Smith Micro Software Inc (SMSI) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Smith Micro Software fiscal Q1 2009 conference call. (Operator instructions.) And, as a reminder, the conference is being recorded today, on Wednesday, the 6th of May, 2009.

We'll now turn the conference over to Mr. Charles Messman of the MKR Group. Please go ahead.

Good afternoon. Thank you for joining us today to discuss Smith Micro Software's financial results for first quarter 2009, which ended March 31st, 2009.

By now you should have received a copy of the press release regarding our first 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. Financial prospects and other projections of its performance, the Company's ability to increase its business and anticipated timing and financial performance of its new products and potential acquisitions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the Company's products and it notes customers and their end users, new and changing technologies, 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 & 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 statements.

The forward-looking statements contained in this conference call are made on the basis of the views and the assumptions of Management regarding future events and business deployments 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. Bill?

Thank you, Charles.

Good afternoon, everyone, and welcome to our earnings conference call. I am pleased to report another solid financial performance for our first quarter of 2009. We have posted the strongest first quarter results in our Company's history despite the challenging economic environment that we are operating in.

During the quarter we grew our revenues over 9% year-over-year to $23.8 million, but of more importance I believe is the fact that we posted strong operating performance during the quarter as is evidenced by our earnings pre share of $0.01 per diluted share on a GAAP basis or $0.13 a share on a non-GAAP basis.

Looking at a couple of key indicators by which we measure our business, our gross profit on a GAAP basis of $19.3 million increased $2.5 million or 15% from first quarter of 2008. Non-GAAP gross margin increased from 81% in the first quarter of 2008 to 86% in this year's first quarter.

During the quarter we continued to meet our strategic business goals. Looking across all of our business segments we signed a total of just less than a half dozen new customers, something that we expect will contribute significantly to our financial results during the balance of the fiscal year.

We expanded our mobility customer base by adding yet another PC OEM as a customer whose name, unfortunately, for now will need to remain undisclosed. We announced two new multimedia customers in Nextel International and Livewire Mobile. We expanded our leadership role in WiMAX connectivity through agreements with [Clearwire] and Motorola. And we energized our international presence, a key component of our long-term growth strategy with the rollout of COMSTAR as our newest WiMAX customer in Russia.

Based on our recent new customer successes, we anticipate that in 2009 we'll see similar financial growth as was seen in 2008, with the Company's revenue ramped up nicely during the second half of the year. Our revenue tends to follow the pattern of our customers' new product and service rollouts and launch initiatives.

As we said during our fourth quarter earnings call, our business model is one that generates significant free cash flow, as evidenced by how we strengthened our cash position by $4.4 million during the first quarter alone. We view this cash flow generation and the solid revenue results to be a strong validation of our business case.

Our [QuickLink] family of software products, which facilitates connectivity to mobile and wireless carrier networks, remained a key growth driver for the Company as revenues increased 69% year-over-year from $11 million to $18.5 million in the first quarter of 2009.

Looking to the remainder of the year we are very optimistic about future opportunities as we continue to expand our markets, sign-on additional customers, and extend our leadership role as the dominant software provider in the mobility and connectivity marketplace.

Later in the call, I'll discuss in detail our opportunities within our three business segments and overview of what these markets have to offer, but at this time, I'd like to turn the call over to Andy Schmidt, our CFO, to review our first quarter financial results. Andy?

Thank you, 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. The non-GAAP results 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 2009 and 2008 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 comparable GAAP financial measure. The earnings release can also be found in the Investor Relations Section of our website at smithmicro.com.

All right, let's discuss our detailed first quarter results. For our first quarter we posted revenues of $23.8 million and earnings of $0.13 per diluted share. Total revenues of $23.8 million increased from revenues of $21.9 million for first quarter of 2008, an increase of 9%. International revenue was approximately $2.9 million this quarter across all business groups.

As noted on our SEC filing, we are now reporting the following business segments -- wireless, consumer, and other. Wireless includes our connectivity and security and multimedia and convergence business units. Consumer represents our graphics and productivity unit, and our other category remains unchanged from 2008.

