Smith Micro Software Inc (SMSI) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro Software fourth quarter and year-end conference call. (Operator Instructions). This conference call is being recorded today, Thursday, March 5th of 2009. I would now like to turn the conference over to Charles Messman with MKR Group. Please go ahead, sir.

Good afternoon. Thank you for joining us today to discuss Smith Micro Software's financial results for its fourth quarter and fiscal 2008 year ended which ended on December 31, 2008. By now, you should have received a copy of the press release discussing our fourth 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 on today's call are Bill Smith, Chairman, President, and Chief Executive Officer, and Andy Schmidt, Vice President and Chief Financial Officer.

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 2009, our financial prospects and other projections of 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 technology, customers' acceptance of those technologies, new and continuing 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 its filings on Form 10-K and 10-Q, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. 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 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 release.

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

Thanks, Charles. Good afternoon to everyone, and thank you for joining us today. I am pleased to announce our fourth consecutive year of record revenue growth and strong earnings for fiscal year 2008. During the year, we achieved several key milestones as we grew our business on a tactical level and strengthened our overall strategic business model. Most importantly, we continued to expand our leadership as the dominant software provider in the Mobility Connectivity space.

Key accomplishments for the year included introducing new products for 4G networks and adding two new leading WiMAX customers, Clearwire and Motorola. We also expanded our customer base into the PC OEM market, with the signing of Dell, one of the largest computer manufacturers in the world. Our strong results are a reflection of the overall strength of the Company's Connectivity and Security solutions, as we expand our market leadership as the clear, dominant player within the mobility solutions market today.

Looking at our results for fiscal year 2008, we grew revenues to a record $98.4 million, a 34% increase over the $73.4 million we generated in 2007. Our fourth quarter '08 revenues increased 32.4%, to $26.5 million from $20 million in Q4 '07. From a non-GAAP or pro forma standpoint, our fourth quarter earnings grew to $0.28 per diluted share, up from a strong $0.25 per diluted share last year.

During fiscal 2008, we remained very focused on building our product portfolio for the future. We completed the acquisition of PCTEL's mobility software business, which was our largest competitor in the Connectivity market and integrated their technologies into Smith Micro's QuickLink family of Connectivity and Security products. We have created the best mobility solutions suite in the marketplace today.

While we expect our business will surely face challenges from the economic environment, we believe we are in a very strong position to continue to succeed. We enter 2009 with a strong balance sheet and a business model that generates significant free cash flow. Later in the call, I'll discuss in detail our business opportunities and our overall market outlook. But now, I'd like to turn the call over to Andy Schmidt, our CFO, to review our financial results in greater detail. Andy?

Thank you, Bill. Okay. 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. The 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 differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The Earnings Release can also be found in the Investor Relations section of our website at smithmicro.com.

Alright, let's discuss our detailed fourth quarter results. For our fourth quarter, we posted revenues of $26.5 million and earnings of $0.28 per diluted share. Total revenues of $26.5 million increased from revenues of $20 million in fourth quarter of 2007, an increase of 32%. International revenue was approximately $2.85 million this quarter across all business groups.

Connectivity and Security posted another record quarter with revenues of $18.1 million, as compared to $9.5 million last year. An increase of 90%. Consumer posted a strong quarter of $5.8 million, as compared to $5.6 million last year. An increase of 4%. Fourth quarter revenue from Multimedia was $1.6 million, down from $4.2 million in Q4 of 2007, due to a shift in product mix, specifically a shift from music kits to software downloads and CDs. Device Solutions' revenue was approximately $540,000 for the quarter, as compared to approximately $346,000 last year. Finally, we reported approximately $319,000 of other revenue, which compares with approximately $269,000 for fourth quarter of 2007. Total deferred revenue at December 31, 2008 was approximately $923,000, which is the low point for a year as we have large annual maintenance billings of approximately $2.7 million that were invoiced in January of 2009.

Switching to gross profit. Non-GAAP gross margin dollars of $23.2 million increased $7.4 million, or approximately 46% from the same period last year. Of key significance, while our revenue increased 32% year-over-year, our gross margin dollars increased 46% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 87.8% for Q4 of 2008, compared to 79.5% for Q4 of 2007.

