Smith Micro Software Inc (SMSI) 2009 Q4 法說會逐字稿

Welcome to the Smith Micro Software fourth quarter and year end 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, Wednesday, February 24, 2010. I would now like to turn the conference over Charles Messman of the MKR group. Please go ahead.

Good afternoon, and thank you for joining us today to discuss Smith Micro Software financial results for its fourth quarter 2009 and year ended December 31, 2009. By now, you should have received a copy of the press release discussing the fourth quarter and year end results. If you don't have a copy and would like one, please visit www.smithmicro.com or call us at 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, Andy Schmidt, Vice President and Chief Financial Officer and Tom Matthews, Chief Strategy Officer.

Before we begin the call, I want to caution to all on the call, the company may make forward looking statements that involve risk and uncertainties, including, without limitation, forward looking statements related to the Company's revenue guidance for fiscal 2010, its financial prospects and projections of its performance, the Company's ability to increase its business, and the anticipating timing and financial performance of its new products and potential acquisitions. Among the important factors that may 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 materially from those expressed or implied in any forward looking statements. The forward looking statements contained in this released are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this call. And the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of the call.

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

Thanks, Charles. Good afternoon, everyone. And welcome to the fourth quarter and fiscal year ending December 31, 2009 earnings conference call. We are pleased to report a solid financial performance for the fourth quarter, where we generated the highest quarterly revenue results in our company's history of $29.7 million. In addition to a strong quarter, we also posted a record top-line performance for fiscal year 2009, with revenues of $107.3 million which represents a 9% growth rate during this economically challenging year.

On a non-GAAP basis our net income for the quarter totaled $8.9 million or $0.26 per share, and for the year, $25.1 million or $0.76 per share. This reflects an improvement in non-GAAP earnings from 2008 of $21.7 million or $0.69 per share which represents an increase in profits of 16% year-over-year. Non-GAAP operating margins increased nicely from 24.3% in 2008 to 28.1% in 2009. In addition, non-GAAP gross margins correspondingly increased year-over-year from 83.8% to 90.3%. All in all, we are pleased with our financial performance and our demonstrated ability to make significant progress in the face of the difficult economic headwinds, the likes of which we have not seen in the history of our company.

The Company's record results in Q4 were highlighted by a very strong mix of revenues across our portfolio of wireless products. Overall, our wireless and mobile product categories accounted for 88% of total revenue. This represented a dramatic shift from fourth quarter of last year, when wireless product revenues were only 77% of the total. Actual revenues from our wireless product portfolio in Q4 2009 were $26.13 million, which nearly matched our company's entire Q4 '08 revenues of $26.45 million. This represents an increase in wireless product sales of 29% versus Q4 '08 result of $20.3 million. These results reflect our concentrated efforts to focus and build upon our core competency as a recognized leader in the mobile software and connectivity solutions arena where we continue to see high growth potential.

This financial performance also illustrates the challenges we encountered in 2009 in our consumer-facing productivity and graphics business, where this group posted Q4 revenues of $3.45 million, down from year-over-year nearly 41% from $5.82 million we reported in Q4 2008. Year-over-year revenues for this group were $17 million, down 29% from the prior year of $23.9 million which, frankly, was a greater decline in revenue than we had anticipated.

During the quarter, and throughout all of 2009, we continued to broaden our customer base and leverage our go-to-market strategy by adding three new cable MSOs, two new WiMAX operators, a European mobile operator as well as new customers in both the PC and device OEM segment. We view these categories of customers as channel sell-through customers that serve the users by delivering services and products that enable connectivity to networks, devices and critically important data. Our software helps enhance their products and improve their subscribers' connected digital lifestyle experience. With the growing proliferation of connected devices, our goal is to build from our foundation of successes in 2009 and expand our go-to-market channel relationships.

Our continued strategy is to serve these new and existing customers who use these wirelessly connected devices which are rapidly expanding beyond smartphones, laptops, netbooks and e-readers to categories that may include portable gaming devices, mobile media players, tablet computers, digital cameras and other consumer-oriented devices sold by a range of new potential partners outside the traditional mobile operators and device manufacturers. As we look at the forecasted growth for connectivity by 2014, analysts predict as many as 2.5 billion connected data-centric devices will be in use around the world. With this emerging new marketplace, Smith Micro is devoting many of our R&D resources and product development initiatives to build more intelligent service engines and solutions to better connect, provision, and manage the user experience in this burgeoning hyperconnected world.

Before we get into this in greater detail I would like to turn the call over to our CFO, Andy Schmidt to review our financials. Andy?

Thank you, Bill.

First, let me go over the 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 the 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 are referred to in my prepared remarks for both 2009, 2008 and prior years 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 measurement and reconciliation and difference between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In detailed manner for the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of the stock compensation, stock comp totaled $2.3 million for the current period broken out as follows -- $28,000 for cost of sales. $682,000 selling and marketing, $660,000 for R&D, and $974,000 for G&A. In terms of amortization, the total for the current period was $2.4 million, broken out as follows -- $1.4 million for cost of sales. $807,000 for selling and marketing, and $220,000 for R&D.

Okay, moving on. For fourth quarter, we posted revenues of $29.7 million and diluted earnings of $0.04 GAAP and $0.26 non-GAAP. Revenue for the quarter was an all-time record, up 12.2% from fourth quarter 2008, and up 7% sequentially from Q3 2009. International revenue was approximately $1.4 million this quarter across all business groups.

