Smith Micro Software Inc (SMSI) 2008 Q2 法說會逐字稿

Welcome to the Smith Micro Software fiscal second quarter 2008 conference call. At this time all participants are in a listen only mode. Later we'll conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) I'd now like to turn the conference over to Mr. Charles Messman from MKR Group. Please go ahead, sir.

Good afternoon and thank you for joining us today to discuss Smith Micro Software's financial results for its fiscal 2008 second quarter, which ended June 30, 2008.

By now you should have received a copy of the press release discussing our second quarter results. If you do not have a copy and would like one, it is available at www.SmithMicro.com or by calling 949-362-5800 and we will fax or e-mail you one immediately.

With me today on the call are Bill Smith, Chairman, President and Chief Executive Officer, Andy Schmidt, Vice President and Chief Financial Officer and Robert Elliott, Vice President of Marketing.

Before we begin the call I want to caution that on this call the Company may make forward-looking statements that involve risks and uncertainties including without limitation forward-looking statements relating to the Company's net revenue guidance for fiscal 2008, our financial prospects and other projections of our performance, the Company's ability to increase its business, and the anticipated timing and financial performance of our new products and potential acquisitions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in demand for our products from our customers and their end-users, new and changing technologies, customer's acceptance of those technologies, new and continued adverse economic conditions, and the Company's ability to compete effectively with other software companies. These and other factors discussed in the Company's filings with the Securities and Exchange Commission, including filings on Form 10-K and 10-Q could cause actual results to differ materially from those expressed or implied in any forward-looking statements.

The forward-looking statements contained in this conference call are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this call and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this call.

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

Thanks, Charles. Good afternoon, everyone and thank you for joining us. Today we announced our second quarter 2008 results and I'm very pleased to announce that we had another solid quarter with record financial results. For the second quarter, revenue performance was up 53% year over year coming in at $23.5 million. This is our sixth quarter in a row now of delivering consecutive record growth, which I think is very indicative of the strength of our business case.

From a non-GAAP or pro forma earnings standpoint we achieved a very respectable result at $3.6 million or $0.12 per share. As we stated on the last conference call the first half of 2008 has been about laying the foundation for long-term financial growth. We believe we have accomplished this goal and have achieved several internal milestones by investing significant resources into the development of new products that our customers plan to launch in the second half of this year.

In parallel, we are continuing our integrations of new technologies, new customers and employees. Most importantly, we are delivering strong financial results.

For the first six months ended June 30th, 2008, we saw our revenues increase to a record $45.3 million, up approximately 37% over last year. And very significantly we experienced a significant increase in our overall gross profit. Customer concentration continues to decline with our largest customer representing only a 39.6% share. International sales continues to grow and now exceeds 10% of our total sales.

As we look to the overall market, we can start to say that there are strong market drivers and indicators within the broadband connectivity space that are extremely exciting to us and which I will elaborate on this and others later in the call.

But now let me 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 provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. Non-GAAP results discussed in this call 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 that I refer to in my prepared remarks for both 2008 and 2007 are non-GAAP amounts.

Our earnings release which will be furnished to the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of the difference between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measurements. The earnings release can also be found in the investor relations section of our web site at www.SmithMicro.com.

All right, let's discuss our detailed second quarter results. For our second quarter we posted revenues of $23.5 million and earnings of $0.12 per diluted share. Total revenues of $23.5 million increased from revenues of $15.4 million for the second quarter of 2007, an increase of 53%. International revenue was approximately $2.7 million this quarter across all business groups.

Connectivity and security posted another record quarter with revenues at $12.9 million for the quarter as compared to $5.9 million last year. Consumer posted a strong quarter of $6.2 million as compared to $2.3 million last year. Second quarter revenue for multimedia was $3.1 million, down from $5.8 million in Q2 of 2007 due to a shift in product mix, specifically a shift from music kits to higher margin software downloads and CDs. Device solutions revenue was approximately $850,000 for the quarter as compared to approximately $1 million last year; however, device solutions did show good quarter over quarter revenue growth sequentially up over 100%.

Finally, we reported approximately $400,000 of other revenue which compares with approximately $330,000 for second quarter of 2007. Total deferred revenue at June 30, 2008 was approximately $3.1 million.

