Smith Micro Software Inc (SMSI) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro first quarter 2007 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, your conference will be opened for questions. [OPERATOR INSTRUCTIONS.] This conference is being recorded Wednesday, May 2nd, 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's financial results for its fiscal 2007 first quarter ended March 31, 2007. By now you should have received a copy of the press release discussing our first quarter results. If you do not have a copy and would like one you may acquire it at Smith Micro's website at smithmicro.com or by calling 949-362-5800, and we will fax or e-mail one to you immediately.

With me today on the call are Bill Smith, President and Chief Executive Officer, and Andy Smith, 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. All 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 plan.

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 & Exchange Commission, specifically, the Company's most recent Form 10-Q 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.

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

Thanks, Bruce. Good afternoon, everyone, and thank you for joining us today.

I am pleased to announce another strong quarter for Smith Micro. During the first quarter we recorded revenues of $17.7 million, an increase of 79% from the $9.9 million we reported in the first quarter of 2006 and up slightly from the fourth quarter revenues.

Looking at the bottom line, proforma net income for the first quarter was up 113% to $6.2 million or $0.20 per diluted share, which compared to $2.9 million or $0.12 per diluted share in the first quarter of 2006. During the quarter we achieved multiple key milestones, including adding two new carriers, Sprint and IUSACELL to our QuickLink Music solution. I will go into more detail on these deals later in the call.

The quarter was also active on the new product introductions front, as we launched QuickLink Media, our all in one solution for our Multimedia manager for mobile phones. We also previewed our StuffIt wireless windows mobile addition at the CTIA Wireless Conference in March.

And as we announced today, we are in the final stage of development of our StuffIt wireless technology with Kyocera Wireless, a leading mobile device manufacturer.

Finally, we announced and subsequently closed our asset acquisition of Insignia Solutions. The integration of the acquired company is progressing well, and we are working aggressively to address the critical need for effective mobile device management in the wireless communications market.

Needless to say, we have been very busy across the board here at Smith Micro, and I will spend more time on these new developments later in the call, after Andy's financial comments.

At this time, I would like to turn the call over to Andy Schmidt, our CFO. Take it away, Andy.

Thanks, Bill.

First, let me go over our customary introductory items. As we have in past quarters, we have provided proforma results and a reconciliation of proforma results with GAAP results. The proforma results provided net amortization of intangibles associated with acquisitions, stock compensation related expenses, and noncash tax expense to provide comparable operating results. Accordingly, all results I refer to for both 2007 and 2006 are proforma amounts.

Okay, let's discuss our detailed first quarter results. As Bill noted, we posted record revenues of $17.7 million and earnings of $0.20 per diluted share. Total revenues of $17.7 million increased from revenues of $9.9 million for first quarter of 2006, an increase of 79%.

New for this quarter will be a restructured revenue breakout which takes into account our new acquisitions and subsequent business unit reorganization. I'll provide a revenue by our new operating units which are multimedia, which includes music, connectivity and security, which includes our legacy connection manager business and now our enhanced enterprise solution by way of the Ecutel acquisition, compression in consumer, mobile device management, which includes the Insignia product offering, and finally other revenue.

First quarter revenue for Multimedia was $8.5 million, up from $3.9 million in Q1 of 2006. Connectivity and security posted a record $6.1 million in revenue this quarter, as compared to $3.2 million last year. Compression and consumer posted revenue of $2.8 million, up from $2.6 million last year. As we closed the Insignia acquisition in early April there is no revenue to report in Q1 for our mobile device management group. And, finally, we reported approximately $300,000 of other revenue, which is consistent with our first quarter of 2006.

In regard to our connection manager product, PC card software sales represented 86% of connection manager sales, with kits representing 3%, and downloads and activations representing 11%.

Okay, switching to gross profit. As we consistently point out, we manage our business to maximize our gross margin dollars rather than our gross margin as a percentage of revenues. Gross margin dollars of $12.3 million increased $5.4 million or approximately 79% from the same period last year. Gross margin as a percentage of revenue was approximately 70% for Q1 2007 compared to 69% for Q1 of 2006. As we've noted before, our margins are driven strictly by product mix. Gross margins by business unit were as follows: multimedia 51%, connectivity and security 89%, compression and consumer 86%, and other revenue 73%.

Operating expenses for first quarter of 2007 increased to $7 million or approximately $1.5 million from fourth quarter of 2006. The increase is as expected and is attributed to the addition of the Ecutel infrastructure and personnel, Sarbanes-Oxley compliance work, both consulting and auditor fees, seasonal marketing expenses related to trade shows, namely CTIA, and to a lesser extent the continued building of our product management engineering infrastructure.

Operating margin for the current period was 30% as compared to 27.6% for Q1 of 2006. As follows, operating income increased $2.6 million to $5.3 million for the current period. Net income for fourth quarter was $6.2 million or $0.20 per diluted share as compared to $2.9 million or $0.12 last year.

From a balance sheet perspective, our cash position closed at $94 million at March 31, 2007, an increase of approximately $1.5 million from the beginning of the year. Cash generated from operations from the period was approximately $6.6 million.

