Smith Micro Software Inc (SMSI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro fiscal first quarter 2010 earnings 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, May 5th, 2010.

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

Good afternoon. Thank you for joining us today to discuss Smith Micro Software's financial results for our first quarter ended March 31, 2010. By now you should have received a copy of the press release discussing our quarterly results. If you don't have a copy, and would like one, please visit us at www.smithmicro.com, or call us at 949-362-5800, and we will immediately email you one. With me on today's call are Bill Smith, Chairman, President and Chief Executive Officer, Andy Schmidt, Chief Financial Officer, and Tom Matthews, Chief Strategy Officer.

Before I begin the call I want to caution that on the 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 2010,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 may cause actual results to differ materially from those expressed or implied by the forward-looking statements, are changes in demand for the Company's product 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 are discussed in the Company's filings with the Securities & Exchange Commission, including its filings on Forms 10-K and 10-Q, and could cause actual results to differ materially from those expressed or implied in any forward-looking statements. The forward-looking statements contained in this conference call are made on the basis of the views and 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.

With that said, I would now like to turn the call over to Bill Smith, Chairman, President, and Chief Executive Officer. Bill?

Thanks, Charlie. Good afternoon everyone, and welcome to our first quarter, ending March 31, 2010 earnings conference call. We are pleased to report another solid financial performance, where we have posted our fifth consecutive quarter of revenue growth while generating the highest quarterly revenue results in our Company's history of $29.9 million. This represents an increase of $6.1 million over Q1 2009, or a 26% jump in revenue over the same period last year.

In addition to robust top-line growth, we posted strong earnings with GAAP net income of $1.6 million, or $0.05 per share, versus $278,000, or $0.01 per share in the prior-year's first quarter. NonGAAP earnings were up sharply, posting $6.2 million, or $0.18 per share, versus $4 million, and $0.13 per share we reported in the first quarter of last year. This reflects an improvement in nonGAAP earnings from Q1 2009, a $2.1 million, or an increase of 53%. Our nonGAAP profit before taxes also increased nicely, from 22.6% for the Q1 of 2009, to 26.8% in Q1 2010. In addition, nonGAAP gross margins correspondingly increased year-over-year from 86.3% to 92.6%.

Overall we are pleased with our results and the direction and trajectory of the key operating metrics within our business. We are excited about the accomplishments we achieved during the quarter, and in spite of the continued unsteadiness in the macro economy, particularly in the consumer sector, we are pleased with a great start to this fiscal year. We remain vigilantly focused on our strategy, delivering on innovative R&D initiatives, executing on our tactical plans, and expanding our presence globally to achieve continuously improving results to meet our business objectives for the 2010 fiscal year.

Revenue results from within our wireless and mobility business unit continues to be the driving force for Smith Micro. Sales from our wireless and mobility software and services were approximately $27 million in Q1, up a commanding 40% year-over-year. This mobility-focused business unit accounted for 90% of the top-line in the quarter, which is up from 81% of revenues for that business in Q1 of 2009. We are delighted with the performance of this business segment, and we are optimistic about the growth prospects it holds. We continue to place heavy emphasis on this business segment, as we concentrate our efforts and align resources to expand our leadership position in the mobility software arena.

As we discussed on the fourth quarter call, product sales from outside our mobility business during the quarter faced a more challenging environment. Revenue from our productivity and graphics business totaled $2.8 million for the the quarter, which is down from $4.3 million, or 34.7% from Q1 2009. While we continue to run the productivity and graphics business with acceptable margins, we remain acutely aware of the ongoing challenges of the economic environment in the consumer segment. And we are working hard to enhance our product offerings, and fine-tune our strategy and business models to help transform this business into a growing unit again.

Looking ahead to the remainder of the year, we continue to see high growth potential for our software to serve users of mobile internet-connected devices in the expanding 3G world. We are also in the process of gearing up for the coming of 4G services, as the WiMAX footprint continues to expand, and LTE begins to roll out at the end of this year. These new networks are catalysts, and enable the prospect of even greater market expansion for connected device growth, and provide the potential for even greater adoption of our mobile software on a global basis. Overall we are pleased with this quarter. The progress we are making on a strategic R&D initiatives, and the feedback we are getting from key customers on the opportunities ahead.