Our wireless segment reported record revenues for the quarter of $26.1 million, as compared to $20.3 million last year, an increase of 29%. Within the wireless segment, connectivity and security posted revenues of $21.3 million, compared to $18.1 million last year, an increase of 18%. Multimedia and convergence, which includes the Core Mobility suite of products, posted revenues of $4.8 million, compared to $2.2 million last year. Offsetting overall gains in our wireless sector, our productivity and graphics group posted revenues of $3.5 million, as compared to $5.8 million last year, a decrease of 41%. And finally, we reported approximately $115,000 of other revenue, which compares with approximately $319,000 for fourth quarter of 2008. Total deferred revenue at December 31, 2009 was approximately $1.3 million.

Okay, switching to gross profit -- non-GAAP gross margin dollars of $27.6 million increased $4.3 million, or approximately 19%, from the same period last year. Of key significance, while our revenue increased 12% year-over-year, our gross margin dollars increased 19% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 92.9% for Q4 2009 as compared to 87.8% for Q4 2008. Non-GAAP gross margins by product group were as follows -- connectivity and security, 97.8%, multimedia and convergence, 83.5%, productivity and graphics, 76.5%, and other revenue, 55%. As we have noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses -- non-GAAP operating expenses for the fourth quarter of 2009 of $18.9 million is an increase of approximately $2.1 million from Q3, driven primarily by the acquisition of Core Mobility, which closed in October of 2009. The increase in expense is as expected. From a year on year perspective, non-GAAP engineering expenses increased 40%, selling and marketing expense increased 13%, and admin expense increased 5%. Of note, our administrative expense for this quarter included one-time legal expenses related to the Core transaction. Total non-GAAP operating expense has increased 23% year-over-year, driven by planned infrastructure growth and by acquisitions.

Non-GAAP operating margin for the current period was 29.1%, higher than our benchmark 25%. Current period operating margin compares to operating margin of 29.6% for Q4 of 2008. Non-GAAP operating profit for Q4 was $8.6 million, an increase of $800,000, or 10% from the prior year.

Non-GAAP net income for the fourth quarter was $8.9 million, or $0.26 per diluted share, as compared to $9 million or $0.28 last year. Cash generated from operations for the quarter was an exceptional $4.9 million. The primary uses of cash for the period were the Core Mobility transaction of $6.9 million and capital expenditures of $803,000. Capital expenditures were primarily investment in the ERP system and IT infrastructure. Overall, our current quarter has been consistent with Q1, Q2 and Q3 of this year in that our operating metrics and cash flow have all improved significantly over last year's performance.

Now, in review of fiscal 2009 -- it was a great year for the company. Revenues increased from $98.4 million to $107.3 million, an increase of 9%. A more telling story was the growth of the core wireless business. Wireless revenues increase $16.2 million, or 22%, in 2009 despite the challenging economic environment. While posting meaningful revenue growth over the past three years, we have significantly improved gross margins, which represent the quality of our revenues. In 2006, we posted a gross profit margin of 64.9%. For 2007, 74.4%. 2008 was 83.8%, and in 2009, 90.3%.

In terms of operating margin, we have stated consistently that we target 25% as a benchmark while we continue to invest for what we feel will be the future key growth years in the wireless industry. In 2008, We acquired PCTEL, our company's largest and most successful acquisition. We managed an operating margin of 23.6% in 2008 as we worked through a significant integration effort. In 2009, operating margins increased to 27.7% despite continuing to invest in meeting the challenges of the worldwide recession. Likewise, operating income increased 28% in 2009 to $29.7 million.

From a profitability perspective, we have significantly improved our GAAP performance. Every quarter of 2009 was GAAP profitable, with total year diluted earnings of $0.14 as compared to a loss of $0.02 in 2008. From a non-GAAP perspective, total year diluted earnings were $0.76 as compared to $0.69 in 2008, an increase of 16% on a revenue increase of 9%. From a balance sheet perspective, our cash position closed at $45.9 million at December 31, 2009, an increase of $9.2 million from the beginning of the year while taking into account acquisitions.

Accounts receivable at December 31, 2009 increased to $24.1 million from $18.4 million at the start of the year, which tracks with our increase in sales. Networking capital at the end of the year was a strong $58.7 million, an increase from 2008's $47.7 million. Cash generated from operations for the year was approximately $18.5 million -- factoring out expected increase in accounts receivable, we generated $24.5 million in cash. The primarily uses of cash included the acquisition of Core Mobility for approximately $6.9 million and capital expenditures of approximately $4.8 million. Again, I would like to emphasize that while we reported record revenues, our operating metrics overall demonstrated a very strong performance.

Looking forward to 2010, we expect another highly productive year. Despite the choppy economy, we expect to significantly improve our business in 2010 by primarily expanding our reach within our existing accounts. As we previously reported, we closed a record number of deals in 2008 and 2009. Many of these deals represented new technologies that were just launching in 2009. We write our deals for the long run, and as our customers continue to roll out our products and expand their networks, we will be one of the net beneficiaries of the growing wireless market.

Based on information available at this time, the Company is guiding fiscal year 2010 revenues between $125 million and $135 million. In terms of timing, we expect to see the typical seasonality with Q1 and Q2 being the weakest quarters. As such, it is important to view your business from a year-over-year basis and not a sequential quarter basis. Similar to 2008 and 2009, the back half nature of the revenue guidance is not conditional on new contract wins but driven by how our customers market and roll out our products.

Now, while we review contract and product wins as the key driver to building our business, we are like every other business operating in the recessionary climate. Our customers, new and old, will determine the level of our success in 2010. If our customers' businesses succeed, we will succeed. As we noted consistently, we just need a reasonable economic environment to operate within. We are the dominant player in a very desirable space, and we are ideally positioned to benefit from the coming 4G generation of wireless service offerings. In regard to 2010 gross margins, we expect a product mix very similar to 2009, or approximately 90% gross margins. Operating margin will be revenue dependent. Given the new product opportunities we have ahead of us, we expect to continue to invest in our R&D and sales infrastructure. Having said that, we have been consistently reevaluating our business and deploying our assets in the most profitable area and will continue to do so. At this time we will once again target 25% operating margin for the year, following our expected quarterly seasonality patterns. The back half of the year is more profitable than the first six months of the year.