Switching to gross profit. Non-GAAP gross margin dollars of $19 million increased $7.1 million or approximately 59% from the same period last year. Of key significance, while our revenue increased 53% year-over-year our gross margin dollars increased 59% for the same period. As follows non-GAAP gross margin as a percentage of revenue was approximately 81% for Q2 2008 compared to 77.6% for Q2 of 2007.

Non-GAAP gross margin by business unit were as follows. Connectivity and security, 91%; consumer, 74%; multimedia, 66%. For device solutions and other revenue gross margin dollars totaled approximately $600,000. As we've noted before our margins are driven strictly by product mix.

Okay, switching to operating expenses. Non-GAAP operating expenses for the second quarter of 2008 increased to $14.6 million or an increase of approximately $400,000 from Q1 of 2008. The increase is as expected and is attributed to additional engineering resources deployed to meet new customer product delivery scheduled for the second half of the year.

Non-GAAP operating margin for the current period was approximately 18.7% and is within our previously stated guidance range of 17% to 20% and is up from Q1 2008 operating margin of 16.6%. Current period operating margin compares to approximately 28.6% operating margin for Q2 of 2007. Non-GAAP net income for the third quarter was $3.6 million or $0.12 per diluted share, as compared to $5.1 million or $0.16 last year.

From a balance sheet perspective our cash position closed at $26.2 million at June 30, 2008, a decrease of approximately $61.4 million from the beginning of the year and consistent with our cash position at March 31, 2008. The decrease from the beginning of the year is attributed the PCTEL MSG Group acquisition on January 4th, 2008.

Looking at accounts receivable at June 30th, 2008. Accounts receivable increased from $19.7 million from $13.2 million at the beginning of the year driven by increased sales, the timing of new sales, which is typically at the end of the quarter and newly acquired customer accounts associated with the PCTEL MSG Group acquisition.

Net working capital at the end of the quarter was $38.3 million. Cash generated from operations for the first half of the year was approximately $600,000 and was affected by an increase in accounts receivable, which again is simply timing related. Taking out the accounts receivable timing effect, we generated approximately $7.5 million in cash in the first half of 2008.

Primary uses of cash included the acquisition of PCTEL's MSG group and related legal and banking fees for approximately $60.3 million and capital expenditures totaled approximately $1.2 million.

Looking forward to the balance of 2008, we are on track with our previously stated guidance of revenues between $95 million and $105 million for the year. We expect to post non-GAAP gross margins between 78% and 80%. In terms of non-GAAP operating margin, we expect a consistent improvement from our first half year operating margin of 17.7%.

As our revenues increase over the next two quarters, operating margin will also increase, but in an incremental manner. We expect operating margins to improve to the low 20% range in Q3 and when we look at Q4 operating margin will vary depending upon our need to invest in engineering resources to support possible new customer wins which will drive 2009 revenue.

However, while we expect to have significant sales wins in Q3 and Q4 we feel at this time that we can run the business at a mid-20% operating margin range in Q4 while investing in engineering resources support 2009 customer deployments.

Finally, we expect our 2008 cash based tax expense to be 20% of non-GAAP net income. In terms of housekeeping, we expect to file our current reporting period 10-Q on time. At this point, I'll turn the call back to Bill.

Thanks, Andy. At the center of the Company's growth performance is our connection management business. I am extremely pleased with the connectivity and security business groups' tremendous growth performance which was up over 119% year-over-year to $12.9 million. This group is the largest contributor to our revenue as we grew 18% from the $10.9 million we posted in Q1 of this year. We expect this business segment to continue to be a strong growth driver for the Company during the remainder of the year as the overall wireless data market continues its rapid adoption rate throughout the world.

We are excited about this market segments continued prospects in 2008 and beyond as we see our strong penetration of wireless carrier customers offer new and innovative pricing models in the US to attract an ever expanding appetite for wireless data.

A recent industry report from AVI Research highlighted USB modem adoption for cellular modems was about four times greater than forecasted. Internal modem shipments for computing devices, such as notebooks grew by 120%. Today, both of these market segments are projected to ship about a little bit over 27 million units worldwide and are expected to exceed shipments of 100 million for USB modems and 80 million for internal modems by 2013. What this says is that we are still just entering a high-growth market where we are the leading supplier of connection management solutions worldwide.

While we are also in the very early stages of adoption for true enterprise connectivity, we are beginning to broaden our enterprise delivery channel through our most recent agreement with British Telecom's TTI Net for the European market. This enterprise market is a core business and we are investing to support both our customers and our future customers as we move through 2008.

