Smith Micro Software Inc (SMSI) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software third quarter financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) . This conference call is being recorded today, Wednesday, October 31st of 2007. I will now turn the conference over to Bruce Quigley, VP of Investor Relations.

Good afternoon and thank you for joining us today to discuss Smith Micro Software financial results for the fiscal 2007 third quarter ended September 30, 2007. By now you should have received a copy of the press release discussing our third quarter results. If you do not have a copy and would like one, you may find it at Smith Micro's website at www.Smithmicro.com or by calling 949-362-5800 and we will fax or e-mail you one immediately. With me today 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 information currently available to the Company. The Company assumes no obligation 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 reports on Form 10-Q and Form 10-K. 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.

Thanks, Bruce. Good afternoon, everyone, and thank you for joining us today. Today we announce our third quarter 2007 results. I am pleased to announce another quarter of record revenues for the Company. During the quarter we achieved several significant milestones as well as strong top and bottom line results. Later in the call I will break down specifics within each business segment.

During the third quarter we recorded record revenues of $20.4 million, an increase of 37.8% from the $14.8 million we reported in third quarter of 2006. Looking at our bottom line, non-GAAP net income for the third quarter was $6.7 million or $0.21 per diluted share. For the nine months ended the Company reported record net revenues of $53.4 million. That was up 43.4% over the $37.2 million we reported last year and non-GAAP net income for the nine months was $18.1 million or $0.58 per share which was up 72.7% over the $10.4 million or $0.42 per share we reported last year. I was also pleased with the overall progress we made as a company during the quarter. We saw a number of new customer relationships from Cricket to HGC and now also U.S. Cellular. We saw a continued evolution of our business case as again, we saw several new cross-selling opportunities coming from our acquired businesses and we also made significant progress with a major new Smith Micro branded product Revue for the fast growing SmartPhone worldwide market. I will update you later in the call about these subjects plus more, but first I'd like to turn the call over to Andy Schmidt, CFO and Vice President, to go over the financial results in more detail. Andy?

Thank you, Bill. First let me go over our customary introductory items. As we have in the past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results provided net-out amortization of intangibles associated with acquisitions, stock compensation-related expenses and non-cash tax expense to provide comparable operating results. Accordingly, all results I refer to in my prepared remarks about 2007 and 2006 are non-GAAP amounts.

All right. Let's discuss our detailed third quarter results. As Bill noted, we posted revenues of $20.4 million earning of $0.21 per diluted share. Total revenues of $20.4 million increased from revenues of $14.8 million for third quarter of 2006, an increase of 38%. International revenue was $1.5 million this quarter across all business groups. As discussed at our last conference call, the Vista driver issue which affected our second quarter multimedia revenue is behind us. Third quarter revenue for multimedia was $8.0 million or the same with Q3 of 2006. Connectivity and security posted another record quarter with revenues of $8.0 million for the quarter as compared to $3.8 million last year. Compression and consumer posted record revenues of $3.7 million as compared to $2.6 million last year. Device management revenue was approximately $400,000 for the quarter and is a new revenue stream for us and finally we reported approximately $300,000 other revenue which is consistent with our third quarter of 2006.

In regard to deferred revenue, total deal revenue for our enterprise customers across all product groups was approximately $860,000 this quarter as compared to revenue we recognized of $515,000. Total deferred revenue at September 30, 2007, was approximately $710,000.

Okay. Switching to gross profit, as we consistently point out, we manage our business to maximize our gross margin dollars rather than gross margins as a percentage of revenues. Non-GAAP gross margin dollars of 14.5 million increased 5.5 million or approximately 57% from the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 71% for Q3 2007 compared to 61% for Q3 of 2006. Non-GAAP gross margins by business unit were as follows - - Multimedia, 56%, connectivity and security, 94%, compression and consumer, 74%, mobile device management 56%, and other revenue 46%. As we've noted before, our margins are driven strictly by product mix.

Okay. Switching to operating expenses, non-GAAP operating expenses for the third quarter of 2007 increased to $8.4 million or approximately 9 -- excuse me, $0.9 million from second quarter of 2007. The change is as expected as we added infrastructure and personnel and marketing, selling and advertising expense associated with the new VMware product line. Non-GAAP operating margin for the current period was approximately 30% as compared to 27% for Q3 of 2006. As follows non-GAAP operating income increased $2 million to $6 million for the current period. Despite acquisitions and significant investment in our operating infrastructure we have seen our non-GAAP operating margin increase to 29.5% year-to-date from 26.1% for the nine months ended September 30, 2006. Non-GAAP net income for the third quarter was $6.7 million or $0.21 per diluted share as compared to $4.3 million or $0.17 last year.

From a balance sheet perspective our cash position closed at 83 million at September 30, 2007, a decrease of approximately 9.5 million from the beginning of the year. Cash generated from operations year-to-date was approximately $6 million. The primary uses of cash included the acquisition of Insignia for approximately 15.3 million, the Ecutel acquisition for 8 million, and the payout of the PhoTags earn out of 3.5 million. Cash generated from stock sales and stock options totaled 9.1 million year-to-date. Accounts receivable increased to 17 million primarily driven by the timing of sales during the quarter which is heavily skewed towards the last month of the quarter. Finally, networking capital at the end of Q3 was 94.4 million.

