Smith Micro Software Inc (SMSI) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Smith Micro Software 2nd quarter financial results conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Bruce Quigley. Please go ahead.

Thank you, good afternoon, and thank you for joining us today to discuss Smith Micro Software's financial results for the first fiscal 2007 second quarter results ended June 30, 2007. By now you should have received a copy of the press release discussing our second 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 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 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 and Exchange Commission, specifically the company's most recent form 10Q filed last May and our last form 10K filed. 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 at Smith Micro.

Thanks, Bruce. Good afternoon everyone, and thank you for joining us today. Today we announced our second quarter 2007 results. As we stated in our last conference call we did expect to see some challenges within our multimedia division due to various market dynamics that we had no control over. Specifically, we experienced some delays from some device manufacturers for the new Vista software upgrades putting us in somewhat of a holding pattern as we waited for a few key hardware device drivers.

I am pleased to say that these drivers have now been fully upgraded and we expect to see a strong multimedia growth coming back in the third and fourth quarters of this year. The amount of growth, of course, will depend on the marketing plans of our customers, but we do expect to see a return to growth. I will go into more detail later in the call about certain market dynamics that we are now seeing.

During the second quarter, we recorded revenues of $15.3 million, an increase of 22% from the $12.6 million we reported in the second quarter 2006. Looking at our bottom line, the pro-forma net income for the second quarter was $5.1 million or $0.16 per diluted share. For the 6 months ended, the company reported record pro-forma net revenues of $33 million that was up 47% over the $22.4 million we recorded last year. And pro-forma net income for the 6 months was $11.4 million or $0.37 per share, which was up 85% over the $6.1 million or $0.25 per share we reported last year.

I was also pleased that we reached some significant milestones during the quarter. For the first time all 4 of our business operating units contributed to the company's overall results. We've launched several new products and importantly we are starting to see several new cross selling opportunities throughout our business units becoming a much more important component of our business case going forward.

Also another milestone, for the company was the progress we have made with our new QuickLink Media Mobile edition, our latest wireless consumer product that will be Smith Micro branded. I will go into more detail about this exciting product later in the call. But first I'd like to turn the call over to Andy Schmidt our CF0, to go into more of the financial results. Andy.

Thanks, Bill. First let me go over a few of our customary 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 provided, net out amortization of intangibles associated with acquisitions, stock compensation related expenses, and noncash tax expense to provide comparable operating results. Accordingly, all results referred to for both 2007 and 2006 are pro-forma amounts.

All right, let's discuss our detailed second quarter results. As Bill noted, we posted revenues of $15.3 million and earnings of $0.16 per diluted share. Total revenues of $15.3 million increased our revenues of $12.6 million for the second quarter 2006, an increase of 22%. New for us this quarter, is that of significant international revenue. International revenue was $1.3 million this quarter across all business groups.

As mentioned, during our last conference call, we expected our multimedia revenue to be impacted this quarter by third-party Vista driver issues. Such is the case. Second quarter revenue for multimedia was $5.8 million down from $7.5 million in Q2 2006. Connectivity and security posted a strong quarter with revenues of $5.8 million this quarter as compared to $2.6 million last year.

[Impression] and consumer posted revenue of $2.3 million, consistent with last year's performance. Global device management revenue was $1 million for the quarter and is a new revenue stream for us.

And finally, we recorded approximately $300,000 of other revenue which is consistent with our second quarter of 2006. For the first time, you'll see deferred revenue broken out on our balance sheet. Total deal revenue for our enterprise customers across all product groups was $1.6 million this quarter, as compared to revenue which we booked of $1.2 million. The resulting $400,000 of deferred revenue this quarter plus an acquired $300,000 deferred revenue resulted in an approximate $700,000 deferred revenue balance at June 30, 2007.

Okay switching to gross profit. As we consistently point out, we manage our business to maximize our gross margin dollars rather than gross margin as a percentage of revenues. Gross margin dollars of $11.9 million increased $4.3 million or approximately 57% from the same period last year. Gross margin as a percentage of revenue was approximately 78% for Q2 of 2007 compared to 60% for Q2 of 2006.

Gross margins by business units were as follows -- multimedia 63%, connectivity and security 95%, compression and consumer 86%, mobile device management 73%, and other revenue 46%. As we've noted before, our margins are driven strictly by product mix. A very important note to take away from the margin analysis is that we posted gross margin dollars of $11.9 million in Q2 versus $12.3 million in Q1 of 2007, or near the same margin dollars on revenue reduction of 14%. The point being, we have a very strong business model with new revenue streams coming on tap that are capable of offsetting quarterly fluctuations in individual product and performance such as that which we experienced this quarter.

