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Smith Micro Software, Inc. (NASDAQ:SMSI)

Q1 2009 Earnings Call Transcript

May 6, 2009 4:30 pm ET

Executives

Charles Messman – IR, MKR Group, Inc.

Bill Smith – Chairman, President and CEO

Andy Schmidt – VP and CFO

Analysts

Maynard Um – UBS

Rich Valera – Needham & Company

Chad Bennett – Northland Securities Inc.

Lauren Ye – JP Morgan

Scott Sutherland – Wedbush Morgan Securities

Larry Harris – CL King

Operator

Good afternoon, ladies and gentlemen, thank you so much for standing by. Welcome to the Smith Micro Software fiscal Q1 2009 conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) As a reminder the conference is being recorded today on Wednesday, 6th of May, 2009. I would now turn the conference over to Mr. Charles Messman of the MKR Group. Please go ahead.

Charles Messman

Good afternoon, and thank you for joining us today to discuss Smith Micro Software’s financial results for its first quarter 2009, which ended March 31, 2009. By now, you should have received a copy of the press release regarding our first quarter results.

If you do not have a copy and would like one, it is available at www.smithmicro.com, or by calling 949-362-5800, and we will fax or email you one immediately. With me on today’s call are Bill Smith, Chairman, President and Chief Executive Officer; and Andy Schmidt, Vice President and Chief Financial Officer.

Before we begin the call, I want to caution that on this call, the company may make forward-looking statements that involve risks and uncertainties, including, without limitation, forward-looking statements relating to the company's net revenue guidance for fiscal 2009, financial prospects and other projections of its performance, the company's ability to increase its business and anticipate 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, customers acceptance of those technologies, new and continuing adverse economic conditions, and the company's ability to compete effectively with other software companies.

These and other factors discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Form 10-K and 10-Q, could cause actual results to differ materially from those expressed or implied in any forward-looking statements.

The forward-looking statements contained in this 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 call.

At this time, I’d now like to turn the call over to Bill Smith, Chairman, President, and CEO. Bill?

Bill Smith

Thank you, Charles. Good afternoon everyone, and welcome to our earnings conference call. I’m pleased to report another solid financial performance for our first quarter of 2009. We have posted the strongest first quarter results in our company’s history despite the challenging economic environment that we are operating in.

During the quarter, we grew our revenues over 9% year-over-year to $23.8 million. But of more importance I believe, is the fact that they posted strong operating performance during the quarter as is evidenced by our earnings per share of $0.01 per diluted share on GAAP basis or $0.13 a share on a non-gap basis.

Looking at a couple of key indicators by which we measure of business. Our gross profit on a GAAP basis of $19.3 million increased $2.5 million or 15% from first quarter of 2008. Non-GAAP gross margin increased from 81% in the first quarter of 2008 to 86% in this year's first quarter.

During the quarter, we continued to meet our strategic business goals. Looking across all of our business segments, we signed a total of just less than a half a dozen new customers. Something that we expect will contribute significantly to our financial results during the balance of the fiscal year.

We expanded our mobility customer base by adding yet another PC OEM as a customer, whose name unfortunately for now will need to remain undisclosed. We announced two new multimedia customers in Nextel International and LiveWire Mobile. We expanded our leadership role in WiMAX connectivity through agreements with Clearwire and Motorola.

And we energized our international presence, a key component of our long-term growth strategy with the rollout of CompStar as our newest WiMAX customer in Russia. Based on our recent new customer’s successes, we anticipate that in 2009 we will see several of our financial growth as was seen in 2008. With the company’s revenue ramped up nicely during the second half of the year. Our revenue tends to file the pattern of our customers new product and service rollouts and launch initiatives.

As we said during our fourth quarter earnings call, our business model is one that generates significant free cash flow as evidenced by how we strengthen our cash position by $4.4 million during the first quarter alone. We view this cash flow generation and the solid revenue results to be a strong validation of our business case.

Our QuickLink family of software products, which facilitates connectivity to mobile and wireless carrier networks remains a key growth driver for the company as revenues increased 69% year-over-year from $11 million to $18.5 million in the first quarter of 2009.

Looking to the remainder of the year, we are very optimistic about future opportunities as we continue to expand our markets, sign on additional customers, and extend our leadership role as the dominant software provider in the mobility and connectivity marketplace.

Later in the call, I will discuss in detail our opportunities within our three business segments and an overview of what these markets had offered. But at this time, I would like to turn the call over to Andy Schmidt our CFO to review our first quarter financial results. Andy.