Turning to our consumer business segment, I am extremely pleased that again we saw very strong performance. This unit achieved the highest revenue in its history coming in at $6.2 million, which represents 175% growth rate over 2007 second quarter. I think it is very noteworthy that we achieved this growth during a quarter that seasonally shows slower buying trends.

During the first half of the year we saw our top titles, StuffIt, Deluxe, Poser 7 and VMWare Fusion ship over 400,000 copies. While many in the news are reporting a slowdown in the US economy it has not affected our business model and we hope that this trend continues. And furthermore we have no indication whatsoever of a reversal of this trend.

Now, looking at our multimedia business segment our performance was in line with our expectations as revenues came in at $3.1 million. We continue to see changes in how our customers deliver their products moving towards downloadable software usually as a link on a CD or a CD with a link and a new style retail kit. This results in lower revenue per unit, but a higher margin per unit.

We were also pleased to be part of Sprint's launch of their Instinct mobile phone. This was our first carrier win for our new PC Multimedia Manager for a mobile phone and this new product borrows a lot of design technology from our review of PC Companion products.

Looking at our device solutions group we continue to make good progress with support for mobile our device management suite for HTC and Huawei. Already this year China Mobile has shipped four new HTC Smart Phones utilizing our technology and Huawei continues to deploy two to three device management solutions per quarter for carriers in Asia, Africa, Europe and the Middle east, the most recent being in the Ukraine and Zambia.

As announced earlier this year by our customer the second quarter we shipped to British Telecom their first voice call continuity product that allows their subscribers using a dual mode handset to seamlessly and automatically switch between wireless LAN and wi-fi networks.

In conclusion, we are very pleased with the progress we've made during the first half of 2008 as we continue to position the Company with a very strong foundation for long-term sustainable growth. During the first half we have worked very close with our customers on several new product launches which will hit in the second half 2008. We made significant progress on the integration of our recent acquisitions and most importantly along the way we achieved record revenue growth for the sixth quarter in a row.

We are working very hard to build upon our leadership as the premier wireless software provider in the world. Our strategy for growth could not be more relevant in a world where mobile devices and mobile laptops require broadband wireless connection and as a result our wireless products are becoming key assets in nearly every company today.

We remain confident in the financial guidance we provided earlier this year to the investment community and reiterate our top line revenue guidance of $95 million to $105 million.

With that said, I'd like to turn the call -- open the call for questions. Operator?

Thank you. Ladies and gentlemen, at this time we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Maynard Um from UBS. Please go ahead.

Hi. Thanks. Can you just give us the GAAP pro forma reconciliation sales and marketing, R&D, G&A and then also the pro forma tax rate? And I have a couple other questions.

Sure. First, pretty noteworthy. Our stock comp has come down year-over-year from $4 million to $3.1 million. When we look at the breakout for the current quarter the totals in the cost of sales line stock comp was $130,000, in the sales and marketing $750,000, R&D $920,000, G&A $1.3 million.

Okay and the pro forma tax?

Pro forma tax is 20%. And when we go to amortization - amortization for cost of sales is approximately $875,000, for selling and marketing $560,000 and R&D about $300,000.

Great. Okay. And then just on the operating margin guidance if you can clarify. Did you say that low 20 percentages in Q3 and mid-20s for Q4?

Right. The caveat in Q4 is we feel that we can run Q4 at least in the mid-20s. What we're seeing in our sales pipeline right now is we have so many opportunities out there that if we land these opportunities earlier rather than later we'll put engineering resources on it. That would keep us in the mid-20s or else we could run it higher. So, if you see mid-20s I'd say that's a great sign of success.

Okay. Is that different from the guidance you gave earlier in the year or has that changed?

Earlier in the year we said we'd be getting our business back up to our typical run rate of right around 30%. We still expect to do so, but right now as Bill had commented on when we look at the opportunity out there in connectivity it's been tremendous and so right now is the time to actually land these deals and snap them up. Again, usually we pre-load the expenses, if you will, in engineering a couple quarters before our customer deploys our particular product. So, from that perspective, again, we feel regardless that we'd like to run the business at minimum mid-20s, but the run of that 30% or higher right now we might actually be letting some opportunities go.

Okay. I guess as you balance that how much incremental revenue do you think you can actually drive through that investment as you look into 2009 and I guess when do we get to that point of leverage in the model?