Okay, switching to operating expenses. Operating expenses for the second quarter of 2007 increased $7.5 million or approximately $0.5 million from first quarter of 2007. The change is better than expected as we added a full quarter of both Accutel and Insignia infrastructure and personnel. We are pleased to see a reprieve in the Sarbanes-Oxley compliance work, both in consulting and auditor fees and other related administrative integration expenses. Operating margin for the current period was 28.6% as compared to 23.9% for Q2 of 2006. It's very nice improvement.

As follows, operating income increased $1.4 million to $4.4 million for the current period. In all, we delivered as promised, running the business at 29.4% operating margin for the first 6 months of 2007, at the upper end of our guidance of 25 to 30% on margin.

Next, excuse me, net income for the second quarter was $5.1 million for $0.16 per diluted share as compared to $3.2 million or $0.13 last year. From a balance sheet prospective, our cash position closed at $80 million at June 30, 2007, a decrease of approximately $12 million from the beginning of the year.

Cash generated from operations year to date was approximately $7.4 million. The primary uses of cash included the acquisition of Insignia for approximately $15.3 million, the Accutel acquisition for $8 million, and the payout of the phone tax burn out of $3.5 million. Cash from stock sales and stock options totaled $7.4 million year to date.

Accounts receivable increased to $13 million primarily driven by timing issues related to a change to an EDI interface for our key customer accounts. And finally, net working capital at the end of Q2 was $87.9 million.

Looking forward to the last half of the year, we expect continued improvement in our year on year financial performance. Gross margins will continue to depend on product mix. We expect gross margin in the 70% range for Q3 as our multimedia business bounces back. With regard to operating expenses, based on the significant leverage in our business model, we expect to continue to invest in our business by adding new talent to our roster. We expect operating expenses to increase to the $8 to $8.5 million range in Q3. As stated before we expect operating margins to run around 30 to 35% range for the back half of the year assuming status quo. This number can change based on either additional acquisitions or new product launches.

In regard to taxes, our current estimate is that cash based taxes will be around 5% of pro-forma 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 difficult to predict.

As previously noted, we began 2007 with equity and NOL carry forwards of approximately $15 million federal and $12 million state. At this point, I'll turn the call back to Bill.

Thanks, Andy. Starting with our connectivity and security business segments I was pleased with its overall performance which was up 128% from the prior year. Our connectivity or quickly global solution continues to do very well, and we continue to work hard on signing up new carrier, device, and hardware manufacturers. And I expect to announce new customer wins during the second half of the year. Interestingly, we have also begun to expand our opportunities with this product sweep as we look to expand its overall reach. Global solutions will remain a top priority for the key areas in device manufacturers but as we have all ready seen, there's growing interest within the enterprise and from other types of hardware manufacturers. We see a nice growth opportunity as the product roadmap continues to evolve. And a need to offer a secure connection experience becomes a requirement in this market segment.

This was the first full quarter that our Accutel acquisition, which was acquired in February of 2007 contributed to the company's results. I am pleased with the progress we have made as we have fully integrated the company, and now from a product standpoint we are excited about our QuickLink Mobility connectivity and security strategies to integrate and leverage our connection management expertise with seamless network running (inaudible) persistence to deliver a unique end to end enterprise grade solution to this growing market.

This new offering leverages both the acquired and our developed technology to further enhance wireless access security to improve overall service liability while broadening the customer experience. QuickLink Mobility is expected to begin shipping in the third quarter.

Looking at our mobile device management segment, I'm also pleased and very excited at the overall progress of the integration of the Insignia acquisition. This is the first full quarter of contribution from this acquisition as well. It contributed over $1 million to the top line. We continue to believe that this will be a significant revenue contributor for the company going forward.

As evidence of the significant progress, we have signed some very strong contract wins. First in April, we announced our relationship with Sybase, which is licensing our (inaudible) in differencing technology for inclusion in the Sybase I Anywhere embedded software development kits. Then on May 22 of this year, we announced the licensing agreement with WavPhone, a leader in embedded industrial wireless communication solutions. They chose us to enhance their remote device management services. Both of these significant wins demonstrate the vitality of our new mobile device management group.

Overall, we are truly seeing that we have begun to open many new doors in the large wireless players for the powerful Insignia technology. The technology was always best of breed and now with our strong financial backing doors that were closed in the past are now opening.

