Smith Micro Software Inc (SMSI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Smith Micro Software second quarter 2011 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Tuesday, August 2, 2011. I would now like to the turn the call over to Charles Messman with the MKR Group. Please go ahead, sir.

Good afternoon and thank you for joining us today to discuss Smith Micro Software's second quarter ended June 30, 2011, financial results. 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 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, it's financial prospects and other projections of its performance, the Company's ability to increase its business and the anticipated timing and financial performance of its new products and potential acquisitions. Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the Company's products from its customers and their end users, new and changing technologies, customer acceptance of those technologies, new and continued 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. Before I turn the call over to Bill Smith, Chairman, President and CEO of Smith Micro, I want to point out that, in our forthcoming prepared statements, we will refer to certain non-GAAP financial measures. Please refer back to our press release, disseminated earlier today, for a reconciliation of the non-GAAP financial measures. With that said, I'll now turn the call over to Bill Smith. Bill --

Thanks, Charles. Good afternoon everyone and welcome to our second quarter ending June 30, 2011, earnings conference call. Revenues for the quarter were $16.1 million, in line with management guidance provided on the May 4, 2011, first quarter conference call. Non- GAAP gross margins remain strong at 86% while profitability played out, as we expected, with a non-GAAP net loss of $5.2 million or $0.15 per share, as we continued our investments in innovation and adaptation of our technology and product line to address the emerging marketplace demands. Combined results produced from our top 3 carrier customers, Verizon, AT&T, and Sprint in Q2 were up approximately 25% sequentially from Q1 2011, but remain well below the pace of sales for Q2 2010. Each of these customers represented 10% or more of our quarterly revenues on an individual basis.

We saw very nice gains from Sprint, who came in as our largest customer for this quarter. At Verizon, our revenue recovery remained in a state of pause as sales of our core connectivity product continued to trail well behind 2010 quarterly levels. They've made great progress on their network build out and transition to LTE, and we're anxious to see how the launch of new geographic markets and corresponding marketing campaigns impact our sales ahead. We continue to maintain a strong relationship with Verizon and we're excited about the collaboration that's taking place to support future device rollouts. In the face of what has proven to be a very challenging times for our Company, we are encouraged by the interest from a number of customers for our innovative new products that help them optimize the mobile experience for their end users.

We continue to invest in R&D to aggressively productize our technologies that will position our Company for further participation in the opportunities emerging with the expansion of 4G services on a global basis. We've made great progress in the development of SODA, and we are pleased to see carriers such as Sprint, Comcast and Reliance, along with other industry leaders such Alcatel-Lucent, Huawei and ZTE join as early members of the SODA Innovators program. Work on new offerings, such as our Mobile Network Director and Mobile Hotspot Manager Solutions, combined with the evolution of our connection management software to an integrated platform to better engage, monetize, and retain subscribers, remains a key priority. The investments we are making to enable a more compelling broadband connected experience are critically important to our future. I will discuss the benefits of pursuing the development of these innovations, the opportunities that they open and the impacts to our expense structure in more detail after I turn the call over to Andy Schmidt, our CFO, to discuss our financial results for the second quarter in greater detail. Andy--

Thank you, Bill. First, let me go through 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 on 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 for both 2011 and 2010 are non-GAAP amounts. Our earnings release, which we 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 and 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 totalled $2.3 million for the current period broken out at follows -- $5,000 cost of sales, $643,000 selling and marketing, $385,000 R&D, and $1.23 million for G&A. In terms of amortization, the total for the current period was $2 million, broken out as follows -- $1.26 million cost of sales, $780,000 selling and marketing and $62,000 R&D.

Moving on, for the second quarter, we posted revenues of $16.1 million and a loss of $0.22 per share GAAP and $0.15 per share non-GAAP. Revenue for the quarter compares to $31.4 million for the same period last year. International revenue was approximately $1.8 million this quarter across all business groups. For 2011, we are reporting revenue as wireless and productivity and graphics. As we have 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 revenue as a whole versus components of the platform offering, our wireless segment reported revenues of $13.8 million as compared to $28.3 million last year. Our productivity and graphics segment posted revenues of $2.2 million as compared to $2.9 million last year. Total deferred revenue at June 30, 2011, was $716,000.

