Smith Micro Software Inc (SMSI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro first-quarter 2011 financial results conference call. During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, May 4 of 2011.

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

Good afternoon, and thank you for joining us today to discuss Smith Micro Software's financial results for our first quarter, ended March 31, 2011. 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 call us at (949) 362-5800 and we will immediately e-mail 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 the 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 its performance; the Company's ability to increase its business; and the anticipated timing and financial performance of new products and potential acquisitions. Among the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, are changes in demand of our 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 filings with the Securities and Exchange Commission, including its filings on our forms 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 or call.

Now with that said, I would like to turn the call over to Bill Smith, Chairman, President and CEO. Bill?

Thanks, Charles. Good afternoon, everyone, and welcome to our first quarter ending March 31, 2011, earnings conference call. On February 8, we reported that our first-quarter revenues were expected to be impacted as orders for our core connection manager product from a key customer would fall below previously expected levels. In that press release, and in the subsequent conference call, we set revenue guidance for the first quarter of $15 million to $20 million. As we anticipated, the orders from this key customer moderated, and as a result, our first-quarter revenues came in right in line with these expectations, at $17.8 million.

As a combined result of the dip in revenue and our continued commitment to investing in new opportunities, our non-GAAP net income for the quarter came in at a negative $4.7 million, with a loss of $0.13 per diluted share. As we previously reported, we believe that the anticipated revenue shortfall was caused by our key customer carrying a sufficient level of inventory and licenses to support their primary needs for subscriber growth throughout the first quarter. Revenues produced from that key customer in Q1 were down more than $13 million from the prior quarter, and were down by over $10 million in Q1 from our average quarterly revenue results from this customer for all of 2010.

We consider this change in sales to be primarily driven by a temporary slowdown of subscriber acquisition. This pause in adoption looks to be due to technology transitions taking place as they upgrade their 3G networks to 4G services, and as new devices get rolled out into the market. The transition to these new technologies is well underway, and we anticipate that this evolution will continue on an accelerating pace throughout the rest of 2011.

We continue to have an extremely solid relationship with this customer, and our commitment as a key technology partner is one that we are confident will prove invaluable as they transition to new network technologies and the rapidly emerging changes in device types and form factors. I will speak more about the opportunities emerging as a result of the 4G network rollout, the evolution of various device types, and what these developments will mean for us after I turn the call over to Andy Schmidt, our CFO, to discuss our first quarter financial results in greater 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 non-cash tax expense to provide comparable operating results. Accordingly, all results that are referred to in my prepared remarks for both 2011 and 2010 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 a 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 www.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 $3 million for the current period, broken out as follows -- $17,000, cost of sales; $825,000, selling and marketing; $603,000, R&D; and $1.56 million, G&A. In terms of amortization, the total for the current period was $2 million, broken out as follows -- $1.26 million for cost of sales; $780,000, selling and marketing; and $62,000, R&D.

In moving forward, for first quarter we posted revenues of $17.8 million, and a loss of $0.22 per share GAAP and $0.13 per share non-GAAP. Revenue for the quarter compares to $29.9 million for the same period last year. International revenue is approximately $1.6 million this quarter across all segments.

For 2011 we will be reporting revenues as Wireless, and Productivity and Graphics. As we've spoken to over the last year, we view the future of our wireless business as being a platform of interconnected wireless technologies rather than stand-alone product initiatives. To be consistent in our financial reporting, we will report Wireless revenues as a whole versus components of the platform offering. Our Wireless segment reported revenues for the quarter of $16.1 million as compared to $27.1 million last year. Our Productivity and Graphics segment posted revenues of $1.7 million as compared to $2.8 million last year. Total deferred revenue at March 31, 2011, was $744,000.

Switching to gross profit. Non-GAAP gross margin dollars of $15.3 million compares with $27.6 million during the same period last year. Non-GAAP gross margin as a percentage of revenues was approximately 86% for Q1 2011 compared to 92.6% for Q1 of 2010. The reduction in gross margin is due to lower sales volume covering fixed maintenance and support expense. Non-GAAP gross margins by segment were as follows -- Wireless, 88%; Productivity and Graphics, 70%.

Switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2011 was $23.3 million, with an increase of approximately $1.9 million from Q4 2010, driven primarily by investment in their engineering infrastructure and our Pittsburgh Tech-Center. From a year-on-year perspective, non-GAAP engineering expenses increased 16%, selling and marketing expense increased 19%, and admin expense increased 22%. Total non-GAAP operating expenses increased 18% year over year, primarily driven by a planned headcount addition and infrastructure investments.

Non-GAAP operating loss for Q1 was $8 million as compared to an operating profit of $8 million in Q1 of 2010. Non-GAAP net loss for the first quarter was $4.7 million, or $0.13 per share, as compared to a $6.1 million, or $0.18 per share profit last year. Cash used by operations for the quarter was $2.3 million. Primary uses for cash for the period were capital expenditures of $6.6 million, used for leasehold improvements and IT infrastructure.

