Smith Micro Software, Inc. (SMSI) Q4 2007 Earnings Report, Transcript and Summary

Good afternoon ladies and gentleman and thank you for standing by. Welcome to the Smith Micro Software fiscal fourth quarter in year end 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) I would now like to turn the call to Charles Messman of the MKR Group. Please go ahead sir.

During the course of this conference call we may make forward-looking statements regarding future events or future performance of the company. Actual results may differ materially. These forward-looking statements are made on the basis of the views and the assumptions of the management team regarding events and business performance as of today’s date and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after today. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statement including competitive factors, technology and product development, changes in demand for our products from our customers and our end users and our ability to execute on our business plan. Whether the information on potential factors that could cause actual results to differ materially, please refer to documents that the Company files from time to time with the Securities and Exchange Commission, specifically the Company’s most recent form 10-Q filed in November 2007 and our last form 10-K filing. These documents contain and identify important factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements. At this time I’d like to turn the call over to Will Smith, Chairman, President and CEO of Smith Micro. Will?

Thanks Charles. Good afternoon everyone and thank you for joining us. Today we announced our fourth quarter and year-end 2007 results and I'm pleased to announce that 2007 was the best revenue performance year in the history of our Company. We achieved record revenue of $73.4 million. Later in this call, Andy will provide you with the details of our financial performance from the fourth quarter as well as a recap of the 2007 fiscal year. In addition to the growing revenues and profitability, this past year was marked by a number of significant accomplishments for our Company. We made key forward steps in each of our business units with our core connectivity business doubling year-over-year sales. We added several new deals in that unit including U.S. Cellular, Cricket and a major customer that has yet to be announced that we will launch and begin producing revenues in the second half of 2008. The multimedia business added a major wireless carrier and strength as a new customer and we saw this unit continuing to contribute strongly in fiscal 2008. Our engineering and product development teams worked to create a number of new innovative products that provide us with a portfolio platform for ongoing growth. These include our first embedded platform solution with review and our new QuickLink multimedia suite that expands our offerings beyond music, a comprehensive software synchronization suite for videos, photos, music, messaging, personal information management and more. We anticipate that these software products will serve as the platform for continued growth for this division in 2008 and beyond. As you are aware, we were very active on the M&A front closing four acquisitions in addition to announcing the acquisition of the PCTEL Mobility Solutions Group which is now closed and being integrated into Smith Micro. These acquisitions added strategic assess of new technologies, products, customers, geographic markets expansion and management for our continued growth. I am very pleased to welcome into the Smith Micro family these highly skilled professionals and appreciate the efforts and technologies they develop into the Smith Micro portfolio. We are very excited about our expanded product portfolio and the opportunities to take them to the marketplace. Overall results for the fourth quarter were solid with growth in three of our four business units. As we have previously stated in our last conference call, we expected to see a shift in the mix of products from within our multimedia group due to changes in our largest customer’s music marketing programs. We saw the movement away from retail music kits that arises, as it transition to a music manager software primarily being provided in the own box. Although this impacted our top line, with that customer in the fourth quarter, we are anticipating minimal impact on the bottom line as our product model adjust to the changing market conditions. We have worked very diligently in the past two quarters to redefine and expand our multimedia product line to capture opportunities in the future that can create a new model for growth at Smith Micro. We view 2007 as a year of significant accomplishment and one that has strengthened our foundation for future opportunities. We continued to make important progress and build on our momentum as one of the recognized leaders in the rapidly expanding mobility software space. I look forward to discussing this in greater detail, but first I’d like to turn the call over to Andy Schmidt, our CFO to go over the financial results in more detail, Andy.

