Smith Micro Software Inc (SMSI) 2010 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro fourth quarter and year end 2010 financial results conference call. (Operator Instructions). This conference is being recorded today, Thursday February 24, 2011 and I would now like to turn the conference over to Charles Messman. Please go ahead, sir.

Good afternoon and thank you for joining us today to discuss Smith Micro Software financial results for our fourth quarter ended December 31, 2010 and full year 2010 financial results. By now you should have received a copy of the press release discussing our quarterly year-end results. If you don't have a copy and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will immediately email one to you. With me on today's call are Bill Smith, Chairman, President and Chief Executive Officer, Andy Schmidt, Vice President and Chief Financial Officer and Tom Matthews, Senior Vice President and 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 quarterly revenue guidance, financial prospects and other projections of the performance, the Company's ability to increase its business and the anticipated timing and financial performance of new products and potential acquisitions. Among the important factors that could cause actual results to differ materially from those expressed and implied in forward-looking statements are changes in demand for our company's products from its customers and their end users, new and changing technology, customer's 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, 10-Q and 8-K 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 this release and call. With that said I would now like to turn the call over to Bill Smith, Chairman, President and CEO. Bill?

Thank you, Charles. Good afternoon, everyone and welcome to our fourth quarter ending December 31, 2010 and full year 2010 earnings conference call. We are pleased to report another great quarter with solid financial results and outstanding fiscal year performance. We've posted our seventh consecutive quarter of revenue growth generating the highest quarterly revenue results in our company's history of $35.3 million. This represents an improvement of $5.6 million over Q4 2009 or an 18.8% 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 GAAP net income of $5.8 million or $0.16 cents per diluted share, up 375% over net income of $1.2 million or $0.04 per diluted share in Q4 2009. Pro forma earnings per diluted share totaled $0.37 for the fourth quarter up from $0.26 in 2009. Full year revenues for 2010 totaled $130.5 million, up 21.6% over the $107.3 million in 2009.

Our non-GAAP net income for the full year was $33.9 million or $0.98 per share versus $25.1 million or $0.76 per share for the full year 2009. All in all, we are delighted with our fourth quarter and full year 2010 financial results. We are pleased with our continuous progress in building our business while demonstrating steady growth for the past seven quarters. We accomplished many great things in Q4 and throughout 2010 from both a financial and business operations perspective.

We see the road ahead holding great possibilities for further growth as many exciting transitions taking place in the mobile one wireless industry unfold. We have embarked on a new era of broadband mobile internet service with 4G and LTE coming to life at the end of the year. We see new products and form factors poised to drive adoption of mobile internet services at a level never before seen. Each day seems to bring new developments and Smith Micro is in a great position to capitalize on many of the emerging opportunities. but before I get into our perspective on some of these developments in the future, I will turn the call over to Andy Schmidt, our CFO to discuss our fourth quarter and full year 2010 financial results in more detail. Andy?

Thank you, Bill. First I will 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. Non-GAAP 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 operating results. Accordingly, all results that I refer to in my prepared remarks from both 2010 and 2009 in 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 measures and reconciliation of the differences between each non-GAAP financial measure provided in the press release in 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 difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $3.1 million for the period broken out as follows. $25,000 cost of sales, $835,000 selling and marketing, $742, 000 R&D and $1.54 million for G&A. In terms of amortization, the total for the current period was $2.1 million, broken out as follows. $1.3 million cost of sales, $706,000 selling and marketing and $62,000 R&D.

Okay, moving on. For fourth quarter we posted revenues of $35.3 million and diluted earnings of $0.16 GAAP and $0.37 non-GAAP. Revenue for the quarter was an all time record up 18.8% from fourth quarter 2009 and up 3.7% sequentially from Q3 of 2010. International revenue was approximately $2.1 million this quarter across all business groups. Our wireless segment reported revenues for the quarter of $32.1 million as compared to $26.1 million last year, and increase of 23%. Within the wireless segment, connectivity and security posted revenues of $27.6 million compared to $21.3 million last year, and increase of 29%.

Multi media, backup and messaging, and mobile device products posted revenues of $4.5 million for the period as compared to $4.8 million last year. Offsetting overall gains in our wireless sector, our productivity in graphics group posted revenues of $3.1 million as compared to $3.4 million last year, a decrease of 10%. And finally, we reported approximately $118,000 of other revenue, which compares with approximately $115,000 for fourth quarter of 2009. Total deferred revenue at December 31, 2010 was $1.7 million.

