Smith Micro Software Inc (SMSI) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro Software fiscal third-quarter 2009 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions.) This conference is being recorded today, November 4th, 2009.

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

Good afternoon. Thank you for joining us today to discuss Smith Micro Software financial results for third-quarter 2009 which ended on September 30th, 2009. By now you should have received a copy of the press release discussing our third-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 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 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, 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 are discussed in the Company's filings with the Securities and Exchange Commission, including its filings on Forms 10-K and 10-Q, and could cause actual results to differ material from those expressed or implied in any forward-looking statements. The forward-looking statements contained in this call are made on the basis of the views and assumptions of the management regarding future events and the business performance as of the date of this call. It does not -- 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. Bill?

Thanks, Charles. Good afternoon, everyone, and welcome to our third-quarter 2009 earnings conference call. I'm pleased to report another solid financial performance, highlighted by the strongest quarterly revenue results in our company's history.

Through the first nine months of the year, we also posted a record top-line result, with revenues reaching $77.6 million and a non-GAAP net income totaling $16.2 million, or $0.50 per share. During the quarter we grew our revenue 4% year over year, to $27.8 million. But more importantly, we improved our operating profit performance, where we delivered earnings per share of $0.06 per diluted share on a GAAP basis, or $0.20 per share on a non-GAAP basis.

As we recently announced at our conferences in New York, we added Hewlett Packard, the market leader in the PC OEM sector, to our expanding customer base, giving us two of the top three largest PC manufacturers now distributing our connection management solutions on a worldwide basis. In addition to the PC OEM space, we made significant progress within the cable sector with Comcast, the first cable operator to launch with our connectivity product. Comcast is in the early stages of the rollout of their mobile WiMax services, initially targeting select markets throughout the US. We expect to see expansion throughout the remainder of the year, with accelerating growth hitting in 2010 as they light up major metropolitan areas.

In addition to these new customer launches, we expanded existing relationships with all of our key customers to further enhance their current competitive product offerings, as well as delivering new connectivity and media solutions, which I will talk about in more detail later in this call.

On the new initiatives front, we completed significant product development for our new multimedia solution that offers customers multiple-point access to their favorite media content, including music, photos, and video. We expect the solution to be launched commercially with a key customer sometime within the next two quarters. In addition, we have completed important innovations to our connection management portfolio to support seamless data connectivity for the emerging requirements to bridge data sessions between 3G and 4G networks.

As you all know, we recently announced the acquisition of Core Mobility and I'm pleased to let you know that we closed the transaction on October 26th. This acquisition has significantly strengthened our suite of embedded mobile software technologies for the handset. While Smith Micro has over the years become the premier developer of wireless connectivity software for the personal computer, Core Mobility's strengths were focused on software solutions for the mobile handset. We see significant synergies as we work to integrate the acquired technologies from Core with Smith Micro's expanding portfolio. We are particularly excited about combining Core's OTA synchronization and backup technologies with our new cloud-based media management and PC side-loading capabilities to bring an unparalleled suite of solutions to serve our customers' evolving demands.

Strategically we see a number of major intersections between our combined product roadmaps, as well as synergies within many of the same customer accounts. The addition of this new product portfolio will assist us in delivering not only new standalone products in the voiceover IP area, such as push-to-talk or push-to-ex, visual voicemail and voice messaging, but will help us create new combined products by leveraging the Smith Micro IMS mobile client technologies.

Later in the call I'll discuss in greater detail our opportunities within our business segments, and our overall view of the markets in which we operate. But now I'd like to turn the call over to Andy Schmidt, our CFO, to review our third-quarter financial results. Andy?

Thank you, Bill.

Okay, first, let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed 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 the reconciliation of the difference between each non-GAAP financial measure provided in the press release, and the most directly comparable GAAP financial measure. Our earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In detailed manner for the financial modelers on the call, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $2.4 million for the current period, broken out as follows -- $27,000 related to cost of sales; $705,000 related to selling and marketing; $697,000 related to R&D; and $976,000 related to G&A.

In terms of amortization, the total for the current period was $2.1 million, broken out as follows -- $1.17 million related to cost of sales; $631,000 related to selling and marketing; and $330,000 related to R&D.

Okay, moving on, for third quarter we posted revenues of $27.8 million and earnings of $0.06 GAAP and $0.20 non-GAAP. Revenue for the quarter was an all-time record, up 4.4% from third quarter 2008, our previous record. Our year-to-date revenue of $77.6 million is up 8% from 2008. While revenue did not meet analyst consensus expectations, we beat on earnings, both GAAP and non-GAAP. Our year-to-date GAAP earnings of $0.11 is significantly better than 2008's $0.07 loss. In terms of non-GAAP earnings, we've now posted year-to-date earnings of $0.50 versus $0.41 for 2008, an improvement of 22%. As the ultimate measure of a business is earnings, we are very pleased with our earnings performance this year.

With that in mind, let me go through our usual detailed analysis and talk about expectations for fourth quarter. Total revenues of $27.8 million increased from revenues of $26.6 million for third quarter of 2008, an increase of 4.4%. International revenue was approximately $2.5 million this quarter, across all business groups.