But before we delve into this in greater detail, I would like to turn the call over to our CFO, Andy Schmidt, for his review of the numbers. Andy?

Thank you, Bill. First let me go over our customary introductory items, as we have in past quarters we have provided nonGAAP results, and a reconciliation of nonGAAP and GAAP results. NonGAAP results discussed in this call net out amortization of intangibles associated with acquisitions, stock compensation related expenses, and non-cash tax expense to provide comparable operable results. Accordingly all results I referred to in my prepared remarks for both 2010 and 2009 are nonGAAP amounts.

Our earnings release which will be furnished to the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures, and a reconciliation of the differences between each nonGAAP 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 nonGAAP P&L metrics.

In terms of stock compensation, stock comp totaled $2.8 million for the current period broken out as follows, $28,000 for cost of sales, $803,000 selling and marketing, $625,000 R&D, and $1.35 million for G&A. In terms of amortization, the total for the current period was $2.25 million broken out as follows, $1.5 million cost of sales, and $750,000 selling and marketing.

Moving on, for first quarter we posted revenues of $29.9 million, and diluted earnings of $0.05 GAAP, and $0.18 nonGAAP. Revenue for the quarter was an all-time record, up 25.5% from first quarter 2009. International revenue was approximately $2 million this quarter across all business groups.

Our wireless segment reported record revenues for the quarter of $27 million as compared to $19.3 million last year, an increase of 40%. Within the wireless segment, connectivity and security posted revenues of $22 million, compared to $18.5 million last year, an increase of 19%. Multimedia, backup and messaging, and mobile device products posted revenues of $4.9 million, compared to $730,000 last year.

Offsetting overall gains in our wireless sector, our productivity and graphics group posted revenues of $2.8 million, as compared to $4.3 million last year, a decrease of 35%. And finally, we reported approximately $126,000 of Other revenue, which compares with approximately $280,000 for the first quarter of 2009. Total deferred revenue at March 31, 2010 was approximately $1.8 million.

Switching to gross profit, nonGAAP gross margin dollars of $27.6 million, increased $7.1 million, or approximately 35% from the same period last year. Of key significance, while our revenue increased 25.5% year-over-year, our gross margin dollars increased 35% for the same period. As follows NonGAAP gross margin as a percentage of revenue was approximately 92.6% for Q1 2010,as compared to 86.3% for Q1 of 2009. NonGAAP gross margin by product group were as follows, wireless 93.7%, productivity and graphics 84%, and Other revenue 48%. As we have noted before, our margins are driven strictly by product mix.

Switching to operating expenses. NonGAAP operating expense for the first quarter of 2010 of $19.7 million is an increase of approximately $800,000 from Q4 of 2009, driven primarily by increases in headcount and seasonal trade show expense. Increase in expense is as expected.

From a year-on-year perspective, nonGAAP engineering expense has increased 33%, selling and marketing expense increased 16%, and administrative expense increased 34%. It should be noted that administrative expense includes the cost of facility space and leasehold improvements. Total nonGAAP operating expense has increased 28% year-over-year, driven by planned infrastructure growth and by acquisitions. NonGAAP operating margin for the current period was 26.7%, higher than our benchmark 25%. Current period operating margin compares favorably to operating margin of 21.6% for Q1 of 2009. NonGAAP operating profit for Q1 was $8 million, and increase of $2.8 million, or 55% from the prior year. NonGAAP net income for the first quarter was $6.2 million, or $0.18 per diluted share, as compared to $4 million, or $0.13 last year.

Cash generated from operations for the quarter was approximately $5 million. The primary uses of cash for the period were capital expenditures of $1.3 million. Capital expenditures were primarily leasehold improvements and investment in the ERP system and IT infrastructure. Overall we posted yet another strong quarter of improved operating metrics and very strong cash flow.