Non-GAAP gross margins by business unit were as follows. Connectivity and Security, 95.4%, Consumer, 73.8%, Multimedia, 76.1%. For Device Solutions and other revenue, gross margin dollars totaled approximately $860,000. As we have noted before, our margins are driven strictly by product mix.

Switching to operating expenses. Non-GAAP operating expenses for the fourth quarter of 2008 increased to $15.4 million, or an increase of approximately $400,000 from Q3 of 2008. The increase is as expected and is attributed to additional engineering resources deployed to meet new customer product deliveries scheduled for future quarters. Non-GAAP operating margin for the current period was an exceptional 29.6%. This exceeds our previous guidance and is above what we consider to be our benchmark 25% operating margin for growth quarters. Current period operating margin compares to approximately 29.7% operating margin for Q4 of 2007.

Non-GAAP net income for the fourth quarter was a record $9 million, or $0.28 per diluted share as compared to $7.8 million, or $0.25 last year. As a matter of fact, in Q4 we posted our first GAAP net income of the year of $0.04 per diluted share, which compares to $0.02 last year.

In review of fiscal 2008, it was a great year for the Company. Revenues increased from $73.4 million to $98.4 million, an increase of 34%. Much more important than our revenue growth has been our continued improvement of our business model. We achieved our revenue growth while reducing our Verizon customer concentration from 55.6% in Q4 of 2007, to 18.5% in Q4 of 2008.

While posting 34% plus revenue growth in both 2007 and 2008, we have significantly improved gross margins. In 2006, we posted a gross profit margin of 64.9%. For 2007, 74.4%. And now in 2008, 83.8%.

In terms of operating margin, we started the year with a PCTEL acquisition, our largest and the most successful acquisition in the Company's history. During the first six months of integration, we posted average operating margins of 17.7%. In Q3 of this year, we improved that number to 27.6%, and now in Q4, 29.6%.

Operating income increase in 2008 to $23.2 million from $21.5 million in 2007. From a balance sheet perspective, our cash position closed at $36.6 million at December 31, 2008. Accounts receivable at December 31 increased to $18.4 million, from $13.2 million one year ago, an increase of 39% which is consistent with our increase in sales.

Net working capital at the end of 2008 was a strong $47.7 million. Cash generated from operations for the year was approximately $16.4 million. Factoring out the expected increase in accounts receivable, we generated $23.1 million in cash. The primary uses of cash included the acquisition of PCTEL's MSG Group and related legal and banking fees for approximately $60.9 million in capital expenditures, and other small acquisitions totaled approximately $6.7 million. Again, I'd like to emphasize that while we reported record revenues, our operating metrics overall demonstrated a very strong performance.

Now, looking forward to 2009, we expect another highly productive year. Despite the uncertain economy, we expect to significantly improve our business in 2009 by winning important new deals. As we had previously reported, we closed a record number of deals in Q4 of 2008. Those deals will help fuel our future. Our deal momentum continues in Q1 of 2009, and we expect 2009 to be a robust year in terms of new deals.

Based on information available at this time, the Company is guiding fiscal year 2009 revenues between $110 million and $115 million. In terms of timing, we expect to return to typical seasonality with Q1 and Q2 being our weakest quarters. As such, it's very important to view the business from a year-on-year basis and not a sequential quarter basis. Similar to 2008, the back half nature of our revenue guidance is not conditional on new contract wins, but driven by both revenue recognition roles and contracts that we have won in Q4 of 2008.

While we view contract wins as the key element to building our business, we are like every other business operating in a recessionary climate. Our customers, both new and old, will determine the level of our success in 2009. If our customers' businesses succeed, we succeed. However, while everyone including our customers view 2009 with a degree of uncertainty, one thing is certain. We are the dominant player in a very desirable space, and we will be ideally positioned to benefit once this economy turns around.

Now, in regard to gross margins for 2009, we expect the product mix very similar to 2008 or mid-80% gross margins. Operating margin will be revenue dependent. Given the deals we have closed in the past two quarters, we expect to continue to invest in engineering resources. Having said that, we have been consistently re-evaluating our business and deploying our assets in our most profitable areas and will continue to do this.

