that is really all I can say.

Thanks, guys. Congratulations.

Anton Wahlman, ThinkEquity.

Andy, first of all one thing I didn't hear. Right before music there was a little garbled there. What was the category you mentioned and the exact amount for the one right before music?

If you're referring to revenue, it would have been our OEM. Total revenue numbers?

Yes.

Let's see here, we had $14.2 million from our wireless and OEM segment. (technical difficulty) [$2.8 million] for consumer products and [200] of miscellaneous revenue.

You mentioned operating margins 25 to 30 for the first half and 30 to 35 for the second half of the year. What kind of revenue numbers for the first half or for the second half respective of that assume, I mean is there a certain number you would have to hit in order to get to those numbers? I mean it sounds very general otherwise.

One thing we can always assume is that we definitely have a plan that will be consensus numbers for the balance of the year, so I guess look at consensus and we expect to beat them.

In your mind the '07 consensus number was according to your interpretation of that? What kind of consensus number did you have in mind?

I don't understand your question.

No, I'm just saying I might be looking at one consensus number on some number, but people amazingly enough tend to arrive at different consensus.

I don't know. I just look at the 12 analysts that are publishing right now and expect a few more to launch in the consensus of the average of those 14 or 12 or whatever the ending number is.

In terms of the compression at StuffIt Wireless, if I understand your comments correctly I mean it did not seem to me to be have been -- I mean your comments seemed very similar to what they were about three months ago or three and one half months ago. Was there any incremental color there or were you basically at the same level?

I think -- and I'll choose my words carefully, I think that the way we view it is that we are moving into very substantive discussions and we are getting closer to something. And so three months has moved us closer. How's that?

So would you say that in terms of breaking down StuffIt deluxe between technical evaluation and kind of business models/pricing discussions, would you say that you have moved over a certain hump on the technical side and this is really only business model/pricing discussions? Or is it really a --(multiple speakers)

I think we're deep into the business model discussions at this point.

Mike Walkley, Piper Jaffray.

Congratulations on the strong results. I wanted to just touch base a little bit on just some of the trajectory of your business. On the music kit side, can you give us just a little color on the second carrier, is it international, domestic or is it -- and maybe the size of this carrier relative to Verizon that you've announced?

Oh, no, no, we've announced Pelephone in Israel. And it is obviously a smaller carrier -- it's not kits. They're going to be selling software. I mean it will be software bundled with their music capable phones.

So it's not a new incremental (indiscernible). Got you. And then if you look at some of your PC card customers that talked about record backlogging to the beginning of the year, so would it be fair to assume that your connection manager business should be up sequentially as those guys have guided to over their business models?

Well, first off, we don't talk about backlog any longer. We stopped that a few quarters ago because we're not sure that it was really that helpful. But I would say that the fact that the PC card manufacturers are as bullish as they are and have come out as strong as they are, obviously bodes well for us. So we will just wait and see.

And then just one final question and I'll pass it on. I was just curious about the Verizon customer concentration this quarter.

Verizon is about 74%.

Christin Armacost, Lazard Capital Markets.

Thank you and I'll add my congratulations as well. I wanted to ask you a question about the music, QuickLink music application. What do you think the attach rate is right now with the kits that you're shipping?

We really can't disclose that. That's something that -- again, because we have single customers that's so dominant, all I can say is that we're very pleased with the attached rate we're saying and the reaction not only from Verizon but also from Verizon's end users to the quality of the software product. So we're very bullish on what we're doing here. We expect to have a number of carriers shipping music and other multimedia products by the end of 2007 and that these carriers will definitely come from all parts of the world. So, very excited about it, very strong, strong, growth. It will be a major driver during 2007.

Can you repeat, Andy, what the OpEx assumption you provided for Ecutel and Insignia, please?

Sure. We expect Ecutel to bring about $650,000 per quarter in OpEx expense because this is headcount driven engineering. We expect Insignia to bring about $1.5 million per quarter, once they are onboard in OpEx; again, all headcount driven.

Maynard Um, UBS.

Typically in Q4 that's a strong handset sell-through quarter for the handset, guys, and just curious when you look into Q1 -- well, put it a different way. Are the music essentials kit typically bought with the handsets or has your experience been more that they buy it, figure out that to put music on the phones they're going to have to go out and buy new music essentials kits. Can you just talk about the trends that your seeing there? And then if you could also talk about the DSO's in the quarter that was up sequentially?

Let's talk about the handset sales. Clearly in our consumer part of our business, fourth quarter is always the strongest quarter, so, and it does fall off in first quarter. There is a seasonality. I think that's what you're getting at. When we look at the handset business and we look at music, we just don't have enough history right now to know whether we saw seasonality. I mean, many of us did ask that question -- was this an incredibly strong quarter that might change with some sort of seasonal influences. We just don't have enough data points yet to be able to really speak to that.