Looking forward to the balance of 2010, we are pleased with our first quarter performance and consider it a good start to the year. At this time we are not changing our revenue guidance, but as previously stated we will consider change to our guidance at the midpoint of the year. Also at this time, we will hold steady with our previously announced guidance answer of revenues between $125 million and $135 million, gross margins of around 90%, and we will continue to target operating margins of 25% with the caveat that acquisitions tend to lower our op margin for one to two quarters post-acquisition to the integration-related expenses.

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 nonGAAP net income. If tax laws change throughout the year, I will provide an update to this metric. In terms of housekeeping, we expect to file our current period 10-Q this week, which will represent our final financial statements for the period.

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

Thanks, Andy. Our wireless and mobility business encompasses all products that enable connectivity to wireless networks, devices, data, and people. As we mentioned earlier, revenues in the quarter from this business increased 40% over first quarter of 2009. Sales within the segment were lead by our QuickLink Mobile Suite of connectivity and security software, which were up 3.4% sequentially from the prior quarter, and over 19% year-over-year. This product segment continues to be an important driver of our overall growth, as we deliver intelligent connectivity solutions to key wireless carrier customers, such as Verizon, AT&T, and Sprint. These three carriers, all contributed nicely in the quarter, with each accounting for a minimum of 10% of our revenues, and Verizon, our largest customer, came in at 28% of overall revenues for the quarter.

Other customer segments collectively enabled revenue for the connectivity product line to grow by a healthy $7.7 million over the same period a year ago. These additional customer categories include cable MSOs, such as Time-Warner and Comcast, WiMAX carriers, including Clearwire, and PC OEM manufacturers, Dell and HP. Sales results for the product lines we acquired from the Core Mobility transaction, which closed in Q4 of 2009 also contributed nicely to the 40% jump in year-over-year top-line growth.

These newly acquired product lines include synchronization and backup software, visual voicemail solutions, and push-to-talk communication software. I am also pleased to say that Verizon recently began shipping our push-to-talk software on their BlackBerry handsets at the beginning of the second quarter. Our communications product lines from the Core Mobility acquisition are tracking nicely with the prior guidance we provided of $10 million to $12 million for this fiscal year. Looking at this business unit, excluding additional revenues from the Core Mobility acquisition our organic growth topped 27% for the first quarter on a year-over-year basis. Much of this growth came from our mobile device management, and multimedia management software lines, which were both meaningful contributors during the quarter.

We remain excited about the overall growth prospects for our mobile device management and mobility management products, and the contribution they are making to significantly enhance our portfolio of mobility solutions. Creating software that enhances the connected digital lifestyle by delivering intelligent connectivity solutions is our primary differentiator in the market, and key enabler of continued growth for Smith Micro. We currently command a clear market leadership position in branded Connection Management Software segment today. We are working diligently to further innovate in this area. We will leverage our IP, and enhance our technology to better collaborate and serve our prominent and growing customer base of device manufacturer's cable MSOs, and wireless service providers around the globe.

Our products will keep evolving to address the growing opportunity for connectivity-related solutions. We will continue to expand beyond client-only products, to include client and platform-based offerings, providing more intelligent solutions, designed to simplify the connectivity requirements, as more complexity is introduced into the wireless networks. Throughout the world, we are seeing significant investments in 4G technologies, such as Clearwire's WiMAX market-expansion plans, to cover up to 120 million POPs by year's end. Or the impending launch of LTE networks, such as Verizon, with their stated plans to cover 100 million POPs in 25 markets by the end of the year.

Globally over 50 carriers have announced support for LTE in the future, and we have engineered our software platforms, and intelligent service engines to capitalize on the growth presented by these developments. The evolution of higher speed, wireless networks, supporting a vast number of globally connected mobile devices of various types, presents an exciting opportunity for Smith Micro's adaptive connectivity solutions. A key component of our growth strategy is to deliver mobility solutions that are more intelligent, aware, and agile enough to meet the user's evolving connectivity needs, as they operate across more complex wireless environments, and changing network conditions.