Finally, taxes continued to be in a state of change given state and federal deficit spending. At this time, we are estimating that our 2009 cash-based tax expense will be 25% to 30% of non-GAAP net income. As tax laws change throughout the year, I'll provide an update to this metric.

In regard to cash flow, if we hit our revenue guidance this year, we will generate more than $20 million of free cash flow in 2009. In terms of housekeeping, we expect to file our current year 10-K early next week which will represent our final audited financial statements for fiscal 2008.

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

Thanks, Andy. Okay. As I have been alluding to for some time in 2009, we will focus our discussion on our three product groups instead of the four groups used last year. Our Connectivity and Security group remain the core engine of growth for the Company with an unrivaled portfolio of Security and network Connectivity applications for laptops and mobile devices. For the year, revenue grew 98% from $29.6 million in 2007 to $58.7 million in 2008.

There were several key drivers to this growth. We added many new customers during the year. Both through acquisitions and organic sales. We have remained true to our business principles, that of building the best products and providing the best service. As we often state, we may not be the low cost provider, but we are the best solutions provider.

We have successfully gained the confidence of all of the PCTEL MSG customers and have converted them to our high standard of service model, and as a result, have seen revenue growth from these customers flourish. For example, in the fourth quarter, AT&T represented 11.5% of our revenue, just behind Verizon at 18.5%. Additionally, Sprint just missed being a 10% customer for the quarter by a few tenths of a percent. We are also very pleased to note that we now have all of the big three wireless carriers in the US as Connectivity customers.

We also achieved a significant Company milestone by signing Dell as a new customer. We developed, in conjunction with Dell, a new state-of-the-art connection management solution for their latest series of laptop product offerings. This significant achievement opened up a brand, new market category for Smith Micro's connection management solution. We believe Dell is a game-changing win, and a key customer for us in this space going forward. We are optimistic about our prospects of landing additional OEMs in 2009, to deploy connection management technology for PCs, netbooks, and Consumer Electronics.

The market saw some initial roll-outs of the long-awaited 4G technologies, both WiMAX in 2008 and in 2009, LTE. Specifically, we signed two new customers in the mobile WiMAX space, Clearwire and Motorola. Clearwire will rely on technology from Smith Micro's dual mode Connectivity software for its new 4G network subscribers. In early 2009, they have launched their [nuclear] service in two markets and intend to bring additional markets online in 2009 and '10.

Motorola is a unique opportunity, in that it provides mobile and fixed WiMAX Connectivity devices to carriers around the world, opening new international sales channels. We are Motorola's exclusive partner for WiMAX Connectivity and look to expand this relationship in coming years. During 2009, we look to expand our presence within the emerging mobile WiMAX space as these 4G networks roll out throughout the world. We also see new opportunity to expand relationships that I will call a new breed of carrier customers. Customers that will offer new high speed wireless networks as the demand for wireless Connectivity continues to expand. These companies will include cable operators, emerging large retail mobile virtual network operators, or MVNOs, and other Fortune 500 enterprises.

Another expansion opportunity lies in the international marketplace. We look to expand both in Europe and Asia as carriers and device manufacturers not only look for a high quality solution, but also a partner with a strong balance sheet. We have a few, very small competitors internationally. But none of these are well-capitalized, and in this economic environment, viability does matter.

In 2009, we will begin a major initiative to add value to our connection management solutions through the introduction of Device and Connectivity service solutions that will allow carriers or large enterprises to manage their subscribers and mobile workforce. Needless to say, we have an enormous opportunity ahead of us, and we will build upon our leadership in the software Connectivity space throughout 2009.

Turning to our Productivity and Graphics group or our Consumer Business segment, we are pleased to report that during fiscal 2008, our product lines in the Consumer Market segment grew 68% year-over-year from $14.4 million in 2007, to $23.9 million in 2008. Considering the current economic environment for most products in the retail space, I believe this is a very pleasing performance. During the year, we released twelve new products or versions of our popular selling products and saw our international retail sales grow 161% year-over-year. Thanks mostly to our enhanced presence in the European market. This success is based in part on the fact that our product line consists of both Windows and Mac titles. But more importantly, it also is our very diverse line, spanning compression, utilities, and graphics. We believe in the current economic environment, that we have also been helped by our strong distribution channel through Apple Stores, which have continued to perform nicely.

