Smith Micro Software Inc (SMSI) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro Software fiscal fourth-quarter and year-end 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) I would like to turn the call over to Charles Messman of the MKR Group. Please go ahead, sir.

Good afternoon and thank you for going us today to discuss Smith Micro Software's financial results for its fiscal 2007 fourth quarter, which ended on December 31, 2007. By now you should have received a copy of the press release discussing the fourth-quarter results and overall results for 2007. If you do not have a copy and would like one, it is available at smithmicro.com, or calling 949-362-5800, and we will fax or e-mail you one immediately. With me today on the call is Bill Smith, Chairman, 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 future performance of the Company. Actual result may -- of course, could differ materially. They forward-looking statements are made on the basis of the views and the assumptions of the management team regarding events and business performance as of today's date, and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after today. Such statements involve a number of risks and uncertainties that could cause results to differ materially from those expressed or implied in any forward-looking statements, including competitive factors, technology and product development, changes in demand for our products from our customers and their end users, and our ability to execute on our business plan.

Further information on potential factors that could cause actual results to differ materially we refer you to documents that the Company files from time to time with the Security and Exchange Commission, specifically the Company's most recent Form 10-Q filed in November of 2007 and our last Form 10-K filing. These documents contain and identify important factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements.

At this time I'd like to turn the call over to Bill Smith, Chairman, Chairman, President and CEO of Smith Micro. Bill?

Thanks, Charles. Good afternoon, everyone, and thank you for joining us. Today we announced our fourth-quarter and year-end 2007 results and I'm pleased to announce that 2007 was the best revenue performance year in the history of our Company. We achieved record revenue of $73.4 million. Later in this call Andy will provide you with the details of our financial performance from the fourth quarter, as well as a recap of the 2007 fiscal year. In addition to the growing revenues and profitability, this past year was marked by a number of significant accomplishments for our Company.

We made key forward steps in each of our business units, with our core connectivity business doubling year-over-year sales. We added several new deals in that unit, including U.S. Cellular, Cricket and a major customer that has yet to be announced that will launch and begin producing revenues in the second half of 2008. The multimedia business added a major wireless carrier in Sprint as a new customer, and we saw this unit continuing to contribute strongly in fiscal 2008. Our engineering and product development teams worked to create a number of new innovative products that provide us with a portfolio platform for on-going growth. This include our first embedded platform solution with Review, and our new QuickLink® multimedia suite that expands our offerings beyond music, a comprehensive software synchronization suite for videos, photos, music, messaging, personal information management and more. We anticipation that these software products will service the platform for continued growth for this division in 2008 and beyond.

As you are aware, we were very active on the M&A front, closing four acquisitions in addition to announcing the acquisition of the PCTEL mobility solutions group, which is now closed and being integrated into Smith Micro. These acquisitions added strategic assets of new technologies, products, customers, geographic markets expansion, and management for our continued growth. I am very pleased to welcome into the Smith Micro family these highly-skilled professionals and appreciate the efforts they are extending into (inaudible) and technologies they developed and to the Smith Micro portfolio. We are very excited about our expanded product portfolio and the opportunities to take them to the marketplace.

Overall results for the fourth quarter were solid, with growth in three of our four business units. As we've previously stated in our last conference call, we expected to see a shift in the mix of products from within our multimedia group due to changes in our largest customers' music marketing programs. We saw the movement away from retail music kits at Verizon, as it transitions to a -- to music management software primarily being provided in the phone docks. Although this impacted our top line with that customer in the fourth quarter, we are anticipating minimal impact on the bottom line as our product model adjusts to the changing market conditions. We have worked very diligently in the last few quarter to redefine and expand our multimedia product line to capture opportunities in the future that can create a new model for growth at Smith Micro. We view 2007 as a year of significant accomplishment and one that has strengthened our foundation for future opportunities. We continue to make important progress and build on our momentum as one of our recognized leaders in the rapidly-expanding mobility software space.

I look forward to discussing this in greater detail, but first, I'd like to turn the call over to Andy Schmidt, our CFO to go over the financial results in more detail. Andy?

Thanks, Bill. First let me go over our customary introductory items. As we have in past quarters we have non-GAAP results and a reconciliation of non-GAAP and GAAP results. Non-GAAPs discussed on this call net out amortization of intangibles associated with acquisitions, stock compensation-related expenses, and noncash tax expense to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2007 and 2006 are non-GAAP amounts. Our earnings release, which will furnished to the SEC on Form 8-K continues a presentation of the most-directly comparable GAAP financial measures and a reconciliation of the differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The earnings release can be found in our investor relations at our website, smithmicro.com.

All right, let's discuss our detailed fourth_quarter results. For our fourth quarter we posted revenues of $20 million and earnings of $0.25 per diluted share, which includes a positive $0.03 EPS attributed to favorable year-end tax adjustments. Total revenues of $20 million increased from revenues of $17.2 million for fourth quarter of 2006, an increase of 16%. International revenue was $1.5 million this quarter across all business groups. Fourth quarter revenue for multimedia was $4.2 million, down from $8.9 million in Q4 of 2006, due to a shift in product mix, specifically a shift from music kits to higher margin software downloads and CDs. Connectivity and security posted another record quarter with revenues of $9.5 million as compared to $5.0 million last year.