Thanks Will. 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. Non-GAAP results discussed in this call that are amortization of intangibles associated with acquisitions, stock compensation related expenses and non cash tax substance provide comparable operating results. Accordingly all results that I refer to in my prepared remarks about 2007 and 2006 are non-GAAP amounts. Our earnings release which will be furnished to the SEC in form 8-K continues the 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. Earnings release can be found in our investor relations section at our website www.smithmicro.com. Alright, let’s discuss our detailed fourth quarter results. For our fourth quarter we posted revenues of 20 million and earnings of $0.25 per diluted share which includes a positive $0.03 EPS attributed to favorable year end cash adjustment. Total revenues of $20 million increased from revenues of $17.2 million for fourth quarter of 2006 an increased 16%. International revenue was $1.5 million this quarter across all business groups. Fourth quarter revenue for multimedia that’s $4.2 million down from $8.9 million in Q4 of 2006 due to a shift in product mix, specifically a shift from music kits to higher margin software downloads and CDs. Connectivity and security posted another record quarter with revenues of $9.5 million as compared to $5.0 million last year. Semi Group posted record revenues of $5.6 million as compared to $3.1 million last year. Base solution revenue was approximately $350,000 for the quarter and there is a new revenue stream for us. Finally we reported approximately $270,000 of other revenue which compares with approximately $177,000 for the fourth quarter of 2006. Regard to deferred revenue, total deal revenue for enterprise customers across all product groups was approximately $400,000 this quarter as compared to revenue which we recognize at $265,000. Although deferred revenue at December 31, 2007 was approximately $584,000. Switching to gross profit, non-GAAP gross margin dollars up $15.9 increased $4 million or approximately 33% from the same period last year. Of key significance gross margin dollars of $15.9 million is a $1.4 million or 10% increase from Q3 of 2007. Overall revenues were relatively flat due to the change in how we -- our music product is sold at Verizon. Gross profit increased 10% quarter-to-quarter due to better quality revenue of the new multimedia model. Non-GAAP gross margin as a percentage of revenue was approximately 79.5% for Q4 2007 compared to 69.2% for Q4 2006, a significant increase. Non-GAAP gross margins by business unit were as follows: multimedia 62%, connectivity and security 92%, consumer 73%, advised solutions 55% and other revenue 51%. As we have noted before our margins are driven strictly by product mix. Okay switching to operating expenses. Non-GAAP operating expenses for fourth quarter of 2007 increased to $10 million or approximately $1.6 million from third quarter of 2007. The changes as expected was higher than the expense guidance we give at our Q3 conference call of $9 to $9.5 million as we did not forecast closing the early December e frontier acquisition at that time. $10 million non-GAAP operating expense includes one month e frontier head count infrastructure and marketing costs. Non-GAAP operating margin for the current period was approximately 29.7% as compared to approximately 30% for Q3 of 2007, despite integration expenses associated with e frontier and other seasonal expenses such as audit and stocks compliance work. Non-GAAP net income for the third quarter was $7.8 million or $0.25 per diluted share as compared to $7 million or $0.26 last year. Current quarter non-GAAP net income includes a favorable cash based tax adjustment of approximately $900,000 or $0.03 EPS. That is based on our fiscal year and tax review that takes into account the total fiscal year performance. Non-GAAP diluted EPS without tax adjustment was approximately $0.22. Keen to our favorable tax performance in 2007 has to do with our acquisitions. We were successful in all of our acquisition efforts at negotiating and securing tax free status of the transactions from a Smith Micro prospective. This also holds through for the 2008 acquisition of PCTEL’s MSG group. Alright switching to 2007, in review it was a great year. Revenues increased from $54.5 million to $73.4 million, an increase of 34.7%. Much more importance than our revenue growth has been our improvement of our business model. In 2006 we posted a gross profit margin of 64.9%, but 2007 not only did we post a significant increase in revenues, we posted at 9.5 point increase in gross margin, gross margins of 74.4%. In terms of operating margin, we completed an integrated core acquisition while maintained in the consistent operating margins. Operating margin for 2007 was 29.6% as compared to 29.7% for 2006. Diluted earnings per shares grew from $0.69 in 2006 to $0.84 in 2007. From a balance sheet perspective, our cash position closed at $87.5 million at December 31, 2007, a decrease of approximately $5 million from the beginning of the year. Post our acquisition of PCTEL’s MSG Group on January 4, 2008, our cash position was approximately $26 million. Accounts receivable at December 31, 2007 increased to $13.1 million from $9.8 million, an increase of 34%, consistent with our increase in sales. Networking capital at the end of 2007 was fairly consistent with 2006, $96.6 million for 2007 versus $98.8 million in 2006 despite using cash for all of our acquisitions. Cash generated from operations for the year was approximately $16 million or a very impressive 21.5% of revenue. Primary uses of cash included the acquisition of Insignia for approximately $15.3 million, the Ecutel acquisition for $8 million, payout of the PhoTags earn out of $3.5 million, the acquisition of e frontier for $5 million and capital expenditures approximately $1.2 million. Cash generated from stock sales and stock options totaled $9.1 million year-to-date. Again, I’d like to emphasize that while we recorded record revenues all of our operating metrics overall demonstrated a very strong performance. Now looking forward to 2008, we expect another very strong year. Based on information available at this time, Company expects fiscal year 2008 revenues between $95 million and $105 million. In terms of timing, we expect approximately 40% of the revenue guidance range in the first half of 2008 with 60% in the second half of the year. Back half nature of the revenue guidance is not conditional on new contract wins but driven by both revenue recognition rules and contract wins which we cannot announce until our product ships which is forecast by our customers to be in the second half of 2008. Specifically, we have won three significant OEM deals for which we incurred development expense in 2007 and will incur development expense in the first half of 2008 which we expect to ship and announce in the second half of 2008. In other words, our revenue guidance is based on awarded contracts, not speculation of new contract wins. With regard to gross margins, we expect our business model to continue to improve and expect to post non-GAAP gross margins between 78% and 80%. With regard to operating margin, we expect the first half of 2008 to be affected by the integration of PCTEL’s MSG Group, the acquisitions and development cost for product expected to ship in the second half of the year. As such we expect non-GAAP operating margin of approximately 17% to 20% for the first half of 2008 with the return to our expected operating margin of 30% for the second half of the year. We have had great success with our acquisitions in terms of tax effect. As previously noted all of our acquisitions, including the acquisition to PCTEL’s MSG group for first quarter of 2008 for negotiated secure and a tax free transaction status for Smith Micro. As a result we expect our 2008 cash based tax expense to be 20% of non-GAAP net income. In terms of cash flow we expect to generate in excess of $20 million from operations in 2008 and must stress that while we are guiding to lower operating margin in the first half of 2008, we will be significantly profitable from the non-GAAP reporting perspective and significantly cash flow positive during this period. In terms of house keeping we expect to file our current year 10-K on time which will represent our final audited financial statements for fiscal 2007. At this point I would like to turn the call back to Will.

