Smith Micro Software Inc (SMSI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro Software fiscal Q2 2009 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, August 3rd, 2009.

I would now like to turn the conference over to Charles Messman of MKR Group. Please go ahead, sir.

Good afternoon. Thank you for joining us today to discuss Smith Micro Software's financial results for the second quarter 2009 which ended June 30th, 2009. By now you should have received a copy of the press release discussing our second quarter results. If you do not have copy and would like one, it is available at www.smithmicro.com, or by calling 949-362-5800, and we will e-mail one to you immediately. With me on today's call is 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 related to the Company's revenue guidance for fiscal 2009, its financial prospects and other projections of its performance, the company's ability to increase its business and the 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 from its customers and their end users, new and changing technologies, customer 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 material from those expressed or implied in any forward-looking statement. The forward-looking statements contained in this release are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this release, and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this call.

I'd now like to turn the call over to Bill Smith, Chairman, President, and CEO.

Thanks, Charles. Good afternoon, everyone. Welcome to our second quarter 2009 earnings conference call. I'm pleased to report another strong financial performance. We achieved the strongest second quarter revenue results in our Company's history, and for the first six months of the year, our strongest top and bottom line performance, as well. During the quarter, we grew our revenues 11% year-over-year to $26 million. But just as important as our strong revenue growth is our operating performance during the quarter. Our earnings per share were $0.04 per diluted share on a GAAP basis or $0.17 per 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 $22.1 million increased by $4.1 million or 23% from second quarter of 2008. Our continued strong performance is also reflected in our non-GAAP gross profit of 89.7% which compared to 81% for second quarter of last year. During the quarter, we continued to deliver high-value data connectivity offerings to meet our long-term mobility strategy. Looking across the different areas of our business, we continue to add new customers in new market segments, and we believe these new customers will have an impact on our financial performance during the second half of the year and beyond.

We significantly expanded our addressable market by signing our first cable operator, Comcast, who recently began offering mobile broadband services. We also built upon our leadership role in WiMAX connectivity solutions by securing a new customer, Digital Bridge Communications. Based on our continued success with customers, both new and established, we anticipate the Company's revenues will remain on track during the second half of the year. As most of you know, our revenues tend to follow the timing of our customers' new product and service launch initiatives. And while our customers have expressed concern over the general economic situation, our ability to continue to add new customers is helping us to perform at a growth level consistent with our revenue guidance.

As we have consistently conveyed, our business model continues to generate significant free cash flow from operations, as evidenced by how our cash position grew to $43.8 million during the second quarter. We view this quarter's solid cash flow and record revenue results as reflecting well on our strategic direction, both short term and long term. Our QuickLink family of software products which facilitates connectivity to mobile networks remains the key growth driver for the Company as revenue for this group increased 55% year-over-year from $12.9 million to just over $20 million in the second quarter of 2009. Our mobility line of products which includes our connectivity on security and multimedia and convergence products grew 27% from $16.8 million in Q2 2008 to $21.4 million in Q2 2009.

Looking to the remainder of the year, we remain positive about our future opportunities, our ability to expand into new markets, add new customers, and extend our leadership role as the preeminent software provider in the mobility and connectivity marketplace. Later in the call I will discuss in greater detail our opportunities within our business segments and our overall view of the markets in which we operate.

But now I would like to turn the call over to Andy Schmidt, our CFO, to review our second quarter financial results. 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. The non-GAAP results discussed on 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 2009 and 2008 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC in 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 measure. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com.

Let's discuss our detailed second quarter results. For our second quarter, we posted revenues of $26 million and earnings of $0.17 per diluted share. Total revenues of $26 million increased from revenues of $23.5 million for second quarter 2008, an increase of 11%. International revenue was approximately $1.8 million this quarter across all business groups. As noted on our SEC filings, 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 productivity and graphics units. Our other category remains unchanged from 2008.

As such, wireless reported record revenues for the quarter of $21.4 million as compared to $16.8 million last year, an increase of 27%. Within the wireless segment, connectivity and security posted revenues of $20.1 million compared to $12.9 million last year, an increase of 55%. Multimedia and convergence posted revenues of $1.3 million compared to $3.9 million last year. Slightly offsetting overall gains in our wireless sector, our productivity and graphics group posted revenues of $4.3 million as compared to $6.2 million last year, a decrease of 30%. Finally, we reported approximately $281,000 of other revenue which compares with approximately $396,000 per second quarter 2008. Total deferred revenue at June 30, 2009, was approximately $3.3 million.