Finally, taxes continue to be in a state of change given the state and federal deficit spending. At this time we are estimating that our 2010 cash based tax expense will be 25% to 27% of non-GAAP net income. As tax laws change through the year, I will provide an update to this metric. In regard to cash flow, if we hit our revenue guidance this year, we will generate more than $20 million in free cash flow in 2010. In terms of other housekeeping, we expect to file our current year 10-K next week which represents our final audited financial statements for fiscal 2009.

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

Thanks, Andy. As we mentioned earlier, going into 2010 we will begin reporting our results in two business line categories -- wireless and mobility, and productivity and graphics. Our wireless and mobility business entails all products that enable connectivity to network devices, data and people. This includes our connection management and security products -- our Device Management Suite, our new media management line, synchronization and backup products as well as our communications and messaging portfolio.

Sales results for our wireless products and solutions experienced strong growth in the quarter and throughout the year. Building software that enables this broad and growing category of connectivity is our core competency, and the key growth driver for our business. Our products will continue to evolve and expand to address the growing opportunity for connectivity related solutions.

In Q4 '09, our Connection Management Software suite represented approximately 82% of revenues in our wireless and mobility business segment. The remaining 18% of revenue was derived from the rest of our wireless product portfolio. By comparison, in Q4 '08 Connection Management Software revenue represented 89% of our wireless product sales versus only 11% from our other mobility products. Simply put, we not only expanded our overall revenue in our core connection management, we also gained traction with all our other wireless and mobility products as we diversified our mix. Contributing to this achievement was the reemergence of our media management based business which we announced with Verizon as they launched the new V-Cast Media Manager that is powered by Smith Micro's QuickLink Media software. Our QuickLink Media product serves as a central control point for managing and playing media files including music, video and photos.

In addition, the software is used as primary tool for managing the interface to online content including purchasing media, archiving and backing up files, both locally and to the cloud, and other types of media synchronization across PCs, handsets, and smartphones. As this market evolves, we will continue to focus development efforts to further enhance the web services component and add new features to support multiscreen capabilities for handsets, PCs, and other devices. We anticipate launching additional advanced features in the multimedia space in the second half of 2010.

On the connection management front, we continue to attract new customers in the carrier OEM enterprise space. During the fourth quarter, we announced a new international win with one of France's mobile technology leaders, Bouygues Telecom. Throughout the year, we have also had great success in the cable and WiMAX space, announcing deals with the four top operators in the US, including Time-Warner, Comcast, Clearwire and Sprint. In addition, we also announced a win with a strong regional WiMAX distributor, Digital Bridge.

In the cable sector, we also had success in broadening our portfolio penetration by deploying capabilities with our Device Management Suite for bootstrapping and updating the handset and automatically provisioning the customer onto the carrier's wireless network. We continue to see expanding opportunities with our device management technology for provisioning connected devices and services, managing security, and enforcing policies. One great example of these new capabilities is reflected in our recent win with Nokia, who selected our DM Suite to help manage their mobile workforce of over 120,000 employees worldwide using a wide range of notebooks, smartphones and other devices. The expanding category of customers we now serve creates additional opportunities for us to sell multiple products for our wireless and mobility business segment.

We are already beginning to see numerous opportunities and real traction for our new products, further diversifying beyond connectivity software and allows for deeper and more strategic relationships with our customers. As WiMAX continues to roll out in 2010, we expect to see meaningful activity and increasing revenue contribution from these customers as they begin to launch their marketing initiatives on their quest to become a real force in the wireless sector.

We are also working aggressively to create support for the coming wave of LTE. Globally, over 50 carriers have announced support for LTE in the coming years. And the projected capital expenditure in 2010 for LTE buildout is anticipated to be over $58 billion. We believe this is an early indicator of a rebound in the telecommunications sector, specifically focused on delivering enhanced data services. Much of this will be from tier 1 customers such as Verizon and AT&T. Smith Micro Connectivity Solutions will be there to support LTE along with HSPA plus transitional technology. We believe that with the deployment of these new networks we will see a dramatic shift in broadband mobile data rate plans that could open up new segments of the market for us to serve. We anticipate a significant increase in the number of users who purchase metered services, pay as you go plans for casual users and potential new subscribers to broadband mobile services with emerging internet connected devices. We anticipate that all these developments will be positive for Smith Micro's business going forward.

We also believe that all of these rapidly developing changes in the mobile landscape, with new higher speed networks, increased bandwidth and a proliferation of internet-connected devices, increasing numbers of smart devices with multiradio support, and continuously improving price points for data rate plans, are driving demand for new forms of connectivity -- one where the connection manager is more aware, intelligent and adaptive to the users ever changing wireless conditions. All of these changes and service offerings and new network types create a need for connectivity software that must be smarter and simpler while making intelligent choices for the user.

Smith Micro is deploying adaptive connectivity solutions to leverage our core intelligent connectivity engines in a way that will keep track of users connection history and preferences while maintaining an awareness of changing network conditions across variations in bandwidth, signal strength, network type and more. This software will understand users' rate plans, be location aware, understand device attributes, conform to carrier preferences and seamlessly manage data sessions between 3G, 4G and wi-fi networks. This will improve the user experience, making it possible for people to just be connected without having to worry about how to get connected.

Our intelligent connectivity service engine core will be the center of our software development efforts and product roadmaps to support PC, smartphone and other internet connected devices in 2010. We believe that there is an urgently developing need for these kinds of solutions, and our adaptive connectivity strategy will be the key to propel our future growth and profitability.