Again I'd like to emphasize that while we reported record revenues all of our operating metrics including gross margin, operating margin and net income are also significantly improved from our year previous period. Looking forward to the last quarter of the year, gross margins will continue to depend on product mix. We expect gross margin to continue at the 70 to 75% range in Q4. In regard to operating expenses based on the significant leverage in our model we expect to continue to invest in our business by adding new talent to our roster and to spend marketing dollars to support the launch of a Revue.

Finally we expect SOX related expenses of approximately 300 to 350,000 for the quarter as we prepare for our fiscal year-end 10-K process. We expect non-GAAP operating expenses to increase to the 9 to $9.5 million range in Q4. And as stated before, we expect operating margin to run around the 30 to 35% range for the back half of the year assuming status quo. This number can change based on either new acquisitions or new product launches. In regard to taxes, our current estimate is that cash-based taxes will be around 5% of non-GAAP 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 which of 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. In terms of housekeeping, we expect to file our current quarter 10-Q by November 9th.

In addition, we're going to make a format change to our cash flow statement for our 2006 fiscal year 10-K and June 30, 2007 10-Q. For fiscal 2006, and the six months ended June 30, 2007, we had significant stock option exercises. As per FAS123R enacted in 2006,, we should include the tax benefit related to stock option exercises in the financing section of the cash flow statement rather than the operating section of the cash flow statement. As our stock option exercises were significant during the periods I mentioned, we'll make the change for this line item moving it from cash generated from operating activities to cash generated from financing activities. Let me stress, that the cash flow statement as a whole is unchanged and that there's absolutely no change to the P&L balance sheet or statement of stockholders equity for these periods. Expect to see the cash flow revisions filed along with our current 10-Q on November 9th. At this point I'll turn the call back to Bill.

Thanks, Andy. Starting with our connectivity and security business segment I was extremely pleased with this overall performance during the quarter where we saw record revenues which were up 109% from third quarter of last year. Our QuickLink Mobile brand for connectivity solution saw strengths from all our customers including Verizon Wireless, a All Tell and Enterprise accounts such as [soonums] an account that came to us via the Ecutel transaction. During the quarter Reap Wireless which markets products under the Cricket Wireless brand announced that they will begin shipping QuickLink Mobile and U.S. Cellular announced just last week the availability of QuickLink Mobile shipping on their first two wireless data devices. We expect to see more contributions from these customers in the coming quarters as they roll out new data services to meet customers' demands. We continue to work very hard on signing new carriers and device manufacturers and we expect to announce new customer wins during the fourth quarter of this year. We believe that the strength in this product suite across the board is attributable to several factors with the most important being wider adoption of wireless broadband services throughout the marketplace. In the recent past we saw the majority of users being corporate executives or road warriors, but now we are seeing a broader mass market as wireless data services reach the enterprise audience and our expectation is that this trend will continue. As wireless carriers continue to offer customers a reasonable price point and various new data plan options, the ease of using wireless broadband will drive broader consumer adoption.

Our acquisition of Ecutel in February is now fully integrated into the company. The new combination of connection management, session persistence and mobile VPN marketed under the QuickLink Mobility brand delivers an industry leading end to end connectivity solution with enhanced wireless access security, policy management and the ability to automatically connect to your approved networks and roam seamlessly across different wired and wireless networks. All this is facilitated via a very user friendly access experience while providing all the power features demanded by the enterprise customer.

We continue to build our IP portfolio and received and announced a new wireless patent persistence in masses for secure network mobility, a process that provides continuous secure communication sessions between mobile users, devices and their home network information resources. Looking forward to fourth quarter, we are expecting continuing strong revenue growth for our connectivity and security business unit.

Now looking at our mobile device management segment, although revenues for the business unit was down from the prior quarter, I am pleased with the continued progress we've made with the integration of the Insignia acquisition. To fall back on what I will call delay in revenues was due to restructuring of Legacy and Insignia contracts. This event in essence lengthened the sale cycle as we changed contracts to better fit the Smith Micro business model. We believe that the future opportunities for our OTA technology will reside with device manufacturers, wireless carriers and the enterprise as they seek new ways to remotely update wireless devices deployed around the world. There is a lot of activity in the marketplace as we have opened many new doors into large wireless players who have a need for the powerful Insignia technology. The Insignia technology was always Best-of-Breed and now with our strong financial backing doors that were closed in the past are now opening.

We announce a major new customer in HTC, the largest worldwide manufacturer of Windows-based SmartPhones. HTC will begin shipping our Insignia client on their SmartPhone lineup in fourth quarter and will expand their deployment throughout 2008. We have other new customer opportunities, so look for this unit to improve their top line performance in 2008. Now turning to our compression and consumer division which posted an extremely strong quarter, we have several high profile ongoing conversations with many the major wireless handset manufacture, as we continue to move forward with our StuffIt Wireless compression solution. I was very pleased that our consumer side of the business contributed its strongest quarter in its history at 3.7 million and results that were up 44% over last year.

The business segment's growth got a strong assist from our recent agreement we signed with VMware, the global leader in software for virtualize desktops and servers. The infusion combines a very clean and intuitive user experience that allows Mac users to run P.C. applications seamlessly alongside existing Mac applications on Intel-based Macs. This is a significant agreement and we expect to see strong contributions moving forward.