Switching to gross profit, non-GAAP gross margin dollars up $32.6 million increased $5 million or approximately 18% from the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 92.3% for Q4 2010 compared to 92.9% for Q4 of 2009. Non-GAAP gross margin by product groups were as follows, wireless 95%; productivity and graphics 78%; and other, 50%. As we've noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expenses for fourth quarter of 2010, $21.4 million was an increase of approximately $25 million from Q3, driven primarily by investment in our engineering infrastructure. From a year-on-year perspective, non-GAAP engineering expenses increased 12%, selling and marketing expense increased 19% and administrative expense increased 7%. Total non-GAAP operating expense has increased 13% year-over-year, primarily driven by planned head count additions. Non-GAAP operating margin for the current period was 31.6%. Current period operating margin compares favorably to operating margin of 29.1% for Q4 of 2009.

Non-GAAP operating profit for Q4 was $11.2 million, an increase of $2.5 million or 29% from the prior year. Non-GAAP net income for the fourth quarter was $13 million or $0.37 per diluted share as compared to $8.9 million or $0.26 last year. The current quarter includes a favorable tax adjustment of approximately $2 million or $0.06 per share as compared to a favorable tax adjustment of $2.9 million or $0.08 per share last year. Cash generated from operations for the quarter was an exceptional $9.3 million. Primary uses of cash for the period capital expenditures of $2.1 million for lease hold improvements and IT infrastructure.

$5 million or approximately 80 teen% from last year. Was approximately 92.3% compared to 92 for Q4 of 2009 non-GAAP gross margin is as follows, wireless, 95%, productivity and graphics 78% and other, 50%. As we have noted before, our margins are driven strictly by product mix. Switching to operating expenses. Non-GAAP operating expenses for fourth quarter of 2010, 21.4 million with an increase of approximately .5 million from Q3 driven primarily from investment in our engineering infrastructure. Non-GAAP engineering expenses increased 12%. Selling and marketing expense increased 19%. Administrative expense increased 7%.

Overall, our current quarter has been consistent with our first three quarters of the year and that our operating metrics and cash flow have all improved significantly over last years performance. In review of fiscal year 2010, it was a record year for the Company. Revenues increased from $107.3 million to $130.5 million, an increase of 21.6%. A more telling story was the growth of our core wireless business. Wireless revenues increased $29.3 million or 33% in 2010. While posting (inaudible) revenue group over the past three years we have significantly improved gross margins which represent the quality of our revenues.

2008 we posted a gross profit margin of 83.8%. 2009, 90.3% and in 2010 92.7%. Terms of operating margin, we have seen improvement over the past three years. We managed an operating margin of 23.6% in 2008. 2009 operating margins increase 27.7% despite significant investment and meeting the challenges of the worldwide recession. 2010, we increased our operating margins yet again to 29.8% while continuing to invest in our engineering infrastructure. Likewise, operating income has increased 31% in 2010 to $38.9 million. From a profitability perspective, we have significantly improved our GAAP performance.

Similar to 2009, every quarter in 2010 was GAAP profitable with total year diluted earnings of $0.36 cents as compared to $0.14 cents in 2009. From a non-GAAP perspective, total year diluted earnings of $0.98 compares favorably to $0.76 in 2009, an increase in of 29% on revenue increase of 22%. From a balance sheet perspective, our cash position closed at $72.6 million at December 31, 2010, an increase of $26.7 million from the beginning of the year. Accounts receivable at December 31, 2010 increased to $29.8 million from $24.1 million start of the year which tracks with our increase in sales.

Network and capitals at the end of the year is a strong $94.6 million, an increase from 2009's $58.7 million. Cash generated from operations for the year was approximately $24.7 million. Factoring out expected increases in accounts receivable, we generated $31.2 million in cash. Primary uses of cash were for capital expenditures of approximately $6.3 million. In terms of housekeeping, we expect to file our year-end 10-K this week which will represent our final financial statements for the year. At this point I will turn the call back to Bill.

Thanks, Andy. Revenues generated from our wireless and mobility product segment continue to fuel the company's revenue growth and profitability. Our wireless and mobility segment posted revenues of $32.1 million in Q4 2010 up 22.7% over Q4 2009. On a full year basis, revenues from this segment totaled $118.7 million in 2010 up 32.7% from $89.4 million posted in 2009. For the fourth quarter and full year revenues from this segment accounted for 91% of the total revenue for the company. Our productivity and graphics product segment produced roughly 9% of the revenues in the fourth quarter ending 2010, totaling $3.1 million. This is marginally down from the $3.4 million posted in Q4 of 2009 but up nicely from the prior quarter in 2010 by 19%. Revenues from this segment for the full year of 2010 were $11.4 million versus $17 million in 2009.