As such, wireless reported record revenues for the quarter of $19.3 million as compared to $16.2 million last year, an increase of 19%. Slightly offsetting gains in our wireless sector consumer posted revenues of $4.3 million as compared to $5.5 million last year, a decrease of 22.5%. The reduction in consumer revenue was as expected and is directly attributed to the recessionary consumer environment. And, finally, we reported approximately $280,000 of other revenue which compares with approximately $239,000 for our first quarter of 2008. Total deferred revenue at March 31, 2009 was approximately $2.6 million.

Okay, switching to gross profit, non-GAAP gross margin dollars of $20.5 million increased $2.7 million or approximately 15% from the same period last year. Of key significance, while our revenue increased 9% year-over-year our gross margin dollars increased 15% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 86.3% for Q1 2009 compared to 81.4% for Q1 of 2008.

Non-GAAP gross margin dollars by business segment, percent by business segment were as follows -- wireless, 89.5%, consumer, 72.7%, and other, 68.7%. As we've noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2009 of $15.4 million remains unchanged from Q4 of 2008. While we continue to add additional engineering resources, deployed to meet new customer product delivery schedules for future quarters, we have found expense offsets, including redeploying staff from noncore activities and reducing administrative expenses.

Non-GAAP operating margin for the current period was 21.6%, lower than our benchmarked 25% due to the decline in consumer group revenue. However, current period operating margin compares very favorably to operating margin of 16.6% for Q1 of 2008.

Non-GAAP net income for the first quarter was $4 million or $0.13 per diluted share, as compared to $3.1 million or $0.10 per share last year.

From a balance sheet perspective our cash position closed at $41 million at March 31, 2009, an increase of $4.4 million from the beginning of the year.

Accounts receivable at March 31, 2009 increased to $19.4 million from $18.4 million at the start of the year.

Networking capital at the end of Q1 was a very strong $51.8 million.

Cash generated from operations for the quarter was an exceptional $5.3 million. The primary uses of cash for the period were capital expenditures of $846,000.

Overall, we had a very good quarter and a great start to the year. Despite global economic challenges, revenues are up year-on-year, but of key significance our gross margins, operating margins, profitability, and cash flow, all improved significantly over last year's quarterly performance.

Looking forward to the balance of 2009 we expect our business to continue to improve. As Q1 was another robust quarter in terms of winning important new deals, we expect to continue to invest in our engineering infrastructure. As we previously commented upon, we expect that Q2, like Q1, will be seasonably weaker than Q3 and Q4.

In regard to gross margin, we expect our product mix to remain stable and expect mid 80% gross margins.

Operating margin will continue to be revenue dependent, with 25% being our benchmark. But similar to Q1 we may fall below 25% operating margin in Q2 due to backend loaded revenue plan for the year, with operating margins above 25% from Q3 and Q4.

Finally, taxes continue to be in a state of change given the 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 law changes through the year, I'll provide and update to this metric.

Finally, at this time, we are reiterating our revenue guidance of $110 million to $115 million for 2009. In terms of housekeeping, we expect to file our current period 10-Q tomorrow or Thursday.

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

Thanks, Andy.

Our connectivity and security group brings to the market an unrivaled portfolio of security and network connectivity applications for laptops, netbooks, and mobile devices. This suite of connectivity and security products represent our key driver and grew 69% over the first quarter of last year to $18.5 million.

During the quarter we saw strong activity among both new and existing customers as they continued to enhance their services and execute on their broadband mobile data strategies. As I commented on on our fourth quarter earnings call, we saw a strong pipeline of new customers, a trend that I'm pleased to say continues and is reflected across all business segments. We believe the continued acquisition of new customers is a strong measurement of the value of our products bring to the expanding marketplace.

Specifically, we signed an additional notebook PC OEM, solidifying our leadership in the broadband connectivity space for notebook PC manufacturers. Our other PC manufacturer customer, Dell, represented 14% of total revenue during the quarter.

On the carrier front, we announced three new carrier customers in this market segment. With the win of T-Mobile USA we now provide connection manager solutions for all of the big four wireless carriers in North America (inaudible) solutions for the 4G rollout, first with the WiMAX market, which is beginning to see traction around the world.

