Smith Micro Software Inc (SMSI) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro third 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 opened for questions. (Operator instructions). This conference is being recorded today, Wednesday, November 3, 2010.

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

Good afternoon, and thank you for joining us today to discuss Smith Micro Software's financial results for our third quarter ended September 30, 2010. By now you should have received a copy of the press release discussing our quarterly results. If you do not have a copy and would like one, please visit us at www.smithmicro.com or you can 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 we begin the call I want to caution that on this call the Company may make forward-looking statements that involve risks and uncertainties, including without limitation, forward-looking statements related to the Company's revenue guidance for fiscal 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 could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in demand for the Company's products from its customers and their end users, new and changing technologies, customers' acceptance of those technologies, new and continuing adverse economic conditions, and the Company's ability to compete effectively with other software companies.

These and other factors 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 release are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this call and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this call.

So at this time I'd now like to turn the call over to Bill Smith, Chairman, President and CEO of Smith Micro. Bill?

Thank you, Charles. Good afternoon, everyone, and welcome to our third quarter ending September 30, 2010 earnings conference call. We are pleased to report another great quarter with solid financial results. We posted our sixth consecutive quarter of revenue growth generating the highest quarterly revenue results in our company's history of $34 million.

This represents an improvement of $6.2 million over Q3 2009 or a 22.2% increase in revenue over the same period last year. In addition to our strong revenue growth in the quarter, our bottom line was very solid with non-GAAP net income up 19.6% over Q3 2009.

Our non-GAAP net income of $7.9 million or $0.23 per share compared to $6.6 million or $0.20 per share in the third quarter of 2009.

We are delighted with our third quarter results along with our continuing record of consecutive revenue growth over the past year and a half. For the past nine months we've made great progress toward fulfilling our financial goals for 2010. We've successfully met our key operational initiative designed to prepare our company for the growth opportunities we expect will develop over the next several years.

We are about to embark on a new era of broadband mobile internet services with the imminent launch of LTE. These new higher speed services will enable our ability to serve an expanding audience of users with the adoption potential and demographic characteristics that are much broader than today's mobile broadband user base.

We view the upcoming quarters where we expect LTE to launch in earnest as the beginning of the next growth phase in Smith Micro's history. And I have to say, we're pretty excited about what we see ahead of us with our continuing roll-out for 4G, WiMax and LTE networks.

Revenues generated from our wireless and mobility product sales continues to drive the growth within our business. Our wireless and mobility unit posted $31.3 million in Q3 which is up a very strong 38.3% year over year. This represents an increase in the revenues of 11% or $3 million over the prior quarter. Revenue from this unit accounted for over 92% of the total revenue for the Company in the quarter.

We see this increasing sales volume as evidence that our customers are pleased with the value proposition for our Smart Mobility software products and platform.

Before I get into discussing the quarter and our future prospects, I'd like to turn the call over to Andy Schmidt, our CFO, to discuss the third quarter financial results in more detail. Andy?

Thank you, Bill. First, let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed in this call net out amortization of intangibles associated with acquisitions, stock compensation related expenses and noncash tax expense to provide comparable operating results.

Accordingly, our results that I refer to in my prepared remarks, both 2010 and 2009 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 measurements and a reconciliation of the differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure.

Our earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In detailed manner for the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $2.8 million for the current period broken out as follows -- $23,000 in cost of sales; $756,000 in selling and marketing; and $650,000 R&D; and finally, $1.34 million in the G&A line.

In terms of amortization the total for the current period was $2.25 million broken out as follows --$1.5 million in cost of sales; $721,000 selling and marketing.

Moving on, for third quarter we posted revenues of $34 million and diluted earnings of $0.09 GAAP and $0.23 non-GAAP. Revenue for the quarter was an all-time record, up 22% from third quarter 2009. International revenue was approximately $1.8 million this quarter across all business groups.

Our wireless segment reported record revenues for the quarter of $31.3 million as compared to $22.7 million last year, an increase of 38.3%. Within the wireless segment, connectivity and security posted revenues of $27.4 million compared to $21.8 million last year, an increase of 26%. Multimedia, backup and messaging and mobile device products posted revenues of $3.9 million compared to $800,000 last year.

Offsetting overall gains in our wireless sector, our productivity and graphics group posted revenues of $2.6 million as compared to $5 million last year. And finally, we reported approximately $53,000 of other revenue which compares with approximately $169,000 for third quarter of 2009. Total deferred revenue at September 30, 2010 was approximately $2.1 million.