Thanks Andy. During the second half of 2007 we began working diligently to acquire our primary competitor for connectivity solutions. This asset acquisition of PCTEL’s Mobility Solutions Group significantly straightens our customer base and positions Smith Micro as the clear market leader in the connection management software sector. It is filled by the growth and the mobility; broadband mobility data services. This field also brings with it technologies for the future and our loyal domestic customer base and an expanding international customer base that positions Smith Micro with the ability to explore many cross selling opportunities. This transaction closed in the first week in January 2008 and will be the focus of our integration efforts moving forward this year. This leads us into our multimedia segment. As I mentioned earlier this was a quarter of transition. By that I believe we saw a change in the model through which our largest customer delivers their music service offerings. We are now seeing less result -- less reliance on delivering music services through traditional retail kits that dominated 2006 in the first half of 2007. Though we expect to see music kid’s fails to decline in 2008 to be replaced by wider distribution of software in the phone box. We believe multimedia will continue to be a strong contributor to our growth in 2008 and beyond. Before leaving this space I would like to comment on our marketing efforts with our smart phone multimedia manager review. Review launched at the end of fourth quarter of 2007 and is now available on retail shows at Veriz and micro center and online from www.amazon.com and www.buy.com . This is a new product category and we are working closely with our channel partners to build demand for review. Now turning to our connectivity and security division. I am extremely pleased with groups overall performance which was up 100% from the prior year. This is core net technology for Smith Micro and it contributes significantly to our organic growth and profitability. 2007 we grew our wireless customer carrier base from three to 14 of the premier wireless carriers throughout the world. We developed connection solutions to support broadband mobile offerings at Verizon, AT&T, Vodafone, Sprint, Alltel, TELUS Mobility, NTT DoCoMo, Orange, T-Mobile and U.S. Cellular just to name some of our customers. We see this market segment continuing to perform well throughout 2008 as wireless carriers offer new innovative pricing models to attract an ever expanding appetite for wireless broadband data. We are beginning to see plans that drive broader adoption rates among both small business users as well as the early stages of enterprise level adoption. The acquisition of PCTEL MSG further broadens our enterprise delivery channel through partners at AT&T Global Services, Fiberlink, as well as Orange Business Services. In addition to being able to call many new international companies customers, we also expanded our technology portfolio adding a new WiMAX client, adding server based offerings for central configuration and updates, and adding an IMS applications ware for delivering next generation fixed mobile convergence solutions. These are business segments we understand well and we look forward to the opportunities already underway in 2008. As I reported to you earlier, the consumer business continues to be a strong cash generator for the Company and we see this continuing to be an important growth segment. This group has been very active and had a great year growing over 37% in 2007 and 80% in the fourth quarter. We launched a new branded online store, mysmithmicro.com to boost online sales and we have expanded our distribution model in Europe and Japan. We saw contributions to this growth from our own internal brand such as StuffIt and in the growing exclusive republishing model where titles such as VMware and DTV4PC were the leading sellers in their respective categories. In addition, in the fourth quarter Smith Micro closed the acquisition of e frontier in December and expanded our reach into the growing graphic product marketplace. We believe e frontier will be a strong contributor to our growth in 2008. This acquisition also launches Smith Micro into delivering content for the graphics community through our contentparadise.com website and we intend to expand these business initiatives. Today our consumer group enjoys space and ample source averaging ten to 12 titles, a significant accomplishment. And finally looking at our device solutions group, formerly the mobile device management organization, we have expanded its mission and focus it on a number of new initiatives for the company. Firstly it added new and experienced senior management. New Device Solutions Group includes photo technologies, our new IMS techno logy as well as the integration and development of compression technology for the company. This groups focus is on developing new application using these technologies in addition to working toward integrating some of these technologies into our other products. It’s a smart world. EPUs and software are embedded in new areas such as automobiles and consumer appliances. It will be a connected world where everything talks to everything else. It is becoming a converged world where the internet, wireless networks and mobile devices will allow you accomplish far more and communicate in new ways. This group also leads the advancement of all our compression technologies as we see opportunities to add compression to gain strategic advantages for our photo technology. We remain committed to developing and marketing our Stufit wells product line. Today we are in various stages of talks with device manufacturers and we will continue to cultivate these opportunities. We are positioning our technology to reach a much broader audience in just updating the handset devices and as more and more companies understand the true value inside our photo and device management solutions, we believe we can expand into new market segments. Overall our business case continues to move forward very well. We have all four of our business segments contributing to the Company’s financial results. We continue to build upon our leadership role in the wireless software industry with new innovative products and solutions. We continue to expand our patent portfolio having been issued three new patents in 2007 for a total of nine. We now have a truly global customer base which we intend to leverage to cross sell our portfolio of products. Before I turn the call over to questions, I want to talk a little bit about our current stock price and our recent decline in valuation. First as a management team we are very disappointed with the current stock price. Before we recognize the frustrations our share holders are feeling as we feel the same, but it is important to say that this management team is not frustrated with the progress we are making within our Company. We continue to strengthen what was already a solid foundation for our business and see improving fundamentals across all of our lines of business. We have a leadership position in a market that has enormous opportunity ahead for growth as the transfer further adoption of wireless data and broad band mobility solutions continue around the world. We have invested in building a broad base of technologies and products that enable us to move quickly into new markets and adjust to change in conditions. With respect to the change in conditions in the equity market and with the current price of our stock, we will continue to make adjustments to the way expectations or results are being set and being communicated to the street. This is why we are adopting the policy of providing guidance for the first time in the Company’s history. We believe this will better ensure that our cohesive and consistent message regarding expectation can be communicated to the investment community. We also understand that there are several rumors that have been floating about Smith Micro on a consistent basis. We hope we have given you a better understanding that most of these rumors are not substantiated and are simply untrue. Specifically the rumors we tend to hear time and time again with regard to our largest customer of Verizon wireless and if they for some reason or another are going away. I want to reiterate that we have a very strong strategic relationship and we will continue to earn our long-term relationship with Verizon wireless by continuing to provide the best agreed products and service. While we clearly plan on continuing the trend of reducing Verizon as a percentage of our business we plan on doing so at the same time the total revenue dollars on Verizon continue to grow. Another point that I’d like to make has to do with us announcing customer contracts and products. From time to time many of you reach out and ask where is the news? Or why do you remain quite about customer wins? The fact is there is news, but unfortunately in the markets that we operate in, many of our customers do not allow us to discuss publicly the products and services they plan to bring to market even though we have signed contracts with them. Once our customers do announce the launch of new products and if we can talk about them publicly I assure you that we will. We believe we have reached several key milestones in fiscal 2007 as we’ve pushed for the company’s long term strategic growth plans. It’s integrate -- we’ve completed integration of all four of the acquisitions that closed in 2007and we are focused on completing the integration of the Mobility Solutions Group in the first half of 2008. Today’s communications technologies are in constant state of evolution where ever more advanced devices, chips and network platforms promise even greater speed and capacity, yet for all the advances it is the software that empowers the world of mobile convergence and makes next generation platform accessible to the user. The opportunity before us now is to draw together the technologies under development across each of our business units into converged solutions the market now demands. Legally this is at the forefront of our innovation. We remain extremely positive about the long-term prospects for Smith Micro and we believe 2008 will be a very successful year for the Company. With that, I would like to open the call to questions. Operator?