Our wireless segment reported record revenues for the quarter of $22.7 million, as compared to $19.9 million last year, an increase of 14%. Within the wireless segment, connectivity and security posted revenues of $21.8 million compared to $16.6 million last year, an increase of 31%. Multimedia and convergence posted revenues of $835,000 compared to $3.3 million last year. Offsetting overall gains in our wireless sector, our productivity and graphics groups posted revenue of $5 million as compared to $6.4 million last year, a decrease of 22%. And finally, we reported approximately $169,000 of Other revenue, which compares with approximately $326,000 for the third quarter of 2008.

Total deferred revenue at September 30, 2009 was approximately $2.3 million.

Switching to gross profit, non-GAAP gross margin dollars of $25.5 million increased $3 million, or approximately 14% from the same period last year. Of key significance, while our revenue increased 4.4% year over year, our gross margin dollars increased 14% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 91.6% for Q3 2009, compared to 84.2% for Q3 of 2008. Non-GAAP gross margins by product group were as follows -- connectivity and security, 96.8%; multimedia and convergence, 72.6%; productivity and graphics, 72.5%; and Other, 72.2%. As we've noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expenses for the third quarter of 2009 were $16.8 million, and this is an increase of approximately $800,000 from Q2 of 2009 and is as expected. We continued to add additional engineering resources to meet new customer product deliveries scheduled for future quarters. From a year-on-year perspective, non-GAAP engineering expense has increased 21%. Selling and marketing expense has increased 4.5%, and administrative expense increased 16%. Of note, our administrative expense this quarter included one-time legal expenses related to the Core transaction. Total non-GAAP operating expenses increased 12% year over year.

Non-GAAP operating margin for the current period was 31.6%, higher than our benchmark 25%. Current period operating margin compares favorably to operating margin of 28% for Q3 of 2008. Non-GAAP net income for the second quarter was $6.6 million, or $0.20 per diluted share, as compared to $6 million, or $0.19 last year.

From a balance sheet perspective, our cash position closed at $48.5 million at September 30, 2009, an increase of $11.9 million from the beginning of the year. Accounts receivable at September 30, 2009 increased to $23.3 million from $18.4 million at the start of the year. Net working capital at the end of Q2 -- or Q3 -- was a strong $63.4 million.

Cash generated from operations for the quarter was an exceptional $5.4 million. Primary uses of cash for the period were capital expenditures of $756,000. Capital expenditures were primarily investment in the ERP system and IT infrastructure. Again, free cash flow year to date is $11.9 million, despite our strategic investments in our business.

Overall, our current quarter has been consistent with Q1 and Q2 of this year in that our gross margins, operating margin, profitability and cash flow have all improved significantly over last year's performance.

Looking forward to fourth quarter, a key element affecting the quarter is the closing of the Core Mobility transaction on October 26th. Typical of most acquisitions, we like to see six months of activity before assuming to provide detailed financial guidance relating to the acquisition. We have noted before that we expect the Core transaction to bring $12 million to $13 million in revenue in 2010.

The other key element for Q4 is the continued challenging economic environment. In terms of our existing business, and the business climate, our most exposed business area is our productivity and graphics group. While posting a positive Q3 at $5 million revenue, we expect Q4 to be, best case, $4 million. Our wireless segment should be solid, as it was in Q3, and our multimedia group revenue is dependent upon customer product launches, which are difficult to predict, given general economic conditions.

In terms of the Core transaction, we are assuming new product relationships and new contracts. It typically takes us two quarters to square away newly assigned contracts in terms of both the timing of product deliveries and revenue recognition. As such, we don't realize run-rate revenue from acquisitions the first quarter to two quarters post closing. However, we do incur integration expense during the same time frame.

In terms of numbers, given the Core transaction, key customer launches, and an expected decline in our productivity and graphics group, Q4 revenue can range from flat with Q3 to $32 million. Gross margin should be in the 90% range, but operating margin may be in the 20% to 25% range due to acquisition integration expense.

With that, I'll turn the call back to Bill.

Thanks, Andy.

Our connectivity and security solutions for laptops, netbooks, and other mobile devices, represent an unrivaled portfolio of competitive products. Looking at the third quarter, revenue increased 31% year over year to $21.8 million, which we view as significantly strong growth, given the current economic environment. Business from our largest mobile customers, AT&T, Verizon Wireless, and Sprint, continued to deliver solid performance within the mobile data market. We are encouraged by the long-term growth prospects of these leading carrier customers and are actively engaged in new product development to support these carriers' rapid 4G network deployments.

In fact, 4G deployments have become a major theme for most of our wireless carrier and cable customers for 2010. Just recently announced, Sprint expects its 4G service to reach 80 markets by the end of 2010, covering 120 million people. And Verizon Wireless has accelerated its LTE deployments to cover as many as 30 markets by the end of 2010, and have nearly nationwide coverage by the end of 2013.