The Company's strong balance sheet and impressive growth continues to attract a wide array of third party software developers who seek to leverage our robust consumer distribution channels. Something of note, the research firm, NPD, recently identified Smith Micro as one of the Top 30 publishers in the US retail software market, up from Number 100 in 2007.

And finally, I would like to introduce you to the Multimedia and Convergence group. This new group combines two previous groups, Device Solutions and Multimedia, which combined have three major product initiatives. These product initiatives are device management, fixed mobile convergence, or IMS, and Multimedia.

There are several reasons we decided to make this change. We believe that by combining our Device Solutions and Multimedia product lines, we will create interesting synergies, enabling us to create unique and compelling mobility solutions. As I have said in the past, we continue to see the market evolving to allow for devices to connect wirelessly -- everywhere to everything. For example, we're in early stage discussions with cable operators, auto and other enterprise industries, that are looking for more robust digital media solutions. Our new business unit will serve these markets with a comprehensive set of fixed mobile convergence device management and personal media management. Our Multimedia client products continue to generate significant demand. During the second half of 2008, we signed on two new customers, LiveWire, which we announced earlier this year, and a new carrier customer that we will announce as soon as their service becomes public. And of course, Sprint and Verizon continue to rely on our technologies.

Looking at 2009, we expect to begin to broaden our customer base through the introduction of a new web-based, Multimedia product that will allow us to introduce new on-demand media services that will reside in The Cloud. This is a new Smith Micro capability that will allow us to enable carriers to offer cloud-based content and media management solutions. You can look forward to hearing more about these exciting new product announcements from us in the near future.

Another focus of this group in 2009 will be to strengthen our Device management and Connectivity management server technologies by combining them into a single platform. This will allow our carrier customers to deliver new, value-added services and enable the ability of our enterprise customers to perform endpoint management from a single platform, targeting Notebooks, smart phones and feature phones. I am excited about the new direction and future growth of this business unit. We look forward to rolling out innovative solutions in 2009 and expect Multimedia and Convergence to become a strong contributor of revenue growth going into 2010 and beyond.

Before I open the call for questions, I'd just like to reiterate a few key points. Over the past five years, we have positioned Smith Micro to become a leading strategic partner in the development of new products for wireless carriers, PC OEMs, and device manufacturers. I believe a key component to the strength of the Company is our cash flow, especially in these unforgiving financial times.

For fiscal 2008, our adjusted cash flow was $23 million, or approximately 23% of our revenue. Gross margins increased to 80% plus. We have a growing IP portfolio, strong on innovation. To date, we have fifteen patents, and we are granted on average, one new patent every seven months.

In the last quarter of 2008, we closed more customer contracts than the entire two previous years put together. Our brand awareness has dramatically increased as more and more customers turn to deploy Smith Micro products on their networks, on their devices, and on their PCs. We are entering 2009 with the strongest pipeline of new customers in the history of the Company. These new customers will broaden our markets as we move through the year. As Andy mentioned to you earlier, we believe 2009 will be in line with the revenue guidance of $110 million to $115 million. We continue to watch this closely, and we'll update you as needed.

As we look at the broader marketplace, we think it presents an opportunity to invest externally, as well as internally, in new product concepts and solutions that will maximize our long-term growth potential. Now, more than ever, I truly believe there is more interest in the Company's mobility solutions than we have ever had before in our history. As I have said previously, general economic uncertainty provides opportunities, and this is a time when the strong will grow stronger. I firmly believe that Smith Micro will emerge post-recession as an even more dominant force in the wireless software sector. The crisp execution of our business case today will lead to dominance tomorrow.

With that, operator, I open the call for questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Maynard Um with UBS. Please go ahead.

Hi, thanks. Few questions, if you could just start with stock comp amortization by COGS, sales, marketing, R& D, G&A.

Yes, sure, Maynard. Alright. Total number for stock comp for the period was $3 million, and we start with cost of sales. GAAP cost of sales included $99,000 of the $3 million. And, we move down into the operating segments. Selling and marketing, $795,000. R&D, $749,000. General administrative, $1.388 million. For a total of $3 million. Amortization, starting with the cost of sales line, $1.01 million. Selling and marketing, $638,000. R&D, $110,000. For a total of $1.76 million.