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Lauren Ye with JP Morgan. Please go ahead.

Hi guys. I just wanted to kind of go through PCTEL and it’s integration that’s happened so far. Can you just walk me through what you have done in I guess the last couple of months with PCTEL and what also needs to be done going forward and I guess given your margin guidance, in the second half of the year, is your margin really growing from maybe some synergies or anything out of PCTEL integration or is it more a revenue lift?

Okay. Let me start the answer and Andy can chime in, but where we are right now, what was formerly known as the PCTEL MSG Group is now part of Smith Micro’s connectivity and security group. I am very pleased that [inaudible] who ran the unit for PCTEL, is now Vice President and General Manager of the connectivity and security group. The connectivity and security group had a great year, it doubled its sales. So in recognition of that, Tom Mathews who ran the unit last year is now Senior Vice President of Corporate Strategy and Development and many of you on the street will see him from time to time at conferences etcetera. Well, we are moving ahead nicely. PC’s job is not an easy one. We have staffed this part of the connectivity group in Aliso Viejo now in Chicago and also in Herndon outside the Washington DC area as well as over in Serbia, pulling together the team into our cohesive unit that’s highly motivated, they are incredibly successful, it’s a lot of work, we are working to eliminate duplications of efforts and redeploy the people that better serve our customers. We need all the people that we have, we probably need more right now. We have a lot of business. We have business that you know about and business we haven’t even announced yet. So this is a very active group, a very strong growth, look for continued growth in 2008.