This represents a year over year decline in revenues for this non core business of 33%. Although we are pleased with the sequential rebound of revenues for this segment in Q4, we continue to explore options that will enable this segment to contribute to our core business in new ways going forward. As I mentioned earlier, we are witnessing many exciting transitions taking place in the mobile and wireless industry. We are seeing new wireless networks with new protocols delivering increased speed and capacity. Innovative devices like tablets and compelling Smartphones are coming to the market at an increasingly accelerated release rate. Some have projected that the number of downloaded mobile applications has now eclipsed 10 billion. Phone sales globally are now out pacing the world's birthrate by a factor of nine to one.

Mobile devices are increasingly becoming the primary way that many access the internet, and in some markets, these devices are the only way that users can connect to the global internet. Mobile data consumption continues to accelerate at a rate that nearly tripled each of the past three years with no signs of slowing down. Although much of this data growth is driven by the adoption of Smartphones, laptops still appear to be the king of mobile data usage. According to SISCO's recent visual networking index report, the average mobile laptop user generates 22 times the amount of data that the average Smartphone user consumes on a monthly basis.

By 2015 laptop usage will still account for 50% of the data consumed over the mobile internet. Laptops will be used for mobile computing in ways that will deliver a better user experience than a Smartphone or even a tablet can deliver. We believe that the experience of consuming mobile data services rendered via laptop coupled with the higher speeds promised from the 4G networks will continue to lead to robust growth for our core connectivity business for some time to come. As enterprise customers begin to sort out the new offices between broadband networks, speeds, coverage footprints and modem devices, we believe that the upgrade cycle from 3G to 4G will start in earnest. This will be good for our business.

In addition to the benefits from this coming upgrade cycle, we expect our business to benefit from a new dynamic of consumer subscribers who may use 4G mobile broadband as a replacement service for fixed broadband in the home. The timing of this opportunity remains subject to network build offs, marketing campaigns and the implementation of innovative pricing strategies. Controlling the connectivity experience by delivering insight into usage patterns while improving manageability through a use of our technology will help our product deliver solid growth and remain the connectivity software of choice.

While we see laptops with embedded modems, USB downloads and other mobile broadband modems as key drivers to our success for the future, we are busy innovating and improving and preparing to deliver new solutions that will make the connectivity experience on Smartphones, tablets and mobile hot spots even more compelling. The key initiative in this area is our quick link Mobile Hotspot Manager powered by Smith Micro SODA or Secure On-Device API. The Hot Spot Manager technology enables ways to manage a mobile hot spot whether on a Smartphone or a tablet or a self-contained hot spot modem with fine granularity and robust security for each connected end point.

As carriers move to more metered data rate plans, the ability to manage, understand and allocate usage across each device connected to a mobile hot spot becomes a compelling and needed feature set. Our SODA technology will enable ways for Smith Micro and its carrier customers to deliver a more uniform set of features and experiences across multiple device types, manufacturers, and form factors. From a mobile hot spot puck to a Smartphone, to a tablet. We are excited about, by these technologies and we are encouraged by the reception we are receiving at both carrier and device manufacturers alike.

We believe these products along with our device management clients and the Smith Micro DNA platform will enable our company to establish increasing and meaningful presence in the Smartphone and tablet market going forward. We look forward to reporting more to you on these developments at the upcoming CTA conference next month and on our next conference call. Before I turn the call over for questions I would like to comment on the revenue shortfall we are expecting in Q1. As reported a little over two weeks ago when we set Q1 guidance in the range of $15 million to $20 million. As discussed in our conference call on February 9th, we are facing a major unanticipated order short fall from a key customer due to an inventory backlog.

We believe this issue will be alleviated over time, and we will get back to a normalized state of license sales to that customer. Although we view this as a temporary setback, we are working to mitigate the possibility of this ever happening again. Aside from the continued product innovation that we expect will add new opportunities, we spent much of 2010 investing and establishing presence in new markets with the goal of expanding and diversifying our customer base.

This geographic expansion initiative is on going and it is part of our strategy for the next five years. We were pleased to report at Mobile World Congress this past week two new wins with both Telecom New Zealand and Bakrie Telecom in Malaysia selecting Smith Micro as their connection management software partner over our competition from this region. We are gratified by these early successes and hope to add more wins in Asia Pac and in Europe this year to expand our customer base and further mitigate the risk from any single customer in the future. We had an absolutely tremendous 2010, and we are excited about our business prospects in 2011 and beyond.

We are really just at the beginning of the 4G mobile internet revolution, and we are poised to participate in expanding ways. The launch of these new high speed networks will enable new subscribers, connected devices and business models that will benefit from our lineup of products and technology. We are focused on continuing to innovate, execute and getting back to an exciting growth and profitability in the near term.