We expect to see several more significant contracts in the coming quarters. I should also note that with the acquisitions we significantly expanded our international sales presence overall. Specifically where Insignia has strong presence in both Europe and Asia. In fact, we're in the hiring process for a new vice president of sales in both Europe and another one in Asia, to attack a market that we historically haven't seen significant revenues from Although we have just begun to see contributions, I expect mobile device management to be a good growth generator for us going forward.

We are positioning our technology to reach a much broader audience than just updating handset devices. And as more and more companies understand the true value inside our photo solutions we believe we can expand into new market segments. Some of these opportunities will include technologies from mobile business units that only a company like ours with the breadth of technology offers will be able to compete.

Now turning to our compression and consumer division, which is seeing very good activity to say the least, we continue to move forward with our Kyocera Wireless relationship that we announced last quarter. Kyocera is working very closely with us to implement more resources compression in a variety of new mobile devices that will hit the market in 2008. The process is moving forward and on track and we expect to get everyone an update soon. I am also very pleased with our progress in speaking with other device manufacturers. And anticipate it will -- that we will be announcing other strategic relationships with major manufacturers in short order.

Within our consumer side of the business, it continues on track. We've launched several new product upgrades during the quarter, and it continues to be a strong cash generator for the company. We see this as becoming a much more important segment for the company as we get ready to launch our new QuickLink Media Mobile edition and Smith Micro branded Smart-phone Software Solution.

This leads us into our multimedia segment. It has performed admirably considering some of the outside factors we saw during the quarter. I believe we've gotten through this issue and expect to see a return to growth going forward. With the iPhone launch that happened in the June-July timeframe we see this event as bringing an enormous amount of attention to the smart phone marketplace in general and we hope to capitalize on this with our software solutions.

I was also pleased that we have started to see contributions from our new Sprint relationship during the second quarter. We expect the Sprint business will continue to grow as they ramp up with new phones with more and more functionalities. On adding new carrier customers, our pipeline is looking very strong. And we expect to announce new wins in the next few quarters with strong interest coming from international markets.

We also strengthened our multimedia solutions with a recent asset acquisition of Business SNF, a private company with which we've had a prior business relationship. Business SNF brings to us a significantly enhanced SMS and MMS capability providing us with the ability to seamlessly send multimedia rich files. Look for us to incorporate this technology into a number of our products, both on the connectivity and multimedia sides of our business. The first products will ship during the third quarter.

Now I would like to spend a little time talking about a new product for us that we expect to launch in the September October time frame. The product will be a Smith Micro branded product that is currently known as QuickLink Media Mobile Edition. This is a very unique product, it gives consumers a rich multimedia experience that includes music, photos and videos on a Microsoft Windows mobility platform, while still remaining loyal to your favorite high-speed network. The QuickLink Media Mobile Edition lets you access all your media quickly and intuitively on your SmartPhone. Browse music by song title, artist, playlist, album or by keywords. Display your music in album view or list view. View and edit your photos in more ways than one, rotate, flip, crop your photos and with our auto-restore and auto-enhance eliminate red eye and improve the image clarity. You can make your own photo slide shows on your SmartPhone as well.

Leveraging on the excitement created by the launch of the Apple iPhone, QuickLink Media Mobile Edition brings together technology expertise from all of our business units to maximize the revenue potential by delivering a product through mobile marketing channels. QuickLink Media Mobile Edition includes a number of Smith Micro patented technologies including Active Images which turns any JPEG image photo file into a self-contained multimedia messaging system that can be received and viewed by any device that supports JPEGs. Personalized multimedia messages with text, sound, music, forms, links to the Internet site, portable wallet, and even your videos all in a single JPEG. And it includes wireless JPEG photo compression, which will provide up to 30% more photo storage on the SmartPhone without adding any additional memory. And it includes our industry leading QuickLink Media PC software to allow users to manage all their multimedia content and purchase music from their PCs via the Internet. They can burn music from their own CD library, organize music by genre and build playlists. All this can be easily synced to the users SmartPhone to enjoy with our new QuickLink Media Mobile Edition. Additionally, the user will be able to optimize our SmartPhone photo library to their PCs for storage and download their favorite full motion video files as well.

Our current roll out strategy is beginning to take hold. As such we anticipate prior to launch establishing several key relationships with mobile vendors to better strengthen the overall product solutions as well as bring a strong marketing campaign surrounding them. Another key strategy, for the rollout is that we will be taking a multipronged channel distribution approach. Leveraging all the strengths of our current customers' which will include wireless carriers, hands held device manufacturers, as well as leveraging our current expertise within our own consumer business segments for robust Online software sales and retail distribution shells presently available to us.