Andy Schmidt

Thank you, Bill. First, let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-gap 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 2009 and 2008 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC, and 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 comparable GAAP financial measure. The earnings release can also be found in the investor relations section of our Web site at smithmicro.com.

All right, let’s discuss our detailed first quarter results. For our first quarter, we posted revenues of $23.8 million and earnings of $0.13 per diluted share. Total revenues of $23.8 million increased from revenues of $21.9 million for first quarter of 2008, an increase of 9%. International revenue was approximately $2.9 million this quarter across all business groups.

As noted on our SEC filings, we are now reporting the following business segments: Wireless, consumer, and other. Wireless includes our Connectivity and Security and Multimedia and Convergence business units. Consumer represents our graphics and productivity units and our other category remains unchanged from 2008.

As such wireless reported record revenues for the quarter of $19.3 million as compared to $16.2 million last year, an increase of 19%. Slightly offsetting gains in our wireless sector, consumer posted revenues of $4.3 million as compared to $5.5 million last year, a decrease of 22.5%. The reduction in consumer revenue was as expected and is directly attributed to the recessionary consumer environment.

And finally, we reported approximately $280,000 of other revenue, which compares with an approximately $239,000 for our first quarter of 2008. Total deferred revenue at March 31, 2009, was approximately $2.6 million. Okay, switching to gross profit, non-GAAP gross margin dollars of $20.5 million increased $2.7 million or approximately 15% from the same period last year.

Of key significance, while our revenue increased 9% year-over-year, our gross margin dollars increased 15% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 86.3% for Q1 2009 compared to 81.4% for Q1 of 2008.

Non-GAAP gross margins dollars by business segment were as follows, wireless 89.5%, consumer 72.7%, and others 68.7%. As we’ve noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2009 of $15.4 million remains unchanged from Q4 of 2008. While we continue to add additional engineering resources deployed to meet new customer product deliveries schedules for future quarters, we have found expense offsets, including redeploying staff from non-core activities and reducing the administrative expenses.

Non-GAAP operating margin for the current period was 21.6% lower than our benchmark 25%, due to a decline in consumer group revenue. However, current period operating margin compares very favorably to operating margin of 16.6% for Q1 of 2008. Non-GAAP net income for the first quarter was $4 million or $0.13 per diluted share as compared to $3.1 million or $0.10 per share last year.

From a balance sheet perspective, our cash position closed at $41 million at March 31, 2009, an increase of $4.4 million from the beginning of the year. Accounts receivable at March 31, 2009 increased to $19.4 million from $18.4 million at the start of the year. Net working capital at the end of Q1 was a very strong $51.8 million.

Cash generated from operations for the quarter was an exceptional $5.3 million. The primary uses of cash for the period were capital expenditures of $846,000. Overall, we had a very good quarter and a great start to the year. Despite global economic challenges, revenues are up year-on-year, but the key significance, our gross margins operating margins, profitability, and cash flow all improved significantly over last year's quarterly performance.

Looking forward to the balance of 2009, we expect our business to continue to improve. As Q1 was another robust quarter in terms of winning important new details, we expect to continue to invest in our engineering infrastructure. As we have previously commented upon, we expect that Q2 like Q1 will be seasonally weaker than Q3 and Q4. In regard to gross margin, we expect their product mix to remain stable and expect mid- 80% gross margins.

Operating margin will continue to be revenue dependent with 25% being our benchmark. But similar to Q1, we may fall below 25% operating margin in Q2 due to backend loaded than revenue plan for the year, but operating margins above 25% from Q3 and Q4. Finally taxes continue to be in the state of change given the State and Federal deficit spending.

At this time we are estimating that our 2009 cash-based tax expense will be 25% to 30% of non-Income. As tax law changes through the year, I will provide an update to this metric. Finally, at this time we are reiterating our revenue guidance of hundred and $10 million to $115 million for 2009. In terms of housekeeping, we expect to file our current period 10-Q tomorrow or Thursday.

At this point I'll turn the call back to Bill.

Bill Smith

Thanks, Andy. Our connectivity and security group brings to the market an unrivaled portfolio of security and network connectivity applications for laptops, netbooks, and mobile devices. This suite of connectivity and security products represent our key driver and grew 69% over the first quarter of last year to $18.5 million.

During the quarter, we saw strong activity among both new and existing customers, as they continue to enhance their services and execute on the broadband mobile data strategies. As I commented on our fourth quarter earnings call, we saw a strong pipeline of new customers; a trend that I am pleased to say continues and is reflected across all business segments.