Consumer group posted record revenues of $5.6 million as compared to $3.1 million last year. Wireless solution revenue was approximately $350,000 for the quarter and is a new revenue stream for us. Finally, we reported approximately $270,000 of other revenue, which compares with approximately $177,000 for fourth quarter of f2006. In regard to deferred revenue, total deal revenue for our enterprise customers across all product groups was approximately $400,000 this quarter, as compared to revenue which we recognized of $265,000. Total deferred revenue at December 31, 2007 was approximately $584,000.

Switching to gross profit, non-GAAP gross margin dollars of $15.9 million increased $4 million or approximately 33% from the same period last year. Of key significance, gross margin dollars of $15.9 million is a $1.4 million, or a 10% increase from Q3 of 2007. So while revenues were relatively flat due to the change in how we -- our music product is sold at Verizon, gross profit increased 10% quarter to quarter due to better quality revenue of the new multimedia model. Non-GAAP gross margin as a percentage of revenue was approximately 79.5% for Q4 2007 compared to 69.2% for Q4 of 2006, a significant increase. Non-GAAP gross margins by business unit were as follows: Multimedia, 62%; connectivity and security 93%; consumer, 73%; device solutions 55%; and other revenue 51%. As we've noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expenses for fourth quarter of 2007 increased to $10 million or approximately $1.6 million from third quarter of 2007. The change is as expected, but higher than the expense guidance we gave at our Q3 conference call of $9 million to $9.5 million, as we did not forecast closing the early December e frontier acquisition at that time. $10 million non-GAAP operating expense includes one month of e frontier headcount, infrastructure and marketing costs. Non-GAAP operating margin for the current period was approximately 29.7% as compared to approximately 30% for Q3 of 2007.despite integration expenses associated with e frontier and other seasonal expenses such as audit and SOX compliance work. Non-GAAP net income for the third quarter was $7.8 million, or $0.25 per diluted share, as compared to $7 million, or $0.26 last year.

Current quarter non-GAAP net income includes a favorable cash-based tax adjustment of approximately R900,000, or $0.03 EPS that is based on the fiscal year-end tax review that takes into account the total fiscal year performance. Non-GAAP diluted EPS without the tax adjustment was approximately $0.22. The key to our favorable tax performance in our 2007 has to do with our acquisitions. We were successful in all of our acquisition efforts at negotiating and securing tax-free status of the transactions from a Smith Micro perspective. This also holds true for the 2008 acquisition of PCTEL's MSG group.

All right, switching to 2007, in review it was a great year. Revenues increased from $54.5 million to $73.4 million, an increase of 34.7%. Much more important than our revenue growth has been our improvement of our business model. In to 2000, we posted a gross profit margin of 64.9%. For 2007, not only did we post a significant increase in revenues, we posted a 9.5 point increase in gross margin, a gross margin of 74.4%. In terms of operating margin, we completed and integrated four acquisitions while maintaining a consistent operating margin. Operating margin for 2007 was 29.6% as compared to 29.7% for 2006. Dilute earnings per share grew from $0,69 in 2006 to $0.84 in 2007. From a balance sheet perspective, our cash position closed at $87.5 million at December 31, 2007, a decrease of approximately $5 million from the beginning of the year. Post our acquisition of PCTEL's MSG on January 4, 2008 our cash position was approximately $26 million.

Accounts receivable at December 31, 2007 increased to $13.1 million from $9.8 million, an increase of 34%, consistent with our increase in sales. Networking capital at the end of 2007 was fairly consistent with 2006,$96.6 million for 2007 versus $98.8 million in 2006, despite using cash for all of our acquisitions. Cash generated from operations for the year was approximately $16 million, or a very impressive 21.1% of revenue. Primary uses of cash included the acquisition of Insignia for approximately $15.3 million, the Acutel acquisition for $8 million, the payout of the Pay Tags earn out of $3.5 million, the acquisition of e frontier for $5 million, and capital expenditures of approximately $1.2 million. Cash generated from stock sales and stock options totaled $9.1 million year to date, again. I'd like to emphasize that while we reported record revenues, all of our operating metrics overall demonstrated a very strong performance.

Now looking forward to 2008, we expect another very strong year. Based on information available at this time, the Company expects expects fiscal year 2008 revenues between $95 million and $105 million. In terms of timing we expect approximately 40% of the revenue guidance range in the first half of 2008, with 60% in the second half of the year. The back half nature of the revenue guidance is not conditional on new contract wins, but driven by both revenue recognition rules and contract wins which we cannot announce until our product ships, which is forecast by our customers to be the second half of 2008. Specifically, we have won three significant OEM deals for which we incurred development expense in 2007 and will incur development expense in the first half of 2008, which we expect to ship and announce in the second half of f2008. In other words, our revenue guidance is based on awarded contracts, not speculation of new contract wins.