We continue to expand our popular StuffIt product line and have launched a new product StuffIt Expander for Windows. This product is a free companion product to our StuffIt Deluxe archive and compression software which allows users to open archives compressed in Smith Micro's StuffIt 10 format. StuffIt Expander also supports archives compressed using the Legacy zip compression method. The compression and consumer business continues to generate strong cash flow for the company and we see an accelerating revenue growth curve moving into 2008 highlighted by the launch of our Revue product. Look for continued top line improvement in the fourth quarter. This moves us into our multimedia segment where we saw a return to more normalized revenues in the third quarter. Issues we faced earlier in the summertime frame with Vista upgrades has worked itself out and we saw a return to expected revenue performance. Within this category we saw revenue growth from our Sprint relationship which is encouraging and we expect this to continue to grow over the coming quarters as Sprint offers more music capable devices. I now want to address some of the recent rumors that have been floating in the marketplace. First off, the rumor regarding the Real Networks announcement. We see Real Networks as more of a content play than a direct competitor with Smith Micro. While Real Networks has a multimedia client and has for some time, we do not believe it meets the needs of our carrier customers. We also have heard incorrect rumors in regards to our relationship with Verizon Wireless. I want to once again reiterate to you that we have had and continue to have a very strong and strategic relationship with Verizon Wireless, our largest customer, and in no way whatsoever do we see this changing any time soon.

Now looking more at the multimedia market as a whole, I can say that we do expect some evolution in the way our customers market their music products. First off, some of our customers are starting to offer phones which come with cables and earbuds in the box. Such phones will use -- excuse me. Such phones will use our music only software solution instead of shipping a separate kit. By no means do we expect to see music kits going away, but we do expect to see more of a mix happening with software only being shipped with some new handset devices. The result of such a shift in product merchandising is good for us on a gross margin standpoint as the gross margin percentage for a software only package is double that of a music kit. Over time this shift may impact our top line revenues as kits bring in more revenue dollars than a software only package. We don't anticipate dramatic effects, but in this short run it may impact this business segment's revenue growth.

Another change we see happening within the market is a move from a music only offering to a more robust multimedia solution that would include music, full motion video and still image photo capabilities all in one. We believe that the deployment of complete multimedia applications will take center stage within the next few quarters. Now I would like to give you an update on our first Smith Micro multimedia branded product Revue. As I stated on the last conference call, this is a very unique solution offering consumers a rich multimedia experience that includes music, photos and video on a SmartPhone operating on the Microsoft Windows mobile platform. Revue will help retailers, device manufacturers and wireless carriers enhance their SmartPhone revenue opportunity. Revue is engineered from the ground up for the very fast growing SmartPhone market. It offers users a robust media experience that fits in their pocket while still remaining loyal to their favorite high speed network. Revue gives SmartPhone users integrated access to their media to browse music by song title, artist, play list, album or key words. You can display your music in album view or list view. View and edit your photos in more than one way, rotate, flip, crop your photos and at first technology breakthrough for any SmartPhone our auto restore and auto enhance that eliminates red eye and improves image clarity. You can even make your own slide shows on your SmartPhone. Throughout the quarter we have worked to line up several new strategic partners for our launch including content offerings and strategic online marketing and retail store partners. Many initial buy-in deals for Revue are complete and we expect to have the product available both online and in stores for the holiday season. OEM sales efforts for Revue are progressing on a number of fronts. Look for OEM Revue relationships to come online in the first half of 2008. Finally, our multimedia business unit is also focused on adding value in its product portfolio as messaging has emerged as one of the highest value revenue generators of our wireless carrier customers. By acquiring new technology from business SMS we are poised to enhance our SMS and MMS offerings to provide the capabilities to seamlessly transfer multimedia rich media files.

Before I turn the call over to questions I would like to reiterate a few key points. Our business case continues to evolve very nicely and we continue to achieve record growth and new customers further enhance our leadership in the wireless software universe, invest heavily in new product development and continue to add new key personnel to the Smith Micro team. We also remain very active on the M&A front and look to complete one or maybe two transactions this quarter. I believe we are just starting to see the growth curve in a number of our markets and we are very optimistic about the future. With that I'd like to turn the call over for questions. Operator?

Thank you. And, ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Lauren Ye with JPMorgan. Go ahead.

Hi, guys. First question. What was Verizon's percentage of revenue this quarter?

68.5.

Very helpful and then around renew, are there carriers looking at this product and what do you think is the opportunity there I guess as you go into 2008 in terms of carrier maybe relationships?

Yes. I think right now on the OEM front we have a number of efforts ongoing. They all look very, very positive. You should view that the OEM relationships will be with wireless carriers as well as device manufacturers and we look to bring these to the market as soon as they're signed and we're kind of targeting the first half of 2008.

Okay. And you mentioned the mix of music manager, with Verizon between the kit and just software. Is there a way to quantify this, what is the mix between those two right now and how do you think that will play out and I guess has Verizon communicated with you if they plan to package their phones this way going forward on all their phones or is it on a phone by phone basis.

Let me take the last part first because I thought I was pretty clear in my comments.

Okay.

We do not see music kits going away, period. We do see a mix developing where some phones will have the cable, earbuds and software in the phone box. We don't know the exact mix and I don't really know that that's known to my customer either. It's being evaluated on a case by case basis. So it's very hard for us to guide you as to how to split it on a percentage basis. I wish I could help you more, but I can't.