From a balance sheet perspective, our cash position closed at $64.4 million at March 31, 2011, a decrease of $8.2 million from the beginning of the year. Accounts Receivable at March 31, 2011, decreased to $24.8 million. Net working capital at the end of the quarter was $79.8 million. In terms of housekeeping, we expect to file our quarter-end 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. There is no denying that the macro trends for increased connectivity to the mobile Internet are stronger than ever. Our industry is in the midst of a number of significant transitions related to these trends. Carriers are making staggering investments to support growing demand for more bandwidth and faster network services, and this is creating both opportunities and challenges. Our customers are grappling with some of the most exciting and fast-paced product and technology innovations the world has ever seen.

The task of supporting these new devices, such as smart phones, tablets, and machine-to-machine connectivity is challenging the operators, their suppliers, and Smith Micro in new ways. The competitive need to more rapidly support these new devices in the most cost-effective way, with the best possible user experience, is driving how decisions are made. We have technologies to help carriers simplify the complexity and manage the accelerating change. And we are in a great position to help them compete more effectively.

As the industry, devices, and technology evolve, we are progressing and adapting as well. The adoption of tablets, mobile hotspot devices and smart phones with WiFi hotspot capabilities have been viewed by some to present either an opportunity or a threat to our core business. We believe that these developments present opportunities for us that hold immense potential.

The market opportunities to support the proliferation of connected devices in the complex mesh of networks, graded service plans, and a variety of network standards calls for transformative approaches. We are innovating and evolving a new approach in the field of connectivity with our Secure-On Device API, or SODA. We apply a standardized way of solving the complex problem of connecting dissimilar devices by using a common approach to their interface. We are pleased with the initial support that we are receiving from industry leaders, such as AT&T International, Sprint, Reliance Communications, PT Bakrie Connectivity, GCT Semiconductor, Comcast Corporation, Bouygues Telecom, Bell Canada and others. We're working closely with several of our customers to bring forward new connectivity solutions, such as our mobile hotspot management software, our mobile network director, and our analytics engine that will make the connected mobile experience simpler.

I want to make it clear that the software demands for connecting embedded modems and USB devices still dominates the mobile broadband service market. These form factors remain critical to our success, while the opportunities for innovative solutions to support the rapid growth of new form factors is very strong as well. We are working hand-in-hand with several of our customers creating new solutions, and we are in a great position to lead the charge into these new connectivity applications. We are focused on executing and reporting meaningful success on this front in coming quarters.

With respect to working with our customers, I'd like to say a little bit about our relationships going forward. One of the key assets has been the strength of our relationships with our top customers. We believe that these relationships are as strong as ever. This is particularly true in the case of our 3 largest customers, Verizon, AT&T, and Sprint, where we are being asked by each of them to assist in the development of new solutions needed to handle some of their increasingly complex challenges.

Over the course of the past few years, Smith Micro has succeeded in becoming the clear market leader in North America for our core connectivity and mobility products. While we continue to cultivate relations within our primary markets, we spent much of 2010 building our sales infrastructure and gearing up for the acquisition of new customers in exciting growth markets outside of North America. Throughout Europe, Asia-Pacific, and Latin America we have begun to develop relationships with Tier I mobile operators, who see the value of our software platforms and solutions. We have had early wins with Telecom New Zealand and PT Bakrie, and announced new relationships with Reliance and AT&T International. Moving forward, one of our primary strategic objectives is to grow new business relationships throughout the world, and turn Smith Micro into a truly global solution provider.

Our Mobility Software business continues to be the main driver for our future growth. While our revenues in this area were challenged in the quarter, this business segment still accounted for 90% of our total revenue. The Productivity and Graphics business produced $1.7 million, or approximately 10% of the total revenues. We have made significant changes in the way we operate that business segment, and we will continue to refine our approach to maximize returns for this product line in the future.

While we navigate through the exciting transitions in the wireless industry, we are continuing to evolve and adapt our technologies to address new opportunities in the market. Through Q2, we expect to see continued impact on our revenues, as choppiness in the adoption of 4G services will continue while the networks get rolled out in the near-term. As a result, we expect the Q2 revenues to remain in a similar range to our Q1 guidance of $15 million to $20 million. We expect sell-through of existing inventories to get worked through by summer's end, and business for our core connection management software to pick up in Q3, and further growth in Q4.

We are working to strike the right balance of investing in the next generation product lines for smarter mobility, while aligning resources as necessary to move the business back into a profitable state. We are energized by the early stage reception for our new products, and expect to see these new technologies begin contributing to our growth in the near term. We are excited by the collaboration that is taking place with our customers on several new initiatives. We are confident that we have the strategies to bring our business back to a solid growth, and capitalize on these exciting macro trends for broadband mobile data services.