As such, we announced Clearwire, which is rolling out their new WiMAX service in North America, and COMSTAR, a leading telecommunications company in Russia, which is also a WiMAX customer currently introducing 4G mobile broadband services. And one of our strongest WiMAX opportunities is through our exclusive relationship with Motorola, who is in WiMAX deployments and trials in more than 40 countries around the world.

I know I have said from time to time that Smith Micro develops the best of breed connectivity solutions and as evidence of that fact, the Motorola USBW 100 with our connection management software won the Best of WiMAX World 2008 award for devices, peripherals, application software category. So with these recent events, we continue to be the clear leader in 4G connectivity solutions.

Turning to our carrier customer base, and their contribution to our results this quarter, as usual we saw a change in our customer distribution. Verizon Wireless had a very strong quarter with us, representing 28% of our revenue during the quarter, which is comprised of their core business combined with revenues resulting from the Alltel acquisition. I am pleased with how we continue to make progress in achieving a broader, more balanced customer base, as our other leading carrier customers were each close to 10%.

As we've often said, our customers are constantly evolving their product strategies and introducing new products and new plans. This is evident in the early product introductions and substantiations surrounding the rapidly emerging category of netbooks, which by their very nature will require mobile broadband connectivity solutions. We have some very interesting product ideas for the netbook space, and we are working diligently with our carrier, PC, and device manufacturer partners as they solidify their strategies.

I should point out that netbooks are still in the early adoption phase, but we believe there is a great opportunity for Smith Micro to participate in this rapidly developing product category. We expect that during Q2 of 2009 you will see a significant netbook product rollout with a Smith Micro connectivity solution included from one of our carrier customers.

We have begun major initiatives to add value to our connection management solutions as we continue, as we introduce products for new devices, services, and solutions that will focus on server technology, allowing carrier, cable operators, and 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 during 2009.

Let me now turn to our productivity and graphics products. Until recently this unit has been referred to as our consumer group, reflecting its primary distribution channel. This group's new productivity and graphics name shifts the emphasis to the products to the groups actual product portfolio, which develops multiple technologies across compression, digital imaging, performance utilities, graphics, and entertainment segments.

Going forward, we will not only be focused on building compelling solutions for the consumer channel but also for new markets including the enterprise and small business.

As expected, in the retail channel we saw a decline in revenues mainly due to seasonality as well as the overall economic environment. The group reported revenues of $4.3 million, which compares to $5.5 million reported in 2008. As we look to the remainder of the year, we expect this group's revenue to remain constant at a run rate of approximately $4 plus million per quarter.

Even though our revenue softened in this business unit there remains bright spots, and I was very pleased with the graphics product line as it performed well. I am very happy to report that we added Wal-Mart, the largest U.S. retailer, to distribute one of our top selling graphic products, (inaudible) studio. Despite the softness in revenue during the quarter this group will continue to contribute to the profitability of the Company.

And, lastly, our multimedia and convergence group, which combines three major product initiatives, device and server management, fixed mobile convergence or IMS, and multimedia. While current period revenues for this group are not significant as compared to our connectivity and security group, the R&D efforts in this group are expected to deliver future product opportunities and technology synergies to create unique and compelling mobile solutions that will expand our market.

I would like to quickly highlight two of our forward-looking products in this area. First, we rolled out a [CTA] wireless this year, our QuickLink Media cloud strategy, to enable carriers to offer cloud based content and media management solutions.

This rich extension of our multimedia offerings is targeted at helping our customers support their convergence strategies for services that will be universally available on a mobile device, their personal computer, and their television.

We see this as a strategy that will have broad appeal to a new, emerging customer base such as cable operators, as well as our carrier customers, who are looking to migrate their multimedia offerings to the cloud while capitalizing on the social networking phenomenon that can drive loyalty and usage.

We also announced two new customers -- Nextel International and LiveWire Mobile. Nextel International has begun to launch our music and photo management product in four Latin American markets and LiveWire Mobile uses our client application to provide PC media management software to wireless carrier networks and mobile devices for access to their LiveWire Mobile full track music service.

Second, as we entered 2009 we began our initiative to combine our device management and connectivity management server technologies into a single platform that we believe will resonate well with our carrier and enterprise customers. This will allow our carrier customers to deliver new value added services and enable our enterprise customers to perform end point management from a single platform, targeting notebooks, smart phones, and other mobile devices connected to their network.