Switching to gross profit, non-GAAP gross margin dollars of $23.3 million increased $4.3 million, or approximately 23% from the same period last year. Of key significance, while our revenue increased 11% year-over-year, our gross margin dollars increased 23% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 89.7%for Q2 2009 compared to 81% for Q2 of 2008. Non-GAAP gross margins by product group was as follows. Connectivity and security, 95.2%. Multimedia and convergence, 62.1%. Productivity and graphics, 74.2%. And other category, 64.4%. As we've noted before, our margins are driven strictly by product mix.

Switching to operating expenses, non-GAAP operating expenses for the second quarter of 2009 of $16 million is an increase of approximately $600,000 from Q1 of 2009. This change is as expected. We continue to add additional engineering resources to meet new customer product deliverables, scheduled for future quarters. From a year on year perspective, non-GAAP engineering expenses increased 16%, selling and marketing expense increased 6%, and we've kept our administrative expense flat. Total non-GAAP operating expenses increased 9.4% year-over-year which is significantly lower than a 23% increase in gross margin dollars. Non-GAAP operating margin for the current period was 28.1%, higher than our benchmark 25%. Current period operating margin compares very favorably to operating margin of 18.7% for Q2 of 2008.

Non-GAAP net income for the second quarter was $5.6 million or $0.17 per diluted share as compared to $3.6 million or $0.12 last year. From a balance sheet perspective, our cash position closed at $43.8 million at June 30, 2009, an increase of $7.2 million from the beginning of the year. Accounts receivable at June 30, 2009 increased to $22.1 million from $18.4 million at the start of the year. Net working capital at end Q2 was a strong $55.9 million. Cash generated from operations for the quarter was an exceptional $5.3 million. Primary uses of cash for the period were capital expenditures of $2.4 million. Capital expenditures were primarily leasehold improvements related to new facilities space, a new ERP system and a new IP telephony infrastructure. Again, free cash flow year to dated is $7.2 million despite our strategic investment in our business.

Overall we had a very good quarter, and we've had a great first half of the year. Despite global economic challenges revenues are up year on year, but of key significant, our gross margins, operating margins, profitability and cash flow all improved significantly over last year's quarterly and six-month performance. Looking forward to the balance of 2009, we expect our business to continue to improve. As the first half of the year was strong in terms of winning important new deals, we expect to continue to invest in our engineering infrastructure. As we look at the balance of the year, we expect our existing key customers to continue to perform well given a challenging economic environment. We are excited that our new customers expect to launch their new products on time but can't comment at this time as to the pace of the new product launches.

All of our deals are multi-year in nature and represent a long-term commitment by our customers. However, products are often launched in a segmented manner so revenue from new products start modestly and continue to grow over time. The resultant pace of the new products launches will be a determining factor in our revenue growth over the next couple quarters.

In regard to gross margin, we expect our product mix to remain stable and expect mid to high 80% gross margins. Operating margin will continue to be revenue dependent with 25% being our benchmark. Taxes continue to be in a state of change given the state and federal deficit spending. At this time, we're 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 will provide an 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 on Tuesday.

At this point I will turn the call back to Bill.

Thanks, Andy. Our connectivity as security solutions for laptops, netbooks and other mobile devices represent an unrivaled portfolio of competitive products. Looking at the first half of 2009 versus the first half of 2008, the revenue associated with these product lines increased by a significant 62%. During the quarter, we began to deliver a new solution to enable our customer subscribers to be on the cutting edge of mobile broadband capabilities. This is reflected in the new multimode connection management solution we recently delivered to Comcast that allows end users to roam between WiMAX and EVDO technologies, a first for the marketplace. While this is the first cable company to begin offering mobile broadband services, we believe that other players in this market segment will be very active in the coming months as they launch new wireless services that converge with their land line offerings.

In the 4G space, Clearwire, in combination with Motorola, both customers of ours, continue to launch WiMAX services in markets such as Atlanta and Las Vegas. We announced a new WiMAX customer, Digital bridge Communications, which will deliver WiMAX services in 15 US markets. Overall, we are beginning to see a lot of activity with regard to mobility solutions for 4G networks from our leading customers who have become more public about their network rollout plans for 2010. We see this as a great opportunity for us as we build upon our clear leadership in 4G connectivity solutions.

I am pleased with our pipeline of new sales activity, as we reach the halfway point of 2009. Our strength has notably been fueled by demand for mobility services and new devices that continue to broaden the overall market. Nearly all of our carrier customers are in the process of offering netbooks either through trials or strong promotional campaigns. While it's clearly too early to project how large the trend could be, early results are showing significant promise. And our customers are requiring more and more new product development as they refine their product rollout strategies. Needless to say, we are excited about the potential with netbooks in the marketplace going forward.

As we indicated in the first quarter 2009 we began work with a second large PC OEM customer and have made significant progress towards completing the initial product development. We look forward to more discussions about this new customer relationship after the product launch later in fiscal 2009.