With that, operator I will turn the call back over to you for questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Thank you, Good afternoon. Bill, I was wondering if you had gotten any more feedback from your large customer on what caused the slow sell through for them in the fourth quarter?

Yes, we are in discussion with the customer. I think we have a pretty good understanding. I think a lot of it has to do with timing on launch of their 4G offerings. Maybe a little later than was originally anticipated. But I think all in all this problem will work itself out, and we just have to be patient and unfortunately it does set up a less than normal quarter for us in Q1 of 2011. As we said a few weeks ago, we look for some recovery in Q2, so maybe we can get back into the break even position and then back to normalcy in the back half of the year.

When you think about your back half of the year, getting back to let's just say similar levels to what you saw in 2010, do you see that being driven primarily by a rebound in connection manager? Do you think there will be significant contribution from the Hot Spot Manager that I guess you are shooting for some wins in the second quarter.

It is going to be a combination of things. Clearly we expect to see strong sales of our connection manager of products across the board. All of our customers we have no reason to believe that won't be the case. But clearly we are excited about what we see happening with the Mobile Hotspot Manager. We think we are going to see very broad adoption. We are very excited about it. We have a nice lineup of customers in the final stages, and we need to get all of that under contract, and then get them to allow us to tell you about it, and we will come racing to the street and give you some good news unlike the bad news we gave you a couple weeks ago.

Okay, and just one more if I could. I just wanted to get your guys take on the impact of tablet computing and the iPad in particular. Obviously doesn't use a connection manager and could theoretically cannibalize laptops, but there might be a play on the hot spot, wifi side. Can you give us a sense of what you think the impact of the iPad was in the fourth quarter and what you think it could be going forward and where your play is there?

We think tablets in general are a great play for us. As far as your first comment replacing a laptop as a tablet user and as a laptop user, I know that both devices serve a purpose. Clearly if I am entering data that I want to transmit I want to do it on my laptop. I have a better keyboard to work with. If I am just reading data, downloading data, the tablet can work almost as well or just as well. I think they both have their place. I don't think one excludes the other. That's how I see that market opportunity. Maybe I'll kick it over to Tom.

Rich, it's Tom. At least in the short term we certainly believe that the enterprise is still driving the mobile broadband service subscriptions. You can look at a number of reports and survey enterprise customers and you will see that the tablets are predominately being used as a prosumer device in the enterprise, not necessarily sanctioned, challenges managing those types of devices. So the laptop, we think, will continue to drive the business for mobile broadband subscriptions. And given some of the initiatives that Bill mentioned earlier, our Hot Spot Management solution, we are all over the device management client. For a number of Android devices there is no reason why we can't see some wins coming from android tablets. With that product line there is an opportunity to expand the business with the tablets, not really have it erode our business.

I think when you really look at the whole mobile hot spot market, the tablet is really the ideal device to use as a mobile hot spot. When you use your phone as a mobile hot spot that somewhat precludes using it as a phone for voice calls. And that is somewhat problematic. We actually see that our play with both our Mobile Hotspot Manager as well as our Mobile Hot Spot Maker software will have a very strong play on both the tablet and the Smartphones going forward. We are particularly excited about it. It is opening up some very large opportunities and we are looking forward to being able to talk more about that and hopefully we will be able to do some of that at CTIA for those of you who are going to be there.

Okay, that's helpful, thank you.

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

Yes, thank you. I had a question about the multi media area. It looks like the sales were down on a year over year basis, and I recognize that there are a number of different product lines such as device management software and push to talk and visual voicemail and other items. Just wondering what accounted for the year over year decline in revenues.

I've kind of talked to this in past conference calls. I really believe that the battle for the multi media market has been won by Apple and Google. We really are not investing further in that segment, nor do I think we should. You are just seeing it decline because that's really not where we think is the best place to deploy our assets.

And kind of following on, this is Andy, as we said before, it is always going to be a little lumpy. Some of the other business types that are in that category are new businesses for us, and it is subject to a little lumpy quarter to quarter performance. There are up front start up cost type revenue, that then transfers over into a loyalty type model which is our common model but it starts small. So, long story short, it was not down a lot. Year over year they both are in the $4 million category which is still a very, it is a very nice amount for us. If you went back another year it wouldn't be on the radar at all. So I would expect this area to be a little lumpy as we go forward and then fill in probably more toward 2012.

I see. And would the device management software on some of these new 4G Android Smartphones be a contributor?

Larry, this is Tom. Yes, absolutely. We are launching on a number of new HTC 4G devices that are beginning to ship in to the U.S. in the next quarter or two. Verizon, AT&T and T Mobile, they are sporting some of the Android devices that we are shipping out.

Great. What are your current thoughts in terms of a tax rate for 2011?