In regard to gross margin, we expect our business model to continue to improve and expect to post non-GAAP gross margins between 78% and 80%. With regard to operating margin, we expect the first half of '08 to be affected by the integration of PCTEL's MSG group -- the acquisition -- and development costs for product expected to ship in the second half of the year. As such we expect non-GAAP operating margin of approximately 17% to 20% for the first half of 2008 with the return to our expected operating margin of 30% for the second half of the year. Finally, we've had great success e with our acquisitions in terms of tax effect. As previously noted, all of our acquisitions, including the acquisition of PCTel's MSG group in the first quarter of 2008, were negotiated securing a tax free transaction status for Smith Micro. As a result, we expect our 2008 cash-based tax expense to be 20% of non-GAAP net income. In terms of cash flow, we expect to generate in excess of 420 million from operations in 2008. I must stress that while we are guiding to lower operating margin in the first half of 2008, we will be significantly profitable from a non-GAAP reporting perspective and significantly cash flow positive during this period. In terms of housekeeping we expect to file our current-year 10-K on time, which will represent our final audited financial statements for fiscal 2007.

At this point I would like to turn the call back to Bill.

Thank, Andy. During the second half of 2007 we began working diligently to acquire our primary competitor for connectivity solutions. This asset acquisition of PCTEL's mobility solutions group significantly strengthens our customer base and positions Smith Micro as the clear market leader in the connection management software sector. It is fueled by the growth and the mobility -- broadband mobility data services. This deal also brings with it technologies for the future and a loyal domestic customer base and an expanding international customer base that positions Smith Micro with the ability to explore many cross-selling opportunities. This transaction closed in the first week in January 2008 and will be the focus of our integration efforts moving forward this year.

This leads us into our multimedia segment. As I mentioned earlier, this was a quarter of transition. By that I believe we saw a change in the model through which our largest customer delivers their music service offerings. We're now seeing less reliance on delivering music services through traditional retail kits that dominated 2006 and the first half of 2007, though we expect to see music kit sales to decline in 2008 to be replaced by wider distribution of software in the phone box. We believe multimedia will continue to be a strong contributor to our growth in 2008 and beyond. Before leaving this space, I'd like to comment on our marketing efforts with our new smart phone multimedia manager Review. Review launched at the end of fourth quarter of 2007 and it is now available on retail shelves at Frye's and Micro Center and on line from Amazon.com and Buy.com. This is a new product category and we are working closely with our channel partners to build demand for Review.

Now turning to our connectivity and security division, I am extremely pleased with the group's overall performance, which was up 100% from the prior year. This is core technology for Smith Micro and it contributed a significantly to our organic growth and profitability. 2007 we grew our wireless customer carrier base from three to 14 of the premier wireless carriers throughout the world. We developed connection solutions to support broadband mobile offerings at Verizon, AT&T, Vodafone, Sprint, Alltel, TELUS Mobility, NTT DoCoMo, Orange, T-Mobile and U.S. Cellular, just to name some of our customers. We see this market segment continuing to perform well throughout 2008, as wireless carriers offer new innovative pricing models to attract an ever-expanding appetite for wireless broadband data. We are beginning to see plans that drive broader adoption rates among both small business users, as well as the early stages of enterprise level adoption. The acquisition of PCTEL MSG further broadens our enterprise delivery channel through partners at AT&T Global Services, Fiberlink, as well as Orange Business Services.

In addition to being able to call many new international companies customers, we also expanded our technology portfolio, adding a new Y Max client, adding server-based offerings for central configuration and updates, and adding an IMS applications layer for delivery next generation fixed mobile convergent solutions. These are business segments we understand well and we look forward to the opportunities already underway in 2008. As I reported to you earlier, consumer business continues to be a strong cash generator for the Company and we see this continuing to be an important growth segment. This group has been very active and had a great year, growing over 37% in 2007 and 80% in the fourth quarter. We launched a new branded on line store mysmithmicro.com, to boost on line sales and we've expanded our distribution model in Europe and Japan. We saw contributions to this growth from our own internal brands such as StuffIt® , and in a growing exclusive republishing model, where titles such as DM wear and DTV for PC, were leading sellers in their respective categories.

In addition, in the fourth quarter, Smith Micro closed the acquisition of e frontier in December and expanded our reach into the growing graphic product marketplace. We believe e frontier will be a strong contributor to our growth in 2008. This acquisition also launches Smith Micro into delivering content for the graphics community through our contentparadise.com website, and we intend to expand these business initiatives. Today our consumer group enjoys space in Apple stores, averaging ten to 12 titles, a significant accomplishment.