Accounts receivable decreased to $9.1 million on increasing sales. Of this amount $7.0 million is related to trade receivables.

And, finally, net working capital at the end of Q1 was $99.3 million.

Looking forward to the next three quarters of 2007, we expect continued significant improvement in our year-on-year financial performance both on the top and bottom line. Gross margins will continue to depend on product mix. We expect gross margin in the 70% range for Q2.

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. As we have previously noted, we expect that the Insignia infrastructure will add approximately $1.5 million per quarter to our expense line. However, given the seasonal expense items unique to Q1, including trade shows and SOX audit expense, we expect total Q2 expenses to increase approximately $1 million from Q1 2007. We continue to 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 a 30 to 35% range in the last half of the year.

With regard to taxes, our current estimate is that cash based taxes will be around 5% of proforma net income for the balance of the year. This estimate is based on our existing NOLs and our internal forecast of profitability and deductions such as those driven by stock option exercises, all of which are very difficult to predict. As previously noted, we began 2007 with equity NOL carry forwards of approximately $15 million Federal and $12 million State.

Finally, we were very pleased to note that included in our 2006 10-K filing, filed this past quarter, we had a clean Sarbanes-Oxley report.

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

Thanks, Andy.

As I mentioned on the last call, we have reorganized the Company into four operating segments. I now want to spend a little time on each segment and talk about the progress made in Q1.

Multimedia. Multimedia continued to be the largest contributor to our financial results during the quarter. We strengthened our business case significantly by adding two new carriers for our QuickLink Music solution. The first is IUSACELL, a regional carrier operating in Mexico. The second and notably larger is Sprint, which we announced on March 26th at the CTIA Show. Sprint will be using our solution to drive its new music data plan. Sprint's selection of Smith Micro is significant, and it demonstrates our ability to land additional tier one carriers and highlights our commitment to mitigate our customer concentration risk.

The Multimedia wireless market is yet another market where we demonstrate our ability to lead the market and not follow. Although we are starting to see some initial revenues from Sprint, we do not anticipate a ramp up until the back half of the year as Sprint adds more music enabled phones and launches a significant music marketing campaign.

In regard to Verizon, Verizon Wireless continued to be our largest customer during the quarter and our relationships remains very strong.

I would now like to discuss some current trends we were seeing in the multimedia marketplace. As we look at the next quarter various market dynamics are at play that are creating a certain degree of uncertainty, thereby affecting our forecasting visibility.

One factor, in particular, is the length of time it will take developers to become compatible with Microsoft Vista. We are currently Vista compatible, however, since we have no control over the process by which certain hardware companies are able to achieve this for themselves, we are in a bit of a holding pattern, waiting for the delivery of key hardware device drivers. A lack of these device drivers is holding up file product tests and the subsequent release of Q2 carrier orders.

In addition, we are seeing signs that large carriers are preparing for major activities to answer the iPhone launch, which we believe will have a favorable impact on our business. While we feel that the affects of a strong multicarrier media blitz will be very beneficial to our business, we can't be certain of the actual timing of such an event nor the timing of the subsequent increased order patterns by our customers. As a result of these factors, the typical visibility that we have at this point in a quarter is somewhat muddied, and we are conservatively viewing revenues in the second quarter to be either flat or slightly up or down from first quarter. That said, we remain very confident in the second half of the year when we expect the Vista issues to subside. Finally, we view the Vista issue to be a temporary timing event and have not changed our internal year-over-year expectations.

Taking a macro approach we continue to track our expectations for a strong second half of 2007, where we expect to see the majority of growth for the year. As I stated before, looking ahead at drivers in this business, we believe the upcoming release of Apple's iTone will deliver a significant marketing push by carriers throughout the summer months and into the fall selling season. We believe that this will have a positive affect on Smith Micro as more and more attention is being paid to the multimedia functions on the wireless device.

The pipeline for adding new carriers is filling up nicely, and we continue to expect to announce additional carrier wins in the next three quarters. I am encouraged to see particularly strong interest from international carriers, a target market of ours that we are working to better leverage.

Productivity and security. Looking at our connectivity and security segment I am very pleased that we achieved record revenue with our connectivity solution. We continue to see the upswing of the business as the CDMA carriers roll-out EVDO as a service and as GSM carriers move to HSDPA.

We also have continued our open dialogues with several new carriers, and that pipeline remains strong. We are seeing positive cross selling opportunities between our multimedia platform, our mobile device management offerings, and connectivity as carriers tend to want a one-stop supplier. We expect to announce new international and domestic carrier wins during the year.

I am also encouraged that the Ecutel system's integration on the administrative, sales, and marketing fronts has gone well. We are on track with the integration of the Ecutel technology which enables seamless network roaming and section persistence. This new capability further enhances wireless access security and broadens the customer experience as we expect new applications to be developed that will require session persistence feature sets. We continue to see this area as a strong growth opportunity for us in the future.