Okay. And then just, Andy, do you have an update in terms of what your tax situation looks like in '08?

No. Not at this time. We just recommend everyone stick with the 30% that our modelers are using.

Okay. Got you. Thanks, guys.

Thank you and, ladies and gentlemen, please limit yourself to one question and one follow-up and requeue for additional. And our next question comes from Maynard Um with UBS. Please go ahead.

Hi, thanks, guys. Your guidance implies less than 16% sequential top line growth kind of at the high end of the range, given kind of all the variables. Historically you've kind of seen that 16 to 17% growth in previous years can you talk about why we're seeing if this is at the high end of the range we're kind of seeing less than historical seasonality. Is that a reflection of the software bundled in the boxes or can you talk a little bit more about that and I have a follow-up.

We'd have to look at your analysis. We've not given any guidance for Q4, so I'm not sure where you're coming up with your sequential calculations.

Well, I was just taking kind of your gross margin guidance, your OpEx guidance and then your operating margin guidance and just kind of trying to extrapolate backwards.

Well, again those are just broad guidelines that certainly we could beat or fall right within the partner. It's not intended to give revenue guidance at this point. It's just basically a very broad range to help you model, but it's not implied to give you revenue guidance.

Okay. And then secondly you talked about the shift of a few phones going to software in box rather than kits and I understand the relationship there on the revenue side, but can you help us a little understand the gross profit, profit dollar impact, not margin but dollar. On my math, you'd probably have to sell somewhere around five software for each music essentials kit -- or five software in box versus one music essential kit to kind of make up that same gross profit dollar which doesn't seem a stretch given that the take rate in box is 100%. Is my math off there? Can you just help me out. Thanks.

Yes. I really don't want to get into trying to figure out the model at this point but what I can say is this. You're correct in the concept that when the software is in the phone box, there's 100% audience that you get to speak to where when there's a stand alone kit it's some subset of that that you get to earn revenue and then profits from. We do lose some profit that we make on the kits. We don't do it for nothing. We are in business to make money, so when we don't ship a kit, we lose some profit dollars and there is the possibility that I think you're suggesting that that could be compensated for by a higher volume as far as overall tax rate. The other thing to keep in mind when you look at this particular opportunity, the software that goes in the box we get revenue for. That software, its main function in life is to take you automatically to a download site and download the music manager. When the user downloads the music manager, we make more revenue dollars, but there could be some breakage in there, so you have to kind of play that in as well.

It's not an easy model. I would be the first one to accept that and there are trade-offs. I think the biggest thing to kind of consider is that it could have some top line effect in the short- term. I think that as the business continues to grow and we're just talking about the multimedia business right now, that that will be, disguised in other new revenue opportunities. So --

Just to be clear, you're saying that you get paid for each software that goes in the box and then you'll get paid more if the download actually happens for the music manager?

That's correct.

Okay. Thank you.

Thank you. Next question comes from Rich Church with Collin Stewart. Please go ahead.

Thanks, guys. Just, Bill, if you could, I know you don't give guidance but just curious if you could make any comment about letting all of this out if you're comfortable with where the Street is for Q4 on the top and of bottom line or how do you think that should --

Well, I don't really look at where the Street is. I kind of look at where my internal model is and that's really what I drive things to. I can say that we are looking for sequential growth in the top, top-line and we'll see how it shakes out on the bottom line because we're also clearly expanding some of our cost basis as we build on our infrastructure, but I can say we are looking for sequential growth on the top line.

Okay. And can you say how much Sprint was in the quarter in terms of revenue?

No, we didn't. We don't break that out.

Okay. But was it up sequentially?

Yes, it was.

Okay. And, Andy, could you give us the reconciliation for non-GAAP on the line items?

Yes, sure. On the operating expenses non-GAAP selling and marketing was 3.2 million, non-GAAP R&D was 3.1 million non-GAAP and G&A 2.1 for a total of 8.4.

Was there any in COGS as well?

Yes, there was a minor amount here. So let me see. Total cost of sales GAAP was about 6.4 and total cost of sales non-GAAP is 5.9.

Okay. Thank you.

Thank you. Next question comes from Reg King with Nollenberger Capital Partners. Please go ahead.

Yes, thank you. Regarding the mobile device management segment, Bill, I think you said that that segment was down a little bit this quarter, but you do expect to see some rebound in it. Can you give us a little bit about the customer activity that you're seeing in that group?

Yes. We're seeing a lot of -- there are a number of fairly large opportunities. Unfortunately these opportunities take a little bit of time to get closed, but I think you will see an uptick on the revenue line for that operating unit most likely also in fourth quarter, but I think you'll see it start to really grow as we get into 2008. I think we saw some of the structural contract issues and some of the basic business practices that we inherited from Insignia and I think we're set to move forward.

Bill, is there some insight you can give us to how you might have restructured this so that -- restructured the deal so they fit better with Smith Micro?

I can't get into details but I can say that obviously it's not an easy matter to go to a customer who really doesn't want to change the contract and convince them it's in their best interest. So it was -- it took a little bit of work. It took a little bit of focus but I'm pleased to be able to say that we're pretty much done with that and we're able to get through that.

Okay. Thanks very much, Bill.

Thank you. Our next question comes from Richard Valera with Needham & Company. Please go ahead.