And finally, looking at our device solutions group, formerly the mobile device management organization, we have expanded its mission and focused it on a number of new initiatives for the Company. First we've added new and experienced senior management. The new device solutions group includes photo technologies, our new IMS technology, as well as the integration and development of compression technology for the Company. This group's focus is on developing new application using these technologies, in addition to working toward integrating some of these technologies into our other products. It is a smart world. DPUs and software are embedded in new areas, such as automobiles and consumer appliances. It will be a connected world where everything talks to everything else, and it is becoming a converged world where the internet, wireless networks and mobile devices will allow you to accomplish far more and communicate in new ways.

This group also leads the advancement of our -- of all our compression technologies, as we see opportunities to add compression to gain strategic advantages for our photo technology. We remain committed developing and marketing our stuff at wireless product line. Today we are in various stages of talks with device manufacturers and we will continue to cultivate these opportunities. We are positioning our technology to reach a much broader audience than just updating of hand set devices and as more and more companies understand the true value inside our photo and device management solutions we believe we can expand into new market segments.

Overall our business case continues to move forward very well. We have all four of our business segments contributing to the Company's financial results. We continue to build upon our leadership roll in the wireless software industry with new innovative products and solutions. We continue to expand our patent portfolio, having been issued three new patents in 2007 for a total of nine. We now, we now have a truly global customer base which we intend leverage, to cross sell our portfolio of products.

Before I turn the call over to questions, I want to talk a little bit about our current stock price and our recent decline in valuation. First, as the management team we are very disappointed with the stock price. We fully recognize the frustrations our shareholders are feeling, as we feel the same. But it is important to say that this management team is not frustrated with the progress we are making within our Company. We continue to strengthen what was already a solid foundation for our business and see improving fundamentals across all of our lines of business. We have a leadership position in a market that has enormous opportunity ahead for growth, as the trends for further adoption of wireless data and broadband mobility solutions continue around the world. We have invested in building a broad base of technologies and products that enable us to move quickly into new markets and adjust to changing conditions.

With respect to the changing conditions in the equity market and with the current price of our stock, we will continue to make adjustments to the way expectations for results are being set and communicated to the Street. This is why we are adopting a policy of providing guidance for the first time in the Company's history. We believe this will better ensure that a cohesive and consistent message regarding expectations can be communicated to the investment community. We also understand that there are several rumors that have been floating about Smith Micro on a consistent basis. We hope we have given you a better understanding that most of these rumors are not substantiated and are simply untrue. Specifically, the rumors we tend to hear time and time again with regard to our largest customer, Verizon wireless and that they for some reason or another are going away. I want to reiterate that we have a very strong strategic relationship and we will continue to earn our long-term relationship with Verizon Wireless by continuing to provide the best-of-breed products and services.

While we clearly plan on continuing the trend of reducing Verizon as a percentage of our business, we plan on doing so at the same time that total revenue dollars from Verizon continue to grow. Another point that I'd like to make has to do with us announcing customer contracts and products. From time to time, many of you reach out and ask, where is the news, or why do you remain quite about customer wins? The fact is there is news, but unfortunately in the markets that we operate in, many of our customers do not allow us to discuss publicly the products and services they plan to bring to market, even though we have signed contracts with them. Once our customers do announce the launch of new products, and if we can talk about them publicly, I assure you that we will. We believe we have reached several key milestones in fiscal 2007, as we've pushed for the company's long-term strategic growth plans. We have integra -- we've completed integration of all four of the acquisitions that closed in 2007 and we're focused on completing the integration of the mobility solutions group in the first half of 2008.

Today's communications technologies are in constant state of evolution where ever more advanced device, chips and network platforms promise even greater speed and capacity. Yes, for the advances, it is the software that empowers the world of mobile convergence and takes next generation platforms accessible to the user. The opportunity before us now is to draw together the technologies under development across each of our business units into converged solutions the market now demands. We believe this is at the forefront of our innovation. We remain extremely positive about the long-term prospects for Smith Micro and we believe 2008 will be a very successful year for the Company.

With that, I would like to open the call to questions. Operator?

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Lauren Ye from JPMorgan.

Hi guys. I just wanted to go through PCTEL and the integration that's happened so far. Can you just walk me through what you have done in, I guess, the last couple of months with PCTEL and then also what needs to be done going forward? And I guess given your margin guidance in the second half of the year, is your margin really growing from maybe some synergies or anything out of PCTEL integration or more a revenue lift?

Okay, let me start the answer, and Andy can chime in, but where we are right now, what was formerly known as the PCTEL MSG group is now a part of Smith Micro's connectivity and security group. I'm very pleased that [Viju Yuneer] who ran the unit for PCTEL is now Vice President and general manager of the connectivity and security group. The connectivity and security group had a great year, it doubled its sales. So in recognition of that, Tom Matthews, who ran the unit last year, is now Senior Vice President of corporate strategy and development and many of you on the Street will see him from time to time at conferences et cetera. We are -- we're moving ahead nicely.