Switching to gross profit -- non-GAAP gross margin dollars of $31.8 million increased $6.3 million or approximately 25% from the same period last year. As a testament to the quality of our revenues, while our revenue increased 22% year over year, our gross margin dollars increased 25% for the same period, as follows. Non-GAAP gross margin as a percentage of revenue was approximately 93.5% for Q3 2010 compared to 91.6% for Q3 of 2009. Non-GAAP gross margin by product groups were as follows -- wireless, 94.6%; productivity and graphics, 81.8%; and the other category was negligible. As we've noted before our margins are driven strictly by product mix.

Okay, switching to operating expenses. Non-GAAP operating expense for the third quarter of 2010 of $20.9 million is an increase of approximately $800,000 from Q2 of 2010. This is driven primarily by increases in headcount and facilities expense. The increase in expense is as expected. From a year-on-year perspective, non-GAAP engineering expenses increased 26%; selling and marketing expense, 27%; and administrative expense increased 18%. It should be noted administrative expense includes the cost of additional facility space and leasehold improvements.

Total non-GAAP operating expenses increased 24% year over year, driven by planned infrastructure growth and by acquisitions. Non-GAAP operating margin for the current period was 32%. Current period operating margin compares favorably to operating margin of 31.2% for Q3 of 2009.

Non-GAAP operating profit for Q3 was $10.9 million, an increase of $2.2 million or 25.5% from the prior year. Non-GAAP net income for the third quarter was $7.9 million or $0.23 per diluted share as compared to $6.6 million or $0.20 last year.

Cash generated from operations for the quarter was approximately $3.5 million. Primary uses of cash for the period were capital expenditures of $900,000. Capital expenditures were primarily leasehold improvements, an investment in the ERP system and IT infrastructure.

Overall we have posted yet another quarter of improved operating metrics and strong cash flow. Looking forward to the balance of 2010, we'll hold steady with our previously announced guidance of revenues between $125 million and $135 million. Gross margins will be between 92% and 94% and we expect operating margins at 30% with the caveat that acquisitions tend to lower op margin for one to two quarters post acquisition due to integration-related expenses.

Finally, taxes continued to be in a state of change given state and federal deficit spending. At this time we are still estimating that our 2010 cash-based tax expense will be 25% to 27% of non-GAAP net income.

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'll turn the call back to Bill.

Thanks, Andy. As I said earlier, we're pretty excited about the growth we are seeing from our wireless and mobility segment. We saw revenues from these product lines grow 38.3% over the third quarter of 2009, giving us confidence that our value proposition and strategy is working.

On a normalized basis, excluding the revenues from our Core Mobility acquisition that we completed in Q4 of last year, we handily grew this business a solid 27% year over year. Our efforts paid off with outstanding results in our connectivity and security area posting Q3 revenues of $27.5 million, which is up nearly 26% over the same period a year ago.

These results were largely driven by our QuickLink mobile products used for connecting devices to 3G and WiMax networks. None of the sales in the third quarter were attributable to the launch of LTE which we believe demonstrates the overall growth prospects for 3G mobile offerings are still in an early cycle.

Outside of the robust sales we are seeing for 3G and WiMax, we are optimistic that the launch of Verizon's new LTE network projected to happen by year-end will usher in a new and expanded growth phase for Smith Micro.

And with that, we expect to see a ramp up of new license sales starting late in Q4 and expanding throughout 2011 as network deployments progress.

The initial Verizon launch has been announced for 38 markets including 62 airports and is planned to cover over 110 million POPs by the end of this year. We are working diligently to support this roll-out and we expect to see immediate benefit from the launch of LTE in a number of ways. We anticipate that the early deployments will focus heavily on broadband mobile data services and modems designed to work with personal computing devices. The focus on these broadband mobile services for the initial launch will enable opportunity for our QuickLink mobile family of connectivity products.

We see deployment of our products being driven in the following ways. One, many current users of 3G service will opt to upgrade to enjoy higher speeds on the 4G networks, giving a new license opportunity. Two, adoption from new users who may consider LTE mobile broadband as a replacement service for fixed broadband in the home. Three, the adoption of more flexible pricing plans that will draw new users such as occasional travelers or casual users; and four, the adoption of pay-as-you-go services as an alternative to Wi-Fi hotspot services.

All of these scenarios are positive drivers for Smith Micro and for further adoption of our suite of connectivity offerings. 4G, WiMax and LTE services will be a major catalyst for our wireless software business which will enable opportunities for the next several years.

And while we anticipate the coming launch of LTE with Verizon, we continue to deliver our market-leading intelligent connectivity solutions to several other key wireless carrier customers, including AT&T and Sprint. These customers contributed nicely to our results in the quarter, with each growing sequentially and accounting as a 10%-plus revenue customer.