The price point of the product is going to be very compelling. We expected it to be somewhere around $29.95, which I believe will be a very compelling price point for SmartPhone owners. Needless to say we're very excited about this opportunity ahead of us. I think it truly the builds off the strength of the company including our technology as well as with our key relationships within the wireless industry.

Now before open the call for questions, I want to reiterate a few points. Overall our business case continues to move forward very well. We have all 4 of our business segments contributing to the company's financial results. We continue to build upon our leadership role within the wireless software industry, with new innovative products and solutions. We continue to expand our patent portfolio having now issued 3 new patents this year with several more pending. And finally, we're pursuing a very aggressive acquisition plan as we look for solid companies or technologies that expand our product solution and/or our customer base.

We believe that we have reached several key milestones in the first half of fiscal 2007 as we push for the company's long-term strategic growth plans. In the first 6 months, we have fully integrated 2 acquisitions, signed several new clients, released an array of new products and upgrades, all adding up to a record first 6 months performance revenue of $33 million and pro-forma earnings of $0.37 per share. We remain extremely optimistic about the remainder of the year, our growing global capabilities and the value our customers place on our expanding product lines.

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

Certainly Sir, thank you. We will now begin the question and answer session, ladies and gentlemen. (OPERATOR INSTRUCTIONS)

Our first question comes from Rich Church with C.E. Unterberg, Towbin. Please go ahead, sir.

Okay, thanks guys. Nice job on the quarter. Bill, on the QuickLink Mobile Media Edition can you talk about who you view as competitors on the software side? Are there other applications available on the Windows Mobile or do you view Apple as the main competitor there?

Well, first off, Apple's a hardware manufacturer that has put together an incredibly rich experience. We're leveraging off of the Microsoft Windows mobility platform. We really don't see any other competitive threats out there yet, I'm sure there will be some, but we don't see them there. And we again believe we're in a leadership role. I always like to say we tend to lead the market not follow it. And I think this is another great example. I think the key point, the key takeaway point, when you think about the whole QuickLink Media Mobile Edition versus the iPhone is the obvious big difference in price. Ours coming in somewhere around $29.95, and the fact that you can use it on any network of your choice so you don't have to give up your favorite 3g or 3.5g network and go backwards. And lastly, you don't have to hide the phone when you bring it into the office because the Windows Mobility platform fits nicely into widely accepted emails standards. So, yeah, I think we've got a lot going for us. It's a very cool application, the brings all of the music, all the photos, all the full motion video in a very easy and intuitive manner. Fixes is a lot of the more difficult parts of the Windows mobility experience in doing that and becomes just a really fun application that works off of a platform that doesn't cost as much and is more widely accepted.

And then on the multimedia division, you said expect the return to grow. Do you think that we could get back to levels like in Q1 or now that we're past the Vista hurdle?

Hey, you know, I would like to say I would be disappointed if we didn't and we'll work hard to do that and maybe even try to beat it. How's that for -- it will take some time. Our customers -- it all depends on their marketing campaigns and what they're doing. It also depends upon overall sales. So there's some things we don't have a lot of good control over, but I do see a resumption of good growth within that business, yes.

And then on Sprint, did you say if that was more than $1 million dollars? And also do you know how many phones they're offering with the product at this point?

I'm not going to talk about what the dollar amount was. It was a reasonable number. It was not a 10% customer anything like that yet, but we certainly hope that someday it can grow to that. I think they have about 10 phones out there, I'm not exactly sure I think it's about 10 phones out. The leaf phone is the Samsung Upstage, which is starting to sell fairly well, from what I understand, at a faster pace which is pretty good.

Okay and one last, Andy, on the tax rates for '08, do you think that given the and N0Ls that we'll get back to more like a 15% level or 30%?

Well at this point, we're just going to advise to everyone to fully tax 2008, there are too many variables, and any acquisition we do will throw in 382 limitations, so at this point the safest thing to do is just fully tax 2008.

Okay, great, nice job guys, thanks.

Hi, thank you. Our next question comes from Mike Walkley of Piper Jaffray, please go ahead.

Great, thanks Andy. Just following up on fully taxing allowances, what tax rate is that, a 40% rate would you use?

Yes, 40% of the pro-forma number.