Sure we as you can tell ended up 2010 in really good shape. All of the legislation that needed to pass, passed at the last minute, and so that was great. When we look into 2011 here given that we've got a slow start here in Q1, it is probably good to start modeling with a 25% pro forma tax rate, in other words cash base, and 45% GAAP tax rate.

Great Okay. Thank you.

Thank you. Our next question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Thanks, thanks for taking my questions. This is Charles Jones sitting in for Mike. Hi Bill and Andy.

Hi, Charles.

Bill, maybe just two quick ones for you, going back to your largest customer. They are done with the major phone launch and now they obviously need to refocus their attention in monetizing their 4G network. Maybe you can just share your views and how quickly you think they go about doing this, the iPhone sales and stocking et cetera. Is that a big priority there, or do you expect to see a shift in resources to the store manager that is actually promoting the data cards?

Well part of that is a question I think you really have to ask Verizon. I am not really qualified to answer that. But I do believe that as the 4G network footprint continues to get larger, that will bode well for some very strong marketing campaigns and clearly we are hopeful that happens sooner instead of later and that should fuel a lot of sales and start moving things forward. I think the thing that a lot of people say is are you disappointed with some of the early numbers coming from that customer on the deployment of 4G. And I think you have to kind of measure that a bit because I think you have to look at it and say the footprint isn't that large. Until the footprint is large enough that it's meaningful, I think that's really the gating item.

Okay. Thanks for that. And then maybe just building on Rich's earlier question on tablets. The Motorola Xoom, it launched today and it requires a two-year contract with the carrier and also a data plan at certain price points. So does this make the case for maybe a Smith Micro Hot Spot Manager slightly stronger versus just a non contract and non carrier affiliated tablet? I would just appreciate any thoughts on the uses of the model we have seen out there with tablets and how Smith Micro might benefit.

Yes, Charles, this is Tom Matthews, how are you? The usage sensitive or metered rate plans are a key component of our strategy for the Hot Spot Manager. One of the key value propositions is presenting information to the user as to how much data is being consumed. It is very difficult for people to gauge how much data they are actually using. If they share that hot spot across multiple devices, or if they share that with multiple people, they need to keep tabs on the amount of data that is being used, or they may run into bill shock situation. Clearly that's a very positive thing for us, and it is one of the key value propositions for that product. We view it as very good for that business.

So longer term when you look at Android tablet trends out there, if it is directly tied to a carrier contract That's a positive then versus just a tablet that is, let's say, a wi-fi for example?

I think the tablets represent a great opportunity for us. Both with our Hot Spot Maker software and then the Hot Spot Manager software. As I have said, I think tablets are probably the way a lot of users are going to go to create mobile hot spots going forward.

Okay, all right, thanks. Guys.

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

Just a couple questions. Andy, I don't know if I missed it. Can you give a customer percentage break down?

No, we had Verizon (inaudible). They were 50% and 40% for the year we have. And then we always have AT&T and Sprint making our greater than 10% list for the year as well.

Okay. And then somewhat kind of piggybacking on a question from before, since you pre announced, do you have any better visibility in terms of how long the transition will take to get back up to speed and get back to levels that you were at before? And obviously if we think we will have a pretty good sequential increase in June, if you are just reasonably back to normal, that would imply that. What would drive that? Would that be mobile hot spot winds that start coming in, or would that just be people getting back to normal on the connection manager side?

I think when you view 2011 you have to view it in steps. Second quarter needs to be a quarter where we see a recovery and order patterns from all of our large customers so we don't have any inventory issues by the end of that quarter. If all falls to plan then we would look to getting back to at least a break even spot for Q2. Then going into Q3 and Q4 we look for more normalized ordering patterns on connection management plus the kick in of Hot Spot Manager plus other new product offerings like video and mobile network director as well as other customer wins both in North America, but more likely, outside of North America in Asia Pac and Europe. We look for the back half of the year to look like the strong results you saw in Q4. Unfortunately the first two quarters are going to be a little bit more challenged.

Yes, okay. And on the hot spot wins, it seems you are fairly close to a couple of wins for that product. Would the Hot Spot Manager maker product or both, would, based on your knowledge today, would they use that piece of software, that product on their whole line of hot spots as you understand it now or would it be on a portion of them? Until the contracts -- until the ink is dry and we work through all of the issues with the various customers we are working with, I can't definitely say, but I would anticipate that if a carrier is going to launch hot spot manager on some lines they will launch it on all lines and that is just the normal way things are done they really are looking for a common user experience across all the possible hardware platforms that the carrier offers. I think That's the best way to view it.