Mobile Device management. Now, I will spend a little time on our Mobile Device Management operating segment. I am pleased that we have closed the asset acquisition of the Insignia Solutions and would like to note that the [NFB] integration is progressing nicely. The Insignia technology brings to us yet another new opportunity to provide infrastructure software to mobile operators and device manufacturers around the world.

During the quarter we had announced a license agreement with Sybase iAnywhere that embedded software development kits that will be paired with Smith Micro's Insignia open management client. This new offering provides a robust high performance technology that enables remote updates and upgrades for mobile devices.

Also, during the quarter we announced our first patent win in the mobile device management area, a patent for the methods of remotely updating an electronic device with an update package via a public network. This is the first of seven patent applications that have been filed. Clearly, our ability to develop and protect new technology will move us into a leadership position in the mobile device management market.

The pipeline for new device management deals is strong, and we expect to announce several new customers in the coming quarters. Although this area is expected to be a small piece of our 2007 revenue, I anticipate that this will become a much important play for us moving into 2008.

Finally, a key up side to the Insignia asset acquisition is the addition of a strong international development and sales team. As we integrate the new teams we should begin to see an up side in our international business opportunities.

Compression and consumer. Briefly, as I look at our consumer side of the business, it continues to contribute profitability to our results. We launched several new products during the quarter including [spring cleaning version 9] and the [media recover 4.0] for both Mac and PC. We also signed an exclusive publishing deal with [KMT Software Inc.] As we look forward we continue to see this as an install cash generator for the Company.

Looking at the compression side, our StuffIt wireless windows mobile edition was previewed at the CTIA Show in March, and the feedback from potential customers was excellent. We also received positive words from the Patent and Trademark Office which granted our patent for [inaudible] compression of digital images.

I am extremely excited by our announcement of the Kyocera Wireless development relationship that I mentioned earlier in the call. To summarize the relationship, Kyocera is in the final stage of evaluation of our StuffIt wireless resource compression solution, which could be embedded in a variety of new mobile devices expected to hit the market in 2008. Obviously, this is something we have been working on for some time, and we are very pleased to be working with the leading handset manufacturer in this important effort for Smith Micro.

We have already provided a prototype of StuffIt operating in a target key of several wireless handsets and demonstrated compression of up to 40% of handset resources. We were able to demonstrate this level of compression while at the same time limiting the compression overhead to a level that was not discernible by the user. Both the high level of compression and the limited overhead were viewed as remarkable accomplishments.

I want to thank the entire Kyocera Wireless team for having the vision to take the lead with our exciting StuffIt wireless technology. While you should know that there will be other device manufacturers to follow the Kyocera lead, the first relationship is extremely satisfying, and I sincerely congratulate the entire compression team for their hard work in helping us in this successful venture.

Before I turn the call over for questions, I want to reiterate a few key points concerning what I see as progress we have made to date. We continue to execute operationally and financially, posting strong year-over-year results for yet another quarter. We continue to participate in fast paced, exciting markets, and continue to pursue opportunities to drive growth. Our delivery of the StuffIt wireless solution and the subsequent access to a brand-new market is an excellent example of our vision and our future.

So, in conclusion, we remain very excited about the company's current and future prospects. We believe we have made significant strides in reducing our customer concentration risks. We have significantly expanded the breadth of technology offerings to further increase our leadership in the wireless software universe. In spite of the potentially challenging second quarter the best clearly still lies ahead of us.

With that said, I will turn the call over for questions. Operator.

[OPERATOR INSTRUCTIONS.]

Our first question comes form Rich Church with Unterberg. Please go ahead.

Well, thanks, guys. Nice quarter. Andy, what was Verizon as a percent of revenue in the quarter?

74%.

Okay. And, Bill, the commentary about revenues flat to up or down slightly, was that specific to multimedia or for the company overall?

It's really, you know, our best guess as we sit here now based on what we know for the Company, it is clearly subject to change, it's a very fluid environment, and we expect it will, will change during the quarter. We will have a number of opportunities to talk to the Street with the trade or with, in investor conferences throughout the month of May, and we'll try to provide updates.

But clearly one thing I want to leave you with in a very strong way is we are very excited about the year 2007. We think it's going to be a great year for Smith Micro. We think it's going to be a banner year for the Company, and we're looking forward to further execution.

And let me ask you, on Verizon's website they list the phones and this compatibility for the access manager, and all of them are due to be completed for Vista by the end of May. Is it, is that your expectation that you'll be able to possibly catch-up during the month of June?

I think, you know, that is clearly something that all parties are working hard on, and we expect to, you know, to execute this thing as crisply as possible.

Okay. And, and you said that you're keeping your internal full year growth targets, can you give us any color on whether or not those are in line with the current Street growth targets for the year?

That's a nice try, Rich. Actually, you know, we look for strong, strong growth as most of the Street does, and, you know, we look forward to executing on that.

Okay. And then with regard to Kyocera, what triggered the press release from them, because clearly it's still in evaluation stages, and where, when do you expect that evaluation to be completed?