Our adaptive connectivity software and platforms will identify users evolving connection patterns and behaviors, and automatically adapt to changing network conditions, to deliver the best possible service. These solutions enable greater bandwidth utilization, enhance customer support, and a better overall user experience. We plan for our solutions to be more tightly integrated with the carrier's networks, operational support, and billing systems to better understand the user's requirements, and more effectively support their needs in a simpler and less obtrusive way. In the near future, there will be more and more connected devices supported by metered service plans, pay-as-you-go offerings, and other innovative rate plans, which we will need to work across mobile networks in the most effective and least-cost manner.

Our adaptive Connectivity Solutions will have the flexibility and capabilities to support our customers in innovative ways, and set a new standard for supporting connected mobile devices. While we are focusing much of our energy on preparing for the exploding adoption of mobile data services, we continue to remain optimistic about the prospects within our productivity and graphics business unit. The rapid adoption of 3D products and service represents an interesting opportunity for further growth within our animation product line and tool sets,the escalating consumption of bandwidth, and increasing transfer of large files driven by video, high-definition photos and graphics, is creating an opportunity for the deployment of our compression technologies in new and innovative ways. Our portfolio of products continues to evolve, and our strength of intellectual property, and breadth of technologies is being put to use in ways that we expect will drive new revenue for this unit. We are working hard on executing efficiently with key product lines in this business, and we are creatively exploring ways to revitalize the unit, and bring it back to a level of material contribution in the near future.

Before I turn the call over for questions, I would like to offer some further observations and perspective on our business. As we look to the coming quarters and beyond, we see the potential astonishing growth, with more globally connected devices driving a need for a diverse array of Connectivity Solutions and services. Analysts' forecasts by 2014, as many as 2.5 billion connected data centric devices will be in use around the world.

A critical factor enabling this growth is the emergence of higher-speed networks, such as LTE and WiMAX, which will drive increased adoption of new mobile broadband services. Other drivers include improved Smartphone functionality, more devices with multi-mode radios, and emerging form factors such as netbooks, tablets, mobile internet devices, as well as new embedded devices providing machine-to-machine connectivity. We are at the very beginning stages of a long-term trend toward an increasingly connected world. This emerging new mega market for globally connected devices provides Smith Micro with the opportunity to leverage our capabilities for delivering mobility solutions to better manage data connections, mobile devices, and the user's critical content and information resources.

We are deploying R&D resources to build more intelligent connectivity software and service platforms. These solutions will support our customers as they grapple with the challenges of supporting more subscriptions, evolving business models, and many more different device types. We have just completed a solid first quarter, growing revenues and earnings, and making great strides towards executing on our business and product plans for the calendar year at hand. We have great expectations for our Company in the near term, and can see significant opportunities emerging for us in the future.

There is lots of work ahead to execute on our strategy, expand our global presence, and continue to improve metrics for all aspects of our business. We believe we have the right technologies, team, and market timing to make Smith Micro a continued success story for years to come.

And with that, operator, I will turn the call back to you, and open it up for questions.

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

Yes, just a couple of questions. First, Bill, can you talk about, you are obviously, you are seeing the 4G ramp come in, is there any way to quantify how significant 4G-related revenue could be in the back half of the year? I mean, do you think it can be 10% of the business by then?

Okay. I don't know that I really want to try to break that, I am really not prepared to break that out, so I am not sure I can give you any real help here. Other than to say, let's just kind of think of it is from a macro level. You are going to continue to see rollout of WiMAX, by Clearwire and others that are working on that system, and you will start to see at the end of the year, the beginnings of the rollout of LTE by Verizon. All of that is good for us. They are all our customers, and we wish them the best, and hopefully they are extremely successful.

Okay. And then good news on what I take is a cross-selling success with Verizon on the push-to-talk product. So that obviously is an incremental win for the Core Mobility business, I would assume, and can you give us a sense of how material that was? And what you replaced there?

Well, I think it is just another example of the strength of our overall connectivity portfolio. We sell to Verizon, Connection Management Software in the form of Easy Access Manager. We sell to Verizon multimedia client software, and look for that to continue to grow and prosper. And now we also talk to them about push-to-talk software.