On the productivity and graphics side, we faced a difficult quarter and year for this business. It has been predominantly consumer facing. We are encouraged by some bright spots within the business segment with our graphics product lines specifically relating to our animation product categories for 3D and 2D solutions anchored by Poser and Anime Studio. We believe we are well positioned to benefit from the 3D animation markets expansion into the personal computer, web, film and TV markets. With our StuffIt product line, we launched a new product in 2009. Within our patented StuffIt compression line of products we enhanced the appeal of our StuffIt product to enter the managed file transfer services market, a large and growing marketplace. We see this as the next logical evolutionary step for this product line.

Given the current macro economy, we anticipate continued challenges within this segment of our business in 2010. We believe that we will be able to build on the success of our key growth areas in graphics and the compression product lines while tightly managing our cost structures to enable solid margins.

Before I open the call for questions, I would like to provide you with these thoughts about our direction for 2010.

We entered 2010 with significant momentum in our wireless and mobility business, where we grew revenues in that segment 22%year-over-year. We continue to have strong customer relationships and a market poised to explode and offer tremendous growth prospects for many years to come. We are excited about our strategy and the development of our new adaptive connectivity solutions which give us a competitive advantage in accessing new revenue sources.

The ongoing demand for our connectivity and communications products position us to capture telecom spending not only in North America but also in international markets. We have the unique expertise, resources, and technology assets to pursue these opportunities and to drive strong financial results. Our balance sheet is healthy with a solid cash position, no debt, and we see a very large and expanding addressable market for our products.

As we announced earlier in the year, our 2010 revenue guidance is expected to be in the range of $125 million to $135 million and we foresee sustainable growth beyond 2010. We are excited about our prospects and look forward to a prosperous and innovative year. With that, operator, I will open the call for questions.

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

Thanks. Just a few questions. Can you just tell us what the one-time legal expense in the non-GAAP expense was in the quarter?

Sure, the one-time legal expense was about $100,000, both for Q3 and Q4 both.

And in terms of 10%, greater than 10% customers in the quarter?

Sure. Again, it is our usual suspects, Verizon, Dell, Sprint, AT&T.

As we look at 2010, are there any changes, I know that the Dell deal had minimums related to it. I wasn't sure if that was a multi-year type of thing. Are there any changes there? And when would you anticipate HP starting to ramp?

The key on all that is what is going happen with our key players in my view and that is the primarily carriers out there and the new accounts coming on tap. We really haven't seen the big roll as far as, let's say ,the LTE pushes that may come in later this year. But certainly when you consider the cable guys and the WiMAX folks, those are ramps that are starting to take place that actually may start pushing people out of 10% so it is hard to comment on that right now.

Okay. And if just in terms of our 2010 guidance in terms of mix, it sounds like consumer didn't really pick up in the fourth quarter as maybe you would have hoped. As we look into 2010, is there now a greater mix of wireless in your guidance and lower consumer for the full year?

You know, in terms of how we look at gross margins, if you consider our Q4, we will probably have a pretty similar mix where you have consumer at about $3.5 million. Obviously a low number, that is the lowest gross margin type product. But we have added new products too including the Core Mobility products which run at about 80% gross margin. The net-net on it is we will probably run at about 90% when we look at what mix comes forward.

Got it. And just last one from me in from a full year guidance participant if you look historically the last couple of years and I know you said the first half is going be weaker than the second half. Typically it's been about 45% of sales in the first half and the balance in the back half. Should we still anticipate that in 2010? Thanks.

If not that maybe a 40/60 type that we have done before. It is hard to predict at this time but definitely I think the key is look at us year on year. Last year, we did $23.9 million in Q1 and we are pretty sure we will post favorably to that which is what really counts to show growth. Take a look at last year and year-over-year look for us to improve each quarter.

Great, thank you.

Thank you. Our next question comes from the line of Scott Searle with Merriman. Please go ahead.

Good afternoon. Just a quick clarification. Did you provide any breakdowns between US and international markets?

Yes, our total international is $1.4 million for the quarter across all business groups.

And what are your expectations, Andy, in looking forward over the course of 2010 for the international markets? You added a couple of new customers but it sounds like it is really LTE dependent so we should be thinking about that as a second half phenomenon?

My view of it, and I will let Bill and Tom chime in, is it is still an early market for us. We do that for the complexity. And we need those markets to show a great deal of complexity. But we do have some non just plain old connectivity products we expect to put in international. We have neat deals done that we haven't announced yet that will show some improvement in that sector. Overall we still show North America market growing more significantly in 2010 and that tends to dwarf when we look at overall numbers North America versus international.

And I can add some color on that. I guess the way I view it is you will see a strong focus on our very large North American carrier customers, the ones that we have been servicing for a number of years that Verizon and AT&T and Sprints and T-mobiles. But I also think you will start to see a step up in the revenues that we can pick up from, you know, the Comcasts, the Time-Warners and the Clearwire side. So, I think as we view 2010 I think those are the places to put most of the focus. It doesn't mean that we are not going to focus on offshore. We will. But when you start following the money and figuring out where the numbers are moving, I think you're going to find that the accounts I just mentioned are where you are going to see a lot of growth.

Bill, maybe to follow up on that front on WiMAX, does WiMAX collectively crack 10% by the middle of this year or second half of this year?

I --

It is hard to say.

Yes.

I mean we are starting to see big tickups. LTE will begin the launch in the second half of the year, as well so it may dampen that percentage a little bit. But definitely we see 4G technologies as really starting to ramp in the second half of the year.