We believe that continued acquisition of new customers is a strong measurement of the value of our products brings it to the expanding marketplace. Specifically, we signed an additional notebook PC OEM, solidifying our leadership in the broadband connectivity space for notebook PC manufacturers.

Our other PC manufacturer customer Dell represents 14% of total revenue during the quarter. On the carrier front, we announced three new carrier customers in this market segment. With the winner T-Mobile USA, we now provide connection manager solutions for all of the big four wireless carriers in North America.

The other wins comes from our emerging market leadership in developing connectivity solutions for the 4G rollout. First, with the WiMAX market, which is beginning to see traction around the globe. As such we announced Clearwire which is rolling out their new WiMAX service in North America and CompStar a leading telecommunications company in Russia, which is also a WiMAX customer, currently introducing 4G mobile broadband services.

And one of our strongest WiMAX opportunity is through our exclusive relationship with Motorola, who is in WiMAX deployments and trials in more than 40 countries around the world. I know, I have said from time-to-time Smith Micro develops the best-of-breed connectivity solutions and is evidence of that fact the Motorola USB w10 with our connection management software won the best of WiMAX World 2008 Award for devices, peripherals, application software category.

So, with these recent events, we continue to be the clear leader in 4G connectivity solutions. Turning to our carrier customer base and their contribution to our results this quarter, as usual we saw a change in our customer distribution. Verizon wireless had a very strong quarter with us representing 28% of our revenue during the quarter, which is comprised of their core business combined with revenues resulting from the Alltel acquisition.

I am pleased with how they continue to make progress in achieving a broader more balanced customer base. As our other leading carrier customers where each close to 10%. As we have often said, our customers are constantly evolving their product strategies and introducing new products and new clients.

This is evident in their early product introductions and customer relation surrounding the rapidly emerging category of netbooks, which by their very nature will require mobile broadband connectivity solutions. We have some very interesting product ideas for the netbook space and we are working diligently with our carrier, PC, and device manufactured partners, as they solidify their strategies.

I should point out that netbooks are still in the early adoption phase, but we believe there is a great opportunity for Smith Micro to participate in this rapidly developing product category. We expect that during Q2 of 2009 you will see a significant netbook product rollout with the Smith Micro connectivity solution included from one of four carrier customers.

We have begun major initiatives to add value to a connection management solutions, as we continue, excuse me as we introduced products for new devices services and solutions that will focus on server technology allowing carrier, cable operators, and large enterprises to manage their subscribers and mobile workforce. Needless to say, we have an enormous opportunity ahead of us and we will build upon our leadership in the software connectivity space during 2009.

Let me now turn to our productivity and graphics products. Until recently, this unit has been referred to as our consumer group, reflecting this primary distribution channel. This group's new productivity and graphics name shift the emphasis to the products to the group's actual product portfolio, which develops mobile technologies across compression, digital imaging, performance utilities, graphics, and entertainment segments.

Going forward, we will not only be focused on building compelling solutions for the consumer channel, but also for new markets included in the enterprise and small business. As expected, in the retail channel we saw decline in revenues, mainly due to seasonality, as well as the overall economic environment.

The group reported revenues of $4.3 million, which compares to $5.5 million reported in 2008. As we look to the remainder of the year, we expect this group's revenue to remain constant at a run rate of approximately 4 million plus per quarter. Even though our revenues softened in this business unit, there remains bright spots and I was very pleased with the graphics product line as it performed well.

I am very happy to report that we added Wal-Mart, the largest US retailer to distribute one of our top selling graphic products and a studio. Despite the softness in revenue during the quarter, this group will continue to contribute to the profitability of the company.

And lastly, our Multimedia and Convergence group, which combines three major product initiatives, devise and server management, fixed mobile convergence for IMS and multimedia. While current period revenues for this group are not significant as compared to our connectivity and security group, the R&D efforts in this group are expected to lever future product opportunities and technology synergies to create unique and compelling mobile solutions that will expand our market.

I would like to quickly highlight two of our forward-looking products in this area. First, we rolled at CK wireless this year, our QuickLink media cloud strategy to enable carriers to offer cloud-based content in media and management solutions. This rich extension of our multimedia offerings is targeted at helping our customers support their convergence strategies for services that will be universally available on the mobile device, the personal computer, and the television.

We see this as a strategy that will have broad appeal to a new emerging customer base such as cable operators, as well as our carrier customers who are looking to migrate their multimedia offerings to the Cloud while capitalizing on the social networking phenomenon that can drive loyalty and usage. We also announced two new customers, Nextel International and LiveWire Mobile.