Clearly our business has been challenged by customer concentration in the first half of 2011. But we believe the bad news is behind us, and we are now focused on turning the corner and getting back to a growth pattern for the second half of this year and throughout 2012. We have strong visibility into the causes of this slowdown, and are executing on our strategy to rapidly reverse this trend. And I look forward to reporting further on these developments, shortly and in future quarters.

With that, operator, I'd like to turn the call over to you and start the questions.

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

Thanks, good afternoon. Bill, in the last quarterly call you talked about the potential of having a flat year-over-year back half. It was being given that the second quarter guidance is that that's not where you think you'd be. Could you give us any sense of where you think you might be in that third or fourth quarter time frame at this point?

That's a fair question. I can't give you exact guidance as obviously this has been a challenging year so far. What I can say is that the way we view it is that this represents somewhat of a one-quarter shift, so I think if you take a look at the thinking, basically take second quarter, shift it into third, third, shift it into fourth, and then you're into 2012. That's probably the best guidance I can give you.

In other words, that's implying the fourth quarter we're still up in that $30 million type of range.

Yeah, I can't answer that question. We will give you guidances as this quarter -- this year continues to evolve. Obviously it's been a very challenging year, it's been a big surprise for us, and it's one that we're dealing with and grappling with. We've got a strong strategy, we have clear visibility as to what the causal factors are. Some of this is frankly right now out of our hands, we've got to wait for other events to take place.

Sure. Well, within your largest customer, which is going through this 4G transition, one of the developments there, which might sort of mitigate the bounce back, is that I think on the MiFi device for the LTE network, you are guys are not on there, at least not with the connection manager. Do you have any sense how much the growth of MiFi for 4G is impacting your connection management sales at this point?

Well, let me just talk about numbers that have been publicly discussed. You know, it's a stated fact that about 500,000 units of 4G devices have been shipped since the launch of 4G in early December. About half of those are handset devices, the other half are data devices. That's a very small, small number. I think clearly there's a period of confusion in the consuming public as to what 4G means, there's a variety of 4G standards, it's very fuzzy. Everybody's talking about 4G and it's not everywhere to be had. I just think that right now what you're seeing is a reaction to a technology transition that we all, I think, initially hoped would be very positive. Turned into being somewhat mystifying. So I think this all will work out. Time will cure this, but we just have to be patient.

As far as your comments on mobile hotspots, we think mobile hotspots offer a very strong opportunity for Smith Micro, with our new mobile hotspot software that will ship for the very first time the end of this quarter. We also see other products that will come into play as our mobile network director also starts shipping this quarter. And unfortunately, as I've always said on the OEM transactions, they tend to start smaller in the beginning and then build up over time. So I really think that for significant numbers, you know, to come through from these new project initiatives, you're probably looking at early 2012

Okay. One more question, if I could, Bill. I asked this last quarter, and we're sort of a quarter further in so I'll ask it again, but, when do you think about cutting your expense level to lower your break-even point? If you're not back into the, say, $30 million-plus by fourth quarter, do we start thinking about reducing the expense rates to bring down the break-even?

Well, you know, we take a rather prudent approach to business around here, and you should rest assured that we are already making efforts to rationalize some of our expenses. But we also are mindful of the opportunities that lay ahead of us, and the need for manpower resources to fulfill those, to make them come to fruition. So with that in mind, we walk that very sensitive balance between being prudent on our expenses yet not short-changing our future. We are very mindful of that, it's something that the entire executive team is highly focused on. But the number one thing we have to be certain of is that we close the number of opportunities we have in front of us, that represent significant upside for us going forward, and so maybe we have to just be careful. But I think we've just got to grow our revenues back up to a level that we would find acceptable and we'll be back to profitability

Okay, appreciate it, thank you.

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

Thank you. Just building on Rich's question, I was just trying to -- maybe you can help us understand a little better the sequentially flat guidance, is at all primarily due to the same customer, and the LTE timing of a new modem shipping in to Verizon? Or are there any other share losses or any deltas you could share with us, maybe to other customers, and then is it also on the productivity side if you can just help us think about that smaller division going forward? Thanks.

That's a good question. Now, I would have to say that, as I said, that one customer was down over $13 million in sales in Q1 over Q4. It is potentially possible it could be even so slightly smaller in Q2 before we would see a resumption of purchasing activity in Q3. That's probably the way we view it, and I believe that we have some pretty good visibility into that, and time will bear that out. You know, we just have to wait and see. And the other part of your question was --

Potential share losses at other customers, if there's anything like that with other customers?