Okay. Great. Now, given some of your deals, like Dell, are fixed rather than on a per unit basis. Can you just talk about how much of your revenues when you look into next year, as a percentage of what you're guiding to is actually visible. That you'll get -- that's fairly recurring in nature?

Sure, sure. Now, just to clarify, let's call it fixed with a floor. So in other words, fixed meaning that there's a floor revenue amount there, incentives that actually grow that revenue stream. And, there are new product enhancements that we expect will be in play here in the future, too, that actually can increase that revenue stream.

Now again, we have very good visibility. Contractually as far as what that floor is. Another key point on that contract is, it's not sensitive to any of the volumes that you see in the PC OEM market. So, if you see any of the OEM market declining over the next quarters due to the recession, that doesn't affect our revenues.

Maynard, maybe I could add to that. I went through the distribution of risk across customers, as far as the carriers. We can also say that for fourth quarter, you would add Dell to a 10% plus customer in our business mix as well. Given it's effectively ten customers or excuse me, four customers that exceed the -- are at the 10% threshold. It's a very different business model than where we were months in the past.

Okay. Great. And then, you're exiting the year with Op margins in the upper 20%s. When you look at 2009, do we see less quarter-to-quarter fluctuations or -- in particular, I'm looking more at the first half. Because if you look two years ago, your margins were actually pretty stable throughout the whole year.

As I commented, it's going to be revenue dependent, and we expect Q1 and Q2 to be our weaker quarters this year. Again, back to normal seasonality. We will expect to incrementally increase R&D expense. As Bill noted, we closed more deals in Q4 than we had in the previous two years. These, again, like anything else we do, there's front-end loading on these deals. These deals really won't come into play until really Q3, more so in Q4. That being the case, the margins -- the operating margin will drop from the Q4 level, and it just depends where we land the revenue in Q1 here and Q2 as far as where that lands.

So, from a modeling perspective, there will be a slight incremental increase in operating expenses in Q1 and Q2. And, building slightly from there as well. As we always say, our benchmark is 25% while we're growing. So, that's our fair weather mark. It can go a little below that. It can go a little bit above that. Again, this last quarter, 29.6% is an example of how it can go above it. But again, we can work a little bit below it. The key for us is really the total year here. Again, these deals we closed in Q4 are very significant deals and similar to when we used to discuss Dell. When these deals come online, they make a noticeable difference.

And then, last one for me, your non-Connectivity segments are weaker than I expected. Should we anticipate that the weakness will continue through the first half in those segments, and I guess, in particular, in the Consumer. And then, what gives you comfort that the Connectivity is actually going to make up the difference given your revenue guidance for the full year actually hasn't changed. Thanks.

I can start with the Consumer side. When you look at Consumer, it was down a little bit Q4 from Q3 which is not necessarily a normal trend. Again, that's the economy starting to kick in. We have very strong products, but we're going to see that that area in particular is going to be the key part that drives seasonality in Q1 and Q2. Now, on the Connectivity side, this is where we're adding some very strong customers that are coming online in Q1, Q2. Then, very significantly in Q3 and Q4.

And I think just talking to the breadth of the business. When you're looking at the number of large customers that we have, all of which are capable of making a difference. All of which we have incredibly strong relationships with. So, we have relatively good visibility into their business plans. Gives us confidence to stand behind our numbers and move things forward. I think when we gave guidance at the start of 2007 -- or excuse me -- the start of 2008, there were a lot of folks on the street that just didn't believe us. Well, we proved them wrong. We came right in there, and we aim to do the same thing again in the current year, in spite of the problems everybody is wanting to talk about. Maybe if we spent more time working on our business and less time talking about the problems, we would all be a little bit more successful.

Operator?

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

Thank you, good afternoon. Just wondering if you could give a little more color, Bill, on the pipeline of deals. First of all, you signed -- it sounded like over half a dozen deals in the fourth quarter. And then, you've got a good pipeline it sounds like in the first half for potential deals. Can you talk about where they're concentrated with respect to segments? It does sound like Connectivity is quite strong, but are there deals in other segments as well? And, can you give a sense of how the split is between OEM versus carrier-type deals?