Nextel International has begun to launch our music and photo management product in four Latin American markets and LiveWire Mobile uses our client applications to provide PC media management software to wireless carrier networks and mobile devices for access to their LiveWire Mobile for track music service.

Second, as we enter 2009, we began our initiative to combine our device management and connectivity management server technologies into a single platform that we believe will resonate well with our carrier enterprise customers. This will allow our carrier customers to lever new value-added services and enable our enterprise customers to perform endpoint management from a single platform targeting notebooks, smart phones, and other mobile devices connected to their network.

As we go forward in 2009 and beyond, multimedia and convergence group continues to invest to capture opportunities in emerging markets. Before I open the call for questions I just like to leave you with these thoughts. Our financial results for the first quarter of 2009 shows Smith Micro continues to perform well.

Even in this difficult economic environment the demand for our innovative connectivity line of products and our new customer signings show the strength of the Smith Micro product portfolio for delivering new product concepts and solutions that will maximize our long-term growth potential.

We are well positioned to move aggressively and leverage our strong cash performance to make the most of the opportunities that arise. In first quarter, our free cash flow of $4.4 million or approximately 18% of total revenue, at the same time we have a disciplined approach to cost and expense management, giving us a strong financial position and we remain debt-free.

We remain on pace with our 2009 roadmap placing us in line with the revenue guidance of $110 million to $115 million that we provided you at the beginning of the year. We continue to watch this closely and I will update you as needed. We continue to drive our strategy that has positioned Smith Micro Software as the leading strategic partner in the development of new software products for wireless carriers.

In the last year, we had delivered our products to PC and OEM device manufacturers and are now becoming an invaluable software partner for the cable companies as well. We have entered 2009 with our strongest pipeline of new customer deals and opportunities in the recent history of our company.

Some of our earlier game changing contracts continue to open doors and are bringing new meaning customers to us. We continue our investment our performance to fuel our future because the products we build today are the way we connect to our customers tomorrow.

Thank you and with that operator I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from the line of Maynard Um with UBS. Please go ahead.

Maynard Um – UBS

Hi, thanks. Can you just start to (inaudible) GAAP to pro forma reconciliation between various OPEX line items?

Andy Schmidt

Yes, (inaudible) just put this in the script now. All right, let’s start with stock comp, cost of sales of 72,000, selling and marketing 737,000, R&D 634,000, G&A 1.148 million for a total of 2.591 million. But with amortization, cost of sales 1.188 million, selling and marketing 629,000, R&D 330,000, for a total of 2.147 million.

Maynard Um – UBS

Okay, great. I just want to clarify that the corporate other gross margin you said was 68.7%?

Andy Schmidt

Yes.

Maynard Um – UBS

Okay. And then, Bill, you talked about new key customers wins across all your product groups, there will be stronger contributors in the back half of the year. You talked about new products like netbooks you are going to launch rolling out in the next quarter, but you also reiterated your prior annual guidance. I am just curious, are there other parts of the business that are seeing greater weakness that’s offsetting this new business?

Bill Smith

No. Actually, I think that we are performing well. We are right on target with what we said at the start of the year. We anticipated a lot of the new technologies coming on online, you know so we feel very positive about everything and you know I don’t really see any issues or significant weaknesses in the business phase going forward, other than what I said about that part of the business that is tied more to the consumer channel, we basically say it is, you know we look at it as a 4 million to 4 million plus per quarter business for the balance of the year.

Maynard Um – UBS

Okay. So, if you – I guess that if you look at your pipeline and I mean there is still new customer wins potentially, how long do those typically take to ramp before they become more meaningful to your revenue stream?

Bill Smith

Well, you know, I said this a number of times. You know, OEM deals try to start out slow and grow overtime, you know some grow faster than others. So, I don’t know that there is a rule finally you can say applies to all, but to the extent that (inaudible) get better quicker and grow faster, you know I am sure, we will have the opportunity to talk about those positive upside if and when they do occur.

Maynard Um – UBS

Okay. And then lastly, just on OpEx, you talked about increasing your engineering infrastructure, Andy can you just provide any color on the sales, marketing and G&A side?

Andy Schmidt

Sure. We've been – when you see the key out here, we’ve reduced G&A fairly significantly both on a GAAP and the pro forma basis which has a lot to do with cost of stocks and audits and so on. So that's going to be a continued good guy. Sales and marketing, we’ve done a pretty good job too of keeping that fairly steady state which has to do with how you attend, the manner in which your attend trade shows and so on, we’ve been very drifty. At the same time, we are adding sales presence so that tends to be minor up tick but not significant. Our key ad as usual in R&D and for us typically that means we add perhaps 400,000 a quarter in that particular area adding resources.