This is really about, you know, a particular perfect storm situation at a particularly large customer, you know. At one point that customer was a lot smaller, and obviously would have had a lesser affect. But Q4 was a 50% customer, and when a 50% customer catches a cold we catch pneumonia, and that's really what happened here . As far as the other part of your question on Productivity and Graphics, yeah, it's a smaller unit, we had some timing issues on some orders. I would expect that that unit's revenue will grow in second quarter. But that's all I can say

Okay. And then you said you're going to ship your first hotspot. Do you have the customers for that yet, and how do you see that potential revenue opportunity in the back half of the year?

We have not announced any new customer relationships for our hotspot product or mobile network director. We are working diligently with a number of Tier I carriers around the world. We expect to announce deals as soon as those customers are shipping, which means that there may be an offset from the time that we close the deal to the time they start to ship, depending on how they cut it. The new product offering is always a challenge of trying to cut in new product offerings, especially in fourth quarter around holiday selling season, at least here in North America. So we'll have to continue to monitor that, but we feel very bullish about the attraction we see for these new products, as well as for SODA, which is really the backbone of a whole lot of our product strategy. So we feel very, very positive bullish and positive about those. I just don't have the numbers to talk to you guys about this quarter

Okay, great, thank you very much. And Andy, just a quick question for the model, how do you think about the tax rates for this year and next year given the losses of the first half of the year?

Sure. Let's say the model is at our GAAP tax rate, which is 40%, which is considered fully taxed, so both GAAP and pro forma model 40%.

Okay, thank you very much.

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

Good afternoon. Andy, could you give us the 10% customers?

Sure, the usual suspects -- AT&T, Sprint and Verizon. We also had, as you know, we were in the PC OEM business for a few years there, we had a contract closeout payment in the first quarter from Hewlett Packard, which kind of bounced them up a little higher than they usually run at. So those were our key four for the period.

Do you have the percentage for the largest?

Our largest was 20%.

Okay, and who was that?

That's Verizon.

Okay. And then can you talk about, Bill, or Andy, for that matter -- so, do you think overall mobile broadband subscriptions industrywide, with your three or four top carriers, have declined since the back half of 2010? Just because of the pause, there's a transition to 4G -- trying to get a sense of if there's been an overall deceleration in mobile broadband subs that your carriers have seen.

I think there's a couple of things to kind of think about. When you make a transition, as is going on between 3G networks and 4G services, the biggest consumers for 4G, at least early on, will be the enterprises. The enterprises, however, need to see a couple of things. They need to see a network footprint that covers all their operating areas, that's large enough to provide effective service, and they need to then be able to test the new devices, the new service offerings, to assure themselves that they indeed can reap the benefits from the faster speed that 4G is advertised to give to them. You know, I think that's an interesting point that also needs to be made -- there was a question earlier about hotspots. The enterprises are going to probably be the last to adopt mobile hotspots. There's a lot of security issues and things going on that need to be dealt with there that the enterprises are going to need to try to satisfy themselves that they're not opening themselves up to any security breaches. I think the enterprises will be buying either embedded modules, or laptops with embedded modules, or USB dongles going forward. I really think, and I think I've said this before, that their entry to the market will be a phenomenon in the second half of this year and on into 2012. So that's maybe the best way I can answer that question.

So, if we were to look out, maybe this time last next year, I know that's a long ways out, but do you feel like your share of the connection manager market with your top four carriers in the US will change from here to there, that is, your share of devices that actually have third-party connection managers on them?

If you're asking me if you think our share of the market's going to get smaller, my answer is an absolute no. I think our market share, if anything, will continue to grow, and it will be driven by the fact that we have a solution that will speak to the needs of a variety of different devices and form factors, and that it makes it easy to do business with Smith Micro. These companies have been doing business with -- these carriers have been doing business with us for years, they know we know the space, they know we are the leaders in this space. That's why we're scoring wins offshore. We'll have more wins to announce out of Asian-Pacific in the not-too-distant future.

We are clearly in a dominant role. There is always going to be competition, all of us have competition. But I think the biggest factor is, to compete against Smith Micro, competitors really only have one thing they can play with, and that's probably price. To stay up with us on the technology side, to keep in front of us, or just try to stay even, is almost impossible because we're moving too fast. So, while I am always very respectful of our competitors, I believe that that right now is the least of our problems. I know many have thought that that's one of our major problems. I don't agree with them. And I do so respectfully. But we'll see

Got it. And then, one clarification, I think. Hotspot manager GAs at the end of the quarter, same type of timing on the hotspot maker products, maybe they're one and the same, maybe they're separate --

Let me clarify that quickly. We're going to have one hotspot management product that will have a variety of features and capabilities. We're not going to have two products -- that nomenclature, which was one that we used earlier, became confusing to the market and so we've kind of consolidated our naming conventions, and that's what we think of it.

So, are you -- the hotspot manager, are you as confident of your ability to get on tablet, Android tablet-type products as you are on the hotspot pucks?