As we go forward in 2009 and beyond, multimedia and convergence group continues to invest to capture opportunities in emerging markets.

Before I open the call for questions, I'd just like to leave you with these thoughts. Our financial results for the first quarter of 2009 shows that Smith Micro continues to perform well. Even in this difficult economic environment the demand for our innovative connectivity line of products and our new customer signings show the strength of the Smith Micro product portfolio for delivering new product concepts and solutions that will maximize our long-term growth potential.

We are well positioned to move aggressively and leverage our strong cash performance to make the most of the opportunities that arise. In first quarter our free cash flow of $4.4 million or approximately 18% of total revenue. At the same time we have a disciplined approach to cost and expense management, giving us a strong financial position, and we remain debt free.

We remain on pace with our 2009 roadmap, placing us in line with the revenue guidance of $110 million to $115 million that we provided you at the beginning of the year. We continue to watch this closely, and I will update you as needed.

We continue to drive our strategy to position Smith Micro Software as the leading strategic partner in the development of new software products for wireless carriers. In the last year we have delivered our products to PC and OEM device manufacturers and are now becoming an invaluable software partner for the cable companies, as well.

We have entered 2009 with our strongest pipeline of new customer deals and opportunities in the recent history of our Company. Some of our earlier game changing contracts continue to open doors and are bringing new, meaningful customers to us.

We continue our investment in our performance to fuel our future, because the products we build today are the way we connect to our customers tomorrow.

Thank you, and with that, Operator, I would like to open the call for questions.

All right, and thank you, sir. And, ladies and gentlemen, we'll being our question and answer session. (Operator instructions.)

Our first question is from the line of Maynard Um with UBS. Please go ahead.

Hi, thanks. Andy, just to start, can I just get the GAAP to proforma reconciliation between the various OpEx line items?

Yes, I've got it right here. I was thinking I should just put this in the script now. All right, let's start with stock comp, cost of sales $72,000, selling and marketing $737,000, R&D $634,000, G&A $1.148 million for a total of $2.591 million.

Going to amortization, cost of sales $1.188 million, selling and marketing $629,000, R&D $330,000, for a total of $2.147 million.

Okay, great. And I just want to clarify that the corporate other gross margin you said was 68.7%?

Yes.

Okay, and then, Bill, you talked about new key customer wins across all your product groups, they'll be strong contributors in the back half of the year. You talked about new products, like netbook is going to be launched, rolling out in the next quarter, but you also reiterated your prior annual guidance. So I'm just curious are there other parts of the business that are seeing greater weakness that's offsetting this new business?

No, actually, I think that we're performing well. We're right on target with what we said at the start of the year. We anticipated a lot of the new technologies coming on, online, so we feel very, very positive about everything and I don't really see any issues or significant weaknesses in the business case going forward. Other than what I said about that part of the business that is tied more to the consumer channel, we basically say it's -- we look at it as a $4 million to $4 plus million per quarter business for the balance of the year.

Okay, so if you -- I guess that if you look at your pipeline and assuming there's still new customer wins potentially, how long do those typically take to ramp before they become more meaningful to your revenue stream?

Well, I've said this a number of times, OEM deals tend to start out slow and grow over time, and some grow faster than others. So I don't know that there's a rule of thumb you can say applies to all, but to the extent that things get better quicker and grow faster I'm sure we will have the opportunity to talk about those positive up sides if and when they do occur.

Okay, and then lastly just on OpEx, you talked about increasing your engineering infrastructure, Andy, can you just provide any color on the sales and marketing and G&A side?

Sure, we've been -- when you see the Q out here we've reduced G&A fairly significantly, both on a GAAP and proforma basis which has a lot to do with cost of SOX and audit and so on. So that's going to be a continued good guy.

Our sales and marketing we've done a pretty good job, too, of keeping that fairly steady state, which has to do with how you attend, the manner in which you attend trade shows and so on. We've been very thrifty. At the same time we are adding our sales presence, so that tends to be minor upticks, but not significant. Our key add is as usual in R&D and for us typically that means we add perhaps $400,000 a quarter in that particular area, adding resources.