Switching to gross profit, non-GAAP gross margin of $13.8 million compares with $28.9 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 85.7% for Q2, 2011 compared to 92.3% for Q2 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, 87%, productivity and graphics, 79%. Switching to operating expenses, non-GAAP operating expenses for the second quarter of 2011 of $22.6 million decreased by $0.7 million from Q1 2011, driven primarily due to the timing of trade shows and corporate sales meetings. From a year-over-year perspective, non-GAAP engineering expenses increased 15%, selling and marketing expense decreased 2% and administrative expense, which includes cost of facilities increases 25%.

Total non-GAAP operating expense has increased 13% year-over-year primarily driven by planned head count additions and infrastructure investment. Non-GAAP operating loss for Q2 was $8.8 million, as compared to an operating profit of $8.9 million in Q2 of 2010. Non- GAAP net loss for the second quarter was $5.2 million or $0.15 per share as compared to a $6.8 million or $0.20 per share profit last year. From a balance sheet perspective, our cash position closed at $62 million at June 30, 2011 -- a decrease of $10.6 million from the beginning of the year, primarily due to investment in capital equipment to build out our data centers. Network and capital at the end of the quarter was $69.2 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. Before I get into further details on the quarter and our vision, I want to take a moment to acknowledge the changes made within our Board of Directors. I want to thank each of the Directors, who have departed the board, for their service to the Company along with their advice and counsel during times of growth and challenge throughout their tenure. I also want to recognize our newly appointed members of the Board, Andy Arno and Greg Szabo. Andy and Greg each bring unique skills and seasoned business experience that will add strength and diversity of perspective to the team. And I want to officially thank them and welcome them to Smith Micro.

There is no doubt that we are experiencing an onslaught of change and transitions in our industry. Some of these changes may pose threats to our business, if we remain in a static state. But we see great opportunities that can be seized during these dynamic times. The key to our financial recovery, our innovation, and execution and that's what we are focused on. The global trend for increased connectivity to the mobile internet across an increasing range of mobile devices is stronger than ever, and that is driving our innovation. Our core mobility business has long benefited from our unique ability to help customers better reduce the complexity of making and monetizing mobile broadband connections from personal computing devices. The task that we are now focused on is making the transition from supporting mostly PC users connected to a single network to supporting many new devices like smartphones and tablets, which may be connecting to multiple network types and services.

I want to give you a brief overview of our vision for delivering new products and then discuss how that relates to our business model, growth prospects, and underlying infrastructure our Company needs to transition back to a profitable growth business. As the industry devices technologies and business models have been evolving, so, too, have we. We have been working hard on new software architectures to enable the ability to go to market with a platform strategy. Over the course of the last several quarters, we have completed initial development of what we call our core software strategy. This approach essentially makes the key components of our primary products into software modules that can plug and play together in new combinations. This architecture supports the foundation of our integrated mobile platform that can adapt and expand rapidly as customer needs change and new opportunities arise. It also enables us to deliver solutions rapidly across many different mobile platforms from hand-helds to tablets to mobile Hotspot devices as well as fixed platforms such as set top boxes and IP enabled televisions.

We have been aggressively developing and refining new applications that are leveraging our core architecture for new products, including our Mobile Network Director, our Mobile Hotspot Manager, and other solutions not yet announced. Most importantly, it enables us to deliver solutions at a lower development cost with higher functionality, greater differentiation and an improved user experience. Our current customer base, as well as many new prospects, have validated that the end user experience is of critical importance to retaining and upselling their subscribers. As service providers contend with the changing customer relationships, they seek new ways to engage their audience and create a user experience that simplifies connectivity. An experience that gives more visibility and control over their connected devices and data plans, which is becoming increasingly important, as operators move to tiered pricing plans and premium service offerings. Our integrated platform with all of its components such as connection management, security, device management, IP mobility, network optimization, analytics, policy control, and a flexible user interface layer will allow our customers to create a tailor made experience for their end users, enabling new revenue opportunities and improving customer satisfaction.