You know we do believe as we continue to roll up new multimedia music and other types of carrier customers, it will somewhat distort the view of seasonality and there will be certain launch dynamics that will kick in. But that doesn't mean that by this time next year we will have a clear picture and we will be able to answer that question. We just don't know.

In the case of the DSO's, again, when you look at a typical quarter for us primarily most of our sales come in the third month of the quarter, especially at year-end the last several weeks from all of our customers. So it's not atypical for us to see [DSO's go up] because again the sales all occur late in the period.

The other part of it is with the big OEMs we work with, we basically have no bad debt. So what occurs is we were asked to basically consolidate our billing so atypically we may bill once a month versus billing in a real-time manner every week. So DSO's really aren't that big of a concern to us. But that's usually how the dynamic works.

Kevin Dede, Merriman Curhan Ford.

Let me offer my congrats, Bill and Andy. Nice job. Bill, I think one of the issues out there is Cingular's release of the iPhone. I was wondering how you might characterize Verizon's anticipation of that move and whether or not you think they might be promotional and offering V CAST music subscribers an avenue to participate in that service ahead of the iPhone launch?

You know that's a question I really can't answer because [personally], I don't know. They don't come and talk to me about their plans of something like that. I mean I think it has been very intriguing to watch some of the comments coming out of Sprint with regard to how they view the iPhone and Cingular's launch. Obviously it's going to create a buzz and that's very, very good for us. The more focus that the carriers create on multimedia applications should enhance sales, and in doing so enhance both our top and bottom line.

I think we just have to sit back and watch and see how the iPhone is received and how well it performs. Not only as a music device but oh, by the way, it's also got to be a phone. So this is something new to them. So we will just have to wait and see. I'm sure it will be a big, great production and I'm sure it will spur interest in the whole multimedia sector of the wireless world.

On Insignia, I know your relationships extends a bit further back than just a recent announcement. I was wondering if you could give us a little insight on some of the synergies that you see developing there? I know you commented a little bit in your prepared remarks but I was hoping you might be perhaps a little more specific with regard to the carriers that they are working with directly and their interest in the other solutions that Smith Micro provides?

Sure. We actually have been looking at Insignia for probably the last four or five years. Insignia was coming out of a change in their business case from a Java-based engine software house to entering the mobile device management space. And we had an opportunity to meet Mark McMillan and his team, and we have followed their progress.

Clearly I thought from the very get-go they did not have enough working capital to really move through this change in their business case. And that proved to be true. But we always thought that the mobile device management part of the wireless space was a very exciting play. You know, I have a very strong expert in this field on my Board, and who came out of the carrier world. And we all think that this is an area that is set to explode. So we are very excited about entering the area. We think there's a lot of drivers.

Insignia has about 30 carriers worldwide right now under contract. They have a number of device manufacturers. We see that there are a lot of synergies and opportunities for us to cross-sell to their customer base and vice versa to cross-sell the mobile device management technology to our customer base. We think the fact that we bring such a strong financial balance sheet to the game will make a big difference to many customers who are trying to make -- basically lay down their bets on how they are going to play in the mobile device management space. So we're just very excited about this. There's a lot of opportunity. We have got a great team that is joining Smith Micro, a strong management team that we think will execute very well.

Well, congrats again and thanks for taking my questions.

James Alexander, Jefferies & Co.

Congratulations also. Could you give us an update on your acquisition strategy from here? Now that you have made these acquisitions what should we expect going forward?

Well, really nothing has changed. As we said during the secondary and we've said numerous times over the last few months, we are actively out looking for additional software technologies in the wireless space that we can add to our portfolio to broaden out our offerings. Clearly I think we delivered on both with both acquisitions on that goal. We also wanted to expand our customer base. That's something that we are very focused on is to expand the number of carriers both here and North America as well as overseas, as well as expanding our sales into the device manufacturing space. So I think both of these deals deliver on that. And that's what we're looking for going forward.

We are actively out talking to various targets. When we have a target that we think is the ideal fit and the right one for us to move forward with we will come to the street and talk about it. But your net takeaway should be that we are very active and we are very aggressively looking for added technologies and business plays to add to our overall business case. We are very focused on becoming without a doubt the absolute dominant player in the worldwide wireless software business. And anybody doubts us they are fooling themselves.

Just one other question. It sounds like you're making a number of changes to your sales force structure. How many sales heads did you exit the year with? Where do you see that going through 2007 and when do you think they will ramp to full productivity under the new structure?