Sales of connectivity related products for 3G and WiMax continue to perform well at AT&T, Sprint and our other customers. Connection management software to support USB modems and mobile hotspot products performs exceptionally well in Q3. We are excited about our intelligent mobility strategy and the mobile hotspot management offerings that we are bringing to the market. The emerging trend of mobile broadband subscribers carrying an arsenal of connected mobile devices such as a SmartPhone, a mobile laptop and a tablet device will need a new way of managing their connections and usage across those devices.

This trends adds complexity for carriers and we are building the connectivity and intelligent management platforms to deliver solutions for these challenges. While product sales at Smith Micro continue to be fueled by making, managing and monetizing connections to mobile internet services, we continue to see progress with the adoption of the balance of our wireless product offerings. These mobility products which include mobile device management, messaging, multimedia and content management applications yielded revenues of $3.9 million for the quarter. The baseline trends and pipeline for this business continues to build as we present our customers with an opportunity to have a single trusted vendor serve multiple needs leveraging common contracts and technology components.

We have worked hard to integrate components and create common architecture across many of the products in our portfolio to establish the Smith Micro mobility platform. This platform for client and server applications and cloud services has become a strategic cornerstone design to deliver customers more comprehensive and differentiated solutions. As we move forward in the area -- in the era of 4G, our further development of our platform and applications supported by this platform will serve to lower costs, bring faster time to market and more value for each of our customers.

Turning to the productivity and graphics group -- revenues for this group were $2.6 million or 7.7% of the revenues in the quarter which is consistent with the previous two quarters. We feel this business has stabilized and plan on running this business as a smaller but profitable part of the Smith Micro portfolio. Given the incredible 4G opportunities ahead of us, we plan on focusing on the LTE play in the near term while continuing to integrate key technological components and products from our productivity and graphics business into our Smart Mobility framework.

Before I turn the call over for questions, I'd like to summarize my observations and perspective on the quarter and our business going forward.

First, our core wireless and mobility product line is performing exceptionally well, driving solid growth and outstanding margins. We had a great third quarter, and with the coming launch of LTE we have every reason to believe opportunities for continued success in the coming quarters are outstanding.

We are really just now at the beginning of the era of 4G mobile internet services. The launch of these new high-speed networks will enable new subscribers, connected devices and business models. We believe our line-up of product offerings, technology, innovation and our strategic growth from that will serve to help our customers drive new business. We have just launched several new products such as our video platform and QuickLink mobility, our universal connectivity and security solution, that are addressing new opportunities emerging in the market.

The confluence of higher speed mobile networks, a proliferation of devices, new applications and content accessibility is driving a long-term trend towards an increasingly connected and mobile world that Smith Micro will prosper from.

We are fortunate to have some of the world's foremost mobile operators, cable MSOs and device manufacturers as customers. And these customers depend upon our technologies to help them deliver mobility services and add value so that their end users can experience mobility and exceptional connectivity in exciting new ways. With the continued roll-out of WiMax and the launch for LTE and HSPA+, Smith Micro will have the opportunity to serve over 200 million POPs with 4G service in North America alone by the end of next year.

We are continuing to advance our R&D efforts for our platform readiness to be able to support this new growth and adapt the technology and business models to serve this market for the long-term. We've executed on three solid quarters in 2010 with record revenue and strong profitability and we remain comfortable with our guidance with annual revenues landing within the original range of $125 million to $135 million.

Looking forward, we expect continued strong quarterly performance that is tied directly to our customers' 4G initiatives. While there are many variables at play still affecting timing, including very significant and complex network upgrades by our carrier customers, we are looking for $35 million in revenue in Q4 of this year and, as Andy noted, a very strong operating margin profile. There is strong upside to our model but the timing of the upside will coincide with the customers' marketing spend and the timing of the network upgrades.

We look forward to taking your calls and discussing these results and future opportunities at our upcoming Analyst Day on November 11. We are preparing for a full day on the eleventh that will also include product demonstrations from many of our new products.

With that, Operator, I'd like to turn it back to you for questions.

Thank you, sir. We will now begin the question and answer session. (Operator instructions). One moment, please, for our first question. Our first question will be from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Yes, thank you. This is Matt Ramsay on for Mike. Congrats on the great quarter and thanks for taking my question. First off, with Sprint's CEO indicating strong overdrive sales in part due to pairing with iPad and Novatel Wireless doing the same, how do you think these trends impact your connectivity business in terms of timing for revenue recognition, and then I'll follow up.

Matt, this is Tom Matthews. We're seeing, obviously, opportunities today with the various mobile hotspots that are out there serving the 3G markets. With respect to the Apple product launches, probably early to really tell at Verizon. However, I will tell you that for quite some time a number of the Verizon customers have been buying the MiFi cards, the mobile hotspots, and tethering those and connecting them to their iPads. So we think that trend will continue and that will be good for Smith Micro.