Until the contracts, the ink is dry and we work through all of the issues with the various customers we are working with, I can't definitely say. But I would anticipate that if a carrier is going to launch Hot Spot Manager on some lines they will launch it on all lines and that is just the normal way things are done. Because they really are looking for a common user experience across all the possible hardware platforms that the carrier offers. I think that's the best way to view it.

Okay. And you touched on it a little bit, but can you just give us an update on your thoughts on progress on the network director product and the video products and what we should expect over the next couple quarters there?

There is a lot of interest. We have some deals where they are really waiting for the completion of the product so we can start shipping and everything. In the case of video, video is pretty much there. Mobile network director will follow. I think most of our focus at the present time is probably around Hot Spot Manager because the market opportunity is so huge and then added to that is the overall SODA standard that will start by being focused on all the hot spot options both hardware and operating system driven as far as Smartphones tablets and then will be expanded probably later in second quarter to speak to the needs of all types of devices that would be more normally serviced by connection management. But I think the key thing is we are making substantial progress in selling the concept of SODA. And we expect to be making some exciting announcements between now and CTIA, or maybe we will wait until CTIA. But in any event, we have carriers that are signed up. We have device manufacturers that are close, and we are very excited by the success we are seeing and expect it to continue.

Okay. Sorry, just one last one for me on SODA. So carriers have basically, blessed is a strong word, but blessed the product or the standard. Are they going to, at least domestically, they carry the sway. Are they going to, quote, unquote, force the device makers to comply with SODA do you think?

We will let the carriers speak for themselves, but in order to reap the benefits of SODA and the key benefits of SODA for a carrier are substantially improved time to market for devices. Better reliability of new products coming out of the chute. Then the only way they can really gain those benefits is to standardize across all of the products that they offer. So I guess that is the best way for me to answer that. And I also would kind of quickly add that as much as we are excited about what we are seeing here in North America we are equally excited about what we are seeing by, in really actually even larger markets when you start thinking of all of Asia Pac and Europe. The benefits of SODA don't know no any national boundaries. The benefits are there, they are provable and it is easier to understand and it is a hard thing to argue against. That's how we see it.

Got it, thanks, guys. Good job on the balance sheet, Andy.

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

Hi, guys. I think you mentioned that you were trying to mitigate this from happening again. I just want to get your thoughts on how you were trying to do that in terms of is it more controlled on your side or maybe contract minimums? I just wanted to understand that concept.

No, Lauren, what I said was we are definitely very sensitive that we don't want to see this happen again. And the best way to make sure that doesn't happen again is by adding a substantial number of new customers which by definition means they have to come from geos outside of North America. And you have seen some early indications of what we are doing with the two wins that we announced at Mobile World Congress. And we look forward to making more announcements in the not too distant future about additional wins. So the way to really fix from ever happening is not have any one cost customer with that large a market share that if they catch a cold we end up with the flu.

Okay. Gotcha. And then the next area I guess you mentioned that the visibility you have gotten from Verizon that it has to do with some of their product launches maybe a little later. Do you have any ideas if it's one product launch or multiple? And I guess on top of that if it is kind of a product launch thing, can you get the volumes back to where we were before or is this, again, you need to be more (inaudible).

Actually I don't think I used the word Verizon, so we'll just say we have a large customer, and what we expect is that we will see an order volume coming from all of our large customers that will look rather sequential on serial growth on a quarter over quarter basis except for this one troubling spot we are faced with in Q1. It will get better in Q2 and if you could take those two quarters out of the chart it would look like a pretty nice line growing when you hit three and four and hopefully move into 2012.

Gotcha. One question for Andy, can you give us some color in terms of how your expense structure looks like in terms of what percentage variable versus fixed? And then also because of this slip going on in Q1, how are you managing your costs given the top line? Are you cutting back anywhere? And how should we think about that going forward?

Sure. We are primarily fixed. As you see a decrease in revenue, again we are very leveraged. So if revenues go up, That's where we are, before very bullish on up margin. When revenues go down, it's likewise. We don't have (inaudible). At this time, given what we know today, certainly in the last number of weeks, we discussed it quite a bit. We feel that this could be well a temporary scenario that we are going through. So we are not changing any plans at this point from an expense perspective. And what it looks like is we still have some investments that have been in play. In particular as we have talked a little bit about before, the tech center we are building in Pittsburgh, depreciation of the data center is going to start coming into play in Q1 and Q2 and basically the whole year. Expenses will go up. I won't get into how much at this point. Just in that we are trying to stay clear from giving too much guidance here until we get more clarity on the revenue side. So just to let you know that there are not plans for cutbacks. At this point we are pursuing the plan that we had in place before the inventory issue arose.