Well, the structure is actually not radically different than what [I had] -- the difference is in how they sell all the different products. You know, whole headcount on sales if you include the business development people and the operations will go from somewhere around 20 at the end of the year to probably double that, 40 some [odd] throughout '07. So and we will add more -- if we need more sales heads we're going to add more sales heads. If we're executing and delivering it will become a rounding error in the numbers.

Actually I had one other question, if it's okay. I know you don't like to provide guidance but plus you were two months into the beginning of the year. Are there any qualitative comments you can provide on how the year is shaping up at this point?

How we view the first quarter?

Yes.

We're executing just fine. We're doing a great job. Things are happening and I look forward to talking about it on the first quarter conference call, but I've got to get the fourth quarter and year end one done first.

Rich Valera, Needham & Co.

With respect to the gross margin we saw this quarter, I think you said, Andy, in your comments that that was primarily due to I think the QuickLink Music product which obviously margin (inaudible) essentials kit. Can you give us a sense of if you expect margins to be sustainable at this level? I would assume you'd expect music, QuickLink music, to continue to ship at a similar rate going forward. What are the things we should watch for that might cause that gross margin to dip from these levels?

Well, as I commented, [we were] 69% this quarter. I'd expected to be 65 to 70, which again, is that ballpark. That is just basically assuming similar product mix, but one of the keys, again, the Ecutel products and the Insignia products are pure software, so that's 80% to 90% margin. So once, again, as we keep adding new products, developing new products or acquiring new products, the margins are going to probably just keep going up from -- it's called a year on year prospective. Because again, kits are one customer, one product type event. We are, again, a pure software company (technical difficulty) when it's all said and done.

And just in terms of the impact that the connection manager business had with PC cards being 80% of the business, was that a positive impact? Do you expect PC cards to continue to stay at that real high percentage of total connection manager sales?

Sure. I mean it is very interesting. You know if you would ask me at the beginning of the year I would say that PC cards and embedded modules would completely dominate but it's an interesting demand for the kits in that world that just keeps coming. So 80% is probably representative for the year and again, the consumer is going to decide where that goes from there, but I think the key on connection manager is we had a record $4.9 million, Rev. A is coming out this upcoming year. It's a product that gets a bit overshadowed by multimedia but it is a great product that is going to grow we think in a significant manner in '07.

Great. Just one final one on StuffIt Wireless. Going back a few quarters, you talked much more about trialing with carriers for StuffIt Wireless, and now it seems like it's moved much more towards sort of a handset OEM play. Do you continue to have discussions with carriers about getting StuffIt Wireless on both sides, on both sort of the server side and on the handset side to really get more advantage from it? Or do you think it's really going to gravitate towards sort of a handset only play?

We continue to have this discussion. I think the reason that I couch the words the way I have is that clearly we're in some pretty serious negotiations but it is on the other side. I think I have said fairly consistently that I thought the first adoption for StuffIt Wireless would be for handset resource code compression. I don't think I varied from that. And I just think that that's a quicker easier sale because it doesn't have as many infrastructure issues as the carriers side. So I wouldn't -- I know everybody is trying to dissect the words and try to figure out exactly what is going on in my head and I'm not sure that I always know. So, I wouldn't do that. I guess I would say, look, we are very actively -- we have some things that are really getting close and that's what I'm talking about.

And just one final one. Andy, do you expect the Insignia deal to close within the March quarter? Is that the timing you're expecting?

No, we had said in second quarter.

I'm sorry. Early second quarter?

Well, that would be our hope but again we just have our closing conditions to get through.

Amit Dayal, Rodman & Renshaw.

I guess I want to begin with a macrolevel question. Is SMS becoming a company that is scheduling exclusively to handsets?

Well, gosh, no. I mean our biggest customer is Verizon Wireless. So I don't see how you can get that net takeaway.

I mean from catering to opportunities related to the handset side. I mean my question was probably are there opportunities you're looking outside of the handset space in other consumer electronics like digital cameras, et cetera, that your technology or your offerings could be applicable to?

Well, we are all -- yes, hey, we have said in the past that we're looking at opportunities with digital cameras and things like that. But it's kind of a secondary plan. I mean the real money right now is in wireless and it is in providing software solutions that enable technologies for carriers and enable revenue opportunities for carriers going forward. At the same time if we can work with the device manufacturers as we clearly will be doing with the mobile device management, to solve problems to allow both the carriers and the device manufacturers to upgrade products in the field in a very cost-effective manner to enable the deployment of new technologies and business opportunities for carriers; you know, that is something we are all about. We are all about being the dominant player in the wireless software space. We have the broadest portfolio now. It is going to get broader and we want to be the one-stop shop.