And just kind of following up with Will’s comments, as we said, the guidance that we are giving here is based on information we know at this time and so we are just assuming existing customers in the case of the PCTEL MSG Group; existing customers and products and expected growth in that area -- Will had pointed out many times as one of the key elements of that acquisition is the opportunity to cross-sell products into these new customers and also to leverage your technology to bring out new products. I get our guidance is taking a look at what we know today, so when we look at the back end, the lift in margins and specifically out margins in the back end of the year is primarily driven by release of products that we right now are doing the development work for, so right now we have got a tax of development expense without the revenues. Revenues come on the stream in the second half and those are contracts that are already awarded. So, once again it does not necessarily assume any new wins or the PCTEL or any of the opportunities that we do derive from the acquisition.

Okay that’s helpful. Just onto HTC, have you guys started shipping those -- that area, any new devices that’s already shipping now or that’s still an opportunity to come.

Well, this is an opportunity that will continue to grow or we do believe -- I believe that the devices are being shipped now and would have to deal more in investigated look to give you more color but that’s the best thing I can tell you right now.

Okay and just Verizon obviously. The opportunity there with I guess Real Networks are you help -- have you I guess seen more clarity in terms of we are going to be helping Real Networks with that transition and is the multimedia player actually an opportunity now? Do you just have more clarity on that?

Well, Real Networks we certainly can say that we are working with them. So, I think it’s very clear that we are working together and so that basically is more of a cohesive opportunity rather than device if that’s certainly the case.

Your software will be on Real network player.

We are not announcing anything today. We certainly don’t launch to announce anything for Verizon for tomorrow, so why don’t we just leave it that we are working closely with both Verizon and with Real Networks to establish by the needs of our largest customer and at the end of the day that’s our number on goal. As far as other multimedia applications at Verizon, the net take away should be that we are moving forward nicely there and you should expect to hear announcements when Verizon is ready to announce them.

Okay very good. Thanks guys.

Our next question comes from Richard Church with Collins Stewarts. Please go ahead.

Thanks, nice job guys. Follow up on the Verizon question. Andy can you tell what the percent of revenues was in the fourth quarter?

Sure 56%.

Okay and with regards to the three new OEM deals are they all in the connectivity business.

We are not going to get into that level of detail. But we will say they have significant deals or else what significant certain means seven figure, but quarter type deals.

Show it out of the box for getting in second half.

Pretty close for that.

Okay and the one that started shipping in the first quarter, I assume is not part of those three deals that you referred to right.

As I said the conferences during the first quarter, I said that we had a major device manufacturer that we have a signed with contract with and we are now at this point allowed to disclose who we are. We are building product and we are expecting to ship.

Do you expect to have revenue from that customer in Q1 right?

Guess I would say the answer to that is yes.

Okay excellent and then Andy could you give us the breakout on to get to non-GAAP just in terms of the line items what the cost of revenue line item would be non-GAAP and selling and marketing and so forth.

Sure for the quarter. Yeah, right we have approximately lets go through this; $4 million in stock comp plus all groups, so which case a $100,000 is related to cost of sales, $1.6 million sales and marketing, about $700,000 R&D, $1.6 million G&A. Then we have about $900,000 adjustment for amortization which case $400,000 approximately is related to COGS, $200,000 sales and marketing, about $300,000 R&D. Then finally we have a non-cash tax adjustment of about $2.3 million that applies basically to the total year.

Okay. And with regards to the outlook for Q1 on the top line, do you expect that you will offset any sequential downtick due to seasonality with revenue from new acquisitions and so we should see an uptick in Q1?

Rich, we are going to stick with our guidance of the $95 to $105 with 40% of that revenue in the first half of the year, getting more granular in that, we don’t think it’s very beneficial.

Okay. Is there -- could you give us any granularity in terms of PCTEL’s contribution to ’08 revenue.

We prefer not to.

Okay. Alright, thanks a lot guys.

Our next question comes from Maynard Um with UBS. Please go ahead.

Hi, thanks. Three questions if I could. First, regarding your guidance, are you seeing any slowing on the consumer side, I mean consumer spend and have you embedded any impact into your guidance?

That’s a great question. In our weekly executive staff meetings, it’s always the first question that I ask as I turn to the guy who runs sales for small business and consumer. The answer right now is we have not seen any slowdown, if anything, it’s running a little bit ahead of plan but it’s something that we are cautiously monitoring, we are very aware of the overall macro environment but we can’t apply it today to us. As far as whether why would we factor that into our model for 2008, I would say that it was always in the back of our mind. I mean clearly, the consumer area has seasonality. We have talked about that in the past. First and second quarters are the slowest quarters and third and fourth are the best quarters but other than that that’s all I could say.