Thank you. Good afternoon, gentlemen. Just with respect to multi media, Bill, you've alluded to some of the potential issues in terms of that could hurt top-line near-term in terms of the mix towards the boxes, but can you give us any sense at all in the fourth quarter of where you expect that directionally, up, down or flat versus the third quarter?

It's very difficult because it really gets into what products sell and because I don't really have direct visibility and when I say what products, I'm saying what handsets are the hot movers. I mean we can think we know, but when the numbers come out and you look at it at the end of the quarter, it's sometimes different and keep in mind we're not buying the handsets and we're not doing the marketing and so so much of it is driven by what the customer does and unfortunately they don't always share that with us and we're not privy to their decision processes, so I wish I could help you, but I don't know how to answer the question otherwise.

That's fair. Do you have any sense on inventory, historically you've had some issues with inventory occasionally building, et cetera. Is there any sense of where that stands with your largest customer at this point?

Yes. From what we can see the inventory is what you would expect to be going into the fourth quarter, which is typically a strong selling season. So you know, I don't see anything abnormal there at all.

Okay. That's helpful. Thank you.

Thank you. Your next question comes from Chad Bennett with Northland Securities. Please go ahead.

Yes. I'll give you your eighth question on multimedia. Just talking about the Real Networks, Verizon Deal, Real announced last night on their call that they'd be deploying their music platform, whatever that entails, with Verizon in early 2008 and I guess what you're telling us is you are going to be working with both Real and Verizon with your piece of the platform going forward in that Real either not at this point or doesn't plan on offering similar functionality to you guys?

Okay. First off, I wouldn't have a clue what functionality Real wants to offer because again, they're not my customer. All I can say is that in this process in dealing with Verizon Wireless who is my customer I understand what their strategies and plans are as they've told us and they do plan on moving to the new Real MTV store. The timing of that has not been announced by Verizon Wireless. I know what Real Networks said on their call last night reportedly, but again I'm not going to comment on that. That's an announcement to come from the customer. Our job is to make sure that our customer, Verizon Wireless, is happy and they have the right products and the products work in a fashion and manner that they find to be their desire going forward and that's what we're focused on and we're getting that job done and our customer's happy and that makes us happy.

Okay. Fair enough. Account activity, great quarter on that side of the business at least relative to what I was thinking. You indicated sequential growth, I guess, going into Q4. I guess my question is what are we seeing -- I mean obviously the PC card guys and the hardware guys are showing rapid growth. I assume you're just not seeing any letup there. Is there any risk that, a couple quarters down the road when we go to the next or whatever it is, next note, that there's any hiccup there or are we just at a level of penetration now that it's just pretty much a sustainable business?

I think you have to look at history and I am a strong believer history tends to repeat itself. There is a very substantial amount of growth happening in the connectivity space. When you allude to Rev B, all that's going to do is accelerate any more growth. So it's not a matter of risk. It's a matter of, very strong top line and bottom line growth in this part of our business case. It's an incredibly good thing. There are really I don't see -- I really can't understand any downside risks to it in the foreseeable future. I don't know how else to say it more directly.

Okay. No. That's fair enough. I just -- even though longer-term it's probably the best thing I'm just wondering if there's any type of hiccup there in the future, but you're not seeing it, so you answered it.

Yes. Don't see it hiccup.

And can you give any clarity on the consumer side how much the Fusion deal helped you this quarter and care to garner a forecast on how much -- I don't know -- percentage of growth that helps the consumer business looking out in '08?

Okay. Clearly, it's a fairly nice step up from the historical numbers for the consumer group that we were able to report this time around. The Fusion business was very helpful and we'll probably be even more helpful next quarter. He mean we didn't have it for a full -- I mean we didn't have it for a full quarter this time. You add on top of that the fact that in the current quarter we have begun shipping the next version of our StuffIt for the Macintosh. Sales are running ahead this year. It's an annual update so, that bodes well as well. The consumer group guys are just really executing their business case very crisply and you're seeing it in the numbers. Like I said I think you should expect to see continued growth in fourth quarter of the top-line and you should probable see that trending out in 2008.

Yes, the key take away is it's not a one-time event. It's actually a new layer now for that business so, what you're seeing is an established new benchmark for the quarter that's up significantly from last quarter. So you can extrapolate it from there.

Oh, absolutely, I agree. I know it's ongoing. I just wondered how much of it was Fusion versus -- I don't know if you call it Legacy, but the other part of the consumer business, but that's fine. The last question --

Hey, Chad, we need to move on. So you can either requeue or we'll talk to you later this afternoon.

Thanks.

Thank you. Next question comes from Anton Wahlman with ThinkEquity Partners. Please go ahead.

Hey, Andy and Bill, I've got a housekeeping question first on the numbers. Kind of the mirror image of an answer you provided to Richard's question earlier on the breakdown of the stock comp to 3.9 to 1 million. Is there any chance you can just give us the actual amounts, not the net amounts but the actual break down of the 3.921?

Sure. It's 91,000 in cost of sales, 1.6 million in selling and marketing, 700,000 in R&D and about 1.6 million in G&A.

Okay. And the $858,000 listed under the amortize, where is that?

It's 390,000 in cost of sales, 160,000 in selling and marketing and 300,000 in R&D.

Okay. And the tax effect, 1.433 is attributable to what tier?

That is obviously just done on a tax line and that is the adjustment from GAAP taxes to cash taxes.