As I said, at your conference in the beginning of January, yes, we saw -- we signed in excess of a half dozen deals. I didn't give the exact number, so I wouldn't have to constantly be barraged with questions on the scorekeeping. But obviously, it was a little bit more than six. Yes, they cut a broad spectrum. We've got carriers. We've got device manufacturers, and we got OEMs. And, they're all kicking in. There is definitely in the wireless business for software a flight to quality where we have seen companies go with a competitive solution that either doesn't work very well, or the company has become very uncomfortable with the overall financial wherewithal that our competitors have.

They're willing to come back to us and say, we know you cost more, but we still want to sign a deal. And, that speaks volumes, and it hasn't slowed up. It's continuing. The book of business that we're working on coming out of shows like CES at the start of this year or the Mobile World Congress that was held in Barcelona a few weeks ago. Or, what we expect to see at CTIA in Las Vegas in another month. All give us plenty of visibility as to the strength of what we're doing, and we're incredibly focused on execution. And, that's what I meant when I said crisp execution sets you up for the future. That's what it's all about.

We can't make people buy more right now in the current economic time, but we can certainly stack the deck and make sure we have all the big significant wins.

That's helpful. And finally, on the Multimedia segment, understand that the transition at Verizon happened away from music essentials kits, but I would have figured the impact of that would have been pretty much done at a minimum in the first half of '08. But, that business has continued to slide fairly significantly. Just wondering if we -- how do we look at that business longer term? Do we think, one, that the revenue there has bottomed, and we should be looking for some growth there? And, how do we look at Multimedia as a whole in 2009 relative to the run rates that we saw in the fourth quarter?

Okay. First off, let me go back and reiterate that we have combined the device and the Multimedia units into a single unit called Multimedia and Convergence. I hope that all analysts following us will make the appropriate adjustments in their models because that's how we're going to report results. But, let me answer your question. Yes, we saw continued weakness in the Multimedia area throughout 2008. As a result, we not only did the merger of the two units, but I thought it was time for a new look and a new strategy as to how we move forward.

We have introduced today at least the concept that we're moving more and more toward Cloud computing and converged technologies. We do not look for strong revenue growth in 2009 in our internal models for this Group. We do look, however, for strong revenue growth going out of 2009. Assuming that we have read the tea leaves right, have listened to our customers, and built these new converged solutions the right way. We think we can be very successful.

I will tell you that we have new customers for this group. I alluded to one that has yet to be announced that is in the process of launching and look forward to talking about that in the hopefully not too distant future. But, there will be others, and we have others. And, we have others that are in the contract signing phase. So, we believe the unit will be alive and well, although it may look a little different. And, it may have a slightly different strategy. That's alright. If a plan doesn't work, don't just keep butting your head against the wall. Make the appropriate changes and move on. That's what it's all about.

That's helpful. That's it from me. Thank you.

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

Yes, hi. Couple questions. Andy, can you give us a breakdown of the Connectivity revenue by device or by hardware?

Yes. Things have changed so much in that space that there really isn't a meaningful breakout. There are no longer any kits being sold in that space. Everything right now is -- we see, basically, CDs and downloads. So from that perspective, we really don't have a device breakout.

Okay. And real quick, what type of cash tax rate are you using in the fourth quarter to get to $0.28?

Again, by the end of the year of course, we get to file our taxes. And, we get to do the final math on what we're allowed to actually utilize in our arsenal, our tax arsenal. And, this has been a real moving target given the difficulties the State of California is having, not to mention the Feds. Long story short, we ended up at about 8.5% cash-based taxes. So, we made an adjustment here in the fourth quarter to get the year right, if you will, from that perspective. You'll note, too, that on a GAAP basis, the taxes are now looking reasonable. That's again, you're trueing-up in fourth quarter for a total year view. So, it's a little bit odd, but that's just the world of tax accounting. Again, 8%-8.5% cash-based. We look to going to somewhere between 25% and 30% in 2009.

That was 8.5% for all of '08, right?

That's right.