Another component of our platform adapted video delivery is allowing us to expand our reach into new opportunities where wireless content is being integrated across multiple screens. In the second quarter, we closed the deal with a leading provider of interactive television systems serving the hospitality industry. This new customer will use our video solution to stream television programming and other content to cruise ships, hotels, and casinos, where guests will be able to view their content on televisions in their rooms or on tablet PCs as they roam the ship or lay by the swimming pool. Until now, streaming content to mobile devices, as well as IPTV systems, required at least 2 different vendors to support. Smith Micro is able to offer an engaging multi-screen experience using our video solution to deliver content to IPTVs, desktop PCs and virtually any mobile device from a single content stream. The opportunities to monetize multi-screen content are very exciting, and we are leveraging all of our platform assets to create a flexible and highly differentiated solution to pursue these new opportunities.

Along with innovating and investing in our overall platform, we continue to invest in SODA, which stands for Secure On Device API, designed to extend our platform capabilities across a multitude of device types, manufacturers, and operating systems. Our SODA Innovator program continues to expand with new participants joining this quarter from key device OEMs, Huawei and ZTE. They join other industry leaders such as AT&T International, Sprint, Reliance Communications, PT Bakrie Connectivity, GCT Semiconductor, Comcast Corporation, Boyd Telecom, Bell Canada and others in understanding the value of a standardized integration layer across [herof genius] mobile platforms, designed to deliver more functionality, higher quality devices to the market faster. We are finding that the combination of SODA and our comprehensive platform approach to deliver improved broadband experiences is enabling Smith Micro to better execute on another pillar of our strategy, which is to expand our business internationally. Recent wins with PT Bakrie Telecom in Indonesia and MTS India and other active, promising opportunities in Asia, Europe, and South America have all advanced due to core architecture, our innovative mobile experience platform strategy, and our thought leadership on SODA.

To execute on our platform strategy and expand our footprint globally, we've had to make investments. With the financial position we have been in for the past two quarters of the year, it would be tempting to cut costs to match revenues. Moving too swiftly on that approach would have derailed our ability to create the next generation platforms for our products, scuttled our SODA initiatives and halted the development of a sales infrastructure designed to service new global markets opportunities. Much of the investment needed for the future has been made, but we will need to continue our investment. That said, throughout the past two quarters, we have been working aggressively to rationalize products, optimize operations, and align costs. We've taken dramatic actions to table a number of programs, consolidate offices, projects, and teams and cut costs associated with people resources. By the end of the year, we will have consolidated functions, facilities, and teams from our Chicago, Herndon, and Austin offices into our Pittsburgh operation. After the expense effects of severance and costs associated with closures, we should begin to see quantitative efficiencies in our expense lines beginning in 2012 and improving throughout the year.

We continue to look for new ways to drive costs out of our business and we will remain vigilant to any changes that may cause further course correction. To execute on our plan to drive new revenues through the sales of these new products and by expansion of our customer presence, we will continue to make investments in sales and marketing. Through the combination of improving our expense efficiencies and increasing revenues, we hope to get back into a profitable state as soon as possible. While we view our mobility software business as our core business and the main driver for future growth, we continue to manage our productivity and graphics business in a profitable way. Revenues for this segment in Q2 were $2.2 million, up 28% sequentially from Q1 2011 yet still down from the $2.9 million posted in Q2 of 2010. We have completed a restructuring of this unit and have aligned costs within the segment to run it properly at current revenue levels. We are pleased with the progress and will continue to refine our operation and strategy for this business in order to maximize overall returns for Smith Micro and its shareholders.