In addition, this month both Clear and Sprint plan to launch WiMax services in Charlotte, Greensboro, and Raleigh, North Carolina; Austin, Dallas/Fort Worth and San Antonio, Texas. Service rollouts will continue in Honolulu and Maui, Hawaii in early December. In early 2010 larger markets such as Chicago, New York, San Francisco, Houston, and Washington, DC will be among the first cities lined up for WiMax availability.

We believe the expanding 4G marketplace will help drive new growth next year. With our position as the leader in the development of smart connectivity management, we bring to market capabilities and solutions that span network boundaries, offering advantages to both the mobile operator and their customers. Our products ensure the best user experience and help mobile users maximize their broadband mobile experience while also assisting operators in minimizing data network operating expenses.

A core feature of our connectivity solutions is our ability to solve the inherent problem with connecting to multiple networks from a single device or application. We continue to be innovative around multi-network access capabilities and improving the end user's connectivity experience. Today consumers increasingly demand seamless access on multiple networks to remain connected in the office, traveling, or at home. Our connection management solutions meet this growing and critical need for a seamless experience across multi-network environments.

Data is being consumed at an ever increasing rate, requiring the offloading of more traffic to private and public WiFi networks. To address this problem, during the first half of 2010 we are introducing new software solutions that reside on smartphones and data devices enabling mobile operators to move a subscriber's voice and data session across network boundaries without disruption.

As you may recall, we were recently granted a patent that offers our customers a transparent method to connect seamlessly between wireless networks. Our patents in this area create strong competitive advantages for Smith Micro, as mobile operators are using this technology to improve band width efficiencies across multiple networks. We view our technical innovation and extensive intellectual property in this area as a core competitive advantage over commodity-type connection managers and PC operating system solutions.

Looking at our PC customers, sales to Dell remain strong, representing approximately 12% of our total revenue during the quarter. I'm also very excited to be able to talk about HP, our newest PC OEM customer, which we've been working closely with since early this year. Our connectivity solution is now offered on their line of enterprise notebooks, consumer notebooks, and netbooks. We see great opportunities with both of our PC OEM customers, as we broaden our connectivity product solutions across a wider mobile computing product segment.

Looking at our carrier customer base, and its contribution to our results this quarter, AT&T had a strong quarter with us, edging up slightly to 11% of our revenue. And Verizon Wireless represented 33% of this quarter's 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. I'm also pleased with the significant progress we have made within our new product development for the quickly evolving wireless network markets.

Within our multimedia and convergence group, we made significant progress and completed our next generation multimedia product, which is built around a robust interface and offers access to a full suite of media resources. Media consumption is rapidly evolving into an on-demand model. Consumers are driving this changing behavior, as they move toward offerings that provide consistent access to the media across all device types and connection options.

Our carrier customers recognize the need to support this demand for their subscribers. However, they also require a software solution that can be delivered across various mobile devices, mobile and PC operating system platforms, and wireless networks. Our next-generation media solution solves this problem and allows carriers to offer a branded suite of media management products. Our new QuickLink media provides access to PC-based and cloud-based mobile multimedia content across a broad range of mobile devices running their proprietary operating systems or established platforms, such as Windows Mobile, Java, BREW, Android, or Symbian.

As we move forward, this opens the door for new features demanded by end users, such as media repositories, or your personal media locker, media management, and side-loading from mobile devices. This quarter our device management initiatives resulted in new agreements that expanded our relationship with HTC to support their smartphones running Android, including the recently launched Hero device at Sprint. In addition, we have continued forward progress in delivering our device management service suite to Huawei for new Asian market deployments.

Let's now turn to our productivity and graphics group that focuses on distributing products to business and consumer segments. While the retail market remains challenging due to the softness in consumer spending, we were still able to manage our business profitably. We performed better than expected in Q3, as Andy noted earlier, and the segment represented $5 million in revenue. During the quarter the group remained focused on launching a new service within the StuffIt family that allows users to not only compress files, but also share files stored in the cloud and access online from the cloud.

In addition to launching this new StuffIt file transfer service, I mentioned in our last call that we had won a new imaging licensing agreement with a leading Fortune 100 corporation. As we reported last month, that customer win was Microsoft, who now uses our patented compression technology to compress images stored on their servers. I'm pleased with the progress we've made with this account, and we believe we can capitalize on similar opportunities in the future.

Now, before I open the call for questions, I'd like to address our revised revenue guidance for fiscal year 2009. As Andy stated in his remarks, several factors have indicated our revenue guidance -- excuse me -- have impacted our revenue guidance, most particularly the flat economic climate, which is impacting both Smith Micro and causing our customers to manage inventory more tightly and deploy new initiatives with more caution. Despite this operating environment we continue to grow, as represented by our record third-quarter revenue results and our bottom-line performance is extremely healthy.

Specifically, during this quarter, we saw slower than expected new product rollouts on the part of several Smith Micro customers. This impacts near-term revenue expectations for 2009, but does not change our positive outlook for these customers' initiatives in 2010. As a result, we are revising our annual guidance for this year, 2009, to $105 million to $110 million.