Turning to our other PC customer, Dell, sales remain solid, representing approximately 13% of our total revenue during the quarter. Overall this vertical market is relatively new and has significant upside. We see great opportunities with both of our PC OEM customers as we broaden our connectivity products solutions across a wider mobile computing product segment.

Looking at our carrier customer base, and their contributions to our results this quarter, Verizon Wireless had a very strong quarter with us, edging up slightly to 36% of our revenue. I continue to be pleased with our progress in achieving a broader, more balanced customer base between carriers, PC OEMs and enterprises, as all contributed strongly to our results during the quarter.

Our multimedia and convergence product lines represent the combination of three major product initiatives. Device and server management solutions, IMS, or rich communication suite solutions for fixed mobile convergence, a PC based and cloud based mobile multimedia management. Starting with our media management solutions. We have worked hard through the first half of the year to retool for technologies to address the growing need for synchronizing and managing data and media files across multiple platforms and the web. The combination of our PC media management and extensive support for side loading data from hundreds of handsets is being enhanced to leverage some of our over the air capabilities using our device management business, to address wireless synchronization to cloud-based services. As we continue to augment the product line with advanced features that create a more integrated user experience, we are better serving existing customers such as Nextel International and LiveWire while pursuing additional growth opportunities with new customers.

We have continued to make progress with our device management product as new agreements expand our relationship with HTC for android device management clients and for further server product deployments with our partner Huawei. We are excited to see opportunities in the device management space arising within the cable and WiMAX service providers, and in this quarter we delivered our first solution to a new cable partner in the US. We are actively integrating the technologies and capabilities that device management brings into our connectivity and security product line to further differentiate Smith Micro offerings to support our customers' wireless services and mobile broadband offerings.

Let me turn now to our productivity and graphics group which is focused on distributing products to the business and consumer segments. 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 revenue of $4.3 million, in line with our expectations. As we stated in the first quarter, we expect this run rate of approximately $4 million-plus to continue throughout the remainder of this fiscal year. We continue to be opportunistic with the productivity and graphics group in finding and building new product offerings to address new emerging markets. We are successfully diversifying our customer base through new deals with major companies that continue to find value on our products, especially our patented StuffIt technology.

For example, we won a new StuffIt imaging license agreement this quarter with a leading technology Fortune 100 corporation, and also launched new publishing products and updates to our leading compression, utilities and graphics products. We also recently relaunched Content Paradise, a new online marketplace and creative platform for hobbyists, artists, and graphics professionals. Overall, this remains a profitable business segment for the Company.

Before I open the call for questions, I would like to leave with you these thoughts. Our strong financial results in the second quarter of 2009 show that Smith Micro continues to perform well. Our new customer agreements and the demand for our innovative connectivity line of products both signal the strength of our existing relationships and our ability to open doors to new markets and new customers such as Comcast, the first cable operator to launch a national high-speed wireless data broadband service. We remain extremely well positioned to move aggressively to leverage our strong cash position, to make strategic technology acquisitions to capitalize on new opportunities as our markets evolve. During the first six months, our operating cash and cash equivalents grew to $43.8 million, and our disciplined approach to costs and expense management gives us a strong financial position, and we remain debt-free.

We are very optimistic about both the opportunities ahead of us in the latter half of 2009, and with the product and business strategies with which we have positioned ourselves. We remain in line with the revenue guidance of $110 million to $115 million that we provided at that time beginning of the year. Where our customers have mobile connectivity and mobility software needs, we add a value. Through a combination of innovation and execution, we bring an unprecedented product portfolio to life. The increasing diversification of our customer relationships helps strengthen our company to succeed. We will continue to drive to the market new technologies that enable our customers to better manage their mobile connectivity, mobile media, and mobile devices. This fundamental product strategy reflects Smith Micro's philosophy to enrich the experience people have with their computers, mobile devices, and wireless networks.

With that, operator, I'd like to open this call for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Maynard Um with UBS. Please go ahead.

Thank you. You commented that revenue will be determined by customer product releases. Can you just talk about what's embedded in your revenue guidance, and in particular are you not assuming some customer launches in the back half? Just trying to get a sense of what level of conservatism is built in, then I have a follow-up.

I think we see that there will be a consistent flow of new customer launches throughout the back half of the year. We have anticipated that, but as I've always said, when you're selling OEM software, new deals tend to start slow and then build up over time. So I think we've probably taken that as a basic outlook when we looked at the back half of the year. We feel very strong about the second half of the year, and look forward to third and fourth quarters.

Okay. And then can you just talk about your expectations for business mix in the second half and also maybe a split, if you can, between Q3 and Q4 from a revenue perspective?