Turning to revenue guidance, through Q3 we anticipate continued pressure on our revenues as the adoption cycle of 4G mobile broadband services, particularly in the enterprise remains in the early stage of deployment. As the 4G networks are further rolled out, the mix of USB modems, embedded modules, mobile hot spots and tablet computers sold will begin to get sorted out. And we should be able to get enhanced visibility in the future revenues. But as of right now, we expect Q3 revenues to be in the range of $15 million to $20 million. We still anticipate sell through of existing software inventory at our key customer to get work through by summer's end. As a result, business for our core connection management software should begin to pick up in Q4 as new devices get launched, expanded network deployments take shape and as marketing campaigns kick in. We continue to work to balance the cost of investing and innovation in the next generation products with an eye towards prudent cost management, while revenues build from our new initiatives.

We remain confident that we have the strategies to rebuild the momentum and to get our business back to quality revenue growth and profitability over the next 4 to 6 quarters. We look forward to updating you on our progress and the new initiatives as developments happen. In closing, I'd like to point out that the Company has faced tough head winds in the past. Each time, we've analyzed the situation and devised a strategy to get the business back on course. We are fortunate to have a massive wireless market in front of us that is undergoing an exciting transition to 4G services, in some parts of the world, and 3G in others. And we intend to leverage our assets to capitalize on these opportunities ahead. With that, operator, I'd like to open the call for questions.

Thank you, sir. We will now being the question and answer session.

(Operator Instructions)

Mike Walkley, Canaccord Genuity.

Bill, maybe you could elaborate a little further just on the relationships with your top 3 carrier customers. Have you lost any market share within those customers? Or is it just the mix of products with the technology upgrade more to Hotspots you're not in versus USB modems? Just a little more color kind of what you're seeing at each of your top 3 customers and what it might take to get your revenue to re-accelerate from the current levels.

Okay. Let's start with our largest customer for the quarter which was Sprint. Sprint -- the momentum there continues to grow. We have multiple products that they are currently shipping. We look forward to having other products shipped by them either later this quarter or next. So, we believe that our growth at Sprint, if anything, is just getting faster and we look for good things there.

Switching to Verizon -- Verizon we haven't lost any market share there whatsoever. What really is more the driver is as you mentioned a transition away from USB devices and embedded modules towards mobile Hotspots. And that has impact our sales of our core of Easy Access Manager that we sell to them.

At AT&T, everything is on track. Nothing has changed. We continue to build the software for the enterprise side of their business and look forward to added sales of other products of, not only to AT&T but, also, to Verizon going forward. In general, our relationships at all 3 of our large accounts are very much intact and very positive, and we see nothing but opportunities for growth going forward.

Okay, great. And just building on that -- with the growth in these Hotspots and the carriers -- 2 of your customers moving to more tiered data plans. What is the feedback from maybe your Hotspot Manager product. When do you think this could be in one of the major customers to help drive some growth for you.

I think I'll kind of lump a couple of products together here that we can look at, our Mobile Network Director product as well as our Hotspot product, both of which will reside in the devices that we currently are not present in.

When you look at Mobile -- Hotspot Manager and the Mobile Network Director, you're starting to look at products that will be in all smartphones going forward -- in tablets going forward as well as serving more traditional markets. We are getting a lot of traction, especially with the Mobile Network Director product and look forward to being able to announce a new customer in the not too distant future. And to actually be able to discuss deployment. We're just in the works on that one.

In the case of Hotspot Manager, we have a number of different opportunities we're working on. Some are more advanced than others. In most cases, with the Mobile Hotspot Manager, we're also looking at the deployment of SODA to make the Hotspot Manager an effective tool which requires the integration of our software into the actual devices. That's a process that's ongoing and we look forward to being able to talk more about that in the not too distant future either.

1 more than question and I'll pass it on. I just want to make sure the cadence of OpEx -- it sounds like you're consolidating some facilities to your new Pittsburgh facility, but you're still investing. It's kind of a flat OpEx run rate, but we should consider for the rest of calendar 2011 that it starts to come down in 2012 Is that the best way to think about it?