Okay. And a quick question on the multimedia and convergence side within the wireless revenue. It was a relatively big number this quarter. Certainly, there was a big contribution from Core Mobility. If I recall correctly, your expectations from Core Mobility were probably some where in the ballpark of around $12 million or so over the next, four plus quarters and so -- was there a big Core Mobility number in there? Or did the older multimedia business take a big step up as well, sequentially or is that -- is that really starting to see contribution already from the new V-Cast Media Manager relationship?

First off, let's go back over I want to reset the core thinking because I saw another number earlier in the week. What we said when we announced the acquisition of Core Mobility to look for $10 million to $12 million in 2010. Now, we obviously picked up some revenues in fourth quarter 2009 and I can let Andy try to kind of break out, you know, the mix, if you will, for multimedia in a general sense.

Sure. You know, the key contributors are the Core suite which are multiple products and, you know, we also have our multimedia product which we announced at Verizon and we also have what we used to call more traditional device management products. All three are contributing and contributing nicely. The Core suite of products contributes probably right around half of it right now. And as we look going forward, again, it is going to be a significant contributor. I think one of the key takeaways is those products that we picked up on acquisition are performing rather immediately, which is great for us. It is always a question mark as we integrate products and look at rip rack. So the big positive is it is right on track and that is where you see a nice pushup there.

So, Andy, maybe to follow up on the point looking at multimedia and convergence -- if I back out Core Mobility as we go into March and June, how should that trend? Is V-Cast Media Manager going to be a big contributor going forward into the March quarter and June quarter or was there a one-time event that we saw there?

Scott, this is Tom. The V-Cast Media Manager launch was a soft launch and it actually was a big contributor to the number that you are referencing. Going forward we are not going to be reporting multimedia and convergence separately. I'm not sure how much you will break out in the future, Andy, as we roll it into the wireless and mobility segment. We believe that over the course of 2010 as Verizon really puts some marketing muscle behind the V-Cast Media Manager launch we will see that ramp nicely and we are pursuing new customers in that area.

And just on the connectivity side, mobile connectivity, Sierra wireless had a difficult fourth quarter but seems like it is an improving outlook for them in March. Part of that is product cycle driven. What is your visibility as you look across the North America customer base on the mobile connectivity front? Thanks, guys.

Let me just start with, make sure we address the topic that we talked about last quarter, which was there looked to be with some of the products a bit of inventory glut. Everything we are seeing now is very strong sell through and keep in mind we are agnostic as far who the vendor is, and really, almost what kind of activity product they are selling to our key carriers. We just care that wireless data plans are being purchased. But we are not seeing any unusual inventory issues or what have you. We are seeing strong sell-through, through all the different carrier customers. In our view it is all very positive. It has had a good start to the year and hopefully we will see some acceleration at the end of the year.

And I guess in answer to your comment about Sierra, you know, when you look at their numbers they still grew and they grew fine. I think maybe they had an expectation problem more than anything else.

Thanks, guys.

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

A couple of questions. Bill, can you give us an update on the smartphone partner that was supposed to ramp in the first half for the wi-fi offload product?

You have got me. I'm thinking right now and I'm drawing a blank. In the first half of when?

2010.

We haven't actually announced a partner this that area. I can tell you that we definitely are working in that area, Chad, but I don't believe we have announced anybody.

Okay. Maybe I mixed it up then. So speaking of another cell phone vendor, you announced Nokia, I believe, on the call. Is that a deal for your device management product, is that a deal that was done in fourth quarter and what should we expect from that, you know, looking out this year?

It is just -- it just started in fourth quarter. It will grow throughout the year. It is, you know, an exciting new area for us to focus on. It is an enterprise sale. We are selling to Nokia IT and they are deploying it throughout the Nokia infrastructure. We believe that it will also provide a number of other opportunities with other large enterprises, especially our Symbian focus, where we can deploy exactly the same product. We plan on enhancing the product beyond Symbian to be adding a number of other device operating systems et cetera, so we think this is a growth area going forward and helps build out our overall offerings that we can go to the enterprise.

We can now talk to the enterprise about our connectivity end to end solutions, give you connection management and security and authentication. We can talk to them about device management and bringing devices up and killing devices that are lost and wiping them. And we now also have a third offering where we can focus on our StuffIt file sharing capability. And so, you know, we now think we are building now the nice portfolio of products to take into the enterprise.

Bill, or Tom, either one, who did you compete with on the deal? Do you know?

Basically all of the usual suspects, Chad, if you are familiar with that marketplace. There is two or three --

Yes.

Guys that have had some long running success in the device management space. And the differentiator is in this portal that we have created to allow users to easily configure and provision services on their handset, some what of a self-provisioning portal. So I think that is an area that we find to provide great efficiencies for the customer -- low cost operation, ease of use and that is one of the key differentiators.

Okay.

And Chad, I have been thinking about your first question and, you know, it is not publicly announced. It actually is going -- you know, what we are focused on is more at a carrier level but you will have to wait until we can talk about it. We just can't talk about what we are doing on moving traffic from the cellular network to wi-fi whether that be both voice as well as data.

Okay. Because I have seen a couple articles, mainly from European carriers, that the cellular to wi-fi offload -- the importance of that is going up in terms of their priorities and I have heard some spot information domestically here. Do you guys feel like that is an opportunity for you in the second half of '10 or is that more of '11 opportunity?

Well, I don't know. My crystal ball is not as good as yours. I'm not sure about the exact timing. But I guess what I would say is that, you know, when you hear about events like what happened in New York City, you know, during the fourth quarter where they had to, you know, where AT&T had to stop selling iPhones because they didn't have enough bandwidth in their network, you can start to see why the need to offload some of this excess load from the cellular to the wi-fi to get to the wire line backhaul is really important. And so, yes, it is going to be a subject, you know, there will be a little relief valve as people roll out 4G. But, you know, if you believe in, you know, the basic principles of Moore's law if we build the capability, we will use it up and we will be back needing more. So that is how I view that.