The evaluation is effectively done. We are working on, you know, final stages. This was a decision made by Kyocera that, you know, to, to let this go because we are expending significant resources jointly now to move things forward. The Kyocera team is very excited about what the StuffIt wireless offering has already demonstrated and what they think it will demonstrate and mean to them going forward. And we are working aggressively to move this through.

Now, that said, we, we are in the process right now of amending the current contract we have with Kyocera Wireless and you may look for yet another release when that's signed. And then, then you can look forward to the first product shipping in 2008, and you'll probably see another release when that's ships. That is a decision jointly made by Smith Micro and Kyocera Wireless, and I, I just can't tell you how pleased I am to have reached this point. We are -- it's no longer something we are talking about maybe in the future getting, it's now something we're talking about getting done.

Great. Congrats on that, and thanks.

Our next question comes from Maynard Um with UBS. Please go ahead.

Hi, thanks. Can you talk about the order flow from Verizon in Q1 and thus far into Q2? Do you feel they have enough kits to kind of last them through the quarter, or do you anticipate they'll continue to order some non Vista kits to kind of get them through until the Vista kits are available?

No, I think, again, we, I think all orders going forward will be for Vista kits, and they have, you know, we saw a slow-down in kit orders towards the end of Q1, so it did affect Q1, as well, a little bit. We're just strong enough that you can't really see it. And, you know, it obviously right now affects Q2, and we're just kind of letting you know what our better visibility is.

Okay. And do you expect when you kind of still have no change in your annual outlook, will the bump-up kind of be in Q3 or should we expect that to kind of flow over Q3 and Q4?

Oh, well, a lot depends upon how the order flow goes and whether we're able to ship and recognize revenue at full level in Q2. Otherwise, it will bump into Q3. I think Q4 just is going to have its own dynamic. That's always a big [inaudible]. Clearly, I think we're definitely seeing some seasonality develop now in the multimedia marketplace, and I would expect Q4 to be a very strong quarter.

Got it. And then on the Sprint side, I know it's a little early but can you offer any color on what you're seeing so far from a [tax] rate standpoint?

We have a very [inaudible] customer that thinks they have great software, and that's nothing new for them. So that's the first thing I see. The second thing I see is that as you are seeing, as well, they're starting to release some of their first ads for some of their new phones, and we're starting to see some, some growth in that. You know, as I've said many times in the past, OEM deals tend to start slow and then grow, and I think the Sprint relationship is like that. That's why I said I think you'll see real growth and be a much more meaningful number in the second half of the year.

Great. And then, lastly, and then I'll queue up again. On the taxes, I know it's a little bit early, but for modeling purpose when we start to think about 2008, any, anything we should be thinking about in particular as we model out our taxes out in '08? Thanks.

Yes, it's a little bit early for that. Maybe at the half point of the year we'll try to give some guidance on that. Again, quite a bit depends on stock option exercises and those type of items. That's pretty darn hard to forecast.

Thank you.

Your next question comes from Mike Walkley with Piper Jaffray. Please go ahead.

Great. Thanks. I wanted to touch base a little bit on the connection manager. It was a very strong quarter, but we did see some of you be, the Novatel's and [Ciara's] of the world talk about a little bit of a new form factor, trading a strong sell in the March quarter. Is that creating a little bit of your conservative guidance, too, potentially a little bit of a slow-down in that in the June quarter?

Yes, we don't see that. You know, we're well aware of the -- I think you're alluding to the USB devices. We've always supported, you know, they're just another look. You can either slide a card into a card slot or you can stick it into a USB port. The one thing that is nice with the USB port is then it allows you to use wireless connectivity from desktop systems. I think that's a nice feature, so, you know, we'll see.

Okay, great. And then on -- in terms of the overall StuffIt with Kyocera, can you give us any color on maybe how the revenue might work with them if it turns into a real product entering 2008?

Yes, we actually have worked through our term sheet, and we are now getting that reduced by the lawyers to something that us business guys intended to say, hopefully. And it will be a [roughly] per handset shipped. It will be, it will be strong [inaudible]. I mean, you know, we are providing a, a method to effectively reduce the cost of phones, and we're going to be paid for it, and that's, you know, Kyocera and I think others that follow will be fine with that.

Great. And just one last question on Insignia, can you give us any hints on kind of the revenue trajectory we should expect from that deal that just closed?

Well, we said, I think, $7 to $8 million would be the deal for the year.

Okay.

And one of the keys that we'll work through is they're obviously just new to us in April is any of the revenue recognition particulars on their legacy contracts to see, you know, how we'll recognize their revenue.

Okay, great. So unchanged from last quarter. Thank you very much.

Our next question comes from [Chad Bennett.]

[OPERATOR INSTRUCTIONS.]

Yes, thanks. Did you guys recognize any revenue in the quarter, either from Ecutel or Sprint, for that matter?

Not from Sprint. Ecutel just a minor amount in this quarter, about $100,000.