And just following on, revenue recognition in that type of product is pretty straightforward. We recognize revenue in those products are shipped into our carrier customers.

Okay, great. On one -- another trend is -- I mean, with Verizon on track to launch in Q4 for LTE and then AT&T doing HSPA+ and then likely LTE in second half of '11, should we anticipate steady growth for your connectivity business quarter over quarter or could there be some lumpy quarters, and can you comment on that, please?

Okay, I think that you should be looking for steady growth. I gave you four drivers in my prepared comments as to why we think the launch of 4G is going to be really good for us. I mean, clearly you're going to have a number of folks that are 3G users, in order to go and actually take advantage of 4G are going to need to get new hardware. And when they do that they'll get new software and we'll get another royalty. Clearly, 4G offerings are very competitive. The landline offerings, there will be a number of users that will say, I think I'll just go with my LTE offering and so that there will be an expansion of the market there as well.

I think some of the new pricing models are going to make it very easy and very attractive for a much broader audience to start using wireless capabilities. And then some of the pay-as-you-go offerings will be extremely competitive against the Wi-Fi hotspot business models, and I think, again, will continue to grow and expand the size of the total addressable market. All in all, I think it's real positive.

And then just following on, if you recall in Bill's remarks, as far as how fast it goes and how soon, it's going to depend, again, on our customers' network readiness and then based on that it's going to then further depend on their marketing spend. So they basically are at the throttle. We expect to see consistent growth, but how fast it goes will be dependent on our customers pulling the levers.

Great, great, that's very helpful. And one quick question, clarification for Andy. Could you talk a little bit about your pro forma expected tax rate in 2011? I know you talked a bit about what to expect for 2010. And if you could comment on 2011 and could we basically expect that to be the assumed tax rate for future years, if you can comment on that, please.

You know what, I'm going to wait until early January when we give guidance. And the primary reason is right now the State of California and federal, too, no one is -- no one has passed the R&D tax credit legislation, either at the federal level or the state level. So while there are expectations that some parts will pass and some won't pass, no one has taken any action right now. So long story short is we have to wait and by the end of December they have to make a movement one way or another, and that will give me a better idea exactly where they will lie.

All right, great. Thanks, that's very helpful and congratulations again on a great quarter.

Thanks.

Thank you. And our next question will be from the line of Lauren Choi with JPMorgan. Please go ahead.

Hey, guys, how's it going?

Hey, Lauren.

So a question -- my first question is just -- I guess and whether you can say or not, I guess, I'm just going to throw it out there. But in terms of your visibility of the Verizon LTE kind of launch, can you talk about if you've already gotten initial kind of orders for certain products or anything like that?

Well, we have a certain amount of visibility. We have an idea, obviously based on how we go through QA and testing of devices and so on. But they -- we really can't give you a full picture until December 31, given that we're the real-time vendor when it comes to delivering software and they are going to basically play it close to the vest all the way through the end of the quarter.

Okay, totally understand. And then I just noticed your multimedia line, it's $3.9 million this quarter, $7.2 million last quarter. I was just wondering what's the ebb and flow in this area and if you could give some color in terms of what drives this part?

Let me correct something you said. It's not the multimedia line, it is the -- all the other wireless software line is $3.9 million, so that includes a number of products, the device management, policy management, a number of different offerings including multimedia.

Messaging and backup products as well as multimedia. So I think on the last quarter we had a good quarter, we had a good uptick. Obviously, we're up year over year as well. We tried to set expectations that we would see this early stage set of products moving in the right direction and at the right trend, but also that it would be somewhat lumpy from time to time. So a lot of early stage deployments where you have initial license arrangements, we don't have the scale with those businesses to see the same sort of consistency that we see out of our connectivity business. And we're really -- we're really excited, Lauren, obviously about 4G driving the business. We think that some of the marketing spend from our carrier customers is probably going to lean more towards promoting those new very expensive network upgrades and promoting those products as opposed to some of the others. We expect it to continue to grow. Look for it to be lumpy from time to time.

Okay, and what is it in this area that's driving this lumpiness? Like what product?

Well, device management, all of those products actually, right, so if you look at device management and multimedia products, there are license revenues that frequently are big buys up front and then some trailing maintenance and additional licenses as the customers continue to grow. So you see sometimes the big hits up front. There has been some customization and adaption fees associated with some of the early stage deployments as well. And I think it really just -- we've got to fill the pipeline, we've got to keep making those sales, and as we build the scale then you'll see more consistency coming from all of those products.