Viju's This job is not an easy one. We have staff that's part of the connectivity group in Aliso Viejo, now in Chicago and also in Hernon, outside the Washington D.C. area, as well as over in Serbia. Pulling together the team into a cohesive unit that's highly motivated, they're incredibly successful, it's a lot of work. We are working to eliminate duplications of efforts and redeploy the people to better serve our customers. We need all of the people that we have. We probably need more right now. We have a lot of business. We have business that you know about and business we haven't even announced yet. So this is a very active group, a very strong growth, look for continued growth in 2008.

Just following up with Bill's comments, notice we said the guidance that we're giving here is based on information we know at this time, and so we're just assuming that existing customers -- in the case of the PCTEL MSG group, existing customers and products and expect growth in that area, Bill had pointed out many times that one of the key elements of that acquisition is the opportunity to cross-sell products into these new customers, and also to leverage their technology to bring out new products. Again our guidance is just taking a look at what we know today, so when we look at the back end, the lift in margins, and specifically out margins in the back end of the year, is primarily driven by release of products that we right now are doing the development work for. So right now we've a tax of development expense without the revenues. The revenues come on stream in the second half and those are contracts that are already awarded. So, once again, it does not necessarily assume any new wins out of PCTEL or any of the opportunities that we do derive from the acquisition.

Okay, that's helpful. Then just on to HTC, have you guys started shipping those -- that area any new devices that's already shipping now or is that still an opportunity to come?

Well, this is opportunity that will continue to grow and we do believe -- I believe the devices are being shipped now. I would have to do more investigative look to give you more color, but that's the best I can tell you right now.

Okay. And then just Verizon, obviously, the opportunity there with real network, are you -- have you seen more clarity in terms of are you going to be helping RealNetworks with that transition and is the multimedia player actually an opportunity now? Do you just have more clarity on that?

Well, the RealNetworks we certainly can say that we're working with them, so I think it's very clear that we're working together and so that basically is more of a cohesive opportunity rather than deversive. That's certainly the case.

But your software will be on a RealNetwork player?

We are not announcing anything today and we certainly don't want to announce anything for Verizon for tomorrow, so why don't we just leave it that we are working closely with both Verizon and with RealNetworks to satisfy the needs of our largest customer, and at the end of the day that's our number one goal. As far as other multimedia applications at Verizon, your net takeaway is -- should be that we are moving forward nicely there and you should expect to hear announcements when Verizon is ready to announce them.

Okay, very good. Thanks, guys.

Our next question comes from Rich Church with Collin Stewart. Please go ahead.

Thanks. Nice job, guys. Follow up on the Verizon question, can you -- Andy, can you tell us what the percent of revenues was in the fourth quarter?

Sure, 56%.

Okay. And with regards to the three new OEM deals, are they all in the connectivity business?

We're not going to get into that level of detail, but what we will say they are significant deals for us and significant certainly means seven figure per quarter type deal.

It's straight out of the box beginning in second half?

Pretty close to that.

Okay. And the one that started shipping in the -- in the first quarter I assume is not part of those three deals that you've referred to; right?

As I've said at conferences, during the first quarter I said that we had a major device manufacturer that we have a signed contract with and we are not, at this point, allowed to disclose who they are. We are building product and we are expecting to ship.

Do you expect to have revenue from that customer in Q1; right.

Yes, I would say the answer to that is yes.

Okay, excellent. And then, Andy, could you give us the break out to get to non-GAAP just in terms of the line items, what the cost of revenue line item would be non-GAAP and selling and marketing and so forth?

Sure. Sure. For the quarter?

Yes..

All right. We have approximately -- let's go through this -- $4 million in stock comp, plus all groups, so which case $100,000 is related to cost of sales, $1.6 million sales and marketing, about $700,000 R&D, $1.6 million G&A. Then we have about $900,000 adjustments for amortization, in which case $400,000 approximately is related to COGS, $200,000 sales and marketing, about $300,000 R&D. Then finally, we have a noncash tax adjustment of about $2.3 million that applies basically to the total year.

Okay. And with regards to the outlook for Q1 on the top line, do you expect that you'll offset any sequential down tick due to seasonality with revenue from the new acquisitions, and so we should see an up tick in Q1?

Rich, we're going to stick with our guidance of $95 million to $105 million with 40% in the first half of the year. Getting more granular than that we don't think is very beneficial.

Okay. Is there -- could you give us any granularity in terms of PCTEL's contribution to '08 revenue?

We'd prefer not to.

Okay. All right. Thanks a lot, guys.

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

Hi, thanks. Three questions if I could. First, regarding your guidance, are you seeing any slowing on the consumer side -- on the consumer spend and have you embedded any impact into your guidance?

That's a great question. At our weekly executive staff meetings it's always the first question that I ask as I turn to the guy who runs sales for small business and consumer. The answer right now is we have not seen any slow down. If anything, it's running a little bit ahead of plan. But it's something that we are constantly monitoring and we are very aware of the -- the overall macro environment but we can't apply it today to us. As far as whether we factored that in to our model for 2008, I would say that it was always in the back of our mind. Clearly the consumer area has seasonality, we've talked about that in the past. First and second quarters are the slowest quarters, then third and fourth are the best quarters, but other than that's all I can say.