Yes, I'm very confident in our ability to penetrate both the puck market as well as the Droid, whether that be handset or tablet market. And I look forward to being able to talk about that. But that's a conversation we'll have to hold for future conference calls. We'll deal with the news we had to deal with today and then we'll move forward from here.

Got it. That's all I had, thanks guys.

Thank you. And our next question comes from Howard Smith with First Analysis. Please go ahead

Yes, thank you. Most of my questions have been answered, I just want to confirm, do you think HP was a 10% customer in the quarter?

Yes.

Okay. Could you talk a little bit about the receivables? It looks like there's some things that have been hanging out since year-end, maybe you can provide some color on that.

Sure, it's pretty simple, we had one of our large customers display balance sheet gains, and they held a $10 million payment until April 1, so as of April 1 the DSOs were down at 70 days, which is normal for us.

Okay, very good. Thank you, that's all I had

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

Thank you, good afternoon. By not having the mobile hotspot manager out until next quarter, can you quantify maybe how much money you left on the table, do you think that's like a $1 million or $2 million revenue opportunity that you were just not getting because it's not coming out until the end of this quarter?

Scott, this is Tom. I think when you look at our largest customer, they didn't really launch the 4G LTE mobile hotspot puck until I think, literally, the last of the quarter, so it had virtually no impact on our first quarter revenues. So going forward I think time will have to pass here, we'll have to get a better understanding of the product mixes before we can really report a more accurate answer for you.

When you look at the international markets, you found a couple customers, you announced some interesting support for SODA from some international guys that are large, like Reliance. Can you describe what kind of phases -- obviously some of these markets are still 2G going to 3G, what kind of phases and how big they can be, Reliance has a lot of customers but they're delivering 3G. Talk about the transition there. Maybe what kind of percentage of revenue do you want international to be as you guys exit this year?

Let me just talk about the transition, because I think it might serve us all well, I mean, it's just kind of a thought that I've had as we've gone through this move from 3G to 4G. I think a lot of us thought that the move to 4G would be probably about as dynamic as the move to 3G, and it really hasn't played out that way as yet. And I think there's some causal factors. Effectively, when the carrier moves from 2G to 3G it's the first time that carrier can really offer a quality mobile broadband experience. This is the case that's going on right now in the Asia-Pac marketplace. And therefore the timing to sign a number of Tier I carriers in the Asia-Pacific area -- this is really crucial, and when we are able to announce exactly what products they are taking, you should rest assured that the first product announced is just that, and that there are others to follow. We are in the process of exciting deals with these carriers for multiple product offerings. By and large, almost all these carriers are very strong supporters of SODA, and they will help drive the adoption of SODA by some of the world's largest device manufacturers. So I think that covered part of your question, you may want to come back now with the other part.

The other part is, do you guys have a goal, or kind of an international revenue goal or percentage of revenue that you'd like to exit this year in international?

Yeah, not really, when you start looking at what's going to happen this year, the new product initiatives, whether SODA-driven, hotspots, manager, mobile network director and so on. You know, our largest option is going to be here in North America, just based on the sheer scale of our customers. We're going to keep announcing wins, but it's just like anything else, we've been idling around somewhere a little bit less than 10% international, maybe 10% moves then to 12%, then 15%. It kind of edges its way in. But still, North America is going to be the first big push for our new initiatives while we sign these other carriers, and, as you know, all of our contacts typically start relatively small and grow from there. It's good seeding for 2012 and 2013.

When you look at the big carriers like Reliance, and they all have support for SODA, how should we interpret that for them becoming actually our real customers buying product versus an industry supporter of a standard?

You just need to be patient and wait for the releases to come out, Scott. That's all I can say

My last question is, can you talk about some of your smaller competitors, their go-to-market strategy, are they coming into prices in the market -- do any of them have anything, or directing their transition to more of a platform like SODA that can be competitive in the future?

Let me just answer that in a couple ways. When you talk about some of our smaller European competitors, and even Asian competitors, their reach from a platform perspective is somewhat limited. As many of you are well aware, it looks like we have a new competitor entering our space with the announcement yesterday of acquisition they made. And they are taking, at least talking somewhat, of a platform approach. Of course, they were clear that the company they bought has no revenue, and hasn't really shipped any products yet, so we'll just kind of have to wait and see. We will be very mindful that they could be a reasonably challenging competitor. But they have to catch up with eight years of experience that they don't have. So we'll wait and see.