Maynard Um – UBS

Okay, great. Thanks, Andy.

Operator

All right. Thank you. Our next question is from Rich Valera with Needham & Company. Please go ahead.

Rich Valera – Needham & Company

Thank you, sort of if you can comment a little more on multimedia, you kind of broke that out last quarter as a segment and this quarter you mentioned it was I think the revenue wasn’t significant relative to kind of activity, I was just wondering, one if you could define what is not significant is sort of less than a million, less than 500,000 and two, sort of what happened to that business as horizon still using the software on their music phones, why at these low levels (inaudible) actually think about business going forward?

Bill Smith

Okay. First of all, let me say it's not significant, it less than a million and so that’s kind of factor the way into it, it just wasn’t a big number. As for as for Verizon, Verizon switched to Real Networks with their music well over almost a year and a half ago, we are seeing a decline in the amount of business we've got from Verizon on the multimedia side. However, that's again have history as we look forward and we look to wherever going we think that multimedia will start to grow back as a more significant part of our business case going forward, especially when we start talking about some of our Cloud computing strategies and the need for not only the carriers but also the cable operators that are starting to meet in the middle. Where they’ve really are focused on delivering content to the three screens that really matter the most, those being the mobile device, the PC and television, and they just come out from different points of view they meet in the middle. So we believe that the multimedia part of our business is a significant play for us going forward and we will grow to be a significant number in coming quarters, it just wasn't this quarter.

Rich Valera – Needham & Company

That’s helpful. And Andy, just I know you don’t want to get into quarterly guidance per se, but can you say anything about the sequential trajectory of revenue expected in the second quarter? Do we expect it to be up or flat relative to the first quarter, if you could give any color here that would be helpful?

Andy Schmidt

Sure. Absolutely, it's going to be up. I mean this, we are seasonal in this business and there is as I said in my prepared remarks, we expect the business to improve from this point. The key is looking at the business year-on-year, so last year in second quarter we did 23.4 and we didn't say we are going to be bad, its just a matter of – we are shooting for our guidance of being up 10% to 15% this year, that’s 1.10 to 1.15. So again that is quarter by quarter and we are shooting the build each quarter, and I’d do last year both not only in revenue but in operations perspective, our margins are up 40% year-on-year. So not only our revenues up 9%, we are up 40% on accounts. So again we expect to continue that type of performance as we go into Q2 and then take it forward.

Rich Valera – Needham & Company

Great.

Bill Smith

I think this is also to assist with our comments that we made since the start of the year, starting at Euro conference in January and namely we said that we were looking at the guidance of 110 to 115 million. We said, if you look at – but the performance was in the four quarters of 2008 kind of look at the first half of the year it's been up somewhere around 10% over that quarterly performance and in the back half of the year, being close to 15% up over that quarterly performance. So while we didn't give you quarterly guidance, we really kind of did all you have to do is get your calculator out.

Rich Valera – Needham & Company

That’s helpful, Bill. Thank you. And just one final one if I could, just wondering how the economics play out for you if you sell your connection manager through a carrier or through a notebook OEM. At this point, I think you have most of the carriers, the major broadband carriers in the US sort of shown up, so how do you generate incremental revenue from a notebook OEM if that notebook is ultimately going to end up on the network that you already have sort of a commission manager agreement with that carrier?

Bill Smith

That’s a very good question. And I think the way to really think about is to look at what the motivation is for PC OEMs to include connectivity software in their offerings going forward versus what the motivation is for the carrier. When you look at the carrier, you're looking at building a piece of software that provides easy access to their network and has really only designed to provide easy access to their network and it does so in a way that is conducive with how they market their services, it's branded to them etcetera. When you look at the PC OEM going forward and we’ve already publicly announced some time ago and they are very significant important customer to us today. Their motivation is to build some connectivity software that provides instant access to Internet anywhere you are on anybody's network, it's branded to the PC OEM and is designed to sort of augment or show off the capability of that PC device whether that PC is a computer or netbook. So it's a little bit different as to how you go to market, they a different products, they are different code basis [ph] and we – as you say, we dominate the carrier one and currently has more and more news becomes public you will see that we have a very dominant law on the PC OEM side as well.

Rich Valera – Needham & Company

Just to be clear, you don’t double to you if there is connection manager embedded on the PC, you don’t also get a royalty from the carrier, do you?