Let's start with the product mix, or business split, as you call it. Should be somewhat consistent with what you saw this quarter, obviously with the wireless sector being the primary growth area, consumer, as we said before, is going to run somewhere in the 4's every quarter. Splitting Q3 and Q4, we won't do that per se. We have to wait and see how it comes together, but we expect, as Bill pointed out, the launches of the new customer, new product launches, basically start slow and build. So our expectation is that what would launch in Q3 would grow in Q4. That seems to be logical. An example, as Bill brought up as a new customer, Comcast, you've seen in press releases they've launched, but only a few cities. Then they will basically -- they've launched in Portland, as per the press release, but you'll see them launch in other cities as they go forward so that's a perfect example of a segmented launch.

Okay. Last one and I will get back in the queue, but related to your PC OEMs, can you remind me of the revenue recognition. Is it based on activation or sell-in? I'm just wondering if you've reached the minimum threshold that you had in the contract.

Typical contracts are in sell-ins, sometimes, depending on the technology. Again, it's more technology driven. They are activation based. But we don't see a sell-in type inventory lag that you might expect on an activation model. So that's not particularly relevant for us. The key relevance is how fast are they launching and what kind of marketing programs are they putting together. If that helps.

And just in terms of whether you have reached your -- because you have talked about the contracts having a minimum. Just wondering if you are experiencing the up side relative to those contracts now.

Again, in very select cases, if we have quite a bit of upfront engineering work to do as we have customers that may launch slowly we may have minimums. Those, again, really aren't in play, as far as driving our numbers any particular way. So I don't think there's any real relevance at this point as far as our minimums are concerned.

Okay, thanks.

And our next question comes from the line of Chad Bennett with Northland Securities. Please go ahead.

Yes, hi, a couple questions. Regarding the second half of the year, even at the low end of your guidance range, you're looking at $30 million quarters, and maybe this is piggybacking on the prior question. So can we get a sense for how much of this is existing customers and programs that we are aware of right now and how much of this is new customers. And then if we can drill down a bit more and try to get a sense, I don't know if you have your arms around it yet, or your carrier customers do, what the embedded assumption is for the netbook opportunities out there in the second half. I imagine it's more of a 2010 event, but any color you can provide.

Okay. I think the way to look at it, I'm trying to understand the line of questioning. As we look at Q3 and Q4, we know what our customer mix is, whether they are in public hands or not, they're known to us. So we're comfortable with the guidance we have given you and we've reiterated at least three times already on the call and have no problem doing it again but we feel comfortable that we will make our numbers. It's not a walk in the park, and never is, but we've got a strong team, we've got a strong mix of customers, an incredibly strong portfolio of technologies. And we're executing on a business case that just seems to work.

As far as the netbooks, I'm very excited about the netbooks. I have not forecasted in large numbers for netbooks because I don't know yet that the consumer's going to adopt netbooks. So while I'm hopeful that the consumer will adopt it and it will become very successful, if there's a lot of activity in that area and very strong attach rate, that should be viewed as upside.

Okay. And then, Bill, another one for you. Can you talk about the impact of 4G upgrades on your business, which I assume are pretty positive? Verizon, I think it was last week, was pretty specific in their 4G rollout in 2010. AT&T has gotten more detailed about their plans in 2010. And then the guys like Clearwire on the WiMAX side I think are probably even more aggressive than they were three, four months ago, about how quickly they want to get networks up and running. Just in general, can you talk about that upgrade and the impact on your business?

Yes. We're in the wireless connectivity business. We make it possible for folks to get hooked up to the wireless Internet, get their jobs done, execute on what they're doing. And when you move from 3, 3.5G to 4G, and suddenly you're looking at wireless data rates that are very much on a par with wireline rates, that's got to bode extremely well for us. I think it's going to bode very well for our carrier customers, and our carrier customers are becoming broader. We've talked for some time about the fact that the cable folks would enter the wireless space, and now we can actually put the first name on the dotted line and tell you who it was. Well, there's more to follow. And our current carrier customers that come from the telecom side with their plans to roll out LTE are exciting.

So you've got a lot of activity in the marketplace, and it's a worldwide marketplace. We tend to focus heavily on North America, but it is broader than that. You're seeing the rollout of both LTE and WiMAX, WiMAX leading the way, LTE to follow soon. And this is going to bode well. It's great from a connectivity standpoint. It's great from a multimedia and conversion standpoint, because we're going to talk about transmitting voluminous amounts of data over wireless infrastructure that really, for the first time, is really up to it. This is an infrastructure that is not taking a backseat to wire line. So when we hit the 4G world this is a very exciting time, and I think it bodes extremely well for Smith Micro, as well as our customers.