I'd like to reiterate that our relationships with our customers remain very strong. Further, no new customer opportunities -- excuse me -- further, our new customer opportunities continue to grow. We remain on track to deliver these new products, some of which are currently in trial phases with these new customers. We remain well capitalized, as our cash balance is approximately $40 million following the Core Mobility transaction and our average quarterly cash generated from our operations has exceeded $5 million per quarter this year. These results are the direct result of the Company's ongoing commitment to disciplined cost and expense management.

Our carrier customers are in the midst of an unprecedented period of change driven by new, smart devices that have raised consumer expectations and the demand for advance mobile connectivity and converging mobile services. Over the next several years we expect to fulfill the demand to provide many of these services, most of which will require complex connectivity solutions over multiple networks, an area in which Smith Micro excels. The build-out of 4G networks is about to accelerate, and we expect to participate in that build-out by building the next mobile experience.

And with that, operator, I'd like to open the call for questions.

Thank you, sir. (Operator instructions.) Maynard Um; UBS.

Just a few questions here. The first one, in terms of the push-out of the new products, should we -- obviously they're going to get pushed out into some timeframe, but should we be thinking about those push-outs going into early 2010 and so would be incremental to kind of our revenue forecast?

Okay. Yes, let me try to give you some color, and also in doing so, maybe help you understand some of our thinking. When we looked at third quarter and, really, going into the final week of third quarter we still believed we could make that quarter. We had delivered software. We had seen some customer push-outs, but there was a major offering that the software had been delivered, but we couldn't recognize revenue until we had acceptance. That acceptance did not come as quickly as we had counted on. That program has been somewhat delayed. And I think that's reflective of the economic environment. And that was pushed into fourth quarter.

If that was it, we probably wouldn't have changed guidance. So we would have just pushed revenue from Q3 into Q4. But as we entered Q4, and now we're about a month into it, we're starting to see some talk about some other delays in rollout of new offerings. We also have the advantage, in a strange sense, of our conference call came later than some others. Many of you listened to the Novatel conference call last week, and the fact that they talked about their MiFi devices not selling through to the level that was expected. When we looked at our own forecast, because MiFi is sold into both Verizon and Sprint, and in the case of Verizon, every MiFi device comes with our connectivity software solution, we looked at our own forecast and quickly had to readjust those as well.

When you combine all of this, we decided it was prudent to reduce the guidance for the year and to bring the numbers down a bit for Q4. As we look at 2010, I guess we have to wait and see where the numbers actually come in for Q4. I mean, we've really moved our guidance from $110 million to $115 million down to $105 million to $110 million. If by chance everything breaks the right way and we hit the upper end of our new guidance, it's the bottom end of the old guidance. Nothing's really changed.

So I really think, to answer your question in the best way, we really need to see what the results are for Q4. We are obviously operating in some very challenging times. These are economic conditions none of us have seen the like of before. But I think that we have proven that we can still deliver on the profitability and the bottom-line results, and this company is going to be fine. Our customer relationships are incredibly solid and we look forward to 2010 and continued growth.

Great, thanks. That's perfect. Second question -- if I take the midpoints of your guidance, it implies that your OpEx is probably going to be somewhere around $20 million. How much of that is coming from integration costs? And are those one-time in nature or ongoing?

The integration costs will be about $2 million and that's going to be ongoing. So that's basically a baseline for what we pick up in the Core Mobility operations.

Got it. Okay. And then, just given the uncertain revenue outlook, can you just talk about then your plans on the OpEx side? Are there any places -- sounded like you were going to continue to add R&D resources for the future products. But given kind of the uncertainty and the decline in revenue guidance, can you just talk about your plans on the OpEx side? Any changes there?

Well, no, not really. I mean, as you pointed out, we do plan on adding resources in engineering. We have been very tight on how we manage the sales and marketing and administrative part of the business, like most others. I think the thing to keep in mind is, given the guidance that we've put out here, we're still looking at growing in Q4. So as I pointed out, if you distill it to a quarterly basis, we're going to be, worst case, flat, is what we're saying in guidance and then anywhere up to $4 million incremental.

So once again that gives us room to still add what we've consider to be run rate expense while still hitting op margin numbers we would expect to. The key difference being, really, in Q4 is the acquisition of Core. As I pointed out that's going to be, let's say, around $2 million in expense. And it's very difficult, basically a month and a half of a quarter, to really nail a revenue number on it. So that's the questionable part as far as op margin is concerned in Q4.

Great. Thank you.

Rich Valera; Needham & Company.

With respect to the $12 million to $13 million of revenue you're expecting from Core next year, can you give us a sense of how you expect that flowing through the year? It sounds like probably back-half weighted, but any color you could give on how back-half- weighted that might be would be helpful.

You know, Rich, traditionally we try to talk more about 2010 at your conference. And that's probably where we'll talk more about it. We need a little bit more time to get a better feel for how we're going to get these contracts transitioned over before I can really comment on that. So let's wait until early January before we start talking timing of that revenue stream.

Okay.

I guess the thing that we can say is, for those of you looking for guidance for 2010, as we have in the past we usually always give that in early January at the Needham conference and that is our plan for next year.