I think --

Okay, great. And then just the -- sorry, Bill, were you saying something?

That's okay. I think one of the key points and you're going to hear a lot about it on the Analyst Day presentations is the build-out of our overall platform and how that's going to really impact our overall sales. So I think if you bear with us until the 11th we'll try to give you some more color and probably give you a better understanding of exactly what we're up to.

Great. Just around the connectivity, so that looked like it was -- even on a quarter over quarter basis, pretty aggressive. Just wanted to see or understand without LTE, is there any specific products that are doing better than you had expected with your customers?

Yes. Well, obviously, we're very pleased with the sales and sell-through of both Verizon, AT&T and Sprint. A number of the other customers are showing some good leverage as well, but they're just not as big. We're pretty excited about what we're doing in the mobile hotspot area for mobile hotspot management. We'll probably be demonstrating some new products in that area on the 11th as well, and I think once you see it and you go, wow, this really does fill in some huge voids in that marketplace and speaks to a real need. We've been out aggressively demonstrating these products to all of our carrier customers. We've gotten some very, very strong responses and we think that will be a very exciting new market or added market for us.

Great. And then just last question around margins. I guess when you -- looking at margins this quarter was 26.5% which is ahead of a large, I guess, roll-out. I was just curious in terms of as that goes live and then if you add on new customers, are we seeing a better or more efficient, maybe, operating model now where even in times when you do invest pretty heavily ahead of a roll-out that we could see mid-20's margins?

Well, we were 32% for the period. So that's leaps and bounds above the 25% and as I --

Oh, yes, sorry. I didn't add in the -- yes, you're right.

Yes. And as I guided, we're coming off the 25% now. This is our demarcation point that Q4 will be 30% and we don't look backwards. I think this will be a new step for us.

Okay, so I guess I'm just wondering if you have another like, let's say, AT&T roll-out in the middle of next year, obviously you have to spend ahead of that. Can you maintain that kind of margin structure given your model now or it's you're still going to see a step-down ahead of a large roll-out?

We don't go backwards. 30% is our new basemark -- benchmark.

Okay. Very nice, thanks, guys.

Thank you.

Thank you. And our next question will be from the line of Rich Valera with Needham. Please go ahead.

Thanks, good afternoon, gentlemen. Question on the connectivity revenue level - obviously a very impressive jump here and a new high water mark for you. Just wondering how comfortable you are that that level is sustainable. Was there any nonrecurring element to that like maybe some upfront license fees like you referenced in the other wireless segment in there?

Well, Rich, (inaudible) I mean, no matter what, we do between 5% and maybe a high water mark of 7.5% each quarter in nonrecurring engineering. That's just normal for us. And our contracts are always built leverage per unit, but in many cases we have the opportunity of monetizing upfront work and we just take advantage of it.

Keep in mind in the prepared remarks, this current quarter did not include any LTE sales. So that's yet to lever the [fee] deployed here which gives us great confidence that not only can we maintain this but do better than this in the upcoming quarters.

Great, that's helpful. And just to be clear, generally with connectivity it seems that there's -- I mean at least as far as subscribers go, you don't get big chunks of revenue in advance. It's pretty much a per-subscriber royalty for you, is that correct?

That's a correct statement.

Which should lend itself to a more gradual build-up as opposed to big lumps, I would think, as the LTE ramps?

I think all this discussion of lumpiness is coming off of the comments made around the nonconnectivity product offerings. And a lot of those product offerings are server-based product offerings which have a larger fee up front with maintenance then that goes on for years and years. So you're just going to inherently -- because you're not dealing with big numbers. I mean, last -- in Q2 it was $6 million. This quarter it was $3.9 million. But in any way you look at it those aren't huge numbers. So any kind of ,movement around that is going to cause a little lumpiness. Now if we can get the nonconnectivity or platform sales up to a much higher level, then I think you'll see the lumpiness totally go away and it will just go on sort of a natural course.

Okay, that's helpful. And then I just wanted to get an update on WiMax. I know it's been pretty small, I don't think particularly material at least as of last call. Any update on how you're seeing WiMax connectivity related revenue ramp?

Well, clearly it's doing well. Clearly, they're going through some finance issues and that's quite public, so there's -- that's fairly well known. Sprint continues to prosper, and they seem to be executing well and holding their customer base. So those are all fall-outs of WiMax. But when you look at it you look at how Clear is launching a couple of cities under LTE in a trial basis, so I mean I don't think anybody is totally wedded to WiMax. They may switch to LTE. That's one of those things we'll just respond to. We don't take sides in this issue. We'll support WiMax services just as well as we'll support LTE services. It's all just part of the hallmark of how we go to market.