Okay, great. Thanks, guys.

All right, thank you. And our next question is from the line of Rich Valera with Needham & Company. Please go ahead.

Thank you. Just wondered if you could comment a little more on multimedia? You kind of broke that out last quarter as a segment and this quarter you mentioned it was I think, the revenue wasn't significant relative to connectivity.

I was just wondering if, one, you could define what is not significant, is it sort of less than a million, less than 500K? And, two, sort of what happened to that business, is Verizon still using the software on their music phone, you know, and why at these low levels, and I guess how should we think about business going forward?

Okay, first off, when we say it's not significant, it was less than a million, and so that's, you can kind of back your way into it. It just wasn't a big number. As far as for Verizon, Verizon switched to [real networks] for their music well over almost a year-and-a-half ago. We've seen a decline in the amount of business we've gotten from Verizon on the multimedia side, however, that's again past history.

As we look forward and we look to where we're going, we think that multimedia will start to grow back as a more significant part of our business case going forward, especially when we start talking about some of our cloud computing strategies and the need for not only the carriers but also the cable operators that are starting to meet in the middle, where they really are focused on delivering content to the three screens that really matter the most, those being the mobile device, the PC, and the television, and they just come at it from different points of view but they meet in the middle. So we believe that the multimedia part of our business is a significant play for us going forward and will grow to be a significant number in coming quarters, it just wasn't this quarter.

That's helpful. And, Andy, just -- I know you don't want to get into quarterly guidance per se, but can you say anything about the sequential trajectory of revenue expected in the second quarter? Do we expect it to be up or flat relative to the first quarter? If you could give any color there, that'd be helpful.

Oh, sure, absolutely. It's going to be up. I mean this is -- we're seasonal in this business, and as I said in my prepared remarks, we expect the business to improve from this point. The key is looking at the business year-on-year, so last year in second quarter we did $23.4 million, and we can say we're going to beat that, it's just a matter of we're shooting for our guidance of being up 10% to 15% this year, that's your $110 million to $115 million.

So, again, look at this quarter by quarter, and we're shooting to build each quarter and outdo last year both not only in revenue but in operations perspective. You know, our op margin is up 40% year-on-year, so not only are revenues up your [9%], we're up 40% where it counts. So, again, we expect to continue that type of performance as we go into Q2 and then take it forward.

Great, thank you.

I think this is also consistent with our comments that we've made since the start of the year, starting at your conference in January, and namely we said that we were looking at guidance of $110 million to $115 million. We said to look at what the performance was in the four quarters of 2008, kind of look at the first half of the year as being up somewhere around 10% over that quarterly performance, and the back half of the year being closer to 15% up over that quarterly performance. So while we didn't give you quarterly guidance, we really kind of did, all you had to do was get your calculator out.

Yes, that's helpful, Bill, thank you. And just one final one, if I could, just wondering how the economics play out for you if you sell your connection manager through a carrier or through a notebook OEM? Because at this point I think you have most of the carriers, the major broadband carriers in the U.S. sort of sewn up, so how do you generate incremental revenue from a notebook OEM if that notebook is ultimately going to end up on a network that you already have a sort of connection manager agreement with that carrier?

Yes, so that's a very good question, and I think the way to really think about it is to look at what the motivation is for PC OEMs to include connectivity software in their offerings going forward, and versus what the motivation is for the carrier.

When you look at the carrier, you're looking at building a piece of software that provides easy access to their network, and it's really only designed to provide easy access to their network. And it does so in a way that is conducive with how they market their services, it's branded to them, et cetera.

When you look at the PC OEM going forward, and we've already publicly announced Dell some time ago and they are a very significant and important customer to us today, their motivation is to build some connectivity software that provides instant access to the internet anywhere you are on anybody's network, it's branded to the PC OEM, and is designed to sort of augment or show-off the capability of that PC device, whether that PC is a computer or a netbook.

So it's a little bit different as to how you go to market, there are different products, they're a different code basis and we, as you say, we dominate the carrier one and candidly as more and more news becomes public you'll see that we are a very dominant role on the PC OEM side, as well.