Another report that might help is when you look at the products, we are fairly acentric towards Mac. Mac products represent 60% of our total sales net space and Macs have been very hot and again they look to be on a nice winning streak and that doesn’t seem to be a bade in 2008.

And actually you could also add to that is that some of our new graphics products are really more pro similar products than consumer products and maybe that will also give us some insulation against any consumer spending problems. I don’t -- all I can offer you.

Okay, great. And then secondly in terms of where the opportunities you are focused on in driving other contract awards that we could see potentially impacting 2008?

We don’t really put limits on that. That’s why will have a great sales team. We are out at all of our customer accounts whether they are customers Smith Micro has in ’07 our customers that joined us via acquisitions and we are aggressively talking about our portfolio of technologies and how those customers can apply those to solve any problems or needs that they have. We are making good progress there and there is a lot of really keen interest and very substantive conversations and that’s we pay our sales teams to do. So we are all pretty focused on growing out our business. I think the other thing we kind of think about is -- I think the overall suite concept for multimedia is something for the future and we are obviously very focused on working with device manufacturers. We nicely build the handsets to offer them software products that will enhance their offering. So there is a lot of growth, there is a lot of opportunity and my sales guys probably say they probably need a few more feet on the street to try to cover the world that we now really speak to.

And to add to Will’s comments, the PCTEL MSG transaction was not a small one by any means for us, so a pretty mature group. They had a significant pipeline already in place when we acquired them. So that also brings in some lead time reductions as far as selling time.

Okay. And in terms of your margin because it kind of sounds like what you are saying is you would love to have more people, are you kind of managing the business to get those margins in the back half of the year or you kind of forecasting here and telegraphing that we should expect an increase in the OpEx numbers as well or if you can just give us a sense of how to think about that.

Okay. Starting with the gross margins obviously that’s our view that we see today as far as product mix and again we are seeing more and more a preferred model that very pure software model where you’re up closer to 80 points gross margin and then to answer your point, yeah, we will be adding heads here and that’s why you should assume an increase in the expense lines and so on. So as revenues grow we expect that the more than cover our operating expenses, but operating expenses are going to grow. I mean just as a data point –- I mean the Company has changed quite a bit. We started the year with 130 employees and now post PCTEL acquisition, we are 330. So again, we are a very different Company in obviously a very positive way.

Okay. Then last one from me, 2007 was a clearly a year of M&A activity. You feel like you have all the right pieces now or do you anticipate further M&A transactions in 2008? Thanks.

Yeah, I will pick that one. You know I think the way we view M&A is that we are totally focused right now on integrating and executing our current business case. We are making great progress on the ERP integration of the PCTEL Mobility Solutions Group but we are really focused on closing a lot of new deals. I mean that’s really what it’s got to be about. We are going to grow this business by execution and the first half of 2008 is all about execution. So we are really focused that way but having said that I think I can honestly say that we probably look at a new company every week, some are very small, some are mid-size, nothing really that large. As we build the portfolio of opportunities to look as per the future and one other reasons we do this is as we talk to our large carrier customers and our new device manufacturing customers and we talked strategically with them. We talk about their road map and we talk about our road map and sometimes they will bring something up that we didn’t have on our road map. We either have to figure out how the building internally or acquire it. So Tom Mathews is out there every week talking to folks and learning about what different companies has offered so that should the need comes that we can’t build it fast enough we will go buy it and we already have it identified and we know something about the company and we know something about their culture as to whether they would fit into the Smith Micro family. I really don’t see any acquisitions at all in the first half, we are really focused on execution. I would not close the door and the back half although I wouldn’t want to encourage and then walk away, say or they are going to deal in the second half because I don’t that even. We will just leave that open.

Okay great. Thanks guys.

Our next question comes from Anton Wahlman with Thinkequity Partners. Please go ahead.

Yeah, Andy I just have a couple of house keeping question. I think I didn’t hear it properly what you said. What did you say the consumer margins were in the quarter?

Let me look this up again for you. Typically low 70’s here. Okay consumers 73%.

Okay and then you went through the numbers for giving up the stock based compensation between the various line items but then you went into some of the other adjustments as well and I was wondering if you can repeat those that followed after the 900,000 or what they were. There was something that was 400,000 and there was something that was 200,000, I’m not sure I’ve heard all the…

Sure, real quickly total amortization adjustment was 900,000 the way you would break up that 900 would be approximately 400,000 at the cost of sales line, 200,000 at the sales and marketing line, 300,000 at R&D line and that should get you to approximately 900 and the only other adjustment we had out there is our year end tax adjustment of approximately $2.3 million.

Okay so 400,000 in COGs, 300,000 in R&D and 200,000 in sales and market.

That as far as amortization is concerned yes.

Okay alright, that’s all I had for now thank you.