Sure. Right, and I guess the point would be that probably the Verizon LTE footprint and the potential subscriber base there would -- will probably dwarf the Clearwire sub base very quickly as they start ramping I would guess.

Just by basis of scope, that's just a reality.

Right. Okay, thanks very much, gentlemen.

Thank you. And our next question will be from the line of Chad Bennett of Northland Capital Markets. Please go ahead.

Yes, hi, guys. Nice quarter.

Thanks, Chad.

Just a couple questions in -- on the fourth quarter guidance of $35 million with no LTE in the third quarter, and I'm always careful to try to correlate you guys with any of the hardware guys, but considering Novatel guided revenues up 45% sequentially third quarter to fourth quarter largely on Verizon's ramp and their MiFi device, I guess I think I understand and I know the answer, but why would there -- and they're different ASPs from you guys, but why would they -- what would the lag time be between you and them?

Let me start with it and I think you bring up an interesting point. If I remember correctly, Novatel missed in Q3 and now they're guiding up. We had a very strong Q3 here and we're guiding up in Q4, but we're a lot more even than they are. So I suspect that our revenue recognition is a little bit different than theirs is. So in essence, if you put the two together, the percent growth might be more comparable. But I think it's probably a lot to do with revenue recognition than anything else why they missed in the Q3 and then have a very big spike in Q4 and we're basically showing a nice smooth curve.

Okay.

Like I said, obviously it's advantageous if you miss a quarter if you feel comfortable enough to guide up. I mean, that kind of takes some of the sting away, doesn't it?

Well, that was a pretty big guide up for them so maybe they're just not as savvy as other companies. But anyways -- okay, so Tom, can you talk about other wireless products, maybe how your pipeline or backlog has improved versus last quarter and give us an idea of -- I know it's still early but is there any type of run rate in this business we should expect from a revenue standpoint looking out now into the next couple of quarters? I mean, is it going to bounce around from --

Well, I mean, Chad, I think not to stop you there, but I think we did $800,000 or so a year ago in that product, set of product categories. We did $6 million last quarter and we basically are up to $3.9 million this quarter. So it's bouncing around a little bit and we expect to continue to bounce.

With respect to the product pipeline, I mean we're seeing opportunities across a number of those products. We're optimistic about our device management solutions. We believe the messaging place will continue to open up. One of the key areas for us to get additional traction in those product lines, those product categories, will be additional traction outside of the North American market as well. And I think we'll try to discuss some of that and our overall macro pipeline at our Analyst Day coming up on the 11th and give you a little bit more color into the areas that we're attacking that should open up opportunities for us with those new product categories.

And just to put a little bit more data to it, keep in mind -- keep everyone really positive on this area despite the fact that it can bounce a little, if you look year to date we've done $16 million in these products year to date 2010 versus only $3 million last year. So that's just phenomenal change in market for us in a total year. So even though it's a little bouncy it's tremendous performance.

Okay, can you just give us -- I hate to do this, but can you just give us any type of insight into what you expect from that in the fourth quarter, just that overall segment, just directionally do you expect it to be up, down, flat?

Just to be safe in modeling, just model it flat.

Okay, fair enough. Then last one for me, Andy, Verizon in the quarter, percentage?

Sure, let me get that right handy.

41%, I believe.

Think we were in at 41%.

Forty-one. Okay, thanks. Nice job.

Thank you.

Thank you. And our next question will be from the line of Scott Searle with Merriman Capital. Please go ahead.

Hey, good afternoon, nice quarter, guys.

Thanks, Scott.

Just to follow up on a couple of quick housekeeping items. Did you give a percentage for AT&T in the quarter?

What I said was both AT&T and Sprint are plus-10% customers.

Okay, both 10%-plus. And Andy, on the OpEx run, you guys have been investing a little bit more. Is there anything that would change that trend as we're going into the December quarter?

No, we continued to invest and as you've seen we have an announcement, obviously, out there in Pittsburgh. We're going to be building that tech center. We've got a lot going on and we'll -- you'll see a lot of the neat new products out there on the Analyst Day and so on that kind of gives you a little bit more rubber hits the road as far as what we invest in and what it looks like in an R&D perspective. But the key is we're running at 30% op margin now, so we'll send out an op margin goal and we'll hit it, but you'll -- rest assured when you look at our numbers there's a heck of a lot of investment in the future going on in that.

And then just to kind of circle back. I think a couple of questions throughout the call have tried to get at this and I'll be a little more direct on it. In terms of productivity in graphics is kind of come down to a base level. The -- in the wireless segment the multimedia and messaging business has been a little lumpy but you're not expecting it to be down sequentially. And in the fourth quarter we're going to hit -- beyond seasonality we're going to hit a big LTE product cycle with Verizon at some point in time.