Bill Smith

Okay, let me see how to answer that. We get paid a royalty for the software that is preloaded on the PC for the PC OEM. We get paid for every copy that shifts. We are paid for that. And then on the carrier perspective, we get paid for every carrier branded software product that shifts with the devices that they offer. So I always (inaudible), but in actuality we get paid for everything that we sell.

Rich Valera – Needham & Company

Okay, but would you get paid by one or the other, not both right?

Andy Schmidt

In most cases.

Bill Smith

Yes.

Rich Valera – Needham & Company

Okay, that’s what I was – thank you very much.

Bill Smith

There may be some exceptions.

Operator

Fine, thank you. Our next question is from Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett – Northland Securities Inc.

Yes, hi. Good job on the quarter by the way and couple of questions for you. And maybe this is a different way of asking a question from before on the guidance for this year. Considering the wins you mentioned this quarter, do we expect from a volume standpoint the netbooks opportunity cope with the roll-out you have in Q2 and I guess just netbooks in general and then the PC OEM to be defined material however you want, but material contributors to ’09 or are they kind of at run rates in 2010?

Bill Smith

Okay. The piece – let’s kind of separate those two. I think they need to be separate. The PC OEM side of our business is significant. As I said, that alone was 14% of our business in Q1 and we said that we have signed yet another PC OEM whose name we can’t mention yet, but hopefully we will become public not in too distant future and we consider that win will also be significant. So the PC OEM marketplace is a very important strategic marketplace in our overall business case.

Now, let's switch for a second to netbooks, I really think they kind of stand a little bit different. In the case of netbooks, this is an emerging marketplace and there were a number of netbooks shipped in 2008 but those numbers in relative significance are fairly immaterial to the potential for the netbook marketplace. We believe that we are putting together some very strategic products for the netbook market, that would give us a very strong play in that space. And by definition, netbooks the only way they really work is when they are hooked to the Internet, you got to have connectivity capabilities, there is other utility place, there is other multimedia places, other devices solutions all sort of convergence with all of the technologies we process under a single roof in the netbook space. We think the netbook market will grow in 2009 whether it will be significant relative set, that actually have to be seen and I think the market has to bare itself out.

One of your first indicators will be a fairly significant roll-out, other than that what – one of our large carrier customers. If that plays out well, that should give us more – an indicator as to how this market segment might grow. Assuming that it grows, I think it will, clearly by 2010 it’s a very significant play in our overall business space. I hope that helps you.

Chad Bennett – Northland Securities Inc.

Yes and maybe this is a more direct way of asking the question, if we have the top three carriers out there by mid-summer with each of them selling 2 to 3 different brand in netbooks and they are across (inaudible) count 30 or 40 major cities, would that be – I would imagine considering really AT&T is the only one really out there with the netbook in a couple of cities, I would imagine if the roll out became that much – that rapid that would probably be more material than what you are expecting at netbooks this year.

Bill Smith

That’s possible, but of course what we are tying to guess right now is what the adoption rate will be on the part of the end-user? Are we going to buy netbooks or are we going to say no, we need a PC that has as many hard drive and all of the associate power and etc. If the netbooks phenomenal, and I am really debate that is going to be successful, those actually take off in the meaningful way that could provide upside and we will come to the street if that's the case and then we will talk about that. I think we have to wait and see how it plays out before we try to get. I guess that’s for two guys as analysts, I just try to build products and get ready for the marketplace. I think its going to be a strong one.

Chad Bennett – Northland Securities Inc.

Okay, fair enough. And then do we expect to record revenue from the top PC OEM in the second quarter?

Andy Schmidt

We are looking at probably in the second half of the year.

Chad Bennett – Northland Securities Inc.

Second half of the year and I know you don’t want to name names, but is it a top four PC OEM?

Bill Smith

Can I answer the question so I get (inaudible).the problem

Chad Bennett – Northland Securities Inc.

I tried. All right. Just a couple of quick ones for Andy I promise and then I am gone, Andy what was your cash tax rate for the quarter?

Andy Schmidt

25% and just to throw some metrics out there, there are in K and Qs, but we're working forward here that Federal NOL carry forward is about 1.2 million and a state NOL carry forward of 6.3 million.

Chad Bennett – Northland Securities Inc.

Okay.

Andy Schmidt

But more importantly, we have federal tax credits, R&D tax credits of 1.1 million or carrying forward and state tax credits of 600,000.

Chad Bennett – Northland Securities Inc.

Okay.

Andy Schmidt

So that sets us up for what we think we will about 25% and that of course the governments continued (inaudible) profitable companies use our tax vehicles.