Our next question comes from Kevin Dede with Morgan Joseph. Please go ahead.

Will, I was wondering if you might talk to attach rates at Verizon from say third quarter or fourth quarter when you implement or when they implemented the new software policy. May be you can give us a view as to units so we would have a better feeling for the overall acceptance of music connectivity.

I really can’t do that sort of like the one -- the one way I could get fired and we wouldn’t have to worry about percentage of our business Verizon was. I really can’t let those numbers out. Clearly there was a transition away from the music kits to software in a box and we think that the -- there will be kits in 2008, the numbers will be much smaller and we think that there will be more emphasis on trying to reach a much larger market and that’s really all I think I can say. Those are really questions you are kind of need to put to Verizon, but I am not sure they will answer.

Okay is there anything else you can talk to, may be some of your other customers that we was feeling that the new model was somehow reaching more customers.

Okay there is something that’s I mean I think are just sort of straight forward. Clearly if a 100% of the consumers would buy a music capable phone, get the software, have access to the software, be a download whatever method is being used by the carrier, clearly that’s going to be a higher percentage that might use music than those that would pay an extra, what was it $30 for music kit. So I think from the stand point reaching a broader base this is a better model with a one negative and with the negative we saw in the fourth quarter of 2007 that was we took ahead on the revenue line but as Andy pointed out I think quiet clearly it actually helped us on the margin line if things look better so.

So, I guess what your saying is that you think there might be some price sensitivity given the lower price more people will opt in for the additional download.

Something you should consider is look at the carriers and their strategy across the board all different products, they are looking at how do we get to that next level of consumer from the early adopter and in a connectivity side you are seeing different pricing models on the music side again they are trying to get this offer in everyone’s hand so they haven’t -- you are making it as easy as possible for them to take the service. So, of course we expect to see more and more of that across all of our customers. It’s all about adding value added services for their customers that’s exactly how they can grow their revenues.

Well, Can we translate that over to the initial sales review? What sort of interest are you seeing and which avenues are the more productive for you?

I mean I think the way they look at it is clearly the sale of the product over the web is the -- reaches the largest possible audience, so online sales and software in general tend to be maybe a little bit better than just trying to get focus to trying to get into a store to buy a physical product, so I guess that’s how I would view that.

Okay you mentioned your road map Will. I was wondering if you might be able to comment on it a little more detail granted in assembling these acquisitions you have got a lot of technology. I am curious on what pieces you think you can bungle together, what markets you think you can address and how big they might be. Its’ kind of an open ended question, but if you can just give me the things that you think are the most interesting.

I think convergence of everything and I think when you – I think we have talked about this in the past whether it be at conference or whatever. When you look at the, at mobile devices like orders, they all now have -- many have up to 12, 14 different processors that are functioning within them driving all sorts of different things in the order. So the ability to reach out to those devices to update or add features to the over the year, to provide connectivity, to provide multimedia capabilities to drive the clement councils that are in the cars, all become things that Smith Micro can do and there is very few if anybody else that got can say that. We have all the technology under out roof and our engineers are busy working to develop applications that could speak to those kinds of things. That’s a good example because it’s a real world one and you can kind of see it coming and its I think may be a good place to start. I mean there is a lot more but that’s some place to kind of hang your hat.

Fare enough, last question from me. One example on the connectivity side was that the number of faculties that your operating across the country. I wondering if you’re going to take a step back and look at how many faculties you’re looking at around the world and making a move to perhaps consolidate and work on producing overall OpEx.

Well we actually have and I think that’s a good point this quarter. We closed a small facility, we where operating in Kansas City. We are looking at a very small facility in the Silicon Valley but that’s -- so there is something that we are constantly looking at and we are going to focus on raining in expanse where we can, but I think that I don’t want to back away from is that we have a very strong growing business. It wasn’t that many years ago where we did a $11 million in a year and then that grew to the low 20s and that grew to the 30’s and that grow to the 50’s and now its grown to 70’s and we just told you its going to grow somewhere between 95 and 105. That’s what I called gross story and you don’t do that without having a highly motivated team of people and it takes a lot of people because as you are focusing in on larger customers, on more diverse customers it takes a lot of activity, so our people are very important. Though they all go home every night that’s our IP walking out the door and we call can say a little pray that they walk back in the next day, so in the software business it’s very important that we continue to motivate, to compensate and to grow our engineering sales and marketing teams.

And Kevin well it might help a little bit. All of our acquisitions where either asset purchases or the back of asset purchases so we are very specific about what we brought over rather than lets say buying full entity that had non producing assets that we had to basically addressed. So we did really work hard from the acquisition prospective as far as, lets bring them in correctly and when you look at 2007 that’s the way we are able to actually maintain the 30 point op margin while integrating. We are very, very selective.

Well thank you gentleman for taking my questions and keep up the hard work.

Thanks.