We'll talk more in Q4 obviously on 2009 guidance and so on and so forth. Odds are we'll stay consistent with giving you top line guidance in 2009 and forward.

Okay. And the last question for me is when you originally gave your annual guidance you mentioned that it only included contracted deals. Can you give us any color and the status of the pipeline deals and the potential of getting those done into the back half of this year. Thanks.

I'll answer that. Everything is on track. That's one of the reasons we feel very confident and reiterating guidance that we've already given. And you will learn about these three customers in due courses and as they allow us to tell you about them.

The key, Maynard, again is these are signed deal, so they're completed deals. As Bill just noted, they are deploying on time. So, everything is very consistent.

Thank you. Our next question comes from the line of Chad Bennett from Northland Securities. Please go ahead.

A quick question for Andy. Were there any other 10% customers during the quarter, Andy?

No, no other 10% customers, but as Bill commented on a noteworthy piece is International for the first time is over 10%, which is a nice milestone for the Company.

Right. Should we read -- not that it's an enormous figure, but it points up substantially -- should we read the international piece? I guess you gave the device solutions number, which I assume is mainly international, but you're seeing some traction on the other sides of your business?

Sure. And just to give you some more color to that. Device solutions was about 40% of the international number. Consumer was about 34% and connectivity about 20%.

Okay. That's good color. And then can you give us an update on the three OEM deals that are expected to ramp in the second half that are in your guidance? I know we were shipping on one of them in limited quantities in Q1. I guess, first of all, did that one ramp in Q2 and have we shipped on the other two or any of the other two in Q2? And then also how much impact in the multimedia segment did we see from the Sprint Instinct launch?

All right. Let's try to take all those in order. The three deals. The first one we saw some revenue in Q1. We saw a small amount of revenue, I think, in Q2, but it's insignificant. We hope to see it ramp up in the back half of the year.

As far as the others, as we've said one is a PC manufacturer. The other is a carrier. Both are on target for launch and that's pretty much everything I can tell you about them for right now until it's in public hands.

Let's see. The last part of your question was on the Instinct. The Instinct showed some good growth. Sprint now represents a more meaningful share of our overall multimedia revenue and we expect that to continue to grow.

I guess while I'm kind of talking about multimedia I might as well as add a little color to that space as well. We believe that we have some more customer wins in the queue and we will see how those work out, but we do believe that multimedia sales going forward -- once we get through this space that we went through on the Verizon side we'll see it go back up and we're looking forward to some strength there. So, we still feel very positive about the multimedia business overall.

Okay. I guess a follow up, then. Since the time line hasn't changed and I know you guys don't like to get into quarterly stuff, but should we assume that maybe two out of the three or three out of three OEM deals ramped in the, I guess, in the immediate future? I guess I'm trying to get a sense for linearity in the back half of the year and what we should expect from these OEM deals more near-term.

I kind of know the consensus number is right now and we're comfortable with that and that would put us pretty much right in the center of our overall guidance. We'll just see how that all works out, but I think the models that are out there are fine from a revenue standpoint.

Okay. Fair enough. I guess the only other question I would have is clearly the connectivity piece is coming along great and you guys are executing and it seems like we're still early on the penetration side if you listen to Verizon in their call a couple weeks ago. What are you guys seeing in terms of pricing in that space and also the shift from PC cards to more embedded modules and kind of how you see that playing out over the next maybe six to nine months if you can phrase it that way.

Well, our pricing is inconsistent. So, let's just say that, but then let's kind of zero in on the other part of your question. We're seeing across the board growth in the connectivity space. None of our carriers are not showing fairly strong growth. So, that's all very, very positive. We have more carriers coming on line in the connectivity space. There are other plays, obviously, on the embedded side with the [Go-V] as well as the Ericsson solution for the PC manufacturers. I think I quoted some numbers from AVI where they say that they see very strong growth continuing for both the USB based modems as well as the embedded. They kind of gave a nod to USB over embedded. That's a subject reasonable people could argue about, but in either case it's strong numbers.

I mean, they were looking at 100 million units for the USB modems and 80 million units for the embedded modems by 2013. That's up from a total of about, I think it's 27 million right now. So, this is just enormous growth going forward and we're going to see some changes in the mix of our customers.