And it is pretty tough for someone to do that and get around your patents, is that correct?

That is something that, you know, our patents, we have not really fully exploited. It is a good subject. We are, you know, really working closely. We have new IP legal talent within the company now as to exactly how to deploy these either defensively or offensively and we haven't really decided yet.

We have some great patents in the field as we talked about in the past for roaming capabilities across the different types of area networks, wi-fi, 3G, 4G et cetera and patents around netting an IP address back into a carrier network and keeping that IP address consistent so they can provide continuity of services as the user moves across these different networks. We believe that the power of the technology selling it into the customers where we have these great and deep relationships is, you know, much more exciting than worrying about the, you know, the offensive place with our patents.

I understand that. Last quick one for me hopefully. And Andy the OpEx run rate in the fourth quarter on a non-GAAP basis -- from a dollar standpoint is that how we should look at OpEx at least into the first half of this year or did we not see the full effect of Core in the quarter?

You saw about two thirds of Core in the quarter, the acquisition closed, you know, later October. So expect the step up in Q1. And as we go through the year again we work hard on managing this as we look at our margin carefully. But you will see a step up in Q1 and, again, for modeling purposes we advise people to continue to model it up, as we are looking to invest. And again, we have a particular plan and pace in mind and any changes to that, of course, we make you aware. And changes really take the form of, you know, of customers accelerating products, you know, as we call kind of good problems to have as people get excited about 4G and LTE that is pretty much what drives our investment.

Thanks, guys. Good job again.

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

Thank you, good afternoon, gentlemen. Just wanted to follow-up on the WiMAX questions. Clearwire is seeing sharp acceleration of their WiMAX subs both their retail subs and with their wholesale partners and looks like they are expecting them to triple into this year. I have a couple of questions around that. One is how do you recognize revenue on Clearwire subs and for their wholesale partners and is there a difference there? And can you give us any sense in terms of what you have seen from revenue from WiMAX to date?

Sure, you know, the Clearwire model works more like an activation model so we see the data a little bit after the fact rather than a sell-in model. Basically it is real time. There is no channel challenges or question marks, it is what it is. We are seeing a great step up, but you have to keep in mind you are starting from zero in that space, so great steps up don't necessarily match a traditional run rate of a Verizon, AT&T, Sprint in connectivity. The great message is it is stepping up. We are seeing a nice curve on it. They are very positive. You know, perhaps by the end of this year we will start seeing, you know, more recognizable revenue from it. In other words, by recognizable, I mean more evident revenue where you start seeing the meter being pushed. But for right now they are doing a bit of catch-up compared to our very, very large customers.

Sure, thank you.

The one thing I could add, though, is that they as a company the Clear team is obviously very energized. Their recent results were positive and I guess in many camps unexpectedly so. And so, you know, clearly they think they are on the right track. And that wasn't a pun. So I will stop at that point.

Great. Just a follow-up on the Verizon Media Manager launch. Can you say if the revenue that you got in the fourth quarter was more of an upfront payment or if it was due to actual product use?

As Tom mentioned it was a soft launch and so it is more of the former versus licenses and so on. And again, kind of following on what Tom said that is again going to be more of a later year from a license perspective.

It will ramp as they really begin to aggressively promote the product.

So in like the first quarter we wouldn't necessarily expect a similar level of revenue from that product?

It's possible. You know, that brings up a good point, though, talking with the different analysts last quarter. What may not be evident is what is normal for Smith Micro is up to 10% of our revenue can be more of customization type revenue. Again, it is not a huge part of the business but more of a recurring model for us where when you look at all the products we are launching and all the technology we are launching it is very common for us, you know, we do this obviously in tandem with the license model to protect all of our investment to have X amount either in terms of customization fee and/or floors that we put in as far as license revenue and so on.

We have that in play typically with all of our products and it is a consistent contributor every quarter. Even though in the example you are talking about, you may comment in one product we had a perhaps one-time, you know, number in a quarter -- well, the next quarter you are going to see another similar number from a different product technology. It is good to model about 10% of our revenue coming from, you know, minimums or more upfront type revenue.

Great, that's helpful. And one final modeling question. Andy, In reference to the comment that you expected year-over-year growth in the first half, I'm wondering if you could give us any more color with respect to if you still expect year-over-year growth in the non-Core Mobility portion of the business. In other words, it seems that we are expecting $2 million to $3 million of Core per quarter and do we think that the non-Core business would also grow year-over-year in the first half?

That is a good question, and the answer is it should. The question mark we have more so as a company is our productivity and graphics group. As Bill alluded to, they have some great ideas and interesting products coming out, but they are more back half because they are doing a little bit of rebuilding, regenesis. So that group is going to be flatter if not down -- well, it will be down year-over-year as we did $3.5 million in Q4 and they usually hit seasonality in Q1 and 2. We will make up for that in our traditional connectivity business so that traditional connectivity business should be up Q1, Q2.

Okay. That's helpful, thank you.

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

Hi, guys, how is it going? My first question is do you any of your LTE opportunities already factored into your 2010 revenue guidance?

I would say it is always fair that we are making that assumption.

Okay, great. And then the second is of your new wins around WiMAX, the cable device management stuff and then Nokia, can you clarify for me which ones you are already receiving revenue and which ones you will be and at what time I guess they are going live?

I can start out with the brand newbies -- Nokia, for instance that is brand new and so that is more 2010.

First half 2010 or second half 2010?

Should be.

Ramping throughout the year.

Okay.

Yes.

And then what about I guess the four WiMAX carriers? Obviously Clearwire, yes, are the other two already starting as well?