Okay. I'll look forward to that. Separately, I was wondering if you could give more color on the HP deal, how it may be similar or different to the Dell deal, which as I understood it with the Dell deal, you recognized sort of a royalty on every PC shipped essentially. And I don't believe there was an activation component necessarily in that. Can you contrast or compare how the HP deal works with the Dell deal?

Sure. Let me start by answering that in terms of what devices we're on. Again, with Dell, as we've said before, we're on specific business caliber laptops, not the whole suite. So that's one element. The other element is we're building more than just a connection manager. Certainly for Dell it's more of a complete what they call a portal. So it's a different type of product. It's on a more limited base of laptops. Because of this we have a bigger fixed component to the contract. So there's more of a regular recurring revenue, with an upside. But let's say it's less of an upside than we use on a base contract.

HP, on the other hand, ships on all their devices, so it's broader and it's a contract that's more of a Smith Micro model contract, where we'll take less on a regular quarterly mode and have more on a variable upside. With that contract, it just launched. And so, in Q -- or current quarter we've not seen the variable piece kick in. There's two elements of that. One, again, like any launch it has -- it starts fairly modestly and then grows. The other part is just plain timing. The variable part of this requires information that's basically on -- it could be a one to two month lag. So, again, for the September 30th period, we're launched with HP, but we don't have the variable piece kicking in yet. Does that help?

Right. But that should kick in in the fourth quarter, though?

It's going to start, but, again, with all of our contracts, we start somewhat modestly and then we pick up from there.

Right. Okay. That's helpful. Thank you.

Lauren Ye; JPMorgan.

Just wanted to clarify again on this HP relationship. So you're saying that it's going to be on all the laptops, consumer and enterprise and netbooks. I guess, how does it exactly modestly start when they're just kind of putting it on all PCs.

The variable part is a piece of information that's lagging. In other words, it's more of an information lag? Okay?

When you're looking at activations and a revenue stream that's based on that, you've got to get it through the channel into the consumer hand and get it activated, that's a built-in time lag.

Got you. So it is an activation model is what it is, I guess.

With the back part of -- the back -- there's two components to the revenue. The back part, it has an activation component and has a nice opportunity for upside. There is a floor component, which gets paid on a recurring quarterly basis.

Okay, great. And what date did it exactly start?

Boy, I don't --

When did HP --

I don't have the answer to that. I could get back to you. I'm not exactly sure the date it started shipping.

Okay. No problem. Yes, I would --

I'd just be making it up. I don't want to do that. I think I'd rather get --

I'll find out, Lauren.

Okay, that'd be great. And then, just next, the $5 million in productivity and graphics, why was it up this quarter? And then I guess why are you forecasting it down so much next quarter? What's the flip there?

Well, part of the up is the seasonal launch of the StuffIt product, which is usually, again, end of September timeline. Even though it's the end of a quarter, we have a big push. Another part of it is, we're forecasting for the consumer to be very light. And the way we see it is, it's not indifferent to what Novatel guided on in terms of inventory. Again, it's a different product, but a similar scenario where we're seeing the big box stores being tremendously cautious on inventory. And in some cases we have big box stores that are actually cutting back significantly on software as a category. So we're not seeing as much opportunity as far as presence in big box stores. And then it's further complicated by a reduction in inventory they're carrying.

Obviously, one of the old adages of sales is you can't sell from an empty wagon. And the problem here is if they don't carry enough inventory and the shelf is bare, people are going to buy a competitive product, 'cause we won't have the opportunity. You either capture it when the purchaser is standing there or you don't.

Right. Okay. And then, just on your margins this quarter, did it run at your expectations or was it a little -- did it come in higher than you expected? And what was the reason?

You know, that 31% is tremendous. And we always talk about once we start getting in to really run rate, it's very easy to leverage this model and this is how we designed it. And so, like everyone else at least that's -- we think are doing the right things in a recessionary climate, we're really watching the expense side. We're investing where we should be, which is in our R&D side. But everywhere else we're being very prudent and very cautious. And that's how we can actually leverage a basically -- a 7% incremental growth from Q2 '09 to Q3 '09 in revenue and leverage that in -- it's 4 points on the operating margin line. So part of it's the management, what we're doing here, and part is the way we built this model.

Okay. Got you. Was there any, I guess, projects that were delayed that contributed to maybe better margins as well, do you think?

No, absolutely not. And as a matter of fact, that 31% includes that Core transaction one-time legal expenses. So, again, it could have been better even.

Okay. And then just lastly, can you just talk about netbooks from Verizon and AT&T? I think it was a full quarter in Q3. How did that trend and was it at your expectations?

Okay. I knew this question was coming and I've been thinking about how to answer it. I believe that -- and I've talked, obviously, with key executives at the PC OEMs that we do business with. The netbooks space seems to be tracking nicely. What I can't tell, and what I'm concerned about is that it may be cannibalizing other devices. So, while we may see netbook sales go up, we may see other device sales go down, and the net is kind of a push for us. So that's kind of how I view it. I think when I talk to PC OEMs, netbooks can go up and the concern is does it eat into more profitable notebook sales? I don't know the answer. That's a question you ought to ask them.

Okay. Thanks, guys.

Chad Bennett; Northland Securities.