Okay. That's fine. All right. And in the earlier answer, I forgot if it was you, Andy, or it was Bill that said I was just a little bit unclear I wasn't sure if I heard correctly, did you say that you were or you weren't looking for sequential growth?

We were, positive. Potential growth.

All right. Thanks for relieving us on that. Very good. Very good. So the final question I had was just on a comment in the beginning you said, Andy, on the 860,000 of the deferred revenue and the 515,000 the 710,000, I'm just not clear on exactly what that was.

Sure.

Could you please just go over that again.

Sure. That's just to give you a differentiation between, revenue that we book from an enterprise perspective versus deals that we sign. So the point that we were making is we did about 860,000 worth of enterprise deals this quarter of which case we only booked 515,000 of it. The balance going into deferred revenue. So in other words, we often times do more business than we can book, so to speak, from an accounting perspective and as we're doing more and more enterprise business, I'll always give you guys an update of what deal revenue looks like versus booked revenue.

And the enterprise goes into, essentially a combination of the overall buckets including device management and other --

Right. Most of it is in either mobile device management or the connectivity.

Okay. All right. Well, that's very helpful. That's all I had for now. Thank you.

Thank you. Next question comes from Jason Tsai with Montgomery & Co. Please go ahead.

Hi, guys. A couple questions real quick. Bill, can you talk a little bit more about the Music Essentials Kit. I know we've kind of beaten this one here but just one more time. Can you just give us a sense in regards to your internal planning when are you expecting to see or when are you starting to build in a decline in that business on a sequential basis?

Well, okay, first off I think sometime probably early in 2008 it will cease to be a music kit but will become a multimedia kit. The effect of that I don't know how to evaluate yet. It's obviously going to be a broader market reach because it will reach further than just music. It will also get into photos, but assuming that that happens, you don't know how it's going to look. I mean there's a lot of unknowns as well as opportunities. So I wouldn't say that we are anticipating a decline in the number of kits, although it could happen in the short-term which might be the next quarter.

Yes I think a key takeaway as well is interestingly enough to us we've had a number of our customers, large customers, interested in kits. So while, as Bill pointed out there could be -- could be, we don't know -- a slight transition of our largest customer, Verizon, we could completely offset that and then some with other customer additions. So that's where again it's unknown. There's no guarantee whatsoever that anything is going to drop. As a matter of fight, we might be on the next phone call going oh, sorry, guys, it's up and therefore, our gross margins look like X, Y, Z. So it's just more of a heads up that it's out in the marketplace that there are new phones coming out that actually have cables near but in the box and this is just how we look at it and how we're answering that question.

Okay. Fair enough and then speaking of new products coming out, I know that [Juke] has a sink cable included in there. What about the other three devices that Verizon has introduced or at least talked about and are planning to release in the fourth quarter? Do you know if most of those are starting to come out with sink cables in there preinstalled or are you just waiting to hear?

Jason, I guess I'm the wrong guy. We can get you that answer. I mean I know there are a couple handsets that are planned to have the cable and the earbud and the software disc in the phone box. However, there are a number of others that it won't be in the phone box and the way you would get the gear that you need for music would be to buy a music kit. So --

Yes. It's a dimension again as for the press. There are two new phones that may have the earbuds and the cable in the box, but there are over 20 phones at Verizon that are music phones.

Right.

So it's obviously a very small subset at this point.

Okay. All right. Great. Well, thanks a lot, guys.

Thank you. Your next question comes from Kevin Dede with Morgan Joseph. Please go ahead.

Good afternoon, guys.

Yes.

Nice job, nice job having that multimedia bounce back. I was wondering, Bill, if you could talk to the promotional activity that you're seeing at Sprint and Verizon going into the quarter and how that might compare especially on the music side vis-a-vis last year preholiday season?

I think we're all going have to stay tuned. I really can't comment. Even if I did know, I wouldn't be allowed to talk about it. So, I think that you will see promo activities from both of the large carriers, that should be of help to us as we build through the fourth quarter, so I just can't answer your question, Kevin.

Okay. Can you give us a little nor insight and con grates on this the Cricket deal and the U.S. Cellular deal. How long was that sale cycle and do you think you'll push deeper into those carriers perhaps with your multimedia product?

We'd like to think so. You don't close carriers quickly. I mean these are six month or more sales cycles and I think both of them were longer than that, so it takes time. The fact that they are letting us tell you about the deals and the fact that they're now shipping product, bodes well, but if you look at all OEM deals, they tend to start in a, relatively low volume and then grow as they expand out the reach into more devices and, and they get their marketing campaigns in place. So we look forward to seeing, you know, the Cricket and the U.S. Cellular deal grow into a meaningful piece of business for us and we wish them well as they launch into the data connectivity space which is an area candidly that neither of them had really been in before as far as it's always our strategy and it has been our business strategy and we've talked about it on a number of calls and a number of conferences to build a portfolio of software products we could take into the wireless business both to carriers as well as device manufacturers and the trick was always to get one product in the door first and then once you're operating from the inside and you get to call on the customer, it tends to become a little easier to sell them some of the other products in the lineup and clearly that is our strategy for both U.S. Cellular and Cricket, just as it is and just as we execute at Verizon Wireless or Sprint or any of the other folks that we do business with.