Okay. A quick one for Andy. Andy, were there any other, besides Dell and Verizon, were there any other 10% plus customers in the quarter?

No.

And then Verizon in particular, 36% of revenue, I believe, this quarter, obviously revenue was sequentially up, and Verizon I think was 28% last quarter. Was there anything specific that drove the Verizon revenue? Did you see some netbook business? Or just generally speaking, is there any explanation for the strength from Verizon?

Without getting into a lot of details, because we just can't right now, your net take-away is that we're selling multiple products to Verizon, many of which have not been publicly announced, and you're seeing that affecting the revenues. We talked for a long time about the strength of the portfolio, and as this unveils itself, I think you are going to see why we've been so strong about this. Carriers that we do business with tend to like to do business with us. They tend to want to buy more from us, and this may be the start of a trend.

Are these products -- just to probe a little more -- are these products obviously inside the connectivity grouping?

They are inside the wireless grouping, which is then much broader. So you will have to bear with me on that.

All right. That's all I have. Thanks, guys, good quarter.

Our next question comes from the line of Rich Valera with Needham & Company. Please go ahead. Rich Valera, your line is open.

Obviously noticed you filed a shelf here, gentlemen, and you have a strong balance sheet. But just wanted to see if I could get any color on the thoughts on the shelf, presumably maybe for some opportunistic M&A, but, Bill, if you could shed any color on that, that would be great.

We have nothing planned. We have been extremely acquisitive. We are very much out in the marketplace looking at added technologies and business cases that we think would be additive to what we do. We, of course, do everything by first talking to our current customers to make sure they think it's a good idea and something that they want to buy, and so this is really more an effort just to position ourselves to be opportunistic. We have no plans to use this shelf at the present time, but by putting it up, it just makes it that much easier for us to enter the marketplace if all the moons line up.

That's helpful. Andy, with respect to gross margin, very strong this quarter. How should we think about that going forward? Do we think it could stay at these kinds of levels, near the 90%, or might that bounce a little bit lower again with some mix shifts?

Probably, again, the mid to high 80s is where we expect the balance of the year to fall. So again, very strong performance, but it can move a tick or two, depending on product mix, as you refer to.

Great. And then Bill just wondering how you are seeing the market in terms of competition and pricing. I know you have one private competitor out there that maybe hasn't been as disciplined as you on price. Can you just describe how you're seeing the market, particularly in the connectivity space with respect to pricing?

One of the things that we're seeing a very consistent trend towards is the need to add more and more power to the overall connectivity software. That tends to fly in the face of pricing pressures and rather lead us more to an increasing price point. So these two factors tend to work against each other, and for us, tend to work out in a more positive way. So we continue to stay very focused. We're very cognizant that competition is there. However, we understand our role is the absolute leader in this space. We have more technology to bring to bear than anybody else that's out there that we compete against, and we've clearly leveraged that as part of our overall business case and our muscle. So we think we can not find ourselves in a lot of pricing pressures. We frankly see that our biggest issue is just building out the new technologies, getting them to the marketplace on time, to allow our customers to launch their offerings.

Great, thank you. Andy, just quickly, if you could give the stock comp and amortization by opex line item.

Sure. Okay, stock comp, total of $2.483 million, made up as follows. Cost of sales line, $56,000. Selling and marketing, $703,000. R&D, $688,000. G&A, $1.036 million. Again, for a total of $2.483 million. Amortization, total of $2.138 million. Made up as follows. Cost of sales, $1.179 million. Selling and marketing, $632,000. R&D, $327,000. Again, for a total of $2.138 million.

Thanks very much, gentlemen.

Thank you. And our next question comes from the line of Lauren Ye with JPMorgan. Please go ahead.

I just wanted to once again try to understand the operating margin in the back half a little bit more. So your product mix is similar and connectivity is the grosser area, and you mentioned gross margins to be in the mid to high 80s. I just wanted to understand the 25% op margin guidance you're going at. Is it because you are increasing a little bit your operating margins as customers are launching, or is this for new customers? Is this more conservatism on your part?

You know, it's all the above. Conservatism, always, we'd like to beat the numbers. But we continue to build very aggressively for the future, but more so from a contract win perspective. So when we look at building resources, we're not speculating, we're basically staying up with customer demand. As Bill said before, and we look at competitors, we bring more technology to bear, but something else that we're seeing from the very large customers is there's a it lot of, let's call it supplier consolidation going on, where if you look at the wireless sectors of the big carriers, they're very profitable, and they're leading the ship in those companies. They're looking at how can they actually manage their new initiatives, and they'll always look at consolidating projects with strong players, and that's where Smith Micro sits. But for us, we always have to be looking at building our infrastructure to be able to stay up with this pace. So we'll always hedge back to that 25%. This quarter it's 28%, which was fantastic. Can we operate at that level? Of course. But, again, our key objective right now, having won these contracts, and seeing this really tremendous opportunity ahead, is staying up with it and actually staying ahead of it.