Great thanks. And Bill, I was wondering if you could give a little more color on the QuickLink Media Mobile Solutions. How does some of the testing going with all the different windows SmartPhones out there. Is there any problems as it goes from different OEM or have you worked out the issues like that with different OEMs when you are launching these SmartPhones?

Yeah, we're working with a number of different devices. That's a good question, and that's something that our development team has been working very closely on. We don't expect to have any significant issues. Hopefully by the time of the next round of investor conferences which I believe start in the mid part of September in San Francisco we'll have a number of the devices with us with product loaded, so investors and those that are interested in the product will be able see the product at work.

Is this something that you would have to get permission from the OEM in order to be able to load it on the headset? Or as long as it works it's up to the consumer to decide?

No, Mike, it's an application running under the Microsoft Windows Mobility platform. Very easy to install. There's no issues whatsoever. Now, obviously, a hardware OEM is going to pre-load the product that's a different story, but we haven't even started talking about that, we haven't announced yet.

Hey, great, thank you. And just switching gears, just on the StuffIt side. Just understand the (inaudible) their phones will likely ship in calendar 2008 and potentially more customers in that year also?

That's what we're shooting for, yes.

Okay, great, and then just on the mobile device management, I think you guys said you thought that the additions would be $7 to $8 million this year? Is that still on track, to hit those types of numbers?

Yes, I may have to back off a little bit on that, based on the million, at this quarter started. I think it might be hard to hit $7 or $8 million but maybe back it down to about $6 million or something like that. That's probably still right on. And there is a difference between you know, bookable revenue and realizable revenue and that probably makes up the difference.

Okay, great, thanks. One last question, I guess on the connectivity business is down a little bit sequentially is that just due to some of the issues also and should we expect that to kind of recover in the back half of the year?

That some sort of cyclical affect of the market today, I consider it flat. It's slightly up.

Sure.

Okay, great, thank you very much.

Thank you. Reginal King with Nollenberger Capital Partners, please go ahead with your question.

Great, thank you. Good quarter, guys. Andy, I was hoping I could get a couple of the Admin questions on here. Could you give us the Verizon concentration for the quarter?

Sure, Verizon was at 59%.

59%. Okay and how about the head count?

Headcount, all with contractors and what not right around the 215 level.

215 Okay, and then Andy, I think you said this in your comments but it did not get it clearly on my end, but deferred revenue, I guess you said you got $400,000 this quarter, what is in the deferred revenue?

Excuse me, that's basically your deferred maintenance.

Okay.

Or any other contractual items, there may be training or consulting services that are prepaid that would be delivered here in the future.

So we talked I think, on previous calls, you may have some revenue that you realize in the future on a ratable basis might we expect to start to see some of that revenue wise?

That's exactly what this is. So maintenance is always handled ratably that $700,000 is basically money in the bank that will turn to revenue here in the next 12 to say 14 months.

Okay, okay. And then Bill, can you talk a little more about the QuickLink media product you talked about it before. Will that be sold through your current channels that you're using right now or should we expect that you'll have a direct sale download for the end user customers?

Okay it's a multi-pronged channel approach. We will leverage all of our relationships within the wireless industry, with both carriers as well as device manufacturers, as well as we will clearly use our strength in the consumer market where we're particularly strong with online sale of software over the Internet. As well as we have access to a very large number of retail distribution shelves. We'll take it beyond that. We clearly look to get it on the shelves that we've not been on before. Maybe within the wireless space. So at this evolves more we'll be talking more about this. I'll have good options to talk from the two conferences in San Francisco in September and then one in New York the very first week of October so we'll have plenty of time to make a lot of public disclosure about the progress of this product.

And then Bill, can you talk a little bit more about the business, the SNS business that you just acquired, what we might expect to see on business going forward? I think you said we would see revenue very shortly here. So can you give us some idea about what the magnitude we might see throughout the rest of the year?

Okay, first off, let me sort of just kind of size that acquisition. It is about that was about a $1.4 million deal, and basically we were looking for an opportunity to acquire them verses pay them royalties on their technology and it started to look like it was going to become pretty much a push, so that's why we decided to buy them. That's why we did it number one.

Number two, we do expect to launch MMS technology during this quarter and it's got to get sold and it's got to get into the hands of various OEMs who we think will have interest in it. Though, then we have to wait for that to launch. So I can't really tell you what kind of revenue we will have in the last 6 months of the year, but I don't think it's really a large number. I think that the gross the company the business comes from other more well established parts and this will be added to that. We might call it upside, how's that?