Another part is when you look at the products, we're fairly eccentric towards Mac. Mac products represent 60% of our total sales in that space and Mac's have been very hot, and again they look to be on a nice winning streak and that doesn't seem to be abating in 2008.

And actually you can also add to that is that some of our new graphics products are really more prosumer than consumer products and maybe that will also give us some insulation against any consumer spending problems, I don't -- that's all I can offer you.

Okay, great. Then secondly, in terms of -- where are the opportunities you're focused on in driving other contract awards that we could see potentially impacting 2008?

Well, we don't really put limits on that. That's something -- that's why you have a great sales team. We're out at all of our customer accounts, whether they are customers that Micro in '07 or customers that joined us via acquisitions, and we're aggressively talking about our portfolio of technologies and how those customers can apply those to solving problems or needs that they have. We're making good progress there and there's a lot of really keen interest and very substantive conversations and that's what -- that's what we pay our sales teams to do. So, we're all pretty -- pretty focused on growing out our business. I think the other thing to think about is I think the overall suite concept for multimedia is something for the future and we're obviously very focused on working with device manufacturers -- the guys that build the handsets -- to offer them software products that will enhance their offering. So, there's a lot of growth, there's a lot of opportunity, and my sales guys probably say they probably need a few more feet on the street to try to cover the world that we now really speak to.

And to add to Bill's comments the PCTEL MSG transaction was not a small one for us, so a pretty mature group. They had a significant pipeline already in place when we acquired them, so that also brings in some lead time reductions as far as selling time.

Okay. And in terms of your margin, because it sounds like what you're saying is you'd love to have more people. Are you managing the business to get to those margins in the back half of the year, or are you forecasting here and telegraphing that we should expect an increase in the OpEx numbers, as well, or can you just give us a sense as to how to think about that?

Well, if you're starting with the gross margins, obviously that's our view that we see today as far as product mix. And again, we're seeing more and more our preferred mode,l that very pure software model, where you're up closer to 80 points gross margin. And then, to answer your point, yes, we will had be adding, adding heads here and that's why you should assume an increase in the expense lines and so on. So as revenues grew we expect that to more than cover our operating expenses, but operating expenses are going to grow. Just as a data point, the Company's changed quite a bit. We started the year with 130 employees and now post-PCTEL acquisition we're 330. So again we're a very different company in obviously a very positive way.

Got it. Last one for me, 2007 was clearly a year of M&A activity. Do you feel like you have all the right pieces know or do you anticipate further M&A transactions in 2008? Thanks.

I'll take that one. I think the way to view M&A is that we are totally focused right now on integrating and executing our current business case. We're making great progress on the integration of -- of the PCTEL mobile solutions group, but we're really focused on closing a lot of new deals. That's really what it's got to be about. We're going to grow this business by execution and the first half of 2008 is all about execution, so we're really focused that way. Now having said that, I think I can honestly say that we probably look at a new company every week -- some are very small, some are mid size, nothing really that large -- as we build a portfolio of opportunities to look at for the future. And one of the reasons we do this is as we talk to our large carrier customers and our new device manufacturer customers and we talk strategically with them, we talk about their roadmap and we talk about our roadmap and some times they will bring something up that we didn't have on our roadmap and we either have to figure out how to build it internally or acquire it.

So Tom Matthews is out there every week talking to folks and learning about what different companies have to offer so that, should the need come that we can't build it fast enough we'll go buy it and we already have it identified and we know something about the company and we know something about their culture as to whether they would sit into the Smith Micro family. I really don't see any acquisitions at all in the first half. We are really focused on execution. I would not close the door in the back half, although I wouldn't want to encourage anybody to walk away and say, oh, they're going do a deal in the second half, because I don't know that either. We'll just leave that open.

Okay, great. Thanks, guys.

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

Yes, Andy I just have a couple of housekeeping questions. I just didn't hear it properly what you said. What did you say the consumer margins were in the quarter?

Let me look those up again for you. The typically low 70s here. Okay, consumer 73%.

Okay. And then you went through the numbers for diving up the stock-based compensation between the various line items, but then you went into some of the other adjustments, as well, and I was wondering if you can repeat those that followed after that -- after the #900,000 what they were? There was something that was $400,000 and there was $200,000. I'm not sure I heard all of it.

Sure. Sure, real quickly. Total amortization adjustment was $900,000. The way you would break up that $900,000 would be approximately $400,000 at the cost of sales line, $200,000 at the sales and marketing line, $300,000 at the R&D line, and that should get you to approximately $900,000, and the only other adjustment we had out there is our year-end tax adjustment of approximately $2.3 million.

Okay. So $400,000 in COGS, $300,000 R&D and $200,000 in sales and marketing?

Yes, as far as amortization is concerned, yes.

Okay. All right. That's all I had for now. Thank you.