Okay, got you. Then Bill, just around the netbooks again, the Verizon and AT&T, their shipping, can you just talk about the trends that you're seeing? Was it to your expectations? Are you expecting this ramp to be like a product cycle or where it will taper off, or continue to proliferate maybe?

I wish could I answer those questions. A lot of it really lies in the reaction of the consuming public to the netbook. If the consuming public embraces the fact that they're light, they're small, they're easy to carry, they still have a nice sized keyboard, unlike some of the PDAs, which for my fat fingers become a problem, then you are going to see the netbook phenomenon accelerate. I'm hopeful that that's the case, but I don't know that's the case.

In my earlier question, I haven't really built in a real expectation for netbooks, per se. I just have this sixth sense that says I believe that these have a great opportunity to be incredibly successful, and if they are, that should bode well for both us and our customers. That's how I view it. It's an opportunistic thing. I think it has the capability to have a big upside. How big, I've got to leave it to those of you that call yourselves analysts, because you have the crystal ball, and I've never been very good at that. So I'll have to leave it to you, Lauren.

What about the initial things that you've seen so far? Has it been to your expectation?

I didn't have an expectation, that's the whole problem. They have done reasonably well, and there's been good attach rates. But I didn't watch these things and say, gee, I expected that the industry would sell X hundreds of thousands of units. So at this point I think it's time to collect data. I think that that data collection can go through the end of the year, and then we can really look at it and say, okay, based on run rates of actual sell-through, for the second, third, and fourth quarters, this is what this looks like, and this may be what it means, then, for 2010.

Lauren, this is Andy. Just adding on to what Bill is saying, as well. They've just been out now for maybe a quarter and a half. So when you you see that a product like this is launched in the summer, it's a little bit awkward marketing time line. We've got back-to-school coming up in this quarter, which will be interesting based on the demographic profile of who might be buying these. And then we're going to get into your prime retail selling season, the fourth quarter. So those two quarters bring different types of marketing programs, opportunities for the carriers and others. So, at that point, certainly, as Bill said, by the end of the year we should have enough data to really see how did this all go.

Another way to ask it is just how much of expectation did you embed in your guidance? Is this a lot that's in the 100 to 115 guidance, or is this just icing on the cake?

More the icing. Back in January we didn't know a lot about these devices, so you can rest assured it wasn't built in the forecast.

Last question is around the legacy connectivity. How is that trending?

It's been doing well. The legacy connection business, connection manager business. Again, it's been stronger and stronger every quarter as you can see from the total wireless sector. And then as we broke out just the pure connectivity piece, up 55% year over year. It's doing tremendous, especially in light of LTE and everything coming out. I think we're starting to really see some broad demographics come and play with this product.

That's actually a strong point. As you start to see the rollout of WiMAX and LTE, that's all new software royalties for us, because all the old cards, all the old software, all the old USB devices, et cetera, that are out there are going to be thrown out and all new ones have to march in to take their place. So this is just another reason to be extremely bullish about our business case as we head into 2010 and beyond. So, feel really good about things.

Great, thank you.

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

Good afternoon. Good quarter, guys. A couple questions. First of all, I know you've won a few WiMAX deals, and you're getting some traction based on Motorola. Can you give us an update there? And how material are you seeing WiMAX for this year, or is that more future years?

You're seeing your first rollouts through Clear, and then that's going to then dovetail into the rollouts for the cable guys, of which we just put a name on the first one, that being Comcast. And there will be others to follow. We have talked about some of the other offerings in the WiMAX space. As far as Motorola Motorola, we expect to really start generating more business for us, pretty much non North American business, in the last half of the year. They've got a lot of activities underway. We'll have to wait and see. But we think that that will be a strong catalyst for us.

So the WiMAX space, it's just getting started. It's not going to knock your socks off yet, but as they build out their platform and they light up more cities and countries around the world, for that matter, I think it has the capability to be a very successful technology offering. So we just have to wait and see.

Looking at the competition side of things, Microsoft with Windows 7, we're hearing who is going to potentially adopt that. Do you see any of the functionality there being more competitive? You had an interesting patent read through. Can you talk about does that provide any protections, or how you would use that?