Scott, this is Tom, just a couple things I want to add to that as well. With respect to the complexity associated with actually delivering the next-generation technology and having a platform play, there's a variety of technologies that in and of themselves are very complicated that we have integrated into a platform that we would go to market with today. With things like creating an API standard and interfacing with hundreds of different types of devices on multiple protocols, multi-network protocols is a simple thing to do. The ability to actually manage those devices, the hardware, the software, the device management capabilities, that in and of itself is a tough technology. The ability to manage policy management, coming from the carriers that we hold, policy charging, controls, (inaudible), rules, functions that the carriers have today to interface with that is a difficult challenge. Security, IP, IP sets, IP mobility, mobile IT, anchoring to a carrier's home system. All of those things are very, very difficult technologies and they take a long time to build and develop, and we've been working at it for a long time. So we think we've got a great platform story in the marketplace today. In terms of the smaller competitors that you mentioned, you know, a basic plain old connection manager, an ethernet dialer, if you will, that's tough enough technology, but when you start looking at building an integrated platform, and a really comprehensive approach to helping your carriers manage the new network architectures that they have, that's a different story, and we think we still have a big competitive advantage there.

Okay, thank you

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

Hey guys, how's it going. I think you mentioned in the press release that you're expecting the pace of mobile broadband prices to sort of return to an improved order level in the second half. Can you just give me some details in terms of why you're confident that that will happen, in terms of -- are you aware of maybe more new devices coming out from your customer, whether it's maybe internal changes in their sales force, marketing, or is it really maybe that the broadband uptick might be from new wins, maybe not from your largest customer?

Will I think -- let's kind of look at that in a couple ways. You know, clearly, as we stated a number of times, our largest customer had a lot of inventory and a lot of licenses of our software that needed to be burned through. And that's an ongoing process, it's happened throughout Q1, it looks like it'll happen throughout Q2. But at some point in time, it's just sort of a law basic physics, they're going to run out, and they have to start buying. And we are monitoring that closely, we are having continual dialogue with our customer, we are continuing to grow our relationship there. And we feel comfortable, you know, that that will happen sometime in the third quarter and that that would yield the things we're talking about.

A couple of other things, Bill, too, to add to that. We certainly have the better visibility into the network buildout plans as well, so our largest customers, who announced 38 markets in December and 110 million POPs has recently gone public with their plans for the rest the year of having 175 markets filled out by the end of the year. So they'll undoubtedly be a little bit more aggressive about marketing, and we know there's a variety of devices, different form factors, embedded, non-embedded types of modems that we're actually working on right now to support future rollout. So as Bill said in his comments that he has, we've got visibility into the causes, we have some visibility into, obviously, these initiatives going forward. The adoption rates, we'll have to wait and see exactly how they turn out, but we know there's a lot of activity that points in the direction of growth in the future.

And clearly some of the early hiccups, both with devices as well as with the network itself, that have been well-publicized, need to be worked through, and they are being. And it just takes a little bit of time, but -- that's the best way I can answer your question, Lauren.

Okay, that's very helpful. And then, the 4G MiFi device that we're no longer on, was their a rationale for why Verizon went there? Could you just kind of talk a little about -- my thought was that they like to use one vender because you guys are optic on all devices -- was there a technology change, or anything that happened where that strategy got changed? And would that threaten any of the dongles at this point?

No, they're very different devices. So, you interface as a user to the MiFi device through WiFi, and so the thought was that anybody can use WiFi that comes with their PC to get to the device. The primary reason that our software was shipped with these mobile hotspots initially was to get them set up. It's a rather cryptic, somewhat crude approach that the user has to go through to get them set up. That in itself wasn't necessarily strong enough rationale for the carrier to incur the expense, and they looked at other carriers around them, as T2, T1 carriers, that were shipping those software with MiFi. I think that's what led to that decision.

Now let's talk about where I think things are going. And I think you're going to see a number of carriers, Tier I carriers, in North America as well as other places, that will start shipping software with the MiFi devices or mobile hotspot devices. And this is being done through experience. There was very large carrier in Europe that initially made a decision that they just didn't think there was a need for any software with a mobile hotspot. Because they've gone through the experience of deploying these devices into the market, they've come a full 180 degrees and they're back talking with us about the need to deploy a mobile hotspot software product, pronto. So these are the kinds of things that will happen, and you just kind of sometimes have to sit back and let the market take its course.

Alright, but why was the, you know, it was the 3G device you guys were on versus the 4G, was there something technology --

We predominantly helped with the activation process with that, given that we had done a lot of work with that customer to help with activations for all of their mobile broadband services in support of the activation, permission and function, both on the client side and on the service side. It was an easy way to get to market with a consistent activation procedure. They've moved to a sort of over-the-error telephone call for activation. That was the primary reason why that customer chose to work with us initially.

Okay, good. Just last question, I thought Dell kind of had a -- structure a little bit, and I think at one point you guys talked about they were running in the 3 million level. Has that relationship changed at all, given I think you didn't mention them as the 10% customer.

Well, seeing as how for about the last four quarters' conference I've said consistently that the PC OEM market is one that we found difficult to function in and difficult to make money, we pretty much told everybody we were going to try to exit from that space. So, that's really what it's all about.

Okay, thank you.

