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Executives

Charles Messman – IR, MKR Group Inc.

Bill Smith – Chairman, President & CEO

Andy Schmidt – CFO

Tom Matthews – Chief Strategy Officer

Analysts

Larry Harris – C.L. King

Lauren Ye – JPMorgan

Chad Bennett – Northland Capital Markets

Scott Sutherland – Wedbush Securities

Smith Micro Software, Inc. (SMSI) Q2 2010 Earnings Call Transcript August 4, 2010 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro fiscal second quarter 2010 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) This conference is being recorded today, Wednesday, August 4th, 2010. I would now like to turn the conference over to Mr. Charles Messman. Please go ahead.

Charles Messman

Good afternoon. Thank you for joining us today to discuss Smith Micro Software’s financial results for our second quarter ended June 30th, 2010. By now you should have received a copy of the press release discussing our quarterly results. If you do not have one and would like one, please visit us at www.smithmicro.com, or call us at 949-362-5800, and we will email you one immediately.

With me on today’s call are Bill Smith, Chairman, President and Chief Executive Officer; Andy Schmidt, Chief Financial Officer; and Tom Matthews, Chief Strategy Officer.

Before we begin the call, I want to caution that on this call, the Company may make forward-looking statements that involve risks and uncertainties, including, without limitation, forward-looking statements relating to the Company’s revenue guidance for fiscal 2010, its financial prospects and other projections of its performance, the Company’s ability to increase its business and anticipated timing and financial performance of its new products and potential acquisitions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the Company’s products from its customers and their end-users, new and changing technologies, customer acceptance of those technologies, new and 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 Forms 10-K and 10-Q, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. The forward-looking statements contained in this conference call are made on the basis of 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.

With that said, I’d now like to turn the call over to Bill Smith. Bill?

Bill Smith

Thank you, Charles. Good afternoon, everyone, and welcome to our second quarter ending June 30th, 2010 earnings conference call. We are pleased to report another solid quarterly financial performance. We have posted our fifth consecutive quarter of revenue growth, generating the highest quarterly revenue results in our company’s history of $31.4 million. This represents an improvement of $5.4 million over Q2 2009 or 20.7% increase in revenue over the same period last year.

In addition to our strong top line growth in the quarter, non-GAAP net income was up nicely, posting $6.8 million, or $0.20 per share versus $5.6 million and $0.17 per share that we reported in the second quarter of last year.

We’ve recently announced Jim Straight as a new member of our Board of Directors. I want to thank Jim for agreeing to join our board. Jim brings to us a strong grounding in wireless marketing, gained from his years of experience at Verizon Wireless. And yes Jim, I can hear you now.

All in all, we are very pleased with our second quarter and first half financial results along with the quality of the operating fundamentals within our business. In the face of continued challenges provided by a difficult economic environment, we delivered very solid performance and have made further strides in the evolution of our product lines. We look forward to the continued deployment of more ubiquitous and faster broadband mobile services with the coming of LTE and the continuation of the rollout of WiMAX over the course of the next several quarters and in the years ahead.

Our wireless and mobility unit continue to deliver as the growth engine for Smith Micro. Revenues within our wireless and mobility software unit were $28.3 million in Q2, up 32.5% year-over-year. We remain energized by our prospects for future adoption of our Smart Mobility platform within this business segment. We are also committed to enhancing our offerings to enable new solutions that will deliver a smarter mobility experience for our customers and their end users.

Revenues from our productivity and graphics business totaled $2.9 million for the quarter or $0.09 of total sales, which was down 33% from the $4.3 million in Q2 2009. The product lines within our productivity and graphics business have been undergoing transformation to support a more Software-as-a-Service model for our offerings in the future.

This shift is well underway and I will discuss our vision for this unit later in the call after Andy completes his review of the numbers. Andy?

Andy Schmidt

Thank you, Bill. Okay, first, let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results, and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed in this call net out amortization of intangibles associated with acquisitions, stock compensation related expenses, and non-cash tax expense to provide comparable operating results. Accordingly, all results today referred to in my prepared remarks for both 2010 and 2009 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC in form 8-K contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The earnings release can also be found in our Investor Relations section of our website at smithmicro.com.

In detailed manner, for financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $2.9 million for the current period, broken out as follows

$25,000 for cost of sales; $778,000 selling and marketing; $658,000 for R&D; and $1.44 million for G&A.