Couple questions. I think this question's probably been asked a few different ways, but, so Andy, in the guidance you gave for the third quarter, you're not assuming any Core Mobility revenue in that guidance? Is that how we should take it?

No, you're referring to fourth quarter.

Fourth quarter, yes.

In fourth quarter, first and foremost, we have to make up at least a $1 million deficit from the productivity and graphics group. That's our first challenge. Our second question mark that we're really looking at is, as Bill commented to, there's some key product launches where we've got complete software but we're waiting to see if our customer's ready to go. That's another uncertain point. And then, with the Core Mobility, there will be revenue, but as far as how much, what we would assume to take is going to -- again, these are brand new products that we're actually taking on. We know the customers and, of course, we've talked to them. But it's a whole different animal as far as getting into a quarter and saying, okay, let's talk about product acceptance, and so on. All that brings together a $4 million range, hence, why we say okay, flat to $32 million.

As Bill pointed out, if we perform at a certain level, we'll be at the bottom end of the guidance that we gave previously. So there's a lot of variability in play here. There is going to be Core revenue. It's just difficult right now to say exactly what it's going to be. We have an idea of what it can be, but there's a lot of pieces in flux right now relating to Q4.

And the other part is, you have to look at the rev-rec rules. I mean, we may get revenue, but are we allowed to actually recognize that revenue on our books? Was the work done on our -- during the period of time that we owned the company? These are questions that have to be taken on a case by case basis. It makes it difficult to actually give you an absolute number for Q4. And when we get into 2010, hopefully by that time we'll have a better feeling. We will have run the business for a couple of months and we then will understand more about it and we'll give you better guidance.

Yes. And Chad, just following up one more time on that, we're not being ambivalent about Core. The key is, you have to remember is they were not a public company. So since they were not a public company, they can have arrangements in place where they say they're delivering the software, but we'll give you these other things in the month of February. We can't recognize revenue under those circumstances. That's up to us to actually get better clarification with the customer. And that's the type of thing that you have to actually have to get in there and get that clarification settled before you can assume you're going to recognize revenue in that period.

So, since the transaction is closed, it's right for us to assume that all the customer and business -- customer relationship, contracts and business related to Core Mobility transferred over without -- seamlessly, I guess?

Yes. You should take that as a true statement.

Okay. And I think this probably proves it out, too. You indicated you're still comfortable with $12 million to $13 million next year from Core?

Yes. Based on what we know right now, we have no reason to give you a different number.

Okay. Moving on, the product announcement that you talked about for the first half of 2010, the software solution for moving voice and data traffic across multiple networks, that I believe you indicated will be actually a software solution on smartphones -- did you indicate you have a customer for that? And will that be the typical Smith Micro deal where it's kind of a license or royalty per unit? And is the customer actually a handset vendor or is it the carrier?

Okay. All right. Yes, we have identified a customer. It will impact obviously a number of handsets and we are hoping that it will launch as planned in the first half of the year. And it's probably a carrier.

So the carrier dictates to the handset makers what they're going to put on their handset for this type of functionality?

In this particular case that's what has to happen.

I mean -- I guess, wouldn't this potentially -- I mean, moving data across networks, whether it's LTE to WiFi, WiMax or wherever, seems like a pretty big potential opportunity for you guys. Is it too early to tell, or are you just being coy or conservative about it?

I think it's too early to tell. We need to see it deployed. We need to see it in operation and make sure it's as seamless as we all believe it's going to be. And then we'll see what the uptake is. And based on that, then we can come forward and say this is what we think the growth potential is. I guess I caution you not to get ahead of us on this. This is new technology. New technology needs to be proven in the real world. And all that has to -- it can only happen after a launch. If there's any delay in the launch, it gets moved a little bit. And all these are things we're dealing with in the current times, and they're all possible. So that's why we're being -- we're not being coy. We're being cautious.

Okay. So I'm just trying -- not to bug you too much about '10, but considering 4G rollouts really start ramping in a big way in 2010 with your customers. You've got Compaq, which I think is ramping pretty aggressively right now, but it'll even be more so in 2010. You have HP that's really nothing this year, relatively speaking, potentially a 10% customer in 2010, putting words in your mouth. How isn't 2010, backing out Core Mobility, a pretty good growth year?

That's why I like my job better than your job. I'm going to wait until January to forecast this and we'll do as good a job as we possibly can. I think I'd like to see us get a little bit more clarity that the consumer is going to start spending money and then we can, I think, become bullish about these kinds of things. All the points you bring out are well thought out. They're all valid. And they're all the reasons I'm very excited about our business case. But today's not a day to be excited. We came in short on the top line. So I can't feel great when you come in short, even though it was the best quarter we've ever had.

Got it. I thought I'd give it a shot, Bill.

Okay.

Mike Walkley; Piper Jaffray.

This is Charles John sitting in for Mike. Bill, maybe I'll just start off with your guidance for Q4. Just curious, is this caution on the inventory, is it an across the board reaction from all your customers or is it just, I mean, one or two particular customers that are largely contributing to this lowered guidance and increased caution?