This is Andy. Let's just stick with going quarter to quarter on guidance. What you should expect is a slight up-tick in the current quarter and that, as you pointed out we're closing facilities, so we'll have certain costs related with doing so. And then we'll update you on Q4 and go forward at the next call.

Great. Thanks, Andy.

Chad Bennett, Northland Capital Markets.

Just a couple questions. The new -- I think they were new to me -- the SODA partners that you announced, the product guys Alcatel, Huawei and ZTE -- first of all, are those new? And second of all, are those revenue producing relationships?

Yes, they are new in the current quarter. Let's talk about how we make money with SODA. The way we make money with SODA is by selling products that utilize SODA. And that's why it's particularly important that you see device manufacturers of ilk of Huawei and ZTE join the program. By getting SODA embedded into their devices, it enhances our ability to leverage that capability and sell additional product to either our current customers or new customers going forward.

We make our money by selling our software. We don't necessarily make our money by selling SODA. What SODA does is enables the -- our capability to enhance the speed it takes to bring new devices to the make it a lot easier process -- and a lot more predictable. We're pretty excited by what we're seeing with the SODA program. We're pretty excited about what we're seeing from the standpoint of carriers who are either in the process of mandating or have already mandated or thinking about mandating doing forward. That's the essence of, really, some of the drivers of our growth leading in to 2012 and beyond.

Okay. So, with respect to the Connection Manager business and Verizon, I guess the part I'm trying to reconcile is you listen to the Verizon calls and the most recent 1, and I know it's early in terms of device deployment for them. But they talk about their dongle -- and Hotspot business, which I know you're not involved with, and actually being good or growing. And their talking about pretty decent -- again they don't give a lot of detail -- but ramps into the September quarter. How big of an inventory build could they have done if we're still trying to work off inventory into the September quarter? I'm trying to reconcile all that stuff.

It's a fair question. I think the bigger issue and, really, where I want to concentrate, is the fact that we are seeing a technology shift in the market place, where more and more devices that are being used for getting users connected to the wireless internet are mobile Hotspots. Mobile Hotspots in the form of pucks, mobile Hotspots in the form of smartphones, whether those be Droids or iPhones. And they are impacting and eating into some of the market that we traditionally would ship our connectivity software to. The good news is that we have products like our Hotspot Manager and our Mobile Network Director that put us dead square into that market trend transition. So, while it is painful, at the present time, I think there's a lot of reasons to be very positive and very hopeful going forward because we do see a lot of traction with those products.

Okay. And then can you help? One of your perceived new competitors out there, Synchronoss reported the other night -- last night -- and talked about their smart mobility business unit and talked about having a product from that business unit by year end. And they indicated they're already working with a Tier 1 domestic carrier. Any comments there.

I guess you have to ask them who they won the business from? I kind of, in a prior question, I went through our relationships with our top 3 carriers, and they're solid. And we value them. They're important customers to us. We work hard to service them and provide them with great software products, and I think we've done that. So, hey look, we all have competition no matter what business we're in, whether we're building wireless mobility software or working for a bank. We all have to compete in our markets. Competitors come. Competitors go. And I'm sure that the competitor you mentioned will be working hard to try to win business. I don't think they've won any business in our top 3 accounts.

Okay, fair enough. And then, Andy, -- last one for me -- is there a target or something, a range we should be thinking about in terms of cash towards year end? How do you view it?

We're not going that far out with guidance right now, Chad.

Okay. So, but you've extracted probably as much as you can extract in terms of working capital and receivables and what not. Is it fair to say that you're operating loss going forward should kind of mirror what your cash burn is?

I think that's a fair assessment.

Okay, thanks.

Scott Sutherland, Wedbush Securities.