So with the guidance of $125 million to $135 million at the lower end of the range certainly implies that you would be sequentially down, but it seems like there's -- I'm hard pressed to figure out a scenario where you would not be sequentially up. So could you just provide a little bit more color on that front in terms of why you wouldn't be up, and if that's the correct interpretation?

But I did just guide up. I (inaudible) consensus was at $34 million and change and I said, look to $35 million in Q4. If you add $35 million to what we've already done, we're in the upper half or just in the upper half of the range. There's really not a whole lot of secrets left because three quarters are in on the books and I just gave you a number for the fourth one, so it's up to us to execute now.

Let me kind of -- you said a couple of things there and I want to go back on those and just try to give you some color. When we talk about some of the other software products in the wireless lineup, some of the products that are really hot are our visual voice voicemail, our new video product is being extremely well-received. Some of the things we're doing in the area of analytics, some of the things we're doing in the area of fixed mobile conversion are all really exciting growing parts of our business.

Multimedia, let's talk about that for a second because you mentioned that a couple of times. The multimedia market has really changed a lot in the last couple of years. Today we have two particularly strong folks that are really ruling the multimedia space. One of those is Apple and the other is Google. I would say going forward that the multimedia space in its classical sense is not going to be a huge play. I really don't, [Bill,] don't see it. I think the market is dominated by two giants and they are performing extremely well and that's where I think that market's going.

But I think the other markets that we talked about are really exciting and you're going to get a chance to see a lot of this product actually work when you're out here on the 11th and business cycles happen and markets change, and that's what it's all about.

If I could, Bill, just a quick follow-up on that front in terms of the Core conductivity business that -- has there been anything through the first month in the quarter that would lead -- that there is any sort of a slow-down ahead of a major new product launch cycle for Verizon that I should be thinking about anything really other than traditional seasonality plus new upgrade cycle in December?

Yes, I think that's how you should think about it. I mean, I think the Core connectivity business is going to perform well. The biggest caveat is always the one we all worry about, that is G. Verizon said they're going to launch LTE, what if they don't. What if they aren't ready. Well, I think they are. So I guess I'm not as worried about that, I'm not losing sleep on that subject. But on the other hand you've got a bunch of new devices the software is going to have to [shift] with. All those devices have to get all the bugs wrung out of them. If one of those devices doesn't ship on time that could cause a problem, too. So there are caveats. It's not a perfect world. But I think at the end of the day you've got one of the largest carriers in the world in Verizon launching LTE and they are going to launch it big. They've been very vocal about where they're going to be and how big it's going to be. And that's all good for Smith Micro. And I just see a lot of positives. We can all worry about what -- all the what-if's, but I choose not to right now.

Okay, thanks, guys.

Thank you. And our next question will be from the line of Larry Harris with CL King. Please go ahead.

Yes thank you. Congratulations on the results for the quarter.

Thanks, Larry.

In terms of your 4G products, LTE in particular, is it safe to assume and I'm talking about connectivity here, that the gross margins would be similar to what you've historically earned on 3G?

Absolutely.

And when I think about the smartphones, the EVO has done very well at Sprint and I would assume that we'd not only see additional 3G/4G smartphones at Sprint, I would have to assume you'd see them at C;earwire, see them at Verizon and maybe even at some point at AT&T next year. And are there opportunities in terms of device management software, some of these additional applications, maybe even connectivity, being added to some of these 3G/4G smartphones and could this be a significant opportunity for you next year?

That's a good point. I think every EVO that ships includes our device management software as well as our visual voicemail software. So that's a good one to use. That was -- that was helpful. But I think another thing that's pretty exciting that happened at Sprint is in the visual voicemail area. We've gone through tests and now full launch of our voice text capabilities as an extension to our visual voice voicemail. This is in full launch at Sprint and it's just another exciting testament to some of the growth drivers for our overall wireless platform play.

I see. And do you think there are opportunities at some of the other carriers in addition to Sprint?

Of course.

Great.

Look, we're out talking to all the carriers and we're very busy in Europe and we're out seeing some pretty big carriers in Asia. We think that there's lots of opportunities for us to play. They're very different markets in some of the other geos. We think LTE is a big catalyst for change in Europe. Asia is still really just deploying 3G. But I think you're going to see a lot of other opportunities for us that we know the video product is very, very popular, especially in Asia. So we're -- there's a lot of positives going on.

Great. Okay, thank you.

And our next question will be from the line of Scott Sutherland with Wedbush Securities. Please go ahead.

Great, thank you. Good afternoon, guys, and congratulations on the quarter.

Thanks, Scott.