There are other products that we are working with Verizon on, and as soon as we can, we will be happy to talk about that. But this is part of our strategy, as we entered the 2010 year, if you think back to our year-end conference call, we talked about the focus would be to go much deeper, and much broader in our major accounts, and we are executing on that, the numbers prove that point, and it is up to us to make sure that it works out for the whole year, and then at the end of the year we can see where we have really gone.

What did you replace there, Bill? Did they have a push-to-talk product beforehand on the Blackberry?

No. They did not have a push-to-talk product on Blackberry. It is something new.

Okay. Got it. And then last question, the cloud-based multimedia product and launch with Verizon, is that still kind of a second-half event, when they kind of remarket that product, for a lack of better term?

Let me just say this, I am not going to talk about unannounced or unlaunched products at Verizon. I get myself in trouble on that. But I can talk about our product plans, and I can reassure you that it is our product plan to launch a cloud-based multimedia offering before the end of the year, and you can interpret that.

Yes, this is the media-manager product you announced, though last, fourth quarter, right?

Right.

Okay. All right. So that -- -- okay. Got it. All right. Thanks. That's all I have.

Thanks, Chad.

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

Hey, good afternoon, guys. Nice quarter. Hey, just a couple of housecleaning items. In terms of your 10% customers, any more granularity in terms of where AT&T and Sprint were above 10%?

We are not going to try to break that out every quarter. We have done it in prior years. I think as the Company is getting bigger, we will just kind of identify, where the large customers are, and clearly there is no surprise, Verizon, AT&T, Sprint, and for that matter, Dell are all large customers for us.

Dell was not above a 10% customer in the current quarter, is that correct?

I think they just made it.

Okay. And then in general, Bill, just from a standpoint of macro demand in the enterprise market, you guys had been pretty cautious in the fall and during the first quarter about just the economic impact on the enterprise. It seems like based on the results, the mobile connectivity business is still very healthy. So are things generally improving there? Are we starting to see a pickup? And how does the channel look in general from a mobile connectivity standpoint?

Okay. I think I have said on a number of calls, that we don't need a robust economic environment to be very successful. We just need to have some kind of activity. I think what we have today is some kind of activity, and you are starting to see the results of that. Typically, on the seasonally adjusted view, you have would expect Q1 to be sequentially down from Q4. It wasn't. It was up. This bodes well, but it is only one quarter. We have got three more to go beforethe year is up, and if we continue to execute, and we get a little bit of luck, and obviously I think we are fortunate we don't have a lot of exposure to Greece, Spain, Portugal or Italy, I guess we are in pretty good shape.

On the OpEx front, Andy, how should we be thinking about that, and then in the graphics business in general, is that profitable on an operating basis?

Let's start with the first question, and yes, through the year again, you are going to continue to see us again continue to invest in R&D. We are up about $800,000 quarter to quarter sequentially, and that is probably the type of jumps we are going to see as we go through the year, is consistent jumps of that nature.

In terms of the other question, our productivity and graphics group as a whole, we find a way to run that profitably, no matter how we run it. When we first bought it back in 2005 there, about $10 million or $11 million annual revenue, and it was a profitable business. So it is a business we can scale up and down that way, we ensure that it contributes.

Okay. And on the Vcast media manager front, are you getting a better sense in terms of what the revenue contribution for that business could be as we get into the latter portion of 2010?

Scott, this is Tom. We don't normally obviously talk about specific product line revenue from a specific customer. I think Andy gave you an indication as to the growth. Q1 2010 over Q1 2009 for the non-connectivity-related mobile products, of which a large percentage of that was the multimedia product line. So we are showing it ramp pretty nicely.

I guess I can add a little color to that, and just simply say, that we called out probably for the first time in a number of conferences, a strong contribution from mobile-device management, as well as multimedia, so we are pretty excited about what we are seeing in both of these product areas. They are core to our strategy, and they seem to be executing nicely, so we just have to sit back and watch how our big customer Verizon moves forward in the multimedia area.