And Bill what's of your four business divisions might where you expected to be included in?

Well as I said, I see products coming out with connectivity division as well as with and it actually incorporated into the multimedia unit. But the MMS SMS technology fits in both.

Okay, thanks very much. And congratulations on the quarter.

Hi, thank you, Lauren Yuman with JP Morgan, please go ahead with your question.

Hi guys, in terms of marketing initiatives, I wanted just to see if Sprint or Verizon has indicated to you of any marketing programs that will start maybe in the back half of the year?

I wish they probably had because then I could forecast better, but of course if they had I couldn't tell you about it because I would get fired. So, in any case I don't know how else to answer your question.

Gotcha. And then just another question on deferred revenue what segment product or products really contributed to that $400,000 and then how long does it take for that to kind of hit revenue?

The total balance was about $700,000, $712,000.

Right.

Which is split between the Global Device Management and our Connectivity divisions and that basically plays out most of it over the next 12 months.

Okay, great, thanks guys.

All right, thank you, Maynard Um with UBS, please go ahead with your question.

Hi, thanks. Based on your gross margin, your OpEx, and your Op margin guidance, if I got it right I just want to make sure my math is right here, implies revenue should be somewhere in the kind of the $21 to $24 million range in the third quarter. Is that mostly Verizon or are there other areas that are contributing materially to this growth?

I think that we're not implying anything about revenue guidance at this point. But as far as where the pickup comes, I think you're going to see it across the board, where we expect multimedia to come back, Insignia's just had 1 quarter under our belt so that should bring a host of different customers that actually contribute to their revenue. And then the connectivity is actually picking up from Accutel's customers. We're seeing it across the board.

I would say, let me just maybe add some color to that I think that was the first quarter of mobilize management. I think you'll see on a percentage basis very healthy growth hopefully, in the third quarter I think you'll see a rebound in the multimedia side, you're going to see on all the productivity, we continue to get a lot more leverage from the enterprise type customers, and that's where we talk about our QuickLink mobility solution, which is a true end to end and as enterprise client. Yes, I would say the same thing Andy is saying, I think it's broad based I don't think there is any part of our business that doesn't have substantial upside and we fully expect all 4 of them to perform and to perform well.

Maybe if I could ask it a little differently. Clearly in the last quarter you had an impact from Verizon that depressed your revenue. The growth I guess, should be kind of expected to come in Q3 as you start to shift. If the impact had not come in the second quarter would we see kind of I guess it's tough to say what normal seasonal growth is, but last year you grew in that similar 15% range, are we in the ballpark?

Rather than try to put in a percentage I think we can say that what we saw last quarter, or last year that there is seasonality especially on the consumer sides of our business. The consumer side of the business is heavily impacted, not only our compression and consumer business unit but also on a larger extent the multimedia units. So you would expect to see enhanced music sales in the fourth quarter that should be the strongest quarter, and it should build a little bit in the third quarter. We see a -- we think we will see a seasonality trend that matches other types of consumer businesses. So yeah, there should be growth there, but I guess the key they're but it is the key point or the key net takeaway is that we have so many touch points, so many leverage points in this business case there's so much product so many incredible customer relationships that we have now and those they don't even know about yet because we're in the signing process that we feel very very bullish about our business case going forward. And how you want to frame it or put a number on a I know that's something you have to do. I guess it's a positive problem. It's kind of a high class issue.

And then last question, can you explain the increase in DSO again? I didn't hear, I presume some of it was related to Verizon and maybe from late shipments in the quarter but, and then related to that should we expect DSOs to normalize back down to the mid 40 base level or should we expect a slightly higher level as your customers build for the holidays. Thanks.

We would expect it to normalize back into the 40's. The key driver this particular period was a switch to a new EDI interface that our key customers including Verizon. And it basically when they are setting up a the systems and getting converted over and just from the delay in the receivable process.

Great thanks.

All right, thank you, Anton Wahlman with Equity Partners. Please go ahead with your question.

Hey, Bill could you maybe just discuss a little bit the Verizon music essential kit distribution after the Vista transition has been complete. Could you sort of confirm whether the distribution model remains the same, the kits sort of that to do with, it essentially the only thing that changed was the Vista compatibility and the new drivers that the overall sort of business model of that product line remains and is distributed the same way as it was before?