Yes, they have been in play but very small numbers based on what you see in the press as far as footprint. You know, some are going faster than others as far as their launches. But we track consistently with what you read about what they are launching and where they are launching their geos.

And what about the -- go ahead, sorry.

I think the recent news from Sprint that they plan on launching the first WiMAX handset this year should be viewed as positive news. That is a major announcement. There haven't been WiMAX handsets per se out there that can do both WiMAX and 3G which is what is mandatory for this rollout through all four of the named accounts. They are basically all riding on the same network. So we expect that they will start revving up their marketing engines, all these companies know how to play that game and we are -- we have our fingers crossed. We wish them the best, but keep in mind we support all sides in this battle so we just want to see everybody do well.

Okay, great. And what about the cable device management solution?

The cable device management solution is a start, and when you start putting devices on to these cable networks, especially when you go beyond data devices, you need to be able to get them up and running. And so this was a start and we are hopeful that we will roll out our entire portfolio to all of the WiMAX customers so we can talk to them about Push To Talk, we can talk to them about Visual Voice Mail, talk to them about multimedia. We certainly want to talk to them about multiscreen technologies and we have a lot to offer these folks. And we have great relationships and we are building our relationships stronger so --

Has it gone live already or going to?

We have one live one, Lauren, and that has not been publicly announced. But one area that I think is a big advantage for us is the protocols used for managing the WiMAX chipsets, and as you know all of these cable operators that we mentioned are also part of the WiMAX consortium, they are all basically needing a system to manage the devices and provision devices on the network so that is where we see some interesting opportunity in the WiMAX space, not necessarily specifically around the cable industry.

Okay. And are you factoring any of these, you know, four area or three areas that we just talked about into your 2010 guidance already as well?

Of course.

Okay. And then I guess just to try one more time around this operating margin. As we look at the 2009, the way how it kind of expanded over the year, are you still thinking that it would be similar kind of expansion levels?

It would be similar in performance. And, you know, probably the biggest piece that is driving '10 is the Core acquisition. As mentioned, we saw a couple of months of the Core expenses in Q4, and now in Q1 we will have all three months and so on. And so that is, you know, as we always say when we integrate different groups and different technologies you know, we like to build in a little bit of expectation that, you know, it takes a bit of work to do that. When we look at Q1 and Q2, yes, we definitely expect that between the revenue seasonality and the Core transaction those are the two drivers to actually be lower op margin than Q3and Q4.

And just last one around I guess there. I guess with LTE opportunity on your margins, are you accounting for investments already in, you know, in the kind of guidance your gave for 25%?

Absolutely.

Great, thank you very much.

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

Good afternoon, guys.

Hey, Scott.

Yes.

First of all, you know, I was going to ask how you are viewing the pipeline. You pulled some good deals out of the pipeline that are ramping up this year. Are you seeing good sized pipeline in the future? And maybe are they in cable or WiMAX or still the traditional wireless customers or device customers?

We have a strong pipeline but as I have always said, you know, we need to get the deals closed. We then need to get, you know, the product accepted and get the permission of the customer to talk about it. So I'm really restricted as to what I can say and where it's going to be. But I think you should expect to see product moved into all of the suspect places. You know, we are going to sell into the, you know, the 3G market, and we going to sell into the 4G market. It doesn't matter whether it is LTE or WiMAX. We will sell off shore but we are going to have a pretty strong domestic focus because we are going to be working diligently to deploy more and more applications to our large carriers and the new 4G carriers, especially on the WiMAX side. So we look for a lot of growth, you know, and we are trying to set ourself up that when this economy comes back out, we are sitting at the top of our game and ready to grow and really move the ball forward so that's all I can say.

Traditionally in our multimedia segment Verizon had been the main customer there. You relaunched this and expanded the capability. So what is different this time, you know, to land more customers, more sizeable customers in this space? And is anything expected this year or is it more 2011 and beyond?

I think it is this year and I think it is mostly the back half of this year. There are significant differences in the product. The first product with Verizon was really a music manager and all it really did was sideload music to the handset. This is about all media file types and content, and it is also has an interesting interface with the cloud and a variety of services that Verizon has not announced and will ultimately be offering. Some of this will have to wait until they make their announcements and begin their marketing efforts, but we definitely anticipate it being back half of this year.

Great. A couple of more questions. Your productivity and graphics were down this quarter which is a seasonally good quarter. Was there weakness in some part of that or just overall weakness from consumer spending?

Well, as we have talked about now, I think I first talked about it in maybe second quarter conference call and again third quarter conference call -- we are no longer republishing the VMWare product line. We act as a reseller of it, especially in our online areas. And so that probably is the single largest contributor to the decline in that business only aided or as much by an incredibly weak consumer spending habit right now. So, you know, this is, you know, it was a good news area in 2008, it wasn't so good in 2009. And we are not, you know, trying to tell you we think it is going to be great if 2010 either.

Lastly for Andy, I think a quarter ago you mentioned that maybe 2010 would have a 35% cash tax rate and now it is 25% to 27%. Have you changed anything operationally or just further analysis?

Further analysis and pretty much how the numbers work out with what we have remaining NOLs and so on. So it is good news side of it is, you know, we are going to do better than we thought and that should help the modelers out.

Great, thanks a lot, guys.

Thank you. Our next question comes from the line of Kevin Dede with Jesup and Lamont. Please go ahead.

Thanks. Congrats on a nice job, guys. Can you give us more color in the Core Mobility integration, where you are in the process, a little bit on the cross selling opportunities, portfolio integration and other opportunities that you have in developing the products that that company brings you?