Chad Bennett – Northland Securities Inc.

Yes. And that’s probably another conversation, but deferred revenue was up pretty materially at least sequentially, was that your season Andy or was there anything in there?

Andy Schmidt

It’s not seasonal, it’s all connectivity and that seasonal in terms of January early billing.

Chad Bennett – Northland Securities Inc.

Okay. That’s what I figured. Thanks, guys.

Operator

Right. Thank you. And our next question is from Lauren Ye with JP Morgan. Please ago ahead.

Lauren Ye – JP Morgan

(inaudible)

Andy Schmidt

Good.

Lauren Ye – JP Morgan

Just wanted to ask another question on the pipeline. So as you look out your pipeline, could you say that your pipeline has been accelerating? I guess Q1 had half a dozen deals closed. How should we look at your pipeline in Q2 and going forward in 2009?

Bill Smith

Yes, that’s a good question. We were pretty woeful about how we had a very strong Q4 2008. We backed that now with a strong Q1 2009 as far as the – our ability to acquire new customers, sales teams, marketing and business units are executing very well. We have a strong pipeline presently in Q2 and we're very energetically working on getting contracts signed, we have expanded our contracts department as a result of that, that is an area of growth, that's a good sign, a leading indicator possibility. So we look forward to strong customer acquisition throughout the year and as we have said many times we are very bullish about our business guys, we are very bullish about our future and just have to kind of stay tuned.

Lauren Ye – JP Morgan

Okay, great. And I just got a question actually around the customers, have you seen any change in your customer behavior as it relates to sale cycle lengthening or maybe duration of your contracts in light of I guess with this macro economy?

Bill Smith

No. In other words, they remain long term contracts that goal is often said, we are development player in the space and as evidenced by the new contracts we are signing, so always contracts to are multiple year long term contracts. These are purchase order type contracts.

Andy Schmidt

Yes. And I think the other thing is you have to look at whom we do business with. We do business with some of the largest enterprises in the world and these are folks that – we are feeling the impact of the recession and the difficult times, but at the end of the day these are very strong businesses that will weather these times and come out of it probably stronger than they run into it which is something I said about us fairly consistently going forward.

Lauren Ye – JP Morgan

Great. And just Andy around Verizon, did you say it was 28% of total revenues?

Andy Schmidt

Yes. And that includes ALLTEL now, it’s a Verizon.

Lauren Ye – JP Morgan

So sequentially I guess just Verizon alone are some sort of apples to apples basis, did they go up or down?

Andy Schmidt

They are up about 18% Q4, but part of that is mechanics of the consumer business was closer in the 6 million range and now they are down to 4 million, so as part of it simple mathematics, so part of it Verizon added ALLTEL into their numbers, and the other part is just simple mathematics.

Lauren Ye – JP Morgan

Okay. So the business is still steady around this level?

Andy Schmidt

Yes and that you will see a portion of the ALLTEL business that is – there are required to divest, lead their category at the time of divestiture and that will either come yet a new customer to us again or will be incorporated by somebody else of the out devices.

Lauren Ye – JP Morgan

Got you. Okay, great. Thanks a lot guys.

Operator

Thank you. Scott Sutherland with Wedbush Morgan Securities. Please go ahead with your question.

Scott Sutherland – Wedbush Morgan Securities

Great, thank you and good afternoon.

Bill Smith

Yes, Scott.

Scott Sutherland – Wedbush Morgan Securities

Now I ask you the PC OEM and then you rare not giving details, but what’s you put some expenses ramping up on that. Have you already been sending here or you expecting to more extensive to ramp up here and for how long?

Andy Schmidt

Any deal once we say we have got it done, you can pretty much rest assured we have been working on it for a little bit. So we always have a leading on expenses, so we’ve already seen that occur. But as I said earlier in the call or earlier in the Q&A, as Bill commented, we closed just something [ph] half a dozen deals, but a significant number in deal momentum is still strong. So we expect to keep adding it to our R&D bucket and for us that means we can effectively add may be 400,000 a quarter worth of expense in terms of manpower that seems to be our faith. So we expect to continue to add in this category.

Scott Sutherland – Wedbush Morgan Securities

Okay. Wonder about the economics from a carrier versus a device PC OEM perspective? (inaudible) PC OEM guy will pay you for each copy whether that first activates on network or not, so significant pricing is smaller percentage of what a carrier pays for each copy or how should we think about that?