Our next question comes from Kevin Dede with Morgan Joseph. Please go head.

Bill, I was wondering if you might talk to attach rates at Verizon from, say, third quarter to fourth quarter when you implement -- or when they implemented the new software policy, maybe you could give us a view as to units so we'd a better feeling for the overall acceptance of music connectivity?

I really can't to that. That's like a -- the one -- the one way I could get fired and we wouldn't have to worry what percentage of our business Verizon was, so I can't let those numbers out. Clearly there's -- there was a transition away from the music hits to software in the box, and we think that the -- while there will be kits in 2008, the numbers will be much smaller and we think that there will be more emphasis on trying to reach a much larger market and that's really all I think I can say. Those are really questions you need to put to Verizon and I'm not sure they'd answer.

Okay. Is there anything else you can talk to maybe at some of your other customers that would leave us feeling that the new model is somehow reaching more customers?

Well, okay, there's some things I think are just straightforward. Clearly, if 100% of the consumers that buy a music-capable phone, get the software, have access to the software via download, whatever method is being used by the carrier, clearly that's going to be a higher percentage that might be music than those that would pay an extra, what was it, $30 for a music kit. So, I think from the standpoint of reaching a broader base this is a better model, with the one negative, and was the negative what we saw in the fourth quarter of 2007. That was we took a hit on the revenue line, but as Andy pointed out, I think quite clearly, it actually helped us on the margin line and things looked better, so --

So you're -- I guess what you're saying is that you think there might be some price sensitivity, given the lower price, more people opt in for the additional download?

Something you should consider is if you look at the carriers and their strategy, across the board all different products, they're looking at how do we get to that next level of consumer from the early adopter and on the connectivity side you're seeing different pricing models. On the music side, again, they're trying to get the software in everyone's hands so they have -- you're making it as easy as possible for them to take service. So of course, we expect to see more and more of that across all of our customers. It's all about adding value-added services for their customers, that's exactly how the they can grow their revenues.

Well, can we translate that over to the initial sales of Review? What interest are seeing and which avenues are the most productive for you?

Well, I think -- the way too look at it is clearly the sale of product over the web is the -- reaches the largest possible audience, so on line sales and software in general tend to be maybe a little bit better than -- than trying to get folks to [trumble] into a store to buy a fiscal product, so I guess that's how I would view that.

Okay. You mentioned your roadmap, Bill, I was wondering if you might be able to comment on it in a little more detail? Granted, in assembling these acquisitions you've got a lot of technology I'm curious on what pieces you think you can bundle together, what markets you think you can address, and how big they might be. It is kind of an open ended question, but if you could just give me the things that you think are the most interesting.

Look, I think convergence is everything and I think when you -- we've talked abo -- I've talked about this in the past whether it's via conferences or whatever, when you look at the mobile devices like autos, they all now have -- many have up to 12, 14 different processors that are functioning within them driving all sorts of different things in the auto. So, the ability to reach out to those devices, to update or add features to them over the air, to provide connectivity, to provide multimedia capabilities to drive the command consoles that are in the cars, all become things that Smith Micro can do, and there's very few, if anybody else, that's got -- can say that. We have all of the technology under our roof and our engineers are busy working to develop applications that could speak to those kinds of things. That's a good example because it is a real world ones and you can see it coming and it's, I think, maybe a good place to start. There's a lot more but that's place to hang your hat.

Fair enough. Last question for me. One example on the -- on the connectivity side was the number of facilities that your operating across the country. I'm wondering if you are going to take a step back and look at how many facilities you're looking at around the world and making a move to perhaps consolidate and work on reducing overall OpEx?

Well, we actually have and I think that's a good point. This quarter we closed a small facility we were operate in Kansas City. We are looking at a very small facility in the Silicon Valley, but that's -- so it's something we're constantly looking at. We're going to focus in on expense where we can, but I think that the point that I don't want to back away from is we have a very strong growing business. It wasn't that many years ago where we did $11 million in the year and then that grew to low 20s and to the 30 and to the 50s and now it has grown to the 70s and just we told you it will grow between $95 million and $105 million.

That's what I call a growth story, and you don't do that without having a highly-motivated team of people and it takes a lot of people, because as you focusing in on larger customers, on more diverse customers it takes a lot of activity. Our people are very important. They all go home every night. That's our IP walking out the door and we all can say a little prayer they walk back in the next day. So in the software business it's very important that we continue to motivate, to compensate and to grow our engineering sales and marketing teams.

And Kevin, what might help a little bit, all of our acquisitions were either asset purchases or de facto asset purchases, so we were very specific about what we have brought over, rather than, let's say, buying full entity's that had nonproducing assets that we had to basically address. So, we did really work hard from the acquisition perspective as far as let's bring them in correctly, and when you look at 2007 that's the way we were able to -- actually to maintain a 30 point op margin while integrating, we were very, very selective. Thank you, gentlemen for taking my question and keep up the hard work.

Thanks.