Okay. And you actually added, I think you added IUSACELL and also [Pella Phone] in the quarter on the music side. Sprint obviously was during the quarter but a little bit after. Can you talk about, I guess for those two customers, specifically on the music side, is it too early to tell how big they are or how meaningful they are or were they anything in the quarter I guess is really what I'm asking?

Well, okay, I think you're [inaudible] the Pella Phone and IUSACELL. IUSACELL and Pella Phone we expect to start seeing revenues start in the current quarter, in Q2. They are progressing nicely. The translation of product into Hebrew, as well as translation of product into Spanish, is moving forward and is nearing completion. We have target dates, and as long as the target dates aren't moved by our customers, we should be off and running towards the end of this quarter.

Okay. And can, so obviously the Q2 flat progression, even with Sprint, even with a full quarter Insignia, full quarter Ecutel, I guess we still think that could be a flat number, we couldn't grow that number sequentially or is it just there's too many variables out there to tell?

You know, there's, there are a number of variables. I guess the key point is really to say to all you guys is that we've given you a heads up of something that we see that is different, we've never seen this before, and but then we've never had -- we haven't had Vista, you know, a new operating system in a long time, and we've never had, you know, what will probably be an incredible multimedia blitz by, by carriers, at least the top three, and I think that we're riding two of those three horses, so, in the race. And those great things we don't know. We gave you all three options. Which one do you want to pick? We said it could be down, we said it could be flat, or we said it could be up. And, you know, we don't know for sure yet. And I guess that's why they call you analysts.

Okay, thanks.

Our next question comes from Reg King with Nollenberger Capital Partners. Please go ahead.

Great. Thank you. Andy, I was hoping I could ask a few questions and get some clarity just on the P&L? Can you give us the break-out of the revenue and cost of goods sold, just in the traditional product and service mix?

Okay, I can attempt to do that. Again, in our case really the products are everything except for the other category. The other category at about $300,000 is more of our services. That's the broad picture, and actually of that $300,000 it's probably closer to $150,000 to $200,000 would be services, the balance would be products.

Okay. And how should we think about the costs, I mean?

Again, on a balance perspective, the total, the total gross margin, of course, was 70%. On the services side it tends to run traditionally at 55 to 60%, so again that's a very small piece, let's call it $200,000 in services, at 55 to 60, and then the balance, you know, total Company was at 70%. You know, it's going to move to 70.1% for products; right?

Right. So we'll run that number. Thanks, Andy. And, Andy, can you -- you gave us a break-out for gross margin for the different businesses, what would you expect that the mobile device management segment will be?

That's going to run in the 80% range.

You know, I could amplify that, you know, not only -- you have typical software high gross margins but you also have some professional services involved in that side of the business, as far as helping device manufacturers and carriers implement. So that's how you get to a blended number.

Thanks, Bill. And were there any 123 R charges during the quarter, Andy? Can you give us that as a lump sum?

Sure. If you want to talk in terms of how we get the proforma, the stock comp was about $2.6 million for the quarter, and amortization was about $450,000.

Okay, great. And then, Bill, I was just hoping maybe you could give us some ideas, you compete for the new carriers and StuffIt wireless, who is the major competition that you're running up against there? Is that still internal development?

Well, yes, but frankly we don't really see much competition. The first thing you have to do when you come to a marketplace with brand-new technology is you've got to find somebody who is willing to take the risk. And we worked hard to earn the right to ask for the Kyocera business, by demonstrating and investing heavily in the work we've done for them already, and they're appreciative of that and they're moving forward with us. And I expect it's just the first of many.

Okay, thanks very much, Bill. Congrats on this quarter, good luck on the next.

Thanks.

Your next question comes from Jason Tsai with Montgomery and Co. Please go ahead.

Hi, guys. Just a couple of points of clarification. First of all, Bill, on the Verizon push-back for Vista are you seeing that both for PC cards, as well as the music essentials kit, or is that largely just the kits?

It's largely just the kits and because now the cards and the embedded modules make-up most of the business on the connectivity side the, and kits is only what, like it was like 3%, it's not as big an issue. So really it impacts multimedia. So it's a multimedia issue right now, and we'll just work our way through it and come out of it, and it's back to business as usual, and we'll add more carriers and we'll just continue to get bigger.

Great. And then you touched upon this briefly in your prepared comments, but can you go into a little bit more about the Sybase opportunity. Sybase had made significant movements into the wireless area, can you just talk about what you, what you think your unit volume possibility there is and kind of what type of partnership and venture we should look for between the two of you guys going forward?

Well, you know, I think, first off, it is a very significant deal. However, having said that, they just started their marketing effort with the announcement at CTIA. So their sales and marketing teams are out aggressively selling their offering and that's going to take a little bit of time, so I think to kind of set expectations, I think it's a play that will really kick-in in a real meaningful way probably in 2008.

Okay, great. And then, lastly, here, with Kyocera, you know, can you -- the number of handsets that you're going to be in, the lines, are they primarily for North America or is it worldwide? And can you give us a sense as to kind of your internal expectations as far as the number of handsets you think you could be on?