We're also going to see changes with the advent of 4G, the first rollout of 4G you'll see by the end of this year here in North America with the launch of WiMax. We certainly plan on being a very significant participant in that effort and I also think you'll see some other large names that are now heavily centered in the cable business enter the wireless space via the rollout of WiMax.

So, I think there's a lot of reason to be very excited about what's happening in wireless data going forward. Clearly, we're seeing traction offshore now and we're starting to get a little bit more. Clearly, 10% is step one. Now, we'll try to grow it some more. I think overall everything looks very, very rosy.

Okay. Great. Just one quick question regarding Dolby and Ericsson. Competitors say that you guys are working with Dolby and Ericsson and probably have been for some time and there's no threat that they go up the stack into your space?

You should guess that we're working with both firms. They are the leader in the space and we don't plan on [seating] that leadership role to anybody in the near future or for that matter any time.

Okay. Great. Thanks, guys.

Thank you. Our next question comes from the line of Lauren Ye from JP Morgan Chase. Please go ahead.

Hi, guys. I just wanted to dig into the pipeline a little more on the potential wins in the second half. Can you talk about specifically where those deals are coming from and what area they're from and then also are they international or domestic? Just more color around that.

Actually, I've kind of talked about this, so I don't have any problem. One is a PC manufacturer. The second is a carrier. So, it's American based. And the third is a device manufacturer.

Okay. So, these are the ones that you've talked about previously then? Is there anything else in the pipeline that maybe we've not heard of?

I've got to keep some secrets, Lauren.

Okay, guys. Can you just update us on the Verizon and the multimedia player? Has there any progress or new things set up on that front?

We continue to work with them on the multimedia front. Obviously, as was announced it was a deal with Real Networks. We're working closely with them on their music offering as well. We are building music kits for them and they'll just go forward in the multimedia space at Verizon overall.

Okay. And then just some details on your British Telecom relationship. Was this something that you customized for them because they asked for it, or are you actively selling the dual modem voice connectivity product maybe to your other current customers?

You got that mixed up. The dual mode was Brazil Telecom.

Oh, Brazil, yes.

Okay. Is that where your question is?

Yeah, the Brazil. I just wanted to see if you're selling or trying to sell this into other customers as well.

Oh, absolutely. This just happens to be one of the first to deploy. It's still, I would consider, early stage. I might sort of categorize it more as somewhat of a trial. We feel very positive about it. Brazil Telecom feels positive about it and we're happy to have them.

Okay. This area, I guess the dual mode voice connectivity. Is this different gross margins, or is it pretty similar to the normal connectivity margins?

Very similar.

Okay. Great. Those are all my questions. Thanks.

Thank you. Our next question comes from the line of Rich Valera from Needham & Company. Please go ahead.

Thanks. Good evening, gentlemen. Andy, I just missed your breakout of amortization by line item. Could you quickly repeat that?

Sure. So, you heard the stock comp okay, right?

Yeah.

The amortization cost of sales line $875,000 approximately. Selling and marketing approximately $560,000 and Research and Development right around $300,000.

Great. And then just wanted to address the Op margins in 4Q, the sort of more conservative Op margins. Just wanted to be clear that that's purely a function of increased spending. Is there anything else going on there like a change in mix that would change the gross margin or is it purely a function of higher OpEx to go after some opportunities you see in the first half of '09?

Sure. Gross margin is going to be right in that 78% to 80% range. There's no change there. No change in pricing, nothing at that level. You're going to see everything probably on the R&D line. Case in point, we're running at about 380 full-time equivalents right now. The way we can move up and down and we can manage that is we make effective use of engineering contractors in areas such as QA. In other words, not necessarily the key code crunching aspect, although perhaps we do that as well.

The point being is we can run anywhere from 40, 50, 60 contractors, turn them on and off. That's where, again, we have the lever if we get some of these other wins in line, which again as Bill likes to point out now, we are the leader in the space. People come to us, as much as we go sell. At that point then we turn the contractors on full blast and we get products out.

As we're going through all this growth phase we're going through a rationalization process of how many full-time people do we want on board versus the balance of contractors because it is quite a growth spurt as you can see in this area. That's why we have a good lever we can pull and we can run at mid-20s or we can run it higher. Again, the key is a very positive story which is the opportunity is either very large opportunities that are very impressive.

Great. And just to clarify, it sounds like the bulk of that activity that you're pursuing is in the connectivity area; is that correct?