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

Yes, thank you, good afternoon. Wanted to talk a bit about the device management software that you have, I guess a relationship with HTC. The sales that the Thunderbolt has had, and other devices, has that had any material impact on your revenue thus far.

Larry, that's an interesting question. It's a nice piece of business, however the AFCs for clients on the devices are relatively low, and as such can make it really material in our numbers that's challenging. By that, if -- I would not say that we would not take a lot more of that business if it was available to us, been offered to us. It's good solid business, it just isn't -- you've got to sell millions and millions of units to generate a meaningful number.

Just my impression is, with respect to the hotspot manager and similar products, is that it's probably going to be driven by the carriers rather than the OEMs in terms of adoption, is that a correct assumption?

Yes, I think that's a very good assumption to take. However, it also is going to require a lot of cooperative effort between Smith Micro and the various OEMs, be that handset OEMs, or all the hotspot puck OEMs to help give a uniform experience to all the customers of a carrier that are utilizing the variety of devices that are going to be available

A right, thank you

Thank you. Our next question comes from the line of Peter Misek with Jefferies and Company. Please go ahead.

Hi, thank you, this is Jason Ross for Peter. You touched on this already, but in addition to the hotspot manager can you give us as much detail as you could for the product road map for the rest of the year, specifically in terms of timing and what you expect in terms of having a significant financial benefit for any of them. Thanks.

Okay, well, I think we've talked about hotspot, we've talked about mobile network director, the analytics product is also in the launch phases for the next run of it, and we aren't looking for further adoptions. The video product, we have not announced the first customer, however we have one and we may even have a couple. We should be moving forward on that front. We're also working closely in the videoconferencing area, really focused on the Cisco TelePresence standard as a way to offer a video capability and conferencing capability to a wireless device, be that a handset or tablet. So that is all on track for the current year. We will be continuing to upgrade it, our (inaudible) now, product offering, look to further strengthen that.

I guess all in all, without getting into all the weeds on the subject, we have a strong product road map in all categories for the balance of the year, through 2012 into 2013 that were executing against. We share these road maps with our customers, so they understand when different features will be coming to the forefront. We try to match our road maps to the customers' requirements and leads as much as possible so that we can really provide a service offering of our product that will help them compete in the marketplace. I think we've got a pretty strong product lineup, and we're obviously, you know, were still working on a number of creative initiatives on the production management standpoint, so I don't want to say that that product doesn't -- isn't going to continue to grow because that isn't true, there's a full line up there as well.

And so, is it safe to say that more to the mobile hotspots for the first six months, have to watch for those, probably going to be minimal revenues.

It depends. If the product is an upgrade to current shipping product, as it will be in the connection management space, that can have a rather profound impact immediately. If the product is a first-time launch, that one will grow over a period of time.

Great, thank you.

Yep.

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

Thanks. Bill, Tom, maybe you guys can chime in on this together. I'm curious, now that you've got network director together and heading out the door soon, and you've consolidated the name on the hotspot manager product, can you offer a little more detail on how your marketing strategy may have changed since you talked to us in November at the analysts' day? And maybe offer a little insight on the competitive environment, whether or not you think you're butting up against some of the guys in the OSS or BSS states.

Well, let me take the last one first, Kevin. This is Tom. I don't think we're butting up against any of the players in the OSS, BSS base, and in fact I think the opportunities to partner with the number of those types of software and hardware guys, they are particularly in the policy enforcement and policy control functions, those are the areas where there's actually a lot of collaboration taking place, particularly around the mobile network director function. So, I don't really see that as competition, I see that more as opportunities for helping carriers create good strong ecosystems and build better products together. With respect to the overall marketing strategy changes, I think Bill made a comment earlier obviously about consolidating what we were initially targeting as two separate product offerings, with the hotspot manager and the hotspot maker. We've consolidated that into a single offering, with different features or modules that will turn off or turn on depending on the customer's needs. That will include a policy enforcement agent as well as the hotspot management, the hotspot maker, the security elements that we've discussed earlier.

Some of the changes in the go-to-market strategy have resulted from the collaboration that's taken place with the existing customers, some of the SODA partners. What they see is really the key needs, and in addition to that we've gone out and we've worked with focus groups, and we've helped random users how this product offering compares to other offerings in the marketplace today, whether that's just a mobile hotspot puck or whether that's a hotspot on an Android type device or another smartphone. And that's helped us revise our go-to-market strategy and our marketing efforts as well, and we'll continue to revise those in an iterative way as time moves along and as we see more adoption in the marketplace and get additional feedback from our customers.

Can you expand on that, Tom, just you give me a little insight on how you think that's changed the sales cycle?

Well, okay, Kevin, I don't think it's really changed the sales cycle at all. I think that, you know, you have to have the product shipping before you can close the deal, and you've got to go through, especially in some of these newer areas, certain early trials with the key carriers before a full deployment can happen. And I don't think the time table has changed, really, a bit.