I mean we are always constantly looking to expand our business really in the easiest place which now is at people that know you and trust you and believe in what you're doing and I think we're blessed with some really great customers and we think we've done a pretty good job for them and they seem to agree with that and so you should expand -- expect to see us expand our reach.

Andy, last question for me, you mentioned 9 to 9.5 million in OpEx in Q4. That's on a non-GAAP basis and I'm just wondering if you could give us sort of a line item view of that and how you'd expect that expense to trend going into '08 given that you're launching Revue and some of the costs associated to that could be the factor for the increase?

Sure. I mean the best way to look at it is as I discussed. There's about 300 to 350 that I noted would be SOX related, so that would be admin and then the lion's share of the balance would be in the sales and marketing associated with Revue, VMware and so on and so forth and then a scattering in other areas for head count additions, but the primary drivers are launching Revue, continuing to launch VMware and then, of course, our SOX side on the G&A.

Okay. And then into '08 would you expect some of that to back off a little or --

You know what? The answer is probably no. We will still have SOX with us for Q1 which we all love and enjoy and then we will continue, of course, with the marketing because as you can probably tell VMware's with us for quite some time which we're thrilled about and Revue is just starting but we'll do it smartly. We'll try to match the revenue on the launches with the expense but we will have to front load a little bit. I mean that's just the reality of it.

Thanks very much for taking my questions, gentlemen, and nice job.

Thank you. Next question comes from Amit Dayal with Rodman & Renshaw. Please go ahead.

Thank you so much. Could you elaborate a little bit on your acquisitions that you just mentioned. You might close one or two this quarter. Are these going to be more technology oriented or are these going to be revenue oriented if you could just give us a sense of what's going on on that side.

Well, have I to keep a few secrets so, you'll just have to stay tuned. As soon as we have definitive deals signed, we'll race to the Street with the news about them and what they're all about and what they mean for our business case. Now clearly we believe that we wouldn't buy them if we didn't think they were going to be helpful to the growing of our business and we think in both these cases they would be extremely positive. So we're very busy. There's a lot of work that needs to be done. Diligence is not a trivial undertaking. You don't want to find out a lot of things after the fact, surprises like that could cause me to have even less air and you know I don't have much. We don't need that, but we are busy, we are focused and we're pretty excited about both these deals. So let's see if we can get them done.

Next question is are these domestic or international?

Why don't you just say that they probably will have impact both this side of the pond and on other sides of the pond.

Is that Asia, Europe?

There's two sides to the pond.

All right. Thanks so much.

Thank you. Our next question comes from Bob Lee with Sidoti. Please go ahead.

Good afternoon, guys. Just one more question on QuickLink Music here or VCAST Music Manager. Bill, you seem very confident that the Real transaction with Verizon is more content based. Has Verizon had any discussions with you in terms of making your non-over the air platform available to Real and if hypothetically if yes, how flexible and how long would it take for you to transform your product to address the new content in sight?

Okay. I mean look, if Verizon would like to us assist Real in some way that would help facilitate a better user experience for the Verizon customer and we can make money at it, you can bet your sweet bippy we'd do it. Even if we broke even, we might still do it, but we don't do those kind of deals. So we're going to make money at it if we do it. I think that we see Real as a very significant player in the content space and we welcome the opportunity to work with Real just like we work with all the other content guys that are out there and we'll continue to do so going forward. They're not our enemy. They're a part of the food chain that we need to be able to work with and that's what we plan on doing.

Okay. And then moving away from that, Bill, you haven't mentioned anything in terms of Kyocera and SuffIt Wireless. Is there any kind of update in terms of timing to look for a launch of StuffIt Wireless on their handsets and maybe even number of handsets that it could potentially be launched on?

Yes. We continue to work with Kyocera and we have a long term business relationship with Kyocera on a number of fronts. As you are probable aware there are other activities ongoing at Kyocera right now of [anana] nature and candidly as close as we are to them I don't know that we know exactly what the impact of that activity is going to be, but we are working with them. We don't know if that activity will impact release schedules or not. We're just waiting to see.

Okay. Thank you very much.

Thank you. Our next question comes from Seth Potter with Merriman Curhan. Please go ahead.

Hi. Good afternoon. Just a quick question of the 1.4 million sequential increase in your consumer business, what percentage of that was from your VMware product? Thanks.

I would say basically more than 50%.

Okay. And of the total consumer business what percentage is I guess non-smith Micro product that you just publish like VMware?

I couldn't give you that answer. Again --

I think you will probably find that the majority of it is Smith Micro product. I mean the biggest seller going away is StuffIt and I don't see that changing in the near-term. It might get a big help hopefully if everything goes well from Revue, but the publishing business is lucrative to us and it is growing and it's a nice adder. The VMware deal is probably bigger than some of the publishing deals and they're all meaningful and the at the end of the quarter when you add up the numbers.

Okay. And in terms of non-cash comp maybe you mentioned this going forward expect to see this 3.9, $4 million range quarterly and also just in general seasonality, is there usually seasonality going into first quarter?

We've been on such a growth curve that we haven't really been able to chart seasonality at this point. That still seems to hold true. I think we're too early on the growth curve at this point to really see that. The only place we had seasonality baked in was in the consumer business and traditionally Q2 was the weakest quarter from that perspective. That will probably still remain true, but for the balance of the business we're just too early on the growth curve and adding customers and so on to actually see a real seasonality effect on our financials.