Wait, but just to be clear, you don't double dip, do you? If it's -- if there's a connection manager embedded on the PC, you don't also get a royalty from the carrier, do you?

Now, if we -- okay, let me see how to answer that. We get paid a royalty for the software that is preloaded on the PC for the PC OEM. We get paid for every copy that ships, we're paid for that. If, and then from a carrier perspective we get paid for every carrier branded software product that ships with the devices that they offer. So I don't know what you mean by double dipping, but in actuality we get paid for everything that we sell.

Okay, but you get paid by one or the other, not both right?

In most cases.

Yes.

Okay, that's what I was -- thank you very much.

There may be some exceptions.

All right, thank you. Our next question is from Chad Bennett with Northland Securities. Please go ahead.

Yes, hi. Good job on the quarter, by the way. And a couple of questions for you, Bill, and maybe this is a different way of asking a question from before on the guidance for this year, considering the wins you mentioned this quarter.

Do we expect from a volume standpoint the netbooks opportunity, both with the rollout you have in Q2 and I guess just netbooks in general, and then the PC OEM to be and define material, however you want, but material contributors to '09 or are they kind of at run rates in 2010?

Okay, the piece -- let's kind of separate those two, because I think they need to be separated. The PC OEM side of our business is significant. As I said, Dell alone was 14% of our business in Q1. We've said that we have signed yet another PC OEM whose name we can't mention yet but hopefully will become public in the not too distant future, and we consider that that win will also be significant.

So the PC OEM marketplace is a very important strategic marketplace in our overall business case. Now, let's switch for a second to netbooks, because I really think they kind of stand a little bit different.

In the case of netbooks, this is an emerging marketplace, there were a number of netbooks shipped in 2008 but those numbers in relative significance are fairly immaterial to the potential for the netbook marketplace.

We believe that we are putting together some very strategic products for the netbook market that would give us a very strong play in that space, and by definition netbooks the only way they really work is when they're hooked to the internet. You've got to have connectivity capabilities, there's other utility plays, there's other multimedia plays, there's other device solutions plays, there's all sorts of convergence but all of the technologies we possess under a single roof in the netbook space.

We think the netbook market will grow in 2009. Will it be significant in a relative sense? That's yet to be seen. I think the market has to bear itself out. One of the first indicators would be a fairly significant rollout of a netbook by one of our large carrier customers. If that plays out well then that should give us more of an indicator as to how this market segment might grow. Assuming that it grows, like I think it will, clearly by 2010 it's a very significant play in our overall business case. I hope that helps you?

Yes, I mean maybe this is a more direct way of asking the question, if we have the top three carriers out there by mid summer with each of them selling two to three different branded netbooks and they're across, pick the city count, 30 or 40 major cities, would that be -- I would imagine considering really AT&T is the only one really out there with the netbook in a couple cities. I would imagine if the rollout became that much, that rapid, that would probably be more material than what you're expecting out of netbooks this year?

Well, that's possible, but of course what we're trying to guess right now is what the adoption rate will be on the part of the end user. Are we going to buy netbook or are we going to say, "No, we need a PC that has a spinning hard drive and all the associated power, et cetera."

If the netbook phenomena, and I'm willing to bet that it's going to be successful, does actually take off in a meaningful way, yes, that could provide up side, and we will come to the Street if that's the case and we'll talk about that. But I think we have to wait and see how it plays out before we try to guess. I guess that's what you guys do, as analysts. I just try to build products and get ready for the marketplace. I think it's going to be a strong one.

Okay, fair enough. And then do we expect to record revenue from the top PC OEM in the second quarter.

We're looking at probably the second half of the year.

Second half of the year? And I know you don't want to name names, but is it a top four PC OEM?

Cannot answer the question, sir, I'll get in trouble.

I tried. All right.

Just a couple quick ones for Andy, I promise, and then I'm done. Andy, what was your cash tax rate for the quarter?

25%, and just to throw some metrics out there, they're in our K and Qs, but we're working forward here, the federal NOL carry forward of about $1.2 million and a state NOL carry forward of $6.3 million.

Okay.

But more importantly we have federal tax credits, R&D tax credits of $1.1 million we're carrying forward and state tax credits of $600,000.