Andy Schmidt

Well, the biggest thing that we have a consistent pricing model that is tied to volume. And by definition, PC OEM shift higher volume than any, even though the largest carriers purchasing on quarterly basis. Therefore, their cost per unit might be lower, but their volume is substantially higher. So that’s how we think about it.

Scott Sutherland – Wedbush Morgan Securities

(inaudible) get back of it or not on the device side?

Andy Schmidt

That’s right. It’s based on shipment.

Scott Sutherland – Wedbush Morgan Securities

Okay. And lastly, your multimedia again based on what you saw in the connectivity side, it looks like that was under a million. It looks like a rebound, is this really driven by new clients or there is external or national or do you think Verizon starts to rubble out [ph] maybe grow with the ALLTEL acquisition.

Andy Schmidt

Obviously it’s very helpful when you have new customers like Nextel international and LiveWire, that’s all positive and additive. But we also expect some game changing kinds of deals and I don’t think either of those two – first two would be considered game changing and those deals will probably coming around some of our newer technologies in the cloud side.

As well as some enhanced multimedia or device management products as well. One of the things we’ve talked about for some time is the – one of the issues that all of the carriers have to face is that we only have so much (inaudible) much spectrum and so one of the things to do is to look at how you utilize that spectrum. So when you get to things like fixed mobile convergence which is one of the IMS type technologies allows a carrier to move some of the traffic from the cellular networks to a Wi-Fi network when the user is in the Wi-Fi area. That’s a better way to get utilization of the bandwidth they have available to them. These are all technologies that we own there, part of our fabric and part of our overall offerings to our carrier customers, I’ve talked many times about the need to sell the portfolio and I am incredibly pleased that we have a very strong professional sales team today that really gets and they are out selling the portfolio. And so we are selling connectivity, we are selling multimedia, we are selling device solutions products, we are selling a lot of different vast compression products etc and all adds up.

Scott Sutherland – Wedbush Morgan Securities

Okay, great thanks. Good job growing in a tough environment.

Andy Schmidt

Thanks.

Operator

Thank you. Larry Harris with CL King. Please go ahead.

Larry Harris – CL King

Yes. Thank you. With respect to the consumer business, obviously its affected by the economy in such and to what extent would future results there would be driven by say about, who [ph] comes out with a next generation macro care, I think store selling a lot more notebook computers and obviously desktop machines, would that help to drive additional revenues in that segment?

Andy Schmidt

Our productivity and graphics group has a lot of technologies under a single roof. And yes, they have had a very strong tradition of leveraging of what happens in the Macintosh platform and that’s done very well for us because the Mac usually tends to be a little more affluence than a little bit more on after market products like software. So that had their service well. I think that when we look at this groups future, we are looking at how we deploy a lot of this technology going forward and then maybe some ways to go far behind what will be traditional consumer channel and we really can look at the enterprise and small businesses as well as others as a value to bring product to market and that’s something we are highly focused on.

Larry Harris – CL King

Understood. And the reference that you made earlier to working with the cable companies, I assume that as a result of your relationship with Clearwire, is that correct?

Bill Smith

Obviously, relationships tend to leverage off relationships and the Clearwire tie is very meaningful with Smith Micro and we are very privileged to be able to call a Clearwire customer. But there are some very big names that have invested heavily in Clearwire like Comcast, Time Warner and others that can in their own light have a very significant play with Smith Micro going forward. So I think one of the things to look at with the carriers is just you are seeing a logical trend, the carriers are coming out of their telephone experience and those into towards the Internet and towards looking at all three of the primary screens of importance, where the cable guys start with the television and then move in the other way, but at some point and its already happening they pass our crossing. Cable guys are going to become wireless carriers, wireless carriers or cable guys. So it’s interesting to watch this happen.

Larry Harris – CL King

Absolutely. Okay, thank you.

Bill Smith

Thank you, Larry.

Operator

Thank you. Just one moment please. Management, there are no further questions at this time. Please continue for any closing comments.

Bill Smith

Okay. Thank you. I want to thank everyone for joining us today. And just note we hope that you can always join us here for some upcoming conferences, which include the 2009 J.P. Morgan Technology, Media and Teleconference on May 20 in Boston. There are also will be two conferences in early June, The RBC Capital Markets Conference as well as The UBS and Global Technology and Services Conference. Should you have any other questions, please feel free to call us and we look forward to speaking to you on our second quarter conference call. Thank you.

Operator

Thank you. And ladies and gentlemen, this concludes the Smith Micro Software fiscal Q1 2009 conference call. Thank you for using ACT conferencing and have a very pleasant rest of your day.

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