Well, I think -- first, I just want to be clear. I mean, from an inventory standpoint, our biggest inventor -- exposure to our forecast, our internal forecast model, was for software that would be shipped with MiFi devices. When Novatel comes out and guides down substantially and says there's an inventory glut at a big account like Verizon, that causes us to pause. Because suddenly we have to look at our own forecast and either take it off the table or substantially reduce it. So that's something that we just had to react to. And frankly, we didn't know that until they made that announcement last week.

So as far as for the retail products in the consumer channel, I don't think it takes a rocket scientist to figure out that a lot of people are worried whether this is going to be a particularly good holiday season. And every talking head on TV talks about it. So I just think this is the time to be very, very cautious. This is -- and so therefore, that's how we view it.

The inventory question for us, really, on the consumer front, it's not so much that we have so much inventory in the consumer channel, because that's not how we really book our revenue anyway. Our concern is if they don't put enough inventory into a store, and the shelves become empty, then we've lost a sale. Every consumer that comes by to buy a compression product and buys a competitive compression product because ours is not there is a lost sale to us. So it's a little different twist from our standpoint as to how we view inventory. But in the case of Novatel, that's something that I'm going to be very sensitive to.

Okay. Good. Thanks for the color. And then, maybe just more high level, Sprint this week announced their $200 netbook, so you have all three carriers with netbooks now. And Clearwire is getting pretty aggressive with its launch in multiple cities. So earlier on this call when you talked about cannibalization on AT&T and Verizon networks, if when we look at the Sprint/Clearwire opportunity, should we view this as maybe slightly more incremental, with less cannibalization versus the opportunity at AT&T and Verizon, or are they viewed pretty much in the same bucket?

I think it's all the same bucket.

Okay, perfect. Thank you.

Larry Harris; CL King.

Couple of questions. First, in terms of the fourth quarter with, I guess, the $2 million or more incremental operating expenses related to Core Mobility, is that going to be mostly in R&D? Could you provide some sort of general sense as to what the split might be?

Sure. A good 70% of it's going to be R&D and the balance is going to be split between selling and marketing and G&A.

And then, looking at the gross margin performance here over the past couple of quarters, 91.6% in the third quarter and I guess an estimated 90% in the fourth quarter. And I know you're not just providing 2010 revenue guidance, but with the addition of Core Mobility and some of these new products, would you anticipate that the gross margin in 2010 would be roughly the same or increase even from these levels, or would go down? With these new products would we be looking at a similar gross margin to what we've seen, say, in the second half of 2009?

Yes. I mean, the Core Mobility transaction, it's all pure software. So once again, it's pure software that's not in a box, has -- it performs similarly to our wireless metrics, so to speak. Now, having said that, we'll talk more about this in January, with the modelers. We'll be looking at a little bit different real estate on a P&L when we start considering maintenance and service, to where we may reshuffle some of the expense from the R&D line up to cost of sales. It's a net-sum-zero gain, but the model shifts a little bit from a metrics perspective. But in looking at it apples to apples with how we do business today, Core Mobility fits in pretty neatly with how we run our business and how we sell software. So it should be a very similar profile.

And these new multimedia products, would they also have a similar kind of gross margin to where multimedia is today?

Yes. Well, actually it'll be a tick up. I mean, multimedia right now is still a bit of an average, and it's just lower revenue than it will be in the future. And so that'll start skewing up to look more like a wireless product.

Understood. Understood. All right, thank you.

Kevin Dede; Jessup & Lamont.

Yes, Bill, you mentioned that you had software on MiFi with Verizon, but not with Sprint. Can you give us an understanding of why that is and what the difference is in their thinking at those carriers about that product?

Yes. In the case of Verizon, Verizon is very focused on the user experience, not to say that Sprint isn't. But the Verizon software has been adapted to help the user get the MiFi up and running, get it configured and all that kind of thing. So it has multiple purposes. It's a branded experience for Verizon. Sprint just hasn't done it that way and that's a question you ought to ask Sprint.

Okay. What do you think happens as Sprint starts to think about giving their subscribers that ability to roam between 3 and 4G? Do you think that it means that they will handle that software that allows that transition themselves? Or do you really have a shot there?

Oh, now, wait a minute. In the case -- let's not -- let's be very careful, because you just mixed metaphors here. When you start talking about going between 3 and 4G, between EVDO and WiMax, that's all part of our connectivity manager. And that's something that we know how to do better than anybody in the world, and we've covered it with a number of patents. In the case of -- what we were talking about before was MiFi, which is a slick little device that allows you to stick one of those in your home and have a number of users using WiFi to access it, and it then talking then over a 3G line, [to give] connectivity. It's a totally different animal.

So when you're talking about going between networks, going between 3G and 4G, that's a home run spot for us. That's a place that we better own that going forward. That's something that we know. We've got it covered, and I think that's a place we should be, without a doubt, the dominant player.

Okay. Can you give us some more insight on your -- I mean, obviously, you spent a lot of time and effort revamping the QuickLink media and I got the impression that you'll have a customer to talk about in the next two quarters. Can you give us some more insight on how you see that coming together?