There's a mix. I would say that it probably tilts more towards connectivity, but you'll find some healthy deals above the multimedia as well as the device solution side.

And just one final one. You kind of alluded to this in your prepared remarks, but at one point, Bill, I think you thought multimedia might be able to be sort of flattish year over year and clearly it would look like with the first half starts that that's not likely. Is there any kind of way you could frame what you think about the sort of more normalized run rate for multimedia as things get back to a more normal level?

Let me get some of the newer deals that we have in the multimedia space officially closed in shipping and then I might have a better clarity as to how to answer your question.

Okay. That's helpful. Thanks, Bill.

Thank you. Our next question comes from the line of Eric Kainer from Thinkpanmure. Please go ahead.

Thank you very much for taking my call. First question is about the QuickLink IMS product. Can you tell us where we are as far as trials and then volume deployments there?

Sure. First off, Eric, welcome to the coverage area.

Thank you.

Actually, the Brazil Telecom fixed mobile convergence application is part of that IMS deployment. We're really focused in two subject areas; one being voice call continuity and the second being instant messaging. We will expand that application area as it's driven by our customer.

We have a number of deals we are working on. The Brazil Telecom is one of the first to actually be deployed and we're very pleased about it. It does have somewhat of a global look. You'll see deals all around the globe now. We still -- I think we gave guidance earlier in the year. We see IMS as a futures play and I think I'll stick to that. As we're able to book some revenues and grow the presence we'll tell you about it.

Okay. No view as far as how many trials there are or indeed whether that's a product that winds up going through kind of the standard lab trials, field trials and then deployments or anything along those lines?

When we talk about them they're in public hands, so you would actually have live users using them, so I would consider it more a field trial to early deployment stage.

Okay. Fair enough. On the connectivity side could you -- I don't know if you have this available, but could you talk to us about how many connectivity customers you have and if you aggregate those subscribers how many subscribers do those carriers have and how many of those wind up -- how many mobile data customers do they have?

We can't actually, obviously, give out the carrier's numbers, but Robert, maybe you can give something?

This is Robert. We have roughly 13 active carrier customers today shipping data connectivity. And so, some of those are quite large customers, such as Verizon and AT&T here in the United States as well as some customers outside the United States. So, their penetration rates on data connectivity and shipments are going to be all over the board, but I think as Bill alluded they all are on a growth trend in this area.

We're seeing penetration of wireless growth just absolutely -- wireless data explode. That's one of the things that I'm very optimistic about. Good luck and I'll look forward to staying tuned.

Thank you.

Thank you. Our next question comes from the line of Kevin Dede from Morgan Joseph. Please go ahead.

Good afternoon, guys. Congrats on a nice job. Andy, can you just talk a little bit more about the gross margin from a mix perspective? You did really nice in the first half at 81% or a little over on a non-GAAP basis, but your guidance seems to imply that there's a mix shift there. Do you expect it to trend a little lower in the second half?

Sure. Again, all of our products right now are a typical software mix where you're seeing primarily sales that are either downloads or what have you or CD products. For whatever reason in the marketing world, there's always room for kits. We still sell kits to Verizon supporting Real Network's products and we have other opportunities out there, other customers that are interested in kits.

So, the range basically is a bit of a hedge towards any of those particular kit products can actually gain momentum very quickly. They actually are a great accessory for our customers. So, that's why we give the range of 78% to 80%. As you well pointed out, we're running at 81%. It's quite as easy to run that high as well.

Oh, okay. Good enough. Bill, on the consumer side, you mentioned VMWare, Poser and compression software. Is there any one of those three that was especially strong in June?

In June? I don't know about June. I can talk the quarter.

Yeah, well, obviously the quarter.

I would say it's pretty well dispersed evenly among all three.

Okay. And on the Real Network side do you have an indication on how successful -- I mean, as much as you can talk about it -- Verizon has been with that application vis-a-vis either standard V CAST music?

I don't think there's anything I'm allowed to say, so I think I got to pass -- I got to [dump] that question, sorry.

Okay. Fair enough. That's it for me. Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS) I'm showing that we have no questions at this time. Management, please continue with any closing remarks.

We want to thank everyone for calling in today and if you have any questions, please feel free to call Smith Micro or myself, Charles Messman. Thank you again.

Ladies and gentleman, that does conclude our conference for today. Thank you for your participation. You may now disconnect.