Yes, I can't really answer that yet, and frankly I may leave that up to Kyocera Wireless to answer even when I can, because I think it's kind of an internal secret of their own. So we'll kind of leave it at that. You know, we are working to, with them to make sure that the technology will work with all handsets they ship.

Okay, thanks a lot. Nice job.

Our next question comes from [Anton Wahlman] with ThinkEquity Partners. Please go ahead.

Hey, I just wanted to ask kind of a mathematical example here on the $8.5 million in multimedia. If one were to assume purely for the sake of argument that let's just take a shade longer than otherwise would be indicated and [inaudible], let's just say that it just takes to the end of the quarter and you're not simply shipping any more kits to Verizon? I mean does that mean that essentially all of the $8.5 million would then be sort of "at risk" for revenue recognition for the quarter or is there other revenue in there? I've been thinking, for example, of I mean if some of this stuff gets downloaded, as well. I mean, you know, I've downloaded, I don't know how many copies I've downloaded, I must have generated tons of revenue for [inaudible] at some point, but various times downloaded the Music Manager from online and then for some of the other customers, the Israeli and the Mexican examples. So I mean if Verizon doesn't take another [box] this quarter does that mean that it's like $7 million out of the $8.5? Is there sort of a rough number you can put on it?

First, actually, no, it does not mean that the whole $8.5 million is at risk; okay? Let's just, let's put that one to bed quickly. Second off, you know, if we can't ship the kits, you know, I mean in your worse case scenario it also says that Verizon Wireless can't launch their new competitive phone to compete against the iPhone. That's also not particularly likely.

So having said all this, I go back to where we were, you know, we have this moment where we can't get real clarity. We are working forward. We feel very positive that some products can ship and we're going to see a lot of sell through. And as far as Sprint, [inaudible], all those guys who launch and are launching with Vista compatible software, and so it's not an issue there and life goes forward smoothly. So it's just what we said, it's really nothing more.

No, just trying to establish what would be kind of the floor in the event that they just simply for God knows what reason wouldn't [inaudible]?

Well, you can't -- and that's one of the issues we deal with. When you say well, what's the floor, well, what's the ceiling? And so we took a conservative stance, and you can choose to accept that or you can choose to say, "Well, I think they're being too conservative or too optimistic." I, you know, I don't know what else to say.

Okay. So just on the mobile device management, now, did I hear you right, you said $7 million?

$7 to $8 million for the year is what we said I think on the last conference call. We still think that's a reasonable number, you know, considering that they were in our books for the first quarter.

Okay. And then just, finally, on the 6.1 for the connectivity, that's like apples-to-apples, so that is -- I mean there's no other stuff there now that occurred in Q1 that basically wasn't part of the mix in 4Q?

No, no, in Q1 -- that's a record quarter. I mean that's very consistent with the things you're hearing out of folks like Novatel and [CR Wireless.] So, you know, their connectivity side of the business is very, very strong and very, very energetic, so we're moving things forward. We, we look to close some more deals in that side of the house, as well. And another part of it is we're seeing a lot of excitement and traction now on the enterprise side, and look forward to seeing some numbers grow there.

So we see a lot of growth in the data connectivity sector, and we think that, you know, adding in all the technologies that came from the Ecutel transaction allowed us to build some really killer applications, and we think the market is ready for the whole thing now. So we, we're excited about it.

Very good. Thank you.

Our next question comes from Kevin Dede with Merriman. Please go ahead.

Afternoon, guys. Nice job on the quarter. Bill, just back on Insignia really quickly, you said [77 to 8] for mobile device, does that include Sybase?

Yes.

Okay, that's what I thought. And then can you give us an indication on the type of handsets you think you'd be worked in with on Kyocera on the, do you think you'll be on the -- I mean obviously you're prepared to deal with the full range of their offering, but just wondering if you think you'd be used more often on the high end versus the low end or if you could give us any color there?

I think the major issue here is whether the handset is going to be memory challenged, and by that -- so it could be either high or low, depending upon the number of features that they are, you know, that they need to meet a customer requirement might take a handset to a breaking point on memory which the decision then is do you add more memory to the phone or do you just turn on StuffIt Wireless? Well, the StuffIt Wireless ones are a more effective way to go, keeps the costs down, so it doesn't matter whether it's a low end phone or a high end phone.

Congrats on the Insignia patent win. I'm curious as to whether or not you think there might be any violations from some, from the competitors out there, [Bit phone] and others, and how you'd investigate that?

Well, that's something that our in-house counsel who just recently joined us, so it's the first time we have an in-house counsel, and he's, he's working on that with [IP] attorneys to look at our total portfolio. I mean there are a number of patents in the photo market, [firmware] over the air, some of those are held by Bit Phone. It's also nice to be able to tell you that we are a licensee of all the Bit Phone patents. We are probably the only competitor to Bit Phone that has fully licensed all the patents and that's a nice place to be. And we're moving forward and we would look to cross license back some of our patents to HP in the future. So a patent library is a great asset, and it's not our business to necessarily go out and aggressively sell our patents, but we will defend our technology, and that's why you do these things.