Okay. When you talk about Windows 7, Apple has had wireless connectivity built on their operating system for a year or two, it's been awhile. Wireless connectivity built into operating systems tend to be extremely vanilla, not particularly feature-rich, and in some cases not even particularly that easy to use. So as I view the offering by operating system outfits, wireless connectivity, that doesn't particularly cause a problem. One of the things that we do is we provide branding opportunities to our customers. Operating systems don't do that. We provide the capability to launch hundreds of new devices. If you want to wait for the next release of Microsoft's operating system to launch your device, you're probably going to perish, so I don't think that's going to work, either. I'm not particularly concerned about it. It's something that we have to continue to push the envelope. I alluded to the fact that we're trying to pack more and more technology inside of a connectivity client, and thereby redefine the definition of what a connectivity client is. This is not a game that really plays well for those who write operating systems that take months and years to get a product built and launched, and then another year or so to get it right. So I think that's really not a big challenge. I think the trick for us is to continue to execute, to build the best of breed tecnology for all our customers. And our customers are large, they're demanding, and they expect that and they're willing to pay for it, and we're willing to do what it takes as far as from a staffing and from a planning and execution point of view to keep this market growing.

Maybe lastly, one of the questions we are trying to understand last quarter, as you move into this PC OEM model and they're paying you and then the device gets shipped to carriers, have you thought a little bit more of how to think about the revenue model of how you're getting paid by both the device OEMs and the carriers, and which predominates over time?

I think history has got to play this one out. The carriers and the PC OEMs are heavily focused on providing a high quality software solution that's easy to use to reach their goals from a marketing standpoint. And to the extent that their goals intersect, then they can be competitive, but in many cases they don't. And in that way, it's just a broadening of the market more than a competitive thing in the marketplace. I don't know how to answer that question better.

We'll talk about that over the next few quarters, thanks a lot, Bill.

Thank you, and our next question comes from the line of Larry Harris with C.L. King & Associates. Please go ahead.

Yes, thank you. I'm intrigued by the announcement of the order or the relationship with Comcast, so I just want to make sure I understand it. If, say, I'm in Portland, Oregon and I sign up for the Clearwire service through Comcast, I would be getting a disk or a product, Smith Micro products. If, on the other hand, I just go directly to Clearwire and sign up for the service, your customer would be Clearwire, is that correct?

I think if you sign up for the wireless broadband data service offered by Comcast, you will get your software from Comcast, and it will be built by Smith Micro and branded to Comcast. The fact that you know that that's operating under the Clearwire network is really not how it's sold. It's sold as a Comcast offering. Also, by the way, could be operating under EVDO and then it's working on somebody else's network and our software will seamlessly move you back and forth between WiMAX and EVDO.

The second part of your question, if you went directly to Clearwire and you signed up for the service from Clearwire, you would get connectivity software from Clearwire that is also built by Smith Micro and would be branded to Clearwire. In both cases, they are our customers, and we're very proud to have them, and we look for their continued success.

And just one other question. In terms of your working with Comcast, and I assume you would probably be working with one or two other cable operators here, do you think there are some opportunities, maybe not immediately, but a couple of years down the road with some of the innovative products you've got in the multi-media type area that could find some applications with the cable operators?

Most certainly. We've talked about this at investor conferences, et cetera, where we talk about the three screen strategy. The three screens are the screen on the wireless device, the screen on the television, and the screen on your PC. And it really doesn't matter whether you come at this challenge from the cable side or whether you come at it from the telecom side because they're all moving towards the center. And when you move towards the center you're looking for a way to put together service offerings that allow you as a carrier to make money and to then deliver the output of these services to any one of these three screens. And that's right in our wheelhouse. This is something that we have been really focused on. We're working all types of customers in creating these kinds of solutions, and we think it's really exciting for the future. We think we're really one of the very few, if maybe not the only one, who can actually, under one roof, have all this technology and the ability to create such unique outcomes.

Great, thank you.

Thank you, and our next question comes from the line of Kevin Dede with Jessup & Lamont, please go ahead.

Hi Bill and Andy. Congrats on a nice quarter and thanks for staying on the line to take my question.

Welcome back, Kevin, it's nice to have you back.

I appreciate being here. Question for you regarding Verizon, specifically the multi-media technology development work you're doing, that web interface capability that you're developing. Is that something that you think might give you some leverage in dislocating real networks at Verizon on their multi-media side, or could you just give us an update on how you see your development positioning you better.

First off, we've not talked anything about multi-media at Verizon, and really have no plans on talking about it right now, so I don't know how to answer your question because I don't know where the question's coming from on this one.

You just talked about adding new functionality to your multi-media side, so just thinking out loud here.

It was a good extension. That's a logical customer to go to. And I would look forward to being able to talk about that if and when I get that opportunity.

Could you give us some more detail on some of the functionality you're adding to the multi-media side.