Gotcha. And just last question, the revenue visibility that you'll get from this large customer, is there like a time that you will get it that you know of, or its whenever they get back on track that you will know?

We are constantly talking with all of our large customers including this one. We understand what their sell through looks like and we can monitor the burn down of that inventory build up. I think we have pretty good visibility now.

Great. Thanks very much.

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

Good afternoon. I know you mentioned your 10% plus customers, but did you give a percentage for Verizon or just greater than 10%.

Yes, we did. They were 50% for Q4 and 40% total for 2000.

Great. In terms of some of the recent pricing that you are seeing in the international markets for Bakrie and Telecom New Zealand, can you give us a sense how is that shaking out relative to the North American markets? Are you seeing comparable pricing? It sounds like there are some other deals in the pipeline. As we look out to the second half of this year, to the end of this year, how would you expect the international mix to size up at the end of this year? Is it 10% of the mix? Is it 20% of the mix? Or should we not get carried away on that front?

One of the keys to getting started is, getting these customer wins is, as we always say, they start somewhat slowly and they build from there. Adding some color to it, some of the customer wins too are, as we said, some are connection managers and some are going to be first time product so basically they are going to be establishing pricing worldwide for us. That's going to be something different. As far as what percentage at the end of the year, it's too difficult right now to set that type of target. Again these are new geos, brand new contracts and we are trying to all work through the current scenario to see really where things get back on footing for 2011 domestically.

I think the one thing to add is we have worked very aggressively over the last year to implement a course strategy where a large percentage of every connection manager that we build comes from a common set of code that is a very effective way to manage our overall cost of building a product such as this as well as guaranteeing a high level of quality, something that I think we are very unique about and allows us to really compete very effectively and make a strong profit in all geos around the world. So I think it is all good for us.

Hey Bill. Were these new wins, were they competitive bids and/or did you displace anyone?

They are all comparative bids. By and large we were competing against the one competitor in the Asia Pac region and we were very successful in beating them both in quality and future set up.

Gotcha. And maybe on the SODA front, you guys have been pushing this model ahead pretty aggressively and it is evolving a little bit, but what are your current thoughts in terms of how the pricing model is going to work? I think originally you speculated that you might be able to get paid by both the OEM's and ultimately the operators. Or will this ultimately be something that you give away the SODA capabilities with the expectation that as it gets implemented you make money with the connectivity manager or Hot Spot Manager et cetera on the back end. How is the model evolving at this time and how should we think about it?

Let's take the carrier first. When you look at the carrier the carrier will get SODA as part of a product offering that they are purchasing from us. Whether that be Hot Spot Manager or connection manager. And in that case we don't actually charge for SODA. It is part of the benefit of buying those products from us. When we talk about the device manufacturers, then that comes a little bit different. In those cases, we are really saving them [opics]. We are going to give them a standard by which to build all of their API interfaces to the various carrier networks. They don't have to then fund all that development effort. It all comes from us. But to the extent that they want to implement SODA then on software they want to offer to the market, they will pay us a royalty on a per unit ship for SODA. So in that case we are collecting added revenues from SODA.

Gotcha. And lastly, just to follow up on some of your earlier comments for Mobile Hotspot Manager, it sounds like the activity is pretty robust right now. Are there a couple of milestones that we should be thinking about over the next quarter or two that by the middle of this year you would expect to at least have one carrier signed up or whatever the metric might be?

Yes, I think you probably want to come and see us during CTIA and hopefully we will be able to talk about some various wins in the hot spot and SODA area.

And, Bill, just along those lines from a hot spot perspective, how should we be thinking about pricing relative to the traditional conductivity manager?

Pricing is very comparable to the other connectivity offerings that we have. Actually being in some cases somewhat higher. It is all in pricing.

Great, thank you.

Thank you. Our next question comes from the line of Kevin Dede with Brigantine Advisors. Please go ahead.

Afternoon, gentlemen and congratulations on a great year.

Thanks, Kevin.

This question might be best addressed from Tom. I am kind of curious about the mix between the enterprise and consumer on the connectivity management side and how you saw that change through 2010? Given you see greater strength on the enterprise side going forward. I am just kind of wondering how to look at your business (inaudible).

Kevin, really I think the 2010 versus 2009 mix of mobile broadband subscribers using our branded connection manager from the carriers remain pretty steady. There wasn't much change and of course it is skewed very, very heavily toward the enterprise. The rate plans of $50 or $60 per month are typically enterprise type rate plans. Until we see some more consumer oriented pricing models, I think the enterprise will continue to dominate. One of the things that we are anticipating in 2011 is an upgrade cycle coming from those existing embedded customers, the enterprise customers that are now using 3G offerings. And we believe that as the enterprise gets more comfortable with the footprint of the 4G networks, the device types and better understands the nuances and differences between the device, the network protocols and the device types themselves, then we are going to see that upgrade cycle begin. So heavily skewed towards the enterprise still Kevin.