Our next question comes from Richard Valera with Needham & Company. Please go ahead. Richard Valera - Needham & Company : Thank you. Can you guys hear me okay.

Yeah. Richard Valera - Needham & Company : Andy I was wondering if you could give us a bit of a base line OpEx number on a non-GAAP basis for the first quarter. Should we be looking sort of kind of $3.5 million or so up from the quarter on a non-GAAP basis? Is that the way to look at it?

You know what, we are going to just stick with the first half of the year guidance the 17% to 20% on the up margin side and that’s a close enough picture there. Richard Valera - Needham & Company : Okay. And just to make sure I heard you right, did you say it was 20% sort of non-GAAP tax rate?

That’s correct. I’ve got it opened up. Richard Valera - Needham & Company : Okay. Okay, that’s it from me, thank you.

Our next question comes from Chad Bennett from Northland Securities. Please go ahead.

Yeah, a couple of questions. First of all, I think on the multimedia side, what everybody is trying to figure out is business has underwent pretty dramatic transition and we are trying to figure out what does this business look like when we are exiting the year next year because -- and I know the wireless industry constantly involves and there is a lot of moving parts here but do we feel like -- I guess first of all, do we feel like generally from a revenue standpoint we bought up here and this is kind of a baseline to grow from and I know you do want to touch on it but are we still selling software in boxes for music downloads this time next year and is that a growing business, looking out?

Let me -- let me try to take this. I have already made a public comment; I made it at the last conference a few weeks ago. I said that on a macro level for the multimedia business that it wouldn’t surprise me to see by the end of 2008 that multimedia had sales equal to or better than 2007. So that should frame something for you. Secondarily, we have said it consistently and I am not backing away from that at all that there will be a component of multimedia, music, whatever kind of flavor of multimedia kits that will be created. It just may not be created by the customer that you’re -- for the customer that your used to seeing it coming from at least not at the levels that you were used to seeing it coming from. So yeah, there will be kits and yeah, there’s going to be some change in the mix and you saw that in the fourth quarter, but at the end of the day we have a strong and vibrant multimedia business that’s going to do really well in 2008, it’s just going through some changes.

Okay. So we believe that business will grow year-over-year in ’08 from ‘07?

Yes, we do and probably more important is you will see a more significant growth in the contribution from the business. Again certainly even as we looked at a pretty significant transition Q3 into Q4, we saw our gross margins go up 10%. So we actually showed growth in that period while we showed revenues flat. So when you look at 2008, there will be a revenue growth from our perspective and that’s built into our guidance but more importantly you are going to see better contribution. So the contribution will grow much more than the revenue.

Right, okay. And then not to kind of flavor the guidance too much but the range you gave, 95 to 105, and help me with the math if I am wring on the acquisitions but I think you talked about PCTEL roughly be in a $12 may be on the higher end $13 million $14 million business next year and e frontier is a little bit more fogy for me, but I thought its $7 may be $8 million annual revenue run rate business. So if we had those just in aggregate right about $19 million $20 million. If we just had that on to a $73 million exit this year, you are kind of at the bottom of your arrange, so we are going to see -- I mean obviously I don’t think you think about this business as organic versus inorganic because everything’s integrated in all in one right now but so is that the way first of all to look at guidance next year and in kind of may be your conservative outlook there or am I missing something.

Well Chad and the key is as we said a few times here, probably well, probably say it a few more times though is we are going with information we know today. We are going forward with contracts that are in hand that you are not making any type of play that we are going to speculate to win considerably more and more contracts. So we are coming in at it with this is information we know today, these are the contracts in hand today and here is revenue guidance based on that knowledge.

Okay, but I am not mentioning any thing in terms of my rudimentary some of the parts am I?

No, I don’t think you are.

And there is no accounting issues or delayed revenue rack on the PCTEL side. I mean you should be able to recognize everything out there Andy.

Well, as I pointed and given the guidance that the guidance does include revenue recognition across all product groups including acquisitions and then acquisition integration items as we often said whenever we integrated a company we are busy working on the mechanics, we are getting more busy, getting to meet existing customers and all that basically I am I call it stationery work. In other words it’s not like you have that business integrated and you are pushing it forward, so there is a little bit of stall let’s say on new customer development that naturally occurs. We have seen it in another acquisition so all that’s built into the guidance.

Okay but it’s nothing accounting related great.

No, I mean yeah again but the revenue recognition is taken into account when we give our guidance.

Sure okay and then just one quick one for you Andy. Any other 10% plus customers outside of Verizon in the quarter.

Not in this quarter.

Okay thanks guys.

(Operator Instructions). One moment please. At this time we now conclude our question-and-answer session. I would like to turn the call back over to management for any concluding remarks they may have.

Well I think you for joining us today on the call. If you have any further questions. Please feel free to contact Smith Micro or the MKR Group. Thank you.