And just one last follow-up, Bill, in terms of pricing as we are starting to get out into the complexity that LTE brings, and more features and functionality that you are bringing to the mobile connectivity manager. Are you able to actually bump up pricing at all, or should we still continue to think about it just being stable as we look out into the future? Thanks.

I think there are a couple of ways to look at it, I think it is always conservative to look at it as it is going to remain stable. However the complexity is getting enhanced, so that gives us opportunities where the price can actually go up. The good news is that none of what I just said talks about the price going down, and volumes will go up, the price is either going to stay the same or go up, and those all bode well for us.

I think the other thing to kind of watch for as we go into the balance of the spring and summer, and early fall, is just start to see a number of product announcements roll out from Smith Micro, that really address where we are going. We kind of talked about a lot of things we are doing in the area of clients, and we are also now starting to talk even more and more about what we are doing about clients that are supported by platforms, and I think you should be looking forward to seeing that string of product announcements as they come to the forefront. The important part about it is that almost with no exception they are almost all 100% internally developed. Our engineering and marketing teams are focused, they are executing, and there is a lot of excitement around here.

Okay. Thanks. Nice quarter.

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

Yes, thank you, and congratulations on the results for the quarter. You mentioned obviously you don't have a lot of exposure to Greece or some of those other countries, but I was thinking that sometimes you have new technologies introduced that creates discontinuity, and with the introduction of 4G not only in the US, but in international markets, could that introduction allow you to penetrate some of those international markets, where LTE is introduced where you may not have a stronger presence today?

Yes, Larry, this is Tom. Definitely that is part of our strategy. Obviously global expansion is critical for us. It is a huge market out there. And as Bill, I think referenced earlier, there are 50 carriers that have identified LTE as the technology that they are going to support. There are a lot of carriers moving to HSPA Plus as well. And we do less than 10% of our revenue internationally today. As customers move from 3G or 4G, or HSPA Plus as well, they have got to handle multiple kinds of networks there is an additional amount of complexity associated with managing those connections, and that represents an opportunity for our adaptive connectivity strategy. It is a big part of our expansion plan is going after the LTE carrier build-outs.

Great. Okay. Thank you.

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

Thanks. Bill, you have openly talked about the potential of acquisitions going forward. Could you just update us on your strategy around that? Is there any technology that you would like to tuck into or get into?

I have nothing that I really want to talk about now. We're very excited about the early success of the Core Mobility products. We see a lot of leverage from all of the products, but especially you have to kind of call out visual voice mail as a hot ticket item. Additionally as we launched at the CCIA Conference a month or so ago, we did acquire streaming video tech technology, when we acquired what we call [Abbott] Technologies. And Abbott brings, that was kind of a hole in our product line. We didn't have a strong answer in streaming video.

Now we think we actually have a Best-of-Breed answer. A product that doesn't require a client on the remote device to function, as it runs within the browser. It adjusts to varying wireless network conditions on the fly, to ensure the best possible service level, and best possible user experience. Those kinds of things are pretty exciting. And we will continue to look for those kinds of opportunities. They are out there. We go out and look and talk to a number of firms all the time, but I think the other point is the point that I made earlier.

We are also pretty busy developing product internally. We have got a lot of muscle now, and we can get a lot of product done. And you are going to see a pretty impressive rollout in the coming months, so you just have to kind of watch, and you will start to see all of these pieces falling into place, in an incredibly cohesive strategy to develop and deliver connectivity software, both from clients, from servers, from platforms, to service a very broad and growing market.

Great. My next is just around guidance. Q1 you exceeded, it sounds like your internal expectations. I know you are reiterating guidance. I just want to make sure, is this a function of you just trying to stick to the plan that you wanted to give new guidance at the midpoint of the year, or is there some business-oriented change that might have required you to move some revenue forward, I guess?

I think we beat your estimates as well.

Yes.

I think we beat them all, but I think the key point is that we said we would review it at the midpoint of the year. We tend to be a little conservative at times, and don't want to get in front of the market. Obviously we are pretty excited about getting off to such a strong start, and we will see where we are at the end of Q2, and we will speak to that question then.