I have a follow-up question. At the start of the year, you recognized an inventory problem at your largest customer, Verizon. At that point you thought maybe a Q2, a late Q2 recovery. Now it's looking like a Q3 recovery. What's different in the inventory, given that Verizon' s commentary that they are selling pretty well these dongles and other units. What's different now, or what's causing the recovery to take longer than you expected.

Well, first off, we didn't identify that customer as you just did so, I'll just keep it to that. But, secondarily, I think that you have seen a transition that is caused by a technology change away from embedded modules and embedded devices towards mobile Hotspots. That is eating into the market share that we would normally service. So, that's really the driver.

When we look at your SODA partners, you have Sprint and, I think, AT&T International. But your 2 other of your 3 large customers, Verizon and AT&T -- as far as I've seen they haven't announced support yet for SODA. Is that something that you should look for that gives more comfort that these relationships remain strong? Or might we never see it?

I think that's something that I certainly hope we can look forward to. And I would be very hopeful that I get to announce that. And, so, I definitely would not take your last approach, because I believe that SODA has a lot to offer to all carriers around the world, including AT&T and Verizon. And I believe that AT&T and Verizon, as well as others will recognize that fact and see reasons to deploy. So, I remain very positive and upbeat about our chances on that side. So, let's just stay tuned.

Okay, and last -- you've announced several international customers this year, but the revenue is not ramping. Obviously, some of those markets could be different. How should we think about the ramp up of these international customers, and when will we see it in the international revenue stream?

As I've said for years now, when you launch new OEM relationships, they start slow and build over time. As you have pointed out, we've closed new customers, but you don't see a lot of difference in the numbers. It's because of what I just said -- we start slow and build over time. But let me kind of change the focus a little bit. Because I think the focus needs to be much, much broader than what's being implied. When we announce a deal with the PT Bakrie or a MTS India or Telecom New Zealand or any of the other opportunities that I expect we'll be announcing in the coming weeks and months, we're talking about the sale of the first product into those carriers. Most of these carriers are new to the wireless data business. And they don't have a lot of infrastructure built out. Therefore, in almost every case, on the intent of the side of the carrier as well as on the side of Smith Micro, is that we will be selling multiple products to these carriers, and the trick is just to devise an effective implementation strategy and schedule to allow that to happen. So, what you're seeing right now is the first product. Start slow and growing. You'll start to see second, third, and fourth products announced over the next few quarters, and that's really what should be particularly focused on and what is really exciting about some of the wins we're getting offshore.

Okay, and Andy, really quick. What was your CapEx and operating cash flow and your wireless revenue again?

Let's get this looked up here again. Okay. We've got wireless of $13.8 million for the period compared to $28.3 million last year. And for CapEx, I'll get to you shortly. CapEx for the period was about $4.7 million, $4.8 million for Q2. We're about $6.6 million in Q1 so total of the year $11.5 million. And operating cash flow I'm going to have to get back with you on that one.

If I heard you correctly, you said productivity and graphics was $2.2 million. That would get us to $16 million not $16.1 million -- I take it that's rounding?

That's rounding. Just back on cash flow here -- total cash flow from operations was $2.3 million, $2.4 million for the period and a lot of that is aided by burn off of accounts receivable of about $17 million.

I saw you cut that in half. Okay -- great -- thank you.

Lauren Choi, JPMorgan.

I think, Bill, you mentioned there was a 25% sequential growth in your top 3 customers, but the total revenue is down 9.5% sequentially, and product and graphics seemed like they were sequentially up. Can you just talk about what's making the rest of it come down. Were there specific customers that underperformed or certain things that went away?

This is Andy, Lauren, and I'll help you with that. In Q1, we had a contract runoff with Hewlett Packard that was that legacy business similar to Dell that we were doing. And that was about a $3.8 million Q1 revenue, in which case we're not seeing it in Q2. So it was a contract end payment. That's your primarily variance.

Got it. And, Bill, so in Sprint, you talked about that you're working with them on several products. Can you just go into more detail on what those products are.