One more question, on the connection manager front, could you talk a little bit about sales on the Enterprise side and what your pipeline is looking like on this front?

The Enterprise activity continues to ramp. We have a number of very exciting things we're working on in the present quarter. And we are looking for some fairly substantial orders. So, everything is going well. Adding the Ecutel technology to our overall Enterprise offering, they have in excess of 50 different enterprises they're doing business with, really brings us a lot more strength, a lot more girth in the Enterprise space, and also helps us buildout our overall Enterprise sales team.

Just to follow-up to that, I mean how much did we do in revenues from the Enterprise side on the connection manager side?

We don't break that out. It is all in the overall data connectivity space and that is probably where it is going to stay.

And just one final question. You guys have almost like $90 million, $92 million in cash. What interest should we expect in 2007 just for modeling purposes?

Oh, interest. Right now we have been seeing something a little bit about between 5% and 5.2% and it can be driven by the market.

But let me quickly add to that. Investors did not invest in our secondary for us to put cash on the balance sheet to get interest payments. We clearly recognize that we have been given working capital by the investment world to continue the buildout of our Company, our business case and our infrastructure and we're going to do that.

Reg King, Nollenberger Capital Partners.

Congrats, Bill and Andy. Great quarter. Bill, I heard the three segments, I believe that you have reorganized the sales force in wireless OEM and channel consumer. I think I missed the third segment.

Well, actually, let's go over it. From a segment standpoint, and I don't mean this in financial terms but in the way we run our business terms. A segment -- there's four segments that we're operating in. There is connectivity and security. There is multimedia. There is compression and consumer. And there will be mobile device management. Then from a sales team structure, we have wireless OEM, we have Enterprise, and we have channel and consumer. Keep in mind that all these -- these three sales teams can sell any of the products that any of the operation of the Company produced. A good example [of the] kind of taking out of the just pure OEM is to talk about like in the channel area. You know as we are getting further down the road with a number of large Enterprise customers, at the very end they turn it over to their procurement funds. They have certain channels or distributors that they are used to buying their IT software from. So our channel guide has to make sure that all of the Enterprise products are skewed up in those distribution channels and manage that process. So you see, while we may generate the business through our Enterprise sales team, the actual order may go through our channel sales team. Just to lay anybody's fears aside, we will get full credit to both teams so nobody has to worry about it.

Great. Thanks Bill, for that clarification. Andy, regarding the taxes, I see that there was adjustment to pro forma this quarter and I think if I remember your comments correctly you said that about 60% to 80% of the taxes throughout 2007 would likely be non-cash. So I would assume that we expect to see adjustments throughout 2007? Is that correct?

Well, what we will do is from a GAAP perspective again we have to put the stake in the sands beginning the year and so we will show a 40% tax burden from a GAAP perspective. But as we go forward in the quarter and learn more certainly about some of the deductions we get, one of the variables are stock option exercises that sure are hard to predict. We will give additional color each quarter. But our initial estimate is 60% to 80% will be non-cash, which is, again, great for the business and we will try to (technical difficulty)-- fill that out and provide it in pro forma analysis.

Thank you very much. Congrats again on the quarter.

Chad Bennett, Northland Securities.

Just a quick question. Can you give us any indication with QuickLink Music coming out I think about halfway through the quarter, maybe even the last month of the quarter, how much you guys benefited from that in the quarter?

What we're choosing to do is to just communicate music in total and then ultimately that will be multimedia in total. And again that comes back to customer preferences as far as how much detail we're really -- they prefer that we get to the street.

I guess we're going back to the tax question that was just asked, so for go forward estimates for everybody out there on the street, are you going to report a pro forma number ex-taxes going forward?

We will provide a pro forma number ex-non-cash -- excuse me, the non-cash tax expense. What we'll do is we will always break out what is non-cash and provide that so everyone can have a look at it and build it in their models.

And then how much in review did Insignia do in '06?

They are not through their audit yet so we can't release that number. Once that audit is done, that should be public information.

Is there just a rough range that you could give us?

I really can't while they are in mid-audit there. Certainly as we have not completely closed the acquisition, that would be a call you'd have to make to Insignia.

Is it fair to say you guys expect to, through your relationships and connections mainly with probably your largest OEM expect to increase their revenue dramatically with the acquisition? With the relationships?