Sure, Kevin. So, I think from an organizational standpoint is nicely processes -- the process has gone pretty quick and we are nicely integrated organizationally. You know, Core Mobility is a group now that reports into our wireless and mobility organization and they are predominantly focused in the multimedia product line. The three products that they had were backup and restore functions. We are working to integrate that product line with our multimedia software clients to add a cloud backup piece. They also had the Visual Voice Mail product which had some very nice growth as a result of some good uptake with the Android client and Push to Talk. Those two particular products, Visual Voice Mail and Push to Talk, have been integrated in our Communication Suite where we have messaging products and we have the IMS based clients for IM as well as product that we call Mobile Network Director which does the switching between wi-fi 3G and 4G networks.

And we can say that we are very pleased with early reactions from carriers on Visual Voice Mail. It seems to be the hottest item in that lineup that we picked up. Although we have, you know, some good solid leads for both backup and restore and Push To Talk as well. But Visual Voice Mail does seem to be something a lot of folks want to look at, talk about and hopefully we can close some deals and get some more deployment. So far to date, we are very pleased with what we got from this particular transaction. I would say generally in that sense as far as the quality of the folks, the quality of the technology both of those areas I think were exceeding expectations. They have really worked theirself into the mainstream of our wireless and mobility business unit and I know that Rick Carpenter who heads that team, is very excited about what he sees in Mountain View and I think that will be a strong location for us.

Bill, when do you think we will see some announcements on the new win side? Is that more of a second half thing as you expected when you first talked about this deal?

Kevin, you know, that goes back to the crystal ball. You guys have the great crystal ball, I don't have one. I got to get my sales guys to close the deal and they can never do it fast enough, just ask them, they will all tell you that, I'm never happy with the time it takes to get it done and they got to get it -- we got to get it through the process of getting contracts signed and things like that. And then we got to get permission from the customer to talk about it. You know, kind of talks to me like it probably is a second half event but I wouldn't say -- I don't want to take my sales guys off the hook. If they can get it done quicker I would love to tell you about it sometime during the first half.

All right. Give us a little more insight on the international market? Certainly lots of questions on that this evening but I haven't heard from you where you think the Core connectivity business is there, vis-à-vis Birdstep or Option and Huawei the competitive environment and the opportunity that you bring and breadth of products you have to pick low hanging fruit you think at some of these major European carriers?

One of the things, Kevin is the first thing we need to do is put in place an infrastructure over there of sales force and sales organization that can build the relationships. That is what we have done in the last year. Andy mentioned that we anticipate growth in the international markets and I think it will predominantly be from Europe. We are growing from a very low basis, though, right. What might be very high percentage growth but in terms of the overall percentage of revenues contributed to the Company, we probably still expect it to be some what low next year. You have got 51 carriers who have announced LTE that they are adopting LTE and deploying I think that there is 24, the majority of those carriers are in 2010 the majority of those carriers are European-based carriers. So we see LTE as an opportunity to build new relationships and get in there and be the key provider to support LTE. That is one of the focuses of our sales organization. And then also we are seeing a resurgence to a large degree in our device management business a lot around provisioning devices, provisioning connected devices. So those are the types of things that we are looking forward to in 2010 for the international markets.

Well, you were -- you did a nice job if displacing Birdstep and HP and I guess I'm interested in how you see mimicking that type of process with some of these larger carriers?

Well, it is the same thing that we -- we don't really like talking about specific competitors on these calls but really is the same process that we go through with every single customer. We need to build a case for the value that we bring in terms of the quality of the product, the innovation of the product, the ability to help our customers create a user experience that will satisfy their users for the long-term and keep that customer retained for a long period of time. And those are the things that we are used to doing regardless of the market and regardless of the competitor. So I'm not sure there is much change in the way we will operate in those markets.

What I think when you really focus in on what we are doing with the adaptive connectivity putting a lot more intelligence into the connection manager, it moves the whole paradigm forward and makes it more difficult for competitors, be it the folks you mentioned or be it the guys that develop operating systems. It is harder for them to keep up. And when we can also build in the capability to provide rich analytics because we have the clients then that talk to our backend servers that reside in the infrastructure of the carriers, you know, it makes for a very, very strong and deep and meaningful relationship that, you know, really isn't one that we spent a whole lot of time worrying about competitors. We spent most of our time about how to build better product and move things forward.

Thanks, gentlemen. Thanks for holding the call open for my questions.

Sure.

Thank you. Our next question comes from the line of Ian Gilson with Zacks Investment Research. Please go ahead.

I have a couple of small questions. Normally your interest income and other income combined is a positive, in the fourth quarter it was a negative. Anything one time in there?

Yeah, we had a one-time adjustment just through audit as far as how we are accounting for short-term investments on the balance sheet so nothing unusual as far as unusual type of investment on the market. That will Q1 of will go back to the typical run rate at very low interest earned.

And which run rate was the legal expense included?

Legal would have been in the G&A.

Tax rate was a little high in the quarter, somewhat more than a little bit high.

The GAAP tax rate ends up averaging out right around 60%. This is end of year provision true-ups and so on, so the cash taxes came down to just under 18% which was favorable for us as far as how we are estimating. And GAAP taxes are always a bit of a mystery, came in right around 60%.

Okay. And then share count is moving up. Are we getting option conversions for what?

Share counts are up primarily due to the Core transaction in which case we had approximately 700,000 shares. And over a whole year basis we did have about 400,000 shares based on stock option exercises.

Great, thank you very much.

Sure.

Thank you. At this time I don't show any further questions. Management, please go ahead.

I would like to thank everyone for joining us today. If you have further questions feel free to call us. We will be presenting in New York at both the Jefferies and Wedbush investor conferences the week of March 8. So if you are attending the conferences or would like to sign up for a one on one, please do. And of course we look forward to talking to you on our next earnings conference call we anticipate will be in early May. Thank you and have a great day.

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