Our next question comes from Rich Valera with Needham & Company. Please go ahead.

Thank you. Can you guys hear me okay?

Yes.

Andy, I was wondering if you can gif us the baseline OpEx number on a non-GAAP basis for the first quarter. Should we be looking to $3.5 million or so up from the fourth quarter on a non-GAAP basis? Is that the way to look at it?

You know what, we're going to just stick with the first half a year guidance of the 17% to 20% on the op margin side and that's a close enough picture there.

Okay. And just to make sure I heard you right, did you say the it was 20% non-GAAP tax rate?

That's correct. I thought it was (inaudible).

Okay. Okay, that's it for me. Thank you.

Our next question comes from Chad Bennet of Northland Securities. Please go ahead.

Yes, just a couple questions. First of all, I think on the multimedia side what everybody's trying to figure out is business has underwent a pretty dramatic transition and we're trying to figure out what does this business look like when we're exiting the year next year because -- and I know the wireless industry constantly evolves and there's a lot of moving parts here -- but do we feel like -- first of all, do we feel like generally from a revenue standpoint we've bottomed here and this is a baseline to grow from? And I know you don't want to touch on it, but are we still selling software in boxes for music downloads this time next year and is that a growing business looking out?

Okay, let me try to take this. I've already made a public comment, I made it at the Roth conference a few weeks ago. I said that on a macro level for the multimedia business that it wouldn't surprise me to see by the end of 2008 that multimedia had sales equal to or better than 2007, so that should frame something for you. Secondarily, we have said consistently, and I'm not back away from that at all, that there will be a component of multimedia, music, whatever kind of flavor of multimedia kit that will be created. It just may not be created by the customer that you're used to -- for the customer that you're used to see it coming from, at least not at the levels that you are used to seeing it coming from. So yes, there'll be kits and yes, there's going to be some change in the mix and you saw that in fourth quarter. But at the end of the day we have a strong and vibrant multimedia business that's going to do well in 2009, and it's just going through some changes.

Okay. So, we believe that business will grow year over year in '08 from '07?

Yes, we do, and probably more important is you'll see a more significant growth in the contribution from the business. Again certainly, even as we looked at a pretty significant transition Q3 to Q4 we saw gross margins go up 10%, so we actually showed growth in that period while we showed revenues flat. So when you look at 2008, there will be a revenue growth from our perspective, and that's built into our guidance, but more importantly you're going to see better contribution. So the contribution will grow much more than the revenue.

Right. Okay. And then -- not to belabor the guidance too much, but the range you gave, $95 million to $105 million -- and help me with the math if I'm wrong on the acquisitions -- but I think you have talked about PCTEL roughly being a $12 million, maybe on the high end $13 million, $14 million business next year. And I -- e frontier's a little bit more foggy for me, but I thought it was $7 million, maybe $8 million annual revenue run rate business. So if we add those up, just in aggregate we're at about $19 million, $20 million. If we just add that on to your $73 million exit this year, you were kind of at the bottom of your range. So, we're going to see -- obviously, I don't think you think about this business as organic versus inorganic because everything's integrated and all in one right now, but -- so is that the way, first of all, to look at guidance next year and maybe your conservative outlook there, or am I missing something?

Well, Chad, the key is, as we've said a few times here and probably will -- probably say it a few more times, though -- is we're going with information we know today. We're going forward with contracts that are in hand, that we're not making any type of play that we're going to speculate the win considerably more and more contracts. So we're coming at it with this is information we know today, these are the contracts in hand today, and here's revenue guidance based on that knowledge.

Okay. But I'm not missing anything in terms of my rudimentary sum of the parts, am I?

No. No, I don't think you are.

And there's to accounting issues or delayed revenue RAC on the PCTEL side? You should be able to recognize everything out there, Andy?

Well, as I pointed out in giving the guidance, that the guidance does include revenue recognition across all product groups, including acquisitions. And in acquisition integration items, as we have said, whenever we integrate a company we're busy working on the mechanics, we're busy getting to meet the existing customers, and all that's basically, I'm going call it stationary work. In other words, it's not like you have that business integrated and you're pushing it forward, so there is a little stall, let say, on new customer development that naturally occurs. We've seen it in other acquisitions. So all that's built boo the guidance.

Okay. But it is nothing accounting related; right?

No, I mean --

Okay.

But the revenue recognition is taken into account when we give our guidance.

Sure. Okay, and then just one quick one for you, Andy. Any other 10% plus customers outside of Verizon in the quarter?

None in this quarter.

Okay, thanks, guys.

(OPERATOR INSTRUCTIONS) At this time we have concluded our question-and-answer session. I'd like to turn the call back over to management for any concluding remarks they may have.

Well, I want to thank you for going us today on the call. If you have any further question, please feel free to contact Smith Micro or the MKR Group. Thank you.

Ladies and gentlemen, this does conclude the Smith Micro fiscal fourth quarter and year-end conference call. You may now disconnect and thank you for using ACT conferencing.