Maybe building on the international comments you just made. It's still less than 5% of your revenue and how do you get inserted into these international markets? I know you partnered with Motorola awhile ago. How do you get there before these 4G launches there so you're well positioned and get that revenue up?

Actually, this is an ongoing effort. We've deployed a number of sales and marketing resources into the -- into both Europe and Asia, more predominantly Europe than Asia. And they've been busy out telling our story and out doing all the things you have to do in order to become -- or get the opportunity to call somebody a customer. So while we have not shown a lot of sales offshore yet, we believe that there are a lot of opportunities and we're very positive about them and I guess that's really all that I'm saying.

And there's some device manufacturers as well that we've been working with, Scott, as I think we've announced previously, HTC is a current customers on the DM front. They can certainly help us open doors with some of their customers in the international markets. Nokia as well. And clearly as we continue to build our business all options are on the table from an M&A perspective. If the right opportunity shows up internationally, those certainly would be ways that we could consider breaking into the markets faster as well.

Okay, and building on kind of the last person's question, when you look at carriers and all these different devices and all devices are becoming data devices, mobile phones can become kind of like MiFis or Wi-Fi or a wireless hotspots. Why do carriers have to support multiple connectivity solutions? Does it make sense to rationalize and what's the opportunity to support all kinds of different devices? Cards, you've talked about in the past, these My-Fis and other devices?

Well, okay. First off, My-Fi is a trade name of Novatel so there's a number of players entering the market in this mobile hotspot area. Actually, all Android devices going forward are going to have the capability of also supporting mobile hotspots.

So the mobile hotspot usage is a big deal and there's going to be a lot of growth there. Well, it also then is a great opportunity for a company like Smith Micro to provide a common user experience across a variety of different hardware adaptations so that you don't have one experience if the guy is using a Novatel device or another one for a Sierra or another one for an Android device. It's kind of a lot like how we got into the connection management business.

And so what we have here is an opportunity for extreme growth in yet another area - the management of mobile hotspot devices. And while in the early days we didn't ship with mobile hotspot the devices, let's say a Sprint or AT&T hasn't even shipped any yet, going forward we have the opportunity to garner all that business. So we think it's a pretty exciting part of the market.

We're going to be showing you some of that product on the 11th so you'll actually be able to kick the tires and we'll show you all the kinds of different capabilities. I think one of the big issues there is as carriers go more and more to different kind of billing systems based on megabytes of data uploaded and downloaded, it's a real opportunity. And if you have three or four users utilizing your mobile hotspot device, you'd like to have some visibility as to how much of that usage is being chewed up and when it is you're about to go into the penalty box and have to pay a much higher price. You want all these various surprises taken away. And so these are some of the things that we're focused on and some of the things that we're working towards and we think we've got a great product.

Great point. Couple of financial questions for Andy, kind of drilling down a couple of things you mentioned earlier. First, typically in Q1 you have seasonality. I know you didn't see as much last year. With this LTE launch of Verizon do you expect to see a lot less of that seasonality and possibly another uptick quarter like you did last year? You mentioned sequential growth going forward kind of.

Yes, it's too early to tell and we'll get into that more with the guidance. Because it's all subject, like we said, they've got to get -- how deep is the launch, how do they market it and then that's going to drive all their buying patterns as far as reloading channels.

I guess is it fair to say you usually have a seasonal downtick but outside of like things like LTE launching?

Yes, and they get it-- it's typically driven by customer marketing. So it's all going to be dependent on how our customers choose the market in Q1.

My second question, please, what changed in your operating margin goal, was it less investment in new products or was it just your margin mix or just time to bring it up since you've been beating it every quarter.

A little of everything, but actually the key is we have a leveraged model. And one of the beauties of an OEM model and so on and so forth is each incremental sales dollar does not result in an incremental sales expense and so on. So we're starting to get the leverage here at that $34 million, $35 million revenue number, and we're feeling very confident that we can take it one step up while still investing very heavily.

Great. Thanks, guys, and see you next week.

Yes, thank you.

Thank you. And our next question will be from the line of Ian Gilson, Zacks Investment Research. Please go ahead.

My question has been answered. Thanks very much.

We show no further questions at this time. Please continue with any closing remarks.

I want to thank you for joining us today on our third quarter call. We'll look forward to talking to you on our fourth quarter and year-end earnings call. I would like to remind everyone that we are having an upcoming -- our first Analyst Day here in Aliso Viejo, scheduled for Thursday, November 11. Should anyone need any additional information about that, please feel free to call any of us and we'll get you all set up. Thanks again, and we'll look forward to talking to you in a few months.

Ladies and gentlemen, this does conclude the Smith Micro third quarter 2010 earnings conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.