Another question, maybe this one for Bill. You talked a little bit about a Connectivity service business, and I don't know if you're alluding to more of a subscription-based offering that you plan on introducing at some point this year. Care to elaborate a little more on that?

Yes, rather not get ahead of some of the negotiations that are ongoing, but we are definitely looking at some fabric-type changes in how we do business that will provide a more level revenue flow. A revenue flow that can be positive in either good times or bad times. And, we are working that through and feel comfortable that we'll come to reasonable solutions.

Any idea -- just general timing of when we'll see something, Bill?

No, not -- I am not very good at the crystal ball as to when contracts are going to sign, but we're working it.

One of the keys, Chad, is you will not see any difference in the financials. In other words, there won't be any kind of transition effect on a particular quarter or not. And, a lot of that bodes back to the past, that the Company has never done upfront deals. We've always been more of a ratable model. So this, again, we're looking -- as Bill alluded to -- we're looking at different ratable approaches in preparation. Two folds -- one is not only the economy, but just looking at when you're a bigger player in the market, different models actually can make more sense and actually provide much more predictable revenue streams for modelers going forward.

Okay. And then, on the couple WiMAX -- significant WiMAX deals you signed this quarter with Clearwire and Motorola. Do either of those or both of those have minimums on them, or are they device-type deals?

They're both royalty kind of deals, and there's not a real minimum on it. Although we do feel comfortable that both will do reasonably well for us. We're very excited about the Motorola opportunity. Their sales muscle is larger than ours. I didn't say it was necessarily better than ours, but it is bigger. And, they have got more people out there around the world, and I think, they're going to bring us a lot of new customers in places that we may not have been able to reach.

Just following up what Bill's saying there in Motorola. What's really unique about that contract is it's a US-based, US economics-type model, yet they're selling it worldwide. One of the challenges in this space is when you get to certain regions in the world, they don't quite get the value of the product yet. And, they don't get the pricing of the product. So, when you can partner with a Motorola and partner with US pricing, if you will. And, have them take you around the world, it's a great opportunity.

Okay. And I guess, just generally speaking, I know you don't want to get too detailed here. But, if we were to look at your business in '09, by the now three segments that you're reporting in. Based on your guidance, would you expect them -- all three segments to grow year-over-year? Or, maybe a couple do, and one doesn't. Do you care to flush out any color there?

I think the key is that Connectivity group is by -- that's the leader. That's where we've got the most traction and the biggest customers. Consumer's going to be a wait-and-see. They're the most sensitized to the consumer spending question marks in the economy, and I think Bill already alluded to the new group is really -- it's a new launch. This is basically what's going to define success in that area is launching the products. So, launching the products is what we expect to see in '09 with more of the revenue traction coming in late '09 and 2010.

Okay. And Bill, just one last question. Do you want to give us an update where LTE is, related to all the carriers you work with. And, when we expect -- when we could expect to see deployments and roll-outs of LTE networks?

Well, seeing as how really only Verizon has said a lot publicly, I think we just have to go with what Verizon said publicly. We know that Motorola is going to follow with LTE. We know that Sprint is really laying their bet with WiMAX. But, the others have not actually publicly disclosed a lot of their launch schedules. So, I think we have to wait for them to come out and tell you folks about that one.

Okay. That's all I have. Good quarter and year in a tough environment.

Thank you.

Thank you. Our next question comes from the line of Scott Sutherland with Wedbush Morgan Securities. Please go ahead.

Great. Thank you. Good afternoon.

Thank you.

Want to first of all kind of continue on the pipeline discussion. I think you mentioned it was stronger than it's ever been. Can you compare it to where you were in the middle of 2008 before you signed all these deals in the second half? Would you say there was more customers in the pipeline? Or, are there some large seven figure deals in the pipeline that you hope to close?

Yes, I think that's a fair way to look at it, and we were pretty bullish about our pipeline in the mid-part of 2008 as well. And, all I can tell you is we executed and we got the deals done, and I think I've been pretty clear about that. So, not only do we talk about our pipeline, but we do close it as well. And, that in essence, is the essence of crisp execution. So, I feel better today than I did then because the pipeline's bigger, and the names are as big or bigger than the ones we had then.