Okay, I guess I didn't ask it in a proper way, Bill. I apologize. It just seems to me that you're coming to the carrier with a much deeper product that goes much deeper into their networks. The connection manager fits pretty much outside, but the things that you're talking about helping with now reside much deeper within the further levels of the network. And, it just seems to me that they need to have much more faith in the capability that you're able to bring to them, and it would also seem to me that might be part of the reason that some of these things are pushing to the right. Now, granted, Verizon's network isn't nearly as pervasive as you would hope to be, and granted, that's coming, I'm just curious as to whether or not you think that it's taken some time on your side to work with them, demonstrate your capabilities and have your product in line.

Okay let me try to address the different ways that came out. When you look at connection manager, hotspot manager, global network director, you're really talking about products that are primarily client products. They may interface with servers within the central office, some of those servers for policies, et cetera, really don't come from us, they're already there. You know, what our mobile network director does is respond to those policies based on where the user is in the world, and, you know, the calling patterns of that user.

So, I would say that even if you look at products like visual voicemail, or push-to-talk, or other products that, you know, some of which are both client and server-related, clearly visual voicemail resides in the Tier I carrier here in North America, and has prospered substantially in the last few quarters, and we expect it will grow even faster going forward. First off, we've not endorsed the concept that anything has moved out, because I don't think it has. And second, I don't think -- I wouldn't endorse the concept that a carrier will have difficulties doing business with Smith Micro because we are not necessarily known for building infrastructure services. We've had them, we're in the DM area, we're in DM area in a lot of places, but, so, I think we have credibility across the board, but when you look at where the real money is going to come from going forward with all various product offerings, they're predominantly client-based products. And that's something nobody knows better than Smith Micro.

Great, Bill, thanks very much for the clarification. I appreciate it.

Thank you. Our next question comes from the line of Charlie Anderson with Dougherty and Company. Please go ahead

Good afternoon, and thanks for taking my questions. Just a clarification, Andy, on your top customer, I think Bill said down $13 million you said 20%. I'm getting 25% if I'm doing my math right there, or is it a little bit higher than 20% in the quarter?

20%.

20%, okay. If you can just talk about the ASPs for mobile hotspot manager. I think you guys have talked in the past that that would be on par with your connection manager. Obviously that's going to price a little bit different right now, you know, Verizon has had people on a pre-trial for using the hotspot on the phone, won't be a similar pricing engagement the way it is right now on a USB or a puck. I just wonder how you guys feel like you're going to be able to maintain that ASP given the pricing dynamics change a little bit for those kinds of products.

I think that's a good question that, you know -- it's really a function of volume. When we were earlier talking about a product that would sell for, effectively, a similar ASP as a connection manager or even sometimes slightly higher. We were really more addressing our focus to the puck market, which is, I believe, going to always be somewhat smaller. But when we get to the point where a carrier is deploying a hotspot management product that ships with every single Android device, for instance, they ship, you are now talking about an order of magnitude that just pales, probably, the puck market and the connection manager market combined. Therefore the ASPs will most likely be somewhat lower. But then that effect is the volume is going to be so huge, and it is software at the end of the day, so we're still looking at, you know, 90%-plus margins on the software. It's great business.

Just maybe a quick follow-on to that. You guys obviously have a mix shift all last year in terms of your traditional USBs and pucks. I wonder how that shifts those versus the smartphones that are being used as a hotspot, as we get back to -- as you guys feel more normal levels at the end of the year, what kind of mix shift are you assuming there?

I mean this is sort of crystal ball-gazing, you guys are better at it than we are, but I think that you're -- I don't know by the end of the year, but maybe by 2012 or 2013 it might be reasonable to assume that at least in North America that half of the users access the mobile Internet via traditional devices that require a connection manager, and maybe the other half would do so utilizing a MiFi device. I think most of the MiFi devices, especially in the later time frame, will be either tablets or smartphones that are operating on 4G, where the user can browse the device simultaneous with the capability of talking on them, which will require 4G, not 3G. When you look at the current market, there are a number of large carriers that at this point really have not launched in a significant way, global hotspots created and they don't even provide for the capability of utilizing mobile hotspots -- excuse me, smartphones as mobile hotspots. So that will change, that will change through the balance of the year and into 2012, and that will obviously impact the numbers.

Thanks for taking my questions.

Thank you, and at this time I'm showing no further questions in my queue, I would like to turn the conference back over to Mr. Messman for closing comments.

Thank you everyone for joining us today, please feel free to call us if you have any further questions. We appreciate your interest in Smith Micro and look forward to speaking to you in early August. Thanks again

Ladies and gentlemen, this does conclude the Smith Micro first quarter 2011 financial results conference call. Thank you for your participation, and you may now disconnect.