Yes, okay I can basically say to you that nothing other than the software changed in the Music Essentials kits and on the GoPhone. There are some special kits that were created, a special promo kit that was created for the new LG 8550 phone that we did not build because it included memory and a lot of other things which are not in our wheelhouse. In that particular case we did build the CD-ROM [technical difficulty] did sell the software. I think that was -- the overall view of the Music Essentials kit going forward in the plans that we've been told by our customer are totally unchanged. Everything moves forward as planned and we plan on building Music Essentials kits for the foreseeable future.

Very good clarification there. So if this particular LG phone which has been distributed together with our company by a special kit including memory do you think that, I mean it seems to me, from the top of my head here, that is something that happened to other devices as well?

Just to clarify in that kit as well as Bill said it was a special but they also take the kit that we build for the phone. So it's also a very unique situation where we're not -- it's not a replacement it was a special kit and the existing kit that Smith Micro built is still also a kit that's delivered and on the shelves.

So basically if you want to include in the removable memory, you get a kit that's manufactured by someone else but includes your CD-ROM. However if you're buying it the regular non-memory way then you're buying the kit which is your regular kit?

You got it, right. One of the key messages is we would not get involved in the kit business to be a 10% or 15% margin business. As we've always said the kit business to us is that of selling software. And that's where really the margin comes from. And to the extent that the customers want our help, which they typically do in these types of soft programs we're going to go out and help them. But our key focus is selling the software.

Thank you very much very helpful.

All right, thank you, Kevin Dede with Morgan Joseph, please go ahead.

Good afternoon gentleman, Bill, just asking for a little more clarity on what you see happening with Insignia. Now granted you're more comfortable with slightly lower revenue contribution there. Are you expecting those revenues to come from new customers or from the legacy business that Insignia has?

That's a good question. You know. It's a little of both, but I think that you will see some very substantial customers being announced this quarter and next. They're brand new customers to the mobile device management group. And these customers, the new ones will tend to have some very large names. They also will have a little different profile so in some cases will try to hint at that in my script. Not only are we looking at just people who build handsets or devices that need to be updated over the air, we're also looking at people who build other things. Other things that contain in them computer systems that need to be upgraded, enhanced, whatever and that can be performed wirelessly from a remote server. So, these kinds of products can be products that everything from train cars to airplanes to automobiles. These are very large, very substantial projects that really actually not only take into account our mobile device management expertise but also our connectivity expertise and in some cases because we are updating multimedia features within the product whatever is it, it also incorporates a lot of our multimedia expertise. So these are multi year multimillion-dollar types of transactions and as soon as we have them fully inked the customer allows us to come to the market and talk about them will be happy to come forward and do so.

Would you mind giving us the same sort of color on the enterprise connectivity side now that you have Accutel under your belt. Are your potential customers they're seeing you as more complete end to end solution? And when might we be able to see more substantial announcements on the side?

I think the key to that is the release of the QuickLink mobility product, which is a combination product that includes both our client expertise for connectivity and mobile enterprise as well as our session persistence and Security server back end. So you end up with a mobile IT and the authentication parse of the products for a total turnkey solution for the enterprise. And these take a little longer to sell. I would be the first one to tell you these are not fast sales. The product will be done and we'll be in a first round kind of mode this quarter. We are already positioning the product for customers. We are already working to sell it. We are moving our productivity technology forward very aggressively and we think we have some incredibly unique strengths that nobody else in this market can touch. And so we feel very very bullish about what we're doing on the connectivity space.

A year ago some of you guys asked if we could get about $3 million if that was as good as it got? And we said heck no we're just getting started. Now we're up in the $6 million level and I'm going to tell you the same thing. It's very early in this game there are so many legs on the connectivity space that it's pretty difficult to put a cap on how large it can get. Other than to say we're working very hard at it. We have very unique capabilities and we don't think anybody else can touch us.

Now if I'm not correct on this straighten me out but my understanding was that you had most of the Vista patches put together and into Verizon sometime in mid June and now we're about 6 weeks post that. I was wondering if you could give us a flavor for how you're seeing business go with Verizon and with your music kits there.

We're very pleased. I think our customer is very pleased which is probably more important than whether we're pleased. I think their sales are going fine. I think they're continuing to move things forward. The Vista thing is clearly behind us and over. Without exception all the device manufacturers had Vista drivers is all in product today so that little bump in the road is gone. I think the best take away is that I think Verizon is happy with the performance and I think they plan on doing a lot more. So I think you just have to sit back and let Verizon roll out their strategy and tell you how they're moving things forward. I think if you listened to their conference call they're pretty bullish about their business case last week. I guess hopefully you get the point that we're pretty bullish about ours.