Very good. Thanks for taking the questions, and congrats, again.

Thanks a lot.

Our next question comes from Amit Dayal with Rodman and Renshaw. Please go ahead.

Thank you, guys. Most of my questions have been asked already. I just wanted to touch on your comments on Novatel and CR. How much does our Novatel account for in terms of revenues right now?

How much is Novatel of our revenue?

Yes.

Well, where we see Novatel is when they sell their license to our carrier customers that we share in common, and we support their products for those carriers. We sell them a small amount of business, but we've always said the sale of connectivity software to device manufacturers is always very much a secondary play.

All right. And just a follow up on that, I mean if you could provide any visibility into what your expectations are for customer mix at the end of 2007, I mean we're seeing a lot of new customers coming in? I mean is Verizon still expected to be above 70% by the end of the year?

No, no. It will be, you know, we certainly hope it'll be a much smaller number, and we're working aggressively to make that happen.. Clearly, the fact that, you know, Sprint chose to favor us with a selection on the multimedia side was a significant move in that effort, but we have others that will follow.

And I think as I went through all four of our operating units, I mean if there was a theme that should have come through loud and clear, is we expect a number of new customer acquisitions by all four units throughout the year and into 2008. So by definition they're people that we're not doing business with now. So we're going to continue to expand, you know, the breadth of our customers as we expand the breadth of the technologies that we as a company offer to the wireless world.

Great. And just one final question, Bill, on the connectivity side is the strength being partly driven by, you know, your wins on the enterprise clients? I mean we discussed this a little bit in the prior quarter, as well, if you could provide any updates for us?

Yes. Not in this quarter. I think as you start going forward it's going to start to, you know, be more measureable, and it will be impacted by our wins in the enterprise side of the business. And but I think your net takeaway for the current quarter is you really don't have much in the way of enterprise wins in those numbers.

I mean is it possible for you to give us names of some of those potential clients in that space?

Only if we want to lose them as clients, so I --

Well, we don't want you to lose them, please. All right, that's all I have. Thanks so much.

Thank you.

Our next question comes from Bob Lee with Sidoti & Company. Please go ahead.

Thank you very much for taking my question here. I'm going to ask a question concerning the music software, and now that you have some experience under your belts here, do you have any kind of anecdotal data as an actual or your realistic goals as to the attach rate of music enabled phone sales and the consumers going to the website and downloading the software, the QuickLink Music software?

Yes, it's a really good question, but it's a question I think I'd rather leave to our customers to answer. I think you will get different answers from the various customers, so, you know, it's probably worth your asking if they'll answer, and that's interesting. But it's one I feel uncomfortable answering because I think it starts to get into some of the secrets of our customers.

Okay, fair enough. And then the software is still being downloaded, available for download only, it's not included in the, any kind of a sale of product yet; is that correct?

And you're alluding to --

To the music soft --

Is it Verizon? You know, I think, I think the best way to answer that is to say that, you know, that is true at the present time, and you'll just have to wait and see how that might change going forward.

Okay. And then my last question is concerning your cash balance, and about $94 million you have there, and I remember last conference call you said that your investors didn't invest in the secondary to have you put money and earn interest. So can you allude to anything that you're contemplating?

Before I do that, let me go back and amplify on that last question, because I just was thinking this through as you were asking that, you know, when you talked about the software and whether it's only for downloading, whatever, I think a very key point, like with our newest customer, Sprint, the software is being shpped with virtually all of the high end handsets, so it's an activation model and as the user turns on the software we get, you know, it [calls on] and we get paid a royalty. And so in that case it's 100% disseminated with the handsets. For some phones it's still on a download model. I just wanted to clarify that a little bit further because I understand Sprint is new to all of us, so it's a little different model.

Okay, so Sprint is actually going to include it, including the upstage device is going to be included with the actual sale of the device?

I don't know that for certain, but I believe the answer to that is yes.

Okay, great. And then --

Now, we can go to that other question and I'll let Andy --

He was asking and I think the question is have you got $94 million in the bank?

That's not right. Interest.

Yes, right, exactly. So, you know, that means we're going to be going out to buy some more things, and we've told everybody that since we raised the money in fourth quarter. We have a number of targets we are aggressively looking at. We have not at this time concluded any deals or, nor are we ready to announce anything, but, yes, we're sticking to our guns, we didn't raise the money to leave it in the bank, we're going to put it to work.

Okay, great. Thank you very much.

Your next question comes from [Ian Gilson] with [Zachs Investment Research]. Please go ahead.

[Inaudible.] I have a couple of questions. I -- one of these is the potential kit inventory out there of all the [inaudible] PC cards, do you have a handle on what is out there that is not being sold due to lack of compatibility with Vista?

Okay. All the kits that are in, I think you're alluding pretty much to just Verizon now, so okay. All the kits that are in the Verizon stores today are XP only, so those kits that are not sold when the switchover to Vista happens will need to be updated to Vista and a plan is in place as to how that's going to happen.