Okay. In terms of the non-cash comp just in general is it about $4 million a quarter?

About 3.7, 3.8.

Okay. Great. Thanks a lot.

Our next question comes from Ian [Gillson] with the Sacks Investment Research. Please go ahead.

Thanks very much. Housekeeping question for Andy. What was the tax rate -- sorry, the share count for the non-GAAP earnings? I calculate it as $0.22 APS and you reported 21.

Okay. I have 31.4 million shares fully diluted.

Okay.

Basic outstanding 30.2.

Okay. That takes care of that. Going forward how are we looking at the non-GAAP expenses and the impact on the tax rate once you work through your NOL?

Okay. Right now the non-GAAP tax rate we're suggesting people model with is 30% for 2008 just to be conservative. As we close out 2007 and again it's a lot of estimates that we use at this point untill we actually close out a tax year, that's what we're going with and then as we close out our 10-K and what not, we'll give some very definitive guidance.

Okay. Now a question for Bill. When you stop bundling the kits with the phones, is that just for Verizon or across the board?

Okay. First off in the case of Verizon what we're talking about where we would have software only units going out with phones are cases where Verizon has gone to the handset manufacturer and requested as part of the product that they get delivered that it include the cables and the earbuds and then we build the CD-ROMs and get those over for them to kit it up. Today we are looking predominantly at Verizon Wireless because Verizon Wireless is the only one that sells kits to, as Andy alluded; however, there are other opportunities that we are working on and actually very close in, where other folks will be selling some sort of, I guess I will categorize it more as a multimedia kit then just a music kit and that will change the mix then as to who we sell kits to and that might have somewhat of a profound effect on overall kit revenues but we have to wait for it to get close and get started.

Okay. And last question is a discussion about Verizon working with Google or talking to Google about using Google's operating system on SmartPhones?

Yes.

Do you already have software capability for that or would you have to build it?

Okay. Well, we would have to build it because we don't have devices that run a Google operating system as yet. I understand from discussions with both my customer and from what I read in the press as well that there is interest within the industry at looking at what Google can provide in the way of an operating environment for a handset. I think we have to sit back and watch that and we will work with Google just like we work with anybody else that builds operating environments for devices and we would welcome that.

Okay. Thank you very much.

Sure.

Thank you. Our next question is a follow-up from Maynard Um with UBS. Please go ahead.

Hi, thanks. Just a question on your acquisition. Are there any kind of prerequisites or can you help us in terms of thinking about are these deals accretive, neutral or dilute active and then I have a follow-up?

Yes. It's always our goal to do accretive deals. We never look to do diluted deals and if they are dilutive even after the fact we are busy figuring out ways to make sure we flip them back to the accretive column. So I mean I think you should rest assured that the deals we do will be all about software and we will look to try to do accretive deals coming out of the chute. Both the deals we're looking at right now would appear that they would be accretive.

Great. Then a question on your OpEx and your commentary there about the first half you said that the first half spending because of VMware and Revue will continue, offensively keeping your Op margins kind of in the 30 or 35%, but I'd anticipate that you'd expect some of the leverage from that spending to kind of come through. When would you anticipate that? Is that a back half or should we look beyond that to grow beyond that range? Thanks.

At this point it's kind of hard to model as Bill has said we've got two acquisitions we're trying to close and that always throws a wrench in the works of modeling. So we simply can't talk about those yet. So we'll stick with the 30 to 35% and as we bring forward different acquisitions and so on, we'll give you some advice as far as how to model those because integration over the first couple quarters of any acquisition always has some degree of effect on what happens with our Op margins. Let me add some color to that if I could and that would be that as we go into the start of the year this is relatively strong" trade show" part of the year, this is where you see not only the big CTIA Show but you also see #GSM. On a conserver side they have MAC, MAXWELL and CES, so they are a lot of marked in expenses that happen in the earlier part of the year. In addition to that, we are investing heavily in building out our infrastructure from a sales and marketing point of view in both the European markets as well as the Asian markets.

In doing so we have raised some of our expenses and those expenses do front then for what we hope will be a follow-on revenue that would come in in the mid to later part of 2008. So you should see if everything goes as planned a diversification of our revenue away from just being so totally North American sultric to a broader amount of revenue coming from other parts of the world. We have been able to higher some great executives to run our sales efforts that come out of the out of the wireless industry that have great track records we have gone for the best and we are -- we're very bullish on some of the things that are going on as I say on the other side of the pond.

Very helpful. Thanks.

Thank you. Your next question is also a follow-up from Chad Bennett with Northland Securities. Please go ahead.

Yes, Andy, regarding the cash flow changes that we're going to see I believe in the queue that comes out can you just give us a dollar impact of that?

Sure. I mean roughly and this is just broad right now, when we look at fiscal year 2006 total be roughly about $4 million moving from Op cash flow to financing and then for the midyear the six months ended June 30, 2007, about 2 million moving from Op cash flow to financing cash flow. Again, this is just a reclassification.

Okay. Yes. Understand. And then did we have any other 10% customers outside of Verizon?

No, we did not.

That's all I have, thanks.

Thank you. And Mr. Quigley, at this time I'll turn the call back to you for closing comments.

Thank you. I would like to thank everyone for attending this call. If anyone has any other questions, feel free to call us. We look forward to doing this again next year when we will report our 2007 fiscal year results. Good afternoon.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.