But there isn't anything business-wise where you are a little softer in the back half?

Oh, no.

Okay.

No.

And I guess my other question is always around operating margin, so you came out at 26.8% for Q1. You are still targeting 25% for 2010. Has there been a change there in terms of new projects with Verizon or whoever customer, that would require more spending in the back half?

Bill maybe hinted to it a little bit lightly. We have more than a few new products that are coming out. In the past, with the size of Smith Micro we were running to stay up with customer demand, if you will, as far as new products and so on, and now we are not only doing that, but we are getting ahead of our customers, interms of new innovative products and new technologies, so we have no lack of things to do, in terms of new product development.

We are looking ahead to 2011 and 2012, in terms of being a completely different company frankly, in terms of product reach, and looking more like a platform company, frankly. So with that in mind, we are going to continue to invest. And again, we feel that our partnership with Wall Street is we are going to invest, and create some tremendous leverage in the model, but we will be pretty prudent. And will be sure that we target 25 points as our minimum performance.

Let me add some color to that because while we will become a very strong platform company, we are still going to be the absolute dominant provider of client-soft software, that runs on handsets and PCs, so we are not going away from what we do. We are adding to it.

Got you. I guess just specifically then, I guess I just want to understand from quarter-to-quarter, are we expecting a stepdown, or not stepdown, I understand you always kind of beat your 25%, but just wanted to gauge like quarter-to-quarter, should it be less or more operating margins for the back half?

We encourage people to model at 25%, in that, again, we don't expect anything, kind of your questions are do we expect anything bad given that we had such a good Q1? The answer is no. But in the same regard,we want to keep people grounded, in that we are investing, and as I said in my prepared remarks, any types of acquisitions we might do, and Tom and Bill in particular, are tremendously active looking at different technology opportunities, because we just brought up a couple here in the last couple of quarters, be it Core Mobility and Abbott. There There is so much opportunity out here, in terms of making a make buy decision, on do we actually develop the technology? Do we buy the technology? Everything is still on sale given this kind of economy, to be honest with you. So with that in mind, there are a lot of variables we are playing with. But we still feel that given all of these variable we can hit 25%.

Got you. Yes, I don't think I was asking about is there something bad that could happen, but I just wanted to understand your guidance versus a good quarter in March. Let me ask my last question which is around netbooks. I just wanted to get some details around Dell. Are you actually giving what the number this quarter? Or are you going to stay away from that?

Oh, do you mean total Dell revenue?

Yes.

We are trying to keep away from customer specific. They tend to give us a call afterwards, and don't like us talking so specifically about them.

Okay.

So we are just trying to let people know who the big guns are in a particular period. But the key focus that we are trying to keep people on, is look at our guidance. Again, that is the big number that matters, and who contributes most is more of a subset.

Okay. Then I guess my question is can you give us a color around the volumes on netbooks? Have they kind of accelerated like a lot of us thought it would? Or has it been more damp than originally thought?

I guess the answer is, it is kind of flat. I don't see huge excitement around netbooks, and I don't think it is any one vendor or any one carrier. It just seems to be across the board.

And keep in mind that's not necessarily the catalyst or that which would create an inflection point for Smith Micro. We are looking more at 4G in general, and all of the devices that will drive.

Right.

That is more the key for us.

And the rate plans, the changes we anticipate happening with the service offerings when LTE comes out, to try to drive more consumer-oriented broadband mobile services, as opposed to what is really today still predominantly an enterprise service plan. There may be more adoption on netbooks at that point.

Got you.

And I guess the last point in this area is that if you look at the market dynamics, laptop sales are clearly growing, yet netbooks are not keeping pace with laptops, they are just I think the consumer is looking at it and say, I want a more feature-rich PC, and that is fine. Everything that we say, while these are different segment views of the marketplace, at the end of the day, we look at the market in general, and we say this is a market that is exploding. That is going to grow at a very rapid rate, and all of this should bode extremely well. We are very confident with the guidance we provided at the start of the year. We have reiterated it a number of times. We will review it at the midyear, and we will take it from there.