That is a good question. I mean we have given you an idea of [what we say we think] for fiscal 2007 Insignia is about a $10 million year business. They are -- they have established certain traction and they are starting to do fairly well in their own right as far as closing deals. Now to the extent that we can take them into other accounts that they could not get in before and help them close more deals, that is what the game is all about. I don't want you to have a takeaway that we expect to close the deal with Verizon about mobile device management. That really wasn't the goal in what we were doing here. Our goal is to expand our reach. They bring us 30 more carriers, they bring us a number of device management or device manufacturers that they have, either done are about to get done. We look for strong growth in this space.

The mobile device management space, nobody has really made money in it up through last year but we expect that it will start to break out. And you've seen some movement. You have seen us al acquire the assets of Insignia. You have seen HP acquire the assets of another competitor, Bitbone. The nice thing about that is it looks like they're going to pretty much take all that technology internal to HP for HP use. More than to try to compete in the market for other device manufacturers.

So we see a lot of growth. We believe it is a market segment that has the capability surely of doing doubles for a number of -- for the foreseeable future. And I think that should be your net takeaway.

Okay, that is what I was trying to get at. So to get to the revenue number for Insignia, you talked about you don't have to necessarily close a large deal with Verizon is what you're saying?

No, not at all.

[Ian Gill, Investment Research]

I have a question about Insignia. Are you acquiring the company or the assets of the company? Because the stock is selling for $0.08.

We are acquiring the assets.

You're acquiring assets. So you will be leaving behind a [sharehold] at approximately $19 million?

Well, we're leaving behind -- all the stuff we want nothing to do with. Which is all of the past and all the issues of the past. What we're taking forward is the technology and outstanding engineering and sales team that just was frankly undercapitalized and didn't really have a fighting chance to turn successful. If the mobile device management market had developed quicker we might have made it, but it did not. So we are here to step in and move this thing forward at a time when I think the market is ready to move forward. And it will happen over '07 into '08 and into '09. But you're going to see some strong growth. No, we did not buy the company; we bought the assets.

QuickLink Enterprise. We've never really announced any major customers. Are we still going forward with that or is it on the back burner or --?

No, it is definitely going forward. It is going forward very nicely and we will probably never announce major customers because the customers won't allow us to announce them. We usually have to talk in sign language about the kind of company they are and you just have to kind of deal with that because they just won't let us name names. They view us as part of their overall security infrastructure and as such, frankly they just don't want us talking about who they are.

Van Brady, Presidio Management.

You told us about the carrier deals that are done but not announced yet. And I would like to kind of explore that a little further. Obviously you're talking to these people on an ongoing basis and you know what their rollout plans are. Is it possible to give us say a quarter in going forward where it really makes a lot of sense to expect a deal knowing that they're all trying to get to market as soon as possible and they have one eye on the competition and one on how their infrastructure, et cetera to -- and distribution to make the rollout work. So is it possible to narrow down a little bit more, at least by quarter, when we might expect the first deal?

You know, I'm the exception to the rule. You can teach old dogs new tricks. And this old dog has learned that when we have a deal we'll come out and talk about it and until that point, I'm just going to say we're working real hard.

Jeff Wlodarczak, Wachovia Securities.

Great quarter, guys, on the (technical difficulty) -- being really redundant but most of my questions have been answered. Did you break out the headcount between US and international? (multiple speakers)

It is very simple. We had been primarily domestic so but -- certainly to help people out in the color there, Smith Micro here domestically had been about, when you consider full-time equivalents, about 150 employees at the end of the year. And as I have noted with the Ecutel acquisition we'll add about 17 heads and 46 heads with Insignia. With Insignia they have a fairly significant international workforce, both in Korea and in Sweden. And so once we close that acquisition it will be a nice step forward for us to actually have a nice international presence.

Which will be how many people?

There is a total of 46. I don't have the exact breakout in Korea and Sweden but there's significant presences in both those countries, engineering presences.

Real quick, and this is -- where do you see SG&A costs going forward due to the acquisitions? Last year we had a major uptick there? I was looking on how we could -- where do you see that as a percentage?

Well, let's put it this way. Two different ways of looking at it. As I commented earlier, we're at about $5.5 million right now and we had noted that Ecutel would add about $650,000 a quarter to the SG&A expense and that -- including engineering. And that Insignia would add [about] $1.5 million. The other metric you can always go to is the op margin will give you a range and as we noted we said op margin would run between 25% and 30% while we are integrating the acquisitions the first half of '07. And then it would pop-up 30% to 35% in the second half of the year.

At this time I'm showing no additional questions in the queue. Please continue with your presentation.

I would like to thank everyone for attending today's call. We look forward to presenting our financial results for the first quarter of 2007 in late April. Good day.

Ladies and gentlemen, this does conclude the Smith Micro Software fourth quarter and year-end 2006 financial results conference call. You may now disconnect and thank you for using AT&T teleconferencing.