Okay.

So that sets us up for what we think will be about 25% unless, of course, the governments continue to waffle on letting us profitable companies use our tax vehicles.

Yes, that's probably another conversation. But deferred revenue was up pretty materially at least sequentially, was that just seasonal, Andy, or was there anything in there?

That's seasonal. It's all connectivity and that's seasonal in terms of January yearly billing.

Okay, that's what I figured. It's all I have. Thanks, guys.

All right, thank you. And our next question is from Lauren Ye with JPMorgan. Please go ahead.

Hey, Bill, Andy, how are you?

Good.

Just wanted to ask another question around the pipeline, so as you look at your pipeline would you say that your pipeline has been accelerating? I guess Q1 you've had half a dozen deals close, how should we look at your pipeline in Q2 and going forward in 2009?

Yes, that's a good question. We were pretty vocal about how we had a very strong Q4 2008. We've backed that now with a strong Q1 of 2009 as far as our ability to acquire new customers.

Our sales teams and our marketing and business units are executing very well, and we have a strong pipeline presently in Q2. And we are very energetically working on getting contracts signed. We have expanded our contracts department as a result of that, that is an area of growth, that's a good sign. Leading indicator possibly.

So we look forward to strong customer acquisition throughout the year, and as we've said many times we're very bullish about our business case, we're very bullish about our future, and just have to kind of stay tuned.

Okay, great. And I just had a question actually around the customers, have you seen changes in your customer behavior as it relates to the sales cycle lengthening or maybe duration of your contracts in light I guess of this macro economy?

No, in other words, they remain long-term contracts that, as Bill has often said, we are the dominant player in the space, and is as evidenced by the new contracts we're signing. So all these contracts, too, are multiple year long-term contracts. These aren't purchase order type contracts.

Yes, and I think the other thing is you have to look at who we do business with. We do business with some of the largest enterprises in the world, and these are folks that we all feel the impact of the recession and the difficult times, but at the end of the day these are very strong businesses that will weather these times and come out of it probably stronger than they went into it, which is something I've said about us fairly consistently going forward.

Great. And just, Andy, around Verizon, did you say it was 28% of total revenue?

Yes, and that includes Alltel now.

So sequentially I guess just Verizon alone or some sort of apples-to-apples basis, did they go up or down?

Yes, they're up, they were about 18% Q4, and but part of that is mechanics of the consumer business was closer in the $6 million range, and now they're down to $4 million, so part of it is just simple mathematics, but so part of it's Verizon added Alltel into their numbers, and the other part is just simple mathematics.

Okay, so the business is still steady around this level?

Yes.

Yes, now you'll see a portion of the Alltel business that is -- they're required to divest, leave their category at the time of that divestiture, and that will either become yet a new customer to us again or will be incorporated by somebody else that buys it.

Got you. Okay, great. Thanks a lot, guys.

All right, thank you. Scott Sutherland with Wedbush Morgan Securities. Please go ahead with your question.

Great, thank you, and good afternoon.

Yes, Scott.

I wanted to ask you, the PC OEM, I know you're not giving much details, but with Dell you put some expenses ramping up on that, have you already been spending here or are you expecting some more expenses to ramp-up here and for how long?

In any deal once we say we've got it done you can pretty much rest assured we've been working on it for a little bit, so we always have a lead in on expenses so we've already seen that occur. But as I said earlier in the call or earlier in the Q&A, as Bill commented we've closed just something less than half a dozen deals, but a significant number and deal momentum is still strong. So we expect to keep adding into our R&D bucket, and for us it means we can effectively add maybe $400,000 a quarter worth of expense in terms of manpower, that seems to be our pace. So we expect to continue to add in this category.

Okay. I want to get back to the economics from a carrier versus a device, a PC OEM perspective, from my understanding PC OEM guy will pay you for each copy, whether that person activates on a network or not, so should we assume pricing is a smaller percentage of what a carrier pays for each copy or how should we think about that?

Well, I think you should think that we have a consistent pricing model that is tied to volume, and by definition PC OEM ship higher volumes than any, even of the largest carriers and purchase on a quarterly basis. Therefore, their cost per unit might be lower but their volume is substantially higher, that's how to think about it.