Thank you very much, guys.

Okay.

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

Great. Thank you, good afternoon, guys. And good quarter.

Thanks, Scott.

Hey, I wanted to follow up on that last question, that train of thought, when you look at your connectivity business, how much of it is leveraged towards traditional laptops, versus netbooks currently?

It doesn't make much difference. Honestly it's all kind of the same thing to us. It is basically today pretty much a Windows 7 connectivity client, and we don't much care whether it runs on a full-blown full-powered PC or whether it runs on a netbook.

I want to build on the last question, like if you are seeing like 80% or 90% more of a laptop versus a net book, because with the iPad launch--

We don't normally -- Scott, we don't (Overlapping speakers ) I'm sorry. We don't normally disclose that, but the bottom line is, I think it is still predominantly laptop oriented, and netbooks are as Bill said earlier, it is somewhat flat, and it is a much smaller percentage.

Great. And that was my next question. I just wanted to build on basically, some commented iPads might cannibalize some of the low-end Linux-based type netbooks, and I am not really sure if you really put in that market what your plans are there?

The iPad obviously is a pretty slick little device, and it is up to the individual. I mean clearly Apple has got a strong following. I have a couple of them sitting next to me here in this room, that are big Apple backers, and I don't fault them for it. I think I like to have a real keyboard, and things like that, so I guess I probably would never use it, but that is what makes the world go around.

As you look at the connective devices, the laptops, the netbooks, and My-Fis, what other devices do you think are maybe this year, or maybe do you see devices next year, different categories up and coming, that you will be attacking?

I think clearly, all of the Smartphones are a huge play, and the growth and the options that are available to the consuming public are really pretty awesome. I mean, it all started out with the Blackberry, then along came the iPhone, and now you have Google with all of the Droids. You have got HP buying Palm, and reinvigorating that platform. You have the announcement at [SITAE], and then earlier in Barcelona by Microsoft of their new Windows Mobile 7. I mean this is an exciting lineup of technology. We are equal-opportunity arms merchants to all of those folks, so it bodes extremely well for us. We don't pick favorites. We want to work with all of them. Clearly it's a little bit more difficult to work with Apple, and we haven't been able to do that yet, because they tend to also think they are a software company.

But the rest, there is a lot of opportunity, and I think that is a pretty exciting space. The PCs aren't going away. The laptops aren't going away. The Macintoshes are clearly not going away, and clearly we built software for all of those platforms. We build software for the Linux platforms. We don't care what you want to use.

We just want to be able to provide you with a software offering that will get your job done, and that job could be getting you hooked up to begin with. It could be doing things like multimedia applications. It could be executing things like visual voicemail. Voice to text. Push to talk. And now streaming video. I mean there is a whole lineup of product, that we build now, as it really addressed the broader market. Multimedia is a big play, so I know that is a long-winded answer, but it is a big market, and it is growing rapidly, and it is an exciting place to be, and we are right in the center of it.

On Apple performance this quarter, was there anything one-time, or was it kind of business as usual, and these are the trends we are seeing that is driving your business?

I said in my comments about Q1 does bring into certain marketing events. Obviously some that you attended. It is pretty much run rate as usual.

Great. And lastly, Andy I was going to beat you up on the margins, but it didn't seem like you were going to give us anything there, but can you give us the contribution of Core Mobility?

It is basically, you are talking about the gross margin, or are you talking about revenues?

The revenues of Core Mobility. I think you gave us organic growth. But if you can give us the revenues?

The revenues are pretty much in line with the guidance we gave, that we will do about $10 million to $12 million, so they are performing exactly as expected.

Great. Thank you.

Sure.

Thank you. (Operator instructions). And at this time, I am not showing any further questions. I would now like to turn it back to management for any closing remarks. Please continue.

Thank you. I want to thank everyone for joining us today. And remind everyone if they have any questions, please feel free to give us a call at the office. We also will be attending some conferences, specifically the JPMorgan Conference in a couple of weeks in Boston. So hopefully we will get a chance to see you then. Thanks again.

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