I wish I could but I can't, as I'm sure you guessed before you asked the question. We will get that info out to you as fast as possible, and it's really going to be hooked to launch schedules, as well as when our customer will allow us to talk about it. I think in this case, they will allow us to talk about it in fairly short order, so you'll just have to stay tuned.

Okay. And what about the existing products mentioned? Is that talkable?

Yes, Lauren this is Tom. Existing products are the connection management product that we've had there for quite a while. Obviously, we've talked to you in the past about the visual voice mail product. We've added additional functionality with the visual voice mail product over the past couple of quarters with our voice to text offering. On top of that -- in addition to that, we do some backup restore and synchronization over the air.

Got you. I guess the other 1 is just can you give the exact percentage of total revenue from your top 3? I'm just trying to understanding sequentially how the 3 moved.

All right, Lauren, sequentially, let's go through that then. Sprint in Q1 was about 13%, and they went to 34% in Q2. Verizon was 20% in Q1 -- about 18% in Q2. And AT&T was about 13% in Q1 -- 11% in Q2.

Okay. Great and just last question, Andy. I think last quarter, when asked about cost of controls, and I realize that Pittsburgh move has been going on for some time. I think the answer was something like let's wait -- we're not ready yet to realign costs. But now, it sounds like you are. Were there any changes in terms of -- was it a strategy change or were there some actual revenue sources that may have created the less opportunities so you're reducing costs.

I think way to view it, Lauren -- this is Bill -- is that we had a plan in place for the deployment of the Pittsburgh center. That plan was not fully disclosed internally; and, therefore, we couldn't disclose it externally. We're executing on the plan that we've had, and it's just coming to the logical close that we thought it would.

Okay, but there's nothing else in costs for your re-aligning like revenue streams with costs or anything like that. It's really just from the move. Okay. Great -- thank you very much.

Peter Misek, Jefferies.

Hi -- this is Jason North from Peter Misek's team. I have a question in terms of milestones for SODA adoption and the mobile Hotspot Manager. What things should look for in terms of broader adoption there and then the lag between those milestones and which (inaudible) come forward and results.

I think the way to look at this is the first deployments of Hotspot Manager will be around devices most likely utilizing a Droid operating environment. Those devices could be either smartphones or tablets. That will probably come first, followed by deployment of Hotspot Manager that supports more traditional puck technologies. Did that answer your question? Come back at me if I didn't.

And for when those announcements take place, what's the lag, do you think, in terms of when we'll see that in terms of revenues.

Traditionally, in this kind of product, we can't announce it until the product is actually ready to ship. So, in that case, there will be revenues almost immediately, but I'll go back my comment to an earlier question -- all OEM business tends to start slowly and build over time. So, I would not expect this to be different.

Great. Thank you very much.

Charlie Anderson, Dougherty and Company.

Just a follow-up on the Sprint revenue -- you're up over $3 million sequentially. How much of that was the Connection Manager product versus how much was another product? What I'm trying to kind of hone in on is -- is it recurring revenue -- that big jump up that you had?

Let me put it this way -- we try not to break this out specifically in product groups here, but, as Tom was mentioning, we had an enhancement of our voice text -- visual voice mail product that created a nice bump in revenue this period. So that was one of the key drivers. Connectivity is strong there, but the key driver for the period was that particular enhancement.

The actual adoption and utilization of visual voice maybe and voice to text has been a very pleasant surprise, both to us and our customer. It has been a very hot ticket, and it continues to grow at a very rapid rate.

Is that revenue driven on a per unit basis, or is it more sort of project based where we'll see it more lumpy.

No, it will be a per unit base.

Got it -- good. And then, Bill, you talked a lot about the technology transitions. We're seeing this sort of move to Hotspots -- mobile Hotspots, pucks, and then smartphones. Do you feel, personally, like you've seen the end of this change, or are you still holding out hope that we go back to sort of the mix we've had traditionally, and that gets you back to prior revenue levels? Or do you think, to get back to prior revenue levels, you'll sort of need contribution from other products?