As far as the PC cards, I think that cutover is in the works. There is a way for users to download and update to the software and that's already in place.

Okay. On [inaudible], you mentioned there'd be a royalty per handset?

Yes, I did.

Okay. And so essentially that is a zero cost model on revenue at that time?

Oh, yes, that's true. It's going to be residing inside their hardware.

Okay. Who is making that chip?

It's not necessarily going to be a chip. It may reside and most likely will reside in flash someplace.

Okay, okay. On the tax rate, you had guided to 40% in previous quarters, and we saw the first quarter was somewhat higher, and I assume you'll be using a GAAP number of 45, 46% or what?

49% on a GAAP basis.

49%?

49 on a GAAP basis, and a lot of that has to do with stock comp is not a deduction; okay? And so that's why GAAP looks a little bit different. We have $2.6 million in stock comp in the quarter, all that expense, that reduces your GAAP, net income is not a tax deduction, so that's why it looks a little high. But we have it at about, estimated now at about 5%, that would be cash basis applicable to our pro forma, so that's down from, we were saying perhaps around 10% last, last time we talked about this in the last conference call.

Okay, okay. And one sort of esoteric question, Verizon is talking about the strengths of the [Vcast mobile TV.] Now, do you have a software product for that or is that not, does not use your software?

At the present time we do not have an offering in that sector and although it is a very intriguing sector.

But you had in previous periods discussed basically imaging and compression and --

That's a different space. I mean, yes, we do a lot in the imaging space, we do a lot in the area of, of library management for not only with the new equipment media product, not only music, but also full motion video and still image photos. So we have strong answers in that area, but it's not aimed at the mobile TV marketplace. It's a different part of the multimedia marketplace.

Okay, great. Thanks very much.

Our next question comes from [Joe Hudat] with Wachovia Securities. Please go ahead.

It's already been asked. Thank you.

Okay.

Our next question is a follow up from Amit Dayal.

Hi, thanks. Just to be clear, on the inventory for Verizon's music kits, would there be a onetime charge or a write-off relating to that and or is that kind of an impact to gross margins?

No, let me be very clear about that, and that's a great question. Glad you asked it, though. When we sell product to Verizon Wireless it's got a one-way ticket, it doesn't come back, so let's be very straightforward. The inventory that is sitting in Verizon's storage is owned by Verizon Wireless and will be updated by Verizon Wireless. They will need to purchase from us CDs with the new software to make that happen.

Great, okay. And then related to that, how long does testing typically take? And are you just waiting on, are you waiting on every handset vendor for compatibility or can you ship on a handset by handset basis?

No, I think when I was reading it I stumbled over a word, the word was supposed to be in there, "selected," so when you read the transcript add that in in front of that. It is only "selected" drivers. We do have a number of them but we don't have them all, and the desire on the part of customers to launch everything at once.

Got it. And then, lastly, not really looking for Kyocera's numbers in terms of what you'll be shipping, but can you just give us a sense of the addressable market? Maybe how many handsets they shipped last year in 2006?

You know, I don't know, and I don't -- they're not published, so I'm not sure that that's a public, unless they're public and on the Japanese markets. I don't know that they disclose that. I can't answer your question.

Okay, thanks.

The next question comes from [Vic Toroff] with UBS. Please go ahead.

Thanks. Bill, just one question?

Yes.

What is the upgrade [box] if I were to go and buy an [XPK10], four moths down the road I bought a PC with Vista on it, do I have to purchase the software again, or is it a free upgrade?

I think it's a free upgrade, but I'm not absolutely certain of that.

It's a customer request.

Yes, I think you've got to go to each carrier, you know, it's probably a different answer, so I guess, yes, that's probably a better answer.

All right. Thanks.

Our next question is a follow up from Bob Lee. Please go ahead.

Hi, Andy. I just wanted to have, I guess ask a follow up and to the P&L, is there any costs I there that you may classify as a onetime relating to the integration efforts?

No, not from a restructuring perspective. If you consider my remarks, one thing I did bring up on Q1 that is more onetime are our stocks and audit expenses and then we did have marketing and trade show expenses that are unique to the quarter. So as we consider going into Q2, we have Insignia onboard which is about $1.5 million worth of infrastructure costs, but we expect total expenses to only go up a million. So, in other words, we're going to shed about $500,000 worth of seasonal costs, if you will, in Q2.

Okay, all right, thank you.

Sure.

At this time, there are no further questions in the queue. I'd like to turn the call back over to Mr. Quigley for his closing remarks.

Thank you. Once again I'd like to thank everyone for being on this call. We look forward to your return at the end of the second quarter when we report our Q2 results. Also, I hope to see many of you at the three conferences that we have coming up this month, starting with Piper Jaffray on May 9th in New York, J.P. Morgan on May 23rd in Boston, and Lehman Brothers on June 1st in New York. So hope to see you there. Once again, thank you, and good-bye.

Ladies and gentlemen, this does conclude Smith Micro's first quarter 2007 financial results conference call. You may now disconnect, and we thank you for using AT&T Teleconferencing.