Okay, Andy mentioned about $1 million of international revenue. Was that telephone, Accutel, Insignia? Congrats on that level. I was just kind of wondering where it came from and how you see it changing.

Was about $1.3 million of which the majority of it came from the Insignia type product and the balance from the Accutel product.

Okay.

Keep in mind that one of Accutel's best customers is Siemens. And Siemens is all about Europe and we do business with Siemens and multi DOs across Europe and we've already booked a few more in this quarter and we can do is get bigger.

Last question from me, so breathe a sigh of relief. When you first mentioned the QuickLink Media Mobile you were talking about a price range somewhere between $30 and $50 and now you seem to have narrowed it down a little bit. I'm just curious as to what your thinking was behind that?

Well you know, I've got a pretty good guy in the whole consumer business by the name of John [inaudible]. You know him well and John runs our consumer software business and he's looked at the markets and his marketing people as well as in the corporate marketing under Robert Elliot and you know they seem to feel that the right price point is somewhere around that $30 mark. And that is a price point that we can make a strong profit on, but not over price it to the point that it would impact the volume of sales. I think that's one of those times were as a CEO you go with your team because they know what they're doing.

Very good Bill, thank you so much for the great explanations to my questions and congratulations on the business development.

Amit Dayal with Rodman & Renshaw, please go ahead with your question.

Thanks and congratulations gentlemen on the good results. Just one question, just as a follow up to the question on the pricing. Do you have any opportunities to raise prices on the QuickLink music software with Verizon?

Most of our pricing is multi-year. What our protection is more on the price compression side. So we basically lock in our business arrangement for multiple years so you don't see any degradation in margins and what not. So it's not a go up type of model but it's not a good down type of model which tends to be pervasive in the market.

Right. In terms of international revenues how quickly can we expect this to ramp up to (inaudible) percent of all revenues. Is it a year from now or?

You know. I think you got to first off, we're getting our sales team put in place we have identified candidates both in Europe and Asia to head up the sales teams as the vice president's and they need to build out their staffs. We have some staff in place, but it's got to get bigger. And you know that's all part of our strategy, all part of our plan so you know let's give them until the first part of 2008 and maybe we can re-ask that question and maybe we will have already answered it, I don't know we'll see.

Okay thanks and Andy could you give me the Operating expense number you gave again, I missed it?

Op expense for the current quarter is about $7.5 million and we expect it to go up here in the third quarter $8 - $8.5 million.

Okay thanks.

Thank you, (inaudible) of Goldman Sachs Investment Management, please go ahead what's your question?

I didn't quite get the Verizon [precaution] did you say 59%?

Yes.

59, okay great, thank you. On the international revenue, is that a continuation of existing business or was there a new business components in their for Insignia?

Well obviously for us it's brand new. And the Insignia it I believe was primarily existing customers let's call it expanding within their existing contracts.

Thank you very much.

Okay, [Joe inaudible], Wachovia Securities, please go ahead with your question.

Great quarter guys. Just a little follow-up, I missed what was the reason why the expansion on the DSOs again?

Key customers including both Sprint and Verizon have actually moved to a new EDI interface. So basically the setup time to actually get that working at both ends impacts our accounts receivable so in other words it puts a delay in the processing of accounts receivable.

Okay.

That will be normalized here in about a quarter.

Once it's up and running we're back to business as normal. Therefore see it come back down.

Okay, very good. And the headcount and 215 is that just U.S. or is that.

Worldwide.

Everything, okay great. Going to the World wide side to we had in the dollar exposure against the other foreign currencies?

Not really to speak of again, that will always be, in our case we don't carry inventories its gong to be in the case of accounts receivable. Not particularly significant we'll always take it to the current P&L, we won't book it to the balance sheet.

And we will in Europe, we will do business in Euros and Asia we will stay with dollars.

So okay we'll always be dollar-denominated?

Not always it depends on the customer.

In Europe it will accept Euros. So you know we will close deals in Euros. In Asia we are going to stick with dollars.

Okay. Very good every other question was answered. Great job guys.

(OPERATOR INSTRUCTIONS). Management there are no further questions at this time. Please continue with any closing comments.

I want to thank everybody for attending the conference call once again this quarter. And we look forward to speaking with you again next quarter. Have a good day.

All right. Thank you ladies and gentlemen, this does conclude the Smith Microsoft second quarter 2007 financial results conference call. At this time you may now disconnect. We thank you very much for using HT Conferencing. Have a very pleasant day.