One of the biggest areas is, historically we started in this business of wireless multi-media by focusing on music, and when we look at it going forward, music's there but it's just part of the product. It's really heavily built around photos as well as full motion video, built around the capability of warehousing all that data in the cloud, and that cloud offering coming from carriers as a service offering going forward. And that allowing us to build some very unique multi-media software that speaks to the cloud as well as side loading and all types of media. It's an exciting place. There's a role for us, again, from the standpoint of compression. We still believe that the compression play is there. Is just hasn't quite materialized. But as this market gets bigger and the load becomes stronger on the carriers networks, some of our unique patented compression is a very strong play.

Can you give us a taste for your development at Dell, maybe the number of platforms that they've included you on. I know you've talked a little bit about Windows 7 coming out already and some of the features that you bring, but how do you plan to defend your position within Dell and prevent them from taking, essentially, that connectivity manager solution inhouse?

When you look at Dell, our software ships on all their enterprise class PCs, and the market that they're going for is the enterprise market. By definition the enterprise market is looking for a high degree of security and user authentication, it's looking for safeguarding the overall enterprise infrastructure from a data standpoint. None of these things that I just alluded to reside in any operating system provided connectivity. Additionally, and this was actually a question I guess I didn't quite answer that was asked earlier, we do have patent coverage. We have some things that are pretty exciting. One of the things that carriers are becoming particularly intrigued with as the amount of wireless data continues to grow and expand, and in spite of the fact that the networks are going to continue to get faster, there's always going to be that moment where we use up all the bandwidth that they're capable of offering. So then you look to how do we offload, how do we move some of this wireless data to other kinds of pipes like wire line pipes. And one of the best ways to do that is to seamlessly move the data from the cellular network to the WiFi network. That's an area we have some pretty strong patents in, and nobody else can really enter that space without being confronted by those patents. We have a lot of things on our side. We know our marketplace better than anybody else, we have the broadest technology offering that's available anywhere in the world, and we back it up with strong patents to defend our position. This is a strong company that is getting incredibly stronger. We will continue to execute, we'll continue to focus, but I think at the end of the day we're going to come out on top.

Okay, Bill, one last thing for me because it's still a little hazy in my mind. That same capability of switching between WiFi and the cellular network, does that come in handy in trading data off between, say, WiMAX and the cellular network?

It could be between any of the cellular technologies and offload to the wire line backbone, which is what you end up doing once you move it to WiFi.

Okay, and is that through that IMS piece, that zip client that you have?

It's built into our connectivity clients and is part of now multiple patents that we have been successfully awarded. We're in a pretty strong spot.

Very good, thanks guys, and congrats again on a nice job.

Thanks Kevin.

Thank you, and our next question comes from the line of Ian Gilson with Zachs Investment Research. Please go ahead.

I have a couple of questions. On the netbook market, we've had a number of announcements of OEMs coming out with new netbooks, and a number of announcements of netbooks being purchased by carriers, or subsidized by carriers, then marketing them to their subscribers. Obviously the second mechanism is the one you're going for at the moment but is there a big enough market to do what you did at one time at Apple in the netbook market?

Let me try to answer it this way. We don't know how big the netbook market's going to be yet. We all think it might be a very exciting market. Let's make the assumption that maybe it is, and so we believe that one of the most significant distribution channels for netbooks, because by definition they have to be wirelessly connected to be of value, is going to be through the carrier resale network that they have, and that's a place that we are very very strong. We also are focused on the PC OEM marketplace, and we like to play in that market through our PC OEM customers where they're not selling through the carrier network. When they're selling it through the carrier network, the carrier's most likely going to insist that the connectivity client be theirs and be branded to them, not to the PC OEM. Conversely, when it goes through more traditional distribution channels, you may see it as a connectivity client branded to the PC OEM. We like to play in both. We think we're very strong on the carrier side and we'll just wait and see. I think we just have to wait and see how well adopted these devices are.

Last question, how many deals that you consummated in the first quarter generated material revenue in the second quarter?

First quarter, 2009, that would be zero.

How many are likely to generate significant revenue in the third quarter, which is the first quarter of your consummation?

It's going to depend on just how strong the launches are. Probably, again, on an individual basis, none of them will be particularly material when you start comparing them to the Verizons, the Sprints, the AT&Ts, but altogether, let's say, they might show a blip there in the radar. Q3 is just the start, Q4 is going to be, obviously, bigger start, and then these are really big 2010 players.

Thank you.

Thank you, and at this time there are no further questions, I'd like to turn the call back over to management for any closing remarks.

Thank you, again, for joining us today for our second quarter earnings conference call. If you have any other questions, please feel free to call us. Thanks again and we look forward to talking to you on our third quarter conference call.

Thank you. Ladies and gentlemen, this concludes the Smith Micro Software fiscal Q2 2009 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 followed by a passcode of 4125903. ACT would like to thank you for your participation and you may now disconnect.