That's a fair question. If you look -- if I could share with you our internal play, obviously, I can't, but we look at it the following way. We believe that USB devices and embedded modules will continue for some number of quarters, years, whatever, as a vehicle for gaining access to the wireless internet. But we do not believe, based on the transition that we're seeing to mobile Hotspots, that it will ever go back to the level that we were able to see and benefit from in 2010. That said, we still believe that, as a company, we can return to the level of business that we enjoyed in 2010. It will require contribution from our new products. The good news is our new products are being very well received, and I think that that's the positive side of it.

The Company, after recovery, will be a much stronger company. It will be based on a number of different products, so there won't be a concentration around a single product offering and will also be based around a much broader set of customers. So we will not see the kind of customer concentration issues that plagued us in the past. So, I think there's a very good story, but you'll just have to bear with us a little bit until we can kind of get everything rolled out and into public hands.

In terms of near term, is it Mobile Hotspot Manager that would get you there the quickest of all the products?

Well, it's the easiest to deploy right now. Did you say Hotspot Manager?

Yes, Hotspot Manager.

No, I would say the lead product will probably be the Mobile Network Director. The Hotspot Manager, because, in some cases, requires deployment of SODA, that tends to take a little bit longer. So, I think, if you look at where the quickest hits will come from, it's probably in the Mobile Network Director. And then in some other technology areas that we haven't talked much about on this call.

Great. Thanks so much.

Kevin Dede, Brigantine Advisors.

I was curious if you could elaborate on your confidence in the enterprise sector picking up as the year plays out. What sort of hints have you gotten -- information you feel comfortable about that you could talk to regarding that?

I think for the enterprise sector to pick up in a meaningful way, the deployments of 4G need to be broad enough from a geographic perspective to allow the enterprise to really focus on it. I think the ongoing testing that the enterprises of 4G technologies continues. I would expect to see the enterprise become more active in the purchasing towards the end of this year or early next year. I also believe that that group will tend to focus more on traditional USB and embedded modules. They haven't necessarily broadly endorsed Mobile Hotspots as yet. There are some security aspects they haven't gotten comfortable with at the present time. But we expect they, too, will start to embrace Mobile Hotspots sometime in mid- to late 2012.

Okay. Thanks. You also have talked about lots of partners with SODA. But we really haven't seen many of them convert, if any really convert to software purchases. And I guess what I'm hoping -- granted you plan on making some announcements in the near term -- I'm just kind of wondering if there's any sort of rough gauge you can give us on the time it might take for someone to enroll in the partnership program to actually rolling out software with your name attached to it.

Yes. I think you'll see some carriers very active in this space throughout the rest of this year and early next year. And hopefully, some of that mystery will be solved.

Okay. Fair enough. You talked about the TV programming deal with a leisure company. I was wondering if you could give us a little insight on the economics of that? Quantify it at all and maybe talk to how the software used in that solution applies to the carrier world.

Yes, this is the our Vidio product. That's video spelled v-i-d-i-o. I know it's spelled wrong, but that's our marketing people at work. Anyway, that product offering is getting traction in a number of different areas. The particular opportunity I spoke about is a fairly exciting opportunity because it really brings the 3 screen concept to fruition and something we talked about last year, and now you're actually starting to see it deployed. There's other plays for extending telepresence -- video conferencing in the corporate world to mobile devices with our extended telepresence video client. There are other opportunities that you'll see for the delivery of video content that is -- that will be focused more on our traditional carrier base. You should see a win in that area in the not too distant future.

Great. Okay.

Thank you. And I'm showing now further questions at this time. I would like to turn the call back to Management for closing remarks.

I'd like to thank everyone for joining us today. If you have any further questions, please feel free to give us a call in the office, and we'll look forward to talking to you and speaking to you in our third quarter conference call. Thank you.

Ladies and gentlemen, that does conclude our conference for today.

(Operator Instructions)

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