Well, and we've talked about this. I've talked about this at conferences now for some number of months, where we talk about the importance of the three screens, Whether you come from the telco space or you come from the cable space, you want to own control over these key three screens -- the screen on your mobile device, your PC screen, or your television. And this is part of the technology that we are building the enablement for, and making this concept into a reality.

So, given the example I've used many times before, if you have, let's say, a friends and family photo --- a set of photos, and you have folks come over to our home, you can sit them down in front of the TV and do a slide show. And all the data resides in the cloud. If you're sitting in the office, you can show a coworker the same photos on the PC. And if you're out to dinner you can hold up your BlackBerry and show the same photos that you took from your summer vacation. All with the same experience; just three different display devices, very different display devices, all serviced by a single carrier, and it's all driven from the cloud. There is no computing capability on a television, so that's how you get it done. What we're building -- what we're designing, and where we're leading with our multimedia products going forward, is the enablement of that kind of experience. I think that's very, very powerful.

So in that case, and in this instance, you'd require that a client reside on the mobile device on the network?

Well, you need a client and you also need -- and this is one of the reasons we were so intrigued and one of the reasons we closed the deal to acquire Core Mobility, you need to have the technology to get that data from the wireless device. Let's say you take photos utilizing your cellular phone, which now has a pretty cool camera. Now, you've got to get it to the cloud. Well, one of the things you've got to be able to do is do the backup and restore and move that data. You've got to move it effortlessly and it's got to be just a real easy process for the consumer to use. That's what we're all about. That's what we're doing.

Okay. Can you give us a sort of an update on where you think Verizon is thinking about their own V CAST, with the onset of all the Android devices they have coming on, versus the legacy work that they've done with RealNetworks and where you think you might be able to get some leverage on their media portfolio?

You know, I really can't comment on the thinkings of Verizon. That's a question you need to ask Verizon. I'll just have to leave it at that.

Okay. Fair enough, Bill. Thanks.

Scott Sutherland; Wedbush Securities.

So, Bill, you talked a little bit earlier about maybe some substitution of the netbooks versus the notebooks. Can you talk about, is there any difference in pricing between the two as that cannibalization occurs?

You mean from our point of view?

Yes, from your point of view.

No. It's push. But what you -- the issue is that it's not incremental. One replaces the other.

Okay. Understood. Can you talk about on the operating margins side, the Core margins, two things. You first of all talked about maybe a few quarters of integration expenses. But after you get through with those, can you talk about, does Core get to your corporate margins, or are they already at the corporate margins excluding those integration expenses?

That's the one where, as I kind of said in my prepared remarks, that we need to run it. We need to run it for a couple of quarters and then we can give better clarity as far as how we expect it to run.

I guess, maybe you look at -- do you think this is something that was a similar a year out, two years out, that you can get to the similar corporate operating margins?

Well, it's always our goal, but it's just like anything else. We've got to drive it for awhile. And we get a lot better feel for it. And a lot of it -- again, keep in mind, our op margins are quite often driven by opportunity. To the extent that you have better than expected opportunity, your op margins go down in the short term because, again, you're investing in developing products. So that's why we say, we need to drive it for a while and see exactly what the opportunities are. The better the opportunities, perhaps the lower the op margin in the short run.

Okay. Lastly, on the WiMax front, especially international and working with Motorola, you didn't talk much on that international front. And I think you had something like 40 different engagements you're looking at or people you're talking to. Can you give an update there on how that's going?

All the WiMax efforts through Motorola are moving ahead nicely. They are still very bullish on what they're going to get closed, and as soon as we have things we can talk about from them, we'll come to the Street and let you guys know.

Do you think this is maybe just a 2010 event, without giving the quarter?

Yes, I guess probably. Seeing as how it's now in November, yes, I guess it's probably 2010.

Okay, great. Thanks.

Follow up question from Rich Valera.

Hi, Andy. Just wanted to circle back a little on the OpEx for Q4. I think you did say you expected around $20 million. Is that correct?

As far as total dollars, it could be right around $20 million. And, again, depending on the revenue, it's going to put you somewhere between 20% and 25% margin percent.

Great. And in terms of absolute dollars, how should we think about that figure going forward? Does it stay flattish at $20 million, or does it actually creep up as you move into 2010?

Well, you'll be hearing that answer in person in January.

Okay. So as a baseline, assuming sort of $20 million as a starting point, would that be a reasonable starting point?

You know, for modeling perspective, that's not bad.

Okay. That's helpful. Thank you.

This now concludes the Q&A session. I would now like to turn the call back over to management for any closing statements.

I'd like to thank everyone for joining us today. I'd also like to let everyone know that we will be presenting next week at the Merriman Conference in New York. The webcast will be available on the website in the Investor Relations section. Should you have any questions, please feel free to call the MKR Group or Smith Micro. Thanks, and we'll look forward to talking to you at our year-end results conference call.

Ladies and gentlemen, this concludes the Smith Micro Software fiscal third-quarter 2009 conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030, or toll-free, 1-800-406-7325, with the pass code 4174721. ACT would like to thank you for your participation. You may now disconnect.