Okay. Secondly, we're seeing a European model moving to the US where you had a better customer base of subsidizing laptops and netbooks. Are you seeing any benefit or impact from that, and what's your thoughts of that going forward?

We think that the netbook market will be a very significant market, and one that we can have a very profound play in. We have nothing that we're ready to announce as we sit here, but we do believe that on the go-forward, it's yet another kind of market. We believe that we will totally dominate the PC OEM market. I would not -- I'll just leave it at that. I think we are -- we're in the driver's seat. That should be your net takeaway.

Okay. Just couple more questions. Verizon-Altel. Now that the merger is done, do you see anything positive or negative coming out of that, or is it too early to tell?

Verizon is a bigger outfit. They, obviously, were both customers of ours going into the merger, and we look forward to continuing our strong relationship with the merged entity going on.

Okay. Lastly, for Andy. Could we just get depreciation and CapEx for the quarter?

Let's see. Again as I had mentioned, the amortization was $1.76 million, which we don't really have any significant depreciation. Again, we're more computer-based.

Anything on the CapEx? I know it's usually pretty small.

Let's see here. On the CapEx, as I mentioned before in the talk, total for the year we did about $6.7 million. That's CapEx and small acquisitions, if you will. We're a Company that typically runs right around $2 million CapEx number. Again, not very significant. We're just all about leasehold improvements for people, and then getting them workstations.

Great. Alright. That makes the numbers flow. Thank you.

Thank you. Our next question comes from the line of Larry Harris with CL King. Please go ahead.

Yes, thank you. Couple of quick questions, if I could. Looking at Clearwire's plans, looks like they'll be running a network that will run on WiMAX and CDMA, and I assume that at least for a number of years, Verizon's network will be LTE and CDMA. Does that create any opportunities? Does that change things in terms of the software that you provide?

That's a good question. I think the best thing I can say is that it provides an opportunity to do what we do very well, which is to make a very complex problem look simple in the eyes of the user. You as a user will not have to worry about whether you got your Connectivity from WiMAX or CDMA. You won't have to worry about whether it's LTE or whatever. It will be totally transparent.

One thing that I can point out that I -- we haven't talked about -- that I think is also significant. When we talk about all the 4G, whether it be LTE or WiMAX, these are true digital networks. And really, in the backbone of all this is things like IMS. So, a lot of the work that we have done as a Company to build out our IMS applications for deployment that have gone into a number of tests at big name carriers around the world, now face the opportunity of true deployment because 4G is built to run these kinds of things. Fixed mobile convergence, instant messaging, video instant messaging -- all these kinds of things are in our bailiwick. We have product. It is fully demonstrable. Those of you that were in Barcelona and stopped by our booth had an opportunity to see a lot of these things in action.

Those of you who want to come to Las Vegas and meet with us at CTA, will have a similar chance. So, we're pretty excited about what 4G has for us, and it gives us a chance to really show off the power of our total portfolio.

Great. And with respect to netbooks, looks like an interesting opportunity. And there's at least some evidence that people who purchase netbooks already have notebooks, and they actually keep both products. Could that create opportunities? Or, could people use the software on both the netbook and the notebook?

I think that's another strong suit for us. When I'm talking about our Cloud computing strategies that we're going to be bringing to this marketplace, we're really focused on all of the important screens that our carrier customers want to have control of. And, those being not only just the wireless device, but also the PC or the netbook, as well as the television. Well, the beauty of Cloud computing is that the computing is done in the Cloud -- in the Internet -- and is displayed on the remote device. So, you can see the same thing on any of those screens.

That becomes very powerful. And, if you add value-added services that can enhance the revenues of our carrier customers, that obviously is our strategy. And obviously, will bode well for us going forward. That is why when I talk about our Multimedia and Convergence group with a new strategy, a new look. We're not just looking at photo applications and things like that, which frankly, don't have a lot of excitement. But, this kind of stuff has enormous upside. That's where the power is.

Thank you.

Thank you. (Operator Instructions). Management, I'm showing that there are no further questions. I'll turn it back over to you for closing comments.

I want to thank you for joining us today. Should have any further questions, please feel free to call Smith Micro or MKR. We'll look forward to updating you on our first quarter conference call. Thanks.

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. Have a nice day.