You get paid whether it's activated or not on the device side?

That's right, it's based on shipment.

Yes, right. Okay. And, lastly, your multimedia again based on what you saw on the connectivity side it looks like that was soft, under a million. You do expect to rebound, is this really driven by new products or is this Nextel International or are you paying for Verizon starts to level out or maybe grow with the Alltel acquisition?

Well, I mean obviously it's very helpful when you have new customers, like Nextel International and LiveWire, and I mean that's all positive and additive. But we also expect some game changing kinds of deals and I don't think either of those two, first two, would be considered game changing. And those deals will probably be coming around some of our newer technologies on the cloud side, as well as some enhanced multimedia or device management products, as well.

You know, one of the things we've talked about for some time is the, one of the issues that all of the carriers have to face is that you only have so much bandwidth, there's only so much spectrum, and so one of the things to do is to look at how you utilize that spectrum. So when you get to things like fixed mobile convergence, which is one of the INS type technologies, allows a carrier to move some of the traffic from the cellular networks to a WiFi network when the user is in a WiFi area. That's a better way to get utilization of the bandwidth that they have available to them.

These are all technologies that we own, that are part of us, and part of our fabric, and part of our overall offerings to our carrier customers. I've talked many times about the need to sell the portfolio. I am incredibly pleased that we have a very strong professional sales team today that really gets it, and they are out selling the portfolio. And so we're selling connectivity, we're selling multimedia, we're selling device solutions products, we're selling a lot of different products, compression products, et cetera, and it all adds up.

Okay, great, thanks, and a good job growing in a tough environment.

Thanks.

All right, thank you. Larry Harris with CL King. Please go ahead.

Yes, thank you. With respect to the consumer business, obviously affected by the economy and such, but to what extent would future results there be driven by say if Apple comes out with a next generation Mac book error and they start selling a lot more notebook computers and, obviously a desktop machine, would that help to drive additional revenues in that segment?

Well, our productivity and graphics group has a lot of technologies under a single roof, and, yes, they have had a very strong tradition of leveraging off of what happens in the Macintosh platform and that's done very well for us because the Mac user tends to be a little bit more affluent, spend a little bit more on after market products, like software, so that has served us well.

But I think that when we look at this group's future, we're looking at how we deploy a lot of this technology going forward, and there may be some new imaginative ways to go far beyond what would be the traditional consumer channel. I mean and where we really can look at the enterprise and small business, as well as others, as a way to bring product to market, and that's something that we're highly focused on.

Understood, understood. And the reference that you made earlier to working with the cable companies, I assume that's a result of your relationship with Clearwire, is that correct?

Yes, obviously it -- relationships tend to leverage off of relationships. And the Clearwire tie is very meaningful to Smith Micro and we're very privileged to be able to call Clearwire a customer, but there are some very big names that have invested heavily in Clearwire, like Comcast, Time-Warner, and others, that can in their own right have a very significant play with Smith Micro going forward.

So I think one of the things to look at with the carriers is that you're seeing a logical trend, the carriers are coming out of their telephone experience and moving towards the internet and towards looking at all three of the primary screens of importance, where the cable guys start with the television and are moving the other way, but at some point, and it's already happening, their paths are crossing. Cable guys are going to become wireless carriers, wireless carriers are cable guys. So, you know, it's interesting to watch this happen.

Absolutely. Okay, thank you.

Thank you, Larry.

Thank you, and just one moment please. And, Management, there are no further questions at this time, please continue with any closing comments.

Okay, thank you. I want to thank everyone for joining us today, and just some notes.

We hope that you can join us here for some upcoming conferences, which include the 2009 JPMorgan Technology and Media Teleconference on May 20th in Boston. There also will be two Conferences in early June, the RBC Capital Markets Conference, as well as the UBS Global Technology and Services Conference.

Should you have any other questions please feel free to call us, and we look forward to speaking to you on our second quarter conference call. Thank you.

All right, thank you. And, ladies and gentlemen, this concludes the Smith Micro Software Fiscal Q1 2009 Conference Call. You may now disconnect. Thank you for using ATT Conferencing, and have a very pleasant rest of your day.