Great. Okay. Thanks for the color, Tom. On Europe I know you folks have been fighting over there tooth and nail for years and more recently we have seen European competitors make little end roads here. But we have not really seen reciprocity. I no you have been trying. I'm kind of wondering if you can give me sort of a 20,000 foot view of what that market looks like and where you think your biggest hurdles are given that you are bringing a much broader feature set than your competitors?

I think you have to think SODA, SODA and SODA and add a little hot spot on top and you have a good idea of how we are going after Europe.

Okay. Are we going to have to wait though to see sort of an RFP come up? Or are you going to be able to bring this product (inaudible) that your customers and (inaudible) on hard business.

You can't RFP SODA because we are the only place to get it. Unless you want to drink Coke or Pepsi That's the first thing. The second thing if you wait for RFP's you are at a loss for business. You are either helping write the RFP or you are just filling out the blanks and you have already lost. You want to be well out in front of the RFP game. That's where we are now and I think you are going to see some wins from other parts of the world. And that's really I can say. You have seen a couple sold so far, and there is more to come.

Okay, thanks, Bill. I'm curious on Europe they are given a greater concentration of 3G data users. And I think that's why, in my mind, it plays out to be a more important market.

That's an interesting comment, but let me quickly counter, while western Europe and the North American markets are large and very well established markets, they don't show the growth curves that some of the other markets like Asia Pac shows where by and large Asia Pac right now is just launching 3G. So go back in time and look at what happens when in North America 3G got launched. Mobile broadband services are suddenly effective, and they can actually be brought to the market. Or you look at Asia Pac markets where you don't even, in many areas don't even really have established wire line services. This is the first time in Asia Pac and many, many geos that you can actually offer wireless or effective internet offerings. You can get people to the internet either using a laptop, using a Smartphone or using a tablet. The Asia Pac is not something to, it is something to really be followed. And in following that you have to look at [Latam] and other parts of the world, but Asia is a strong market right now and a great opportunity.

Appreciate the color. Thanks Bill. One last question from me and it is on the network director software and how, you mentioned that it might be a little bit further behind in development than video. I guess what I'm wondering is why you are not as focused at getting those to market as you are the mobile hot spot software. Given that it seems to me with operator issues and handling data and their desire to push stuff off on the wi-fi it seems to me that network directors addresses the part that just as well as anything else that you bring.

Kevin, it is Tom again. I wouldn't characterize our development efforts as lagging in mobile network directoring. In fact, they have been accelerating. The one thing that I would say about Mobile Network Director versus the Mobile Hot Spot Maker and manager with respect to the opportunities to take it to market quickly is that the component parts that have to line up for mobile network director are very, very much, they are finite.

Well, you have carrier elements and carrier components that vary from carrier to carrier. So you have infrastructure components that have to interface with, you have policy management components that the carriers are implementing today. There is a lot more complexity inside the network, the network architectures, as well as complexity with our client product. So getting the architecture right to go to market with that product is a much tougher and longer cycle with our carriers. The Mobile Hot Spot Director is a, there is a need today and clearly it is a more simple ecosystem to control in that we are really controlling it and working and collaborating with the same device partners that we work with, with our connection manager today. So that's I think why it is going to take a little longer to get the mobile network director to market.

Okay. And then, Tom, while I have you, just help me understand the difference on where that is getting to market versus video. Understanding that you already have a customer on video. That's what I referred to in terms of lagging. I just meant time to market and understanding the difference.

Yes, well video is obviously, there is a lot of activity given the data growth that is happening in the market around video, around optimization, around better presentation of content to handsets and tablets, and so the video product is out there in the market where we are out selling it. We are doing demos and trials today with customers and that product is real and live, right. The Mobile Network Director product is probably lagging at least a couple of quarters. And again it is because of the complexity of the ecosystem that I mentioned earlier in terms of making that all work together and getting the network architectures agreed upon.

Fair enough. Thanks again for the color, Tom, and thank you too Bill. Again, good luck and thanks.

Thanks Kevin.

Thank you. There are no further questions in the queue. I would like to turn the call back to management at this time for any closing remarks.

I just want to again thank everyone for joining us today. Should you have any further questions, please feel free to give us a call in the office. We will also get a chance to see us at the CTIA Wireless trade show in Orlando. Thank you.

Thank you. Ladies and gentlemen, this concludes the Smith Micro fourth quarter and year end 2010 financial results conference call. We thank you for your participation. You may now disconnect.