In terms of amortization, the total for the current period was $2.3 million, broken out as follows

$1.5 million for cost of sales; $768,000 for selling and marketing.

Okay, moving on, for second quarter, we posted revenue of $31.4 million and diluted earnings of $0.05 GAAP and $0.20 non-GAAP. The revenue for the quarter was an all-time record of 21% from second quarter 2009. International revenue was approximately $3.7 million in this quarter across all business groups.

Our wireless segment reported record revenues for the quarter of $28.3 million as compared to $21.4 million last year, an increase of 32.5%. Within the wireless segment, connectivity and security posted revenues of $21.1 million compared to $20.1 million last year. Multimedia, backup and messaging and mobile device products posted revenues of $7.2 million compared to $1.3 million last year.

Offsetting overall gains in our wireless our productivity in graphics group posted revenues of $2.9 million as compared to $4.3 million last year, a decrease of 33%.

And finally, we reported approximately $121,000 of other revenue, which compares with approximately $281,000 for second quarter of 2009. Total deferred revenue at June 30, 2010 was approximately $2.7 million.

Switching to gross profit, non-GAAP gross margin dollars of $28.9 million increased $5.6 million or approximately 24% from the same period last year. As a testament to overall quality of our revenues, our revenue increased 21% year-over-year while our gross margin dollars increased 24% for the same period.

As follows, non-GAAP gross margin as a percentage of revenue was approximately 92.3% for Q2 2010 compared to 89.7% for Q2 of 2009. Non-GAAP gross margin by product groups were as follows: wireless 93.5%; productivity and graphics 82.7%; and other revenue 49%. As we noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expenses for the second quarter of 2010 were $20.1 million is an increase of approximately $400,000 from Q1 and is driven primarily by increases in headcount and facilities. The increase in expense is as expected. From a year-on-year perspective, non-GAAP engineering expenses increased 22%. Selling and marketing increased 22% and administrative expense increased 38%. It should be noted that administrative expense includes the cost of additional facilities expense and leasehold improvements.

Total non-GAAP operating expenses increased 25% year-over-year, driven by planned infrastructure growth and by acquisitions. Non-GAAP operating margin for the current period was 28.3%, higher than our benchmark 25%. Current period operating margin compares similarly to operating margin of 28.1% for Q2 of 2009.

Non-GAAP operating profit for Q2 was $8.9 million, an increase of $1.6 million or 22% from the prior year. Non-GAAP net income for the second quarter was $6.8 million or $0.20 per diluted share as compared to $5.6 million or $0.17 last year.

Cash generated from operations for the quarter was approximately $7 million. The primary uses of cash for the period were capital expenditures of $2 million. Capital expenditures were primarily leasehold improvements and investment in ERP system and IT infrastructure. Overall, we posted yet another quarter of improved metrics and strong cash flow.

Looking forward to the balance of 2010, we are pleased with our first half year performance. At this time we will hold steady with our previously announced guidance of revenues between $125 million and $135 million. Gross margins will be between 90% and 92% and we will continue to target operating margins of 25% with a caveat that acquisitions tend to lower operating margins for one to two quarters post acquisition due to integration related expenses.

Finally, taxes continue to be in a state of change given state and federal (inaudible) spending. At this time we are still estimating that our 2010 cash based tax expense will be 25% to 27% of non-GAAP net income. As tax laws changes through the year, I will provide an update to this metric.

In terms of housekeeping, we expect to file our current period 10-Q this week, which will represent our final financial statements for the period.

At this point, I will turn the call back to Bill.

Bill Smith

Thank you, Andy. As we mentioned earlier, revenues from our wireless and mobility segment increased 32.5% over the second quarter of 2009. We delivered solid results from every product category within this segment as we make progress towards deploying our suite of Smart Mobility offerings. We continue to deliver our market-leading intelligent connectivity solutions to key wireless carrier customers such as Verizon, AT&T, and Sprint. These customers all contributed nicely to our results in the quarter with each accounting for a minimum of 10% of our revenues.

Although product sales continue to be fueled by our QuickLink mobile connectivity managers, we saw a significant improvement from our other wireless product offerings across our customer base in the quarter. Mobility product lines outside of our connectivity and security include mobile device management, multimedia and content management, along with the acquired messaging products, Visual Voicemail, and Push-To-Talk, which came to us via our Core Mobility transaction late last year.

Results from the combination of these products were up nicely in the quarter. We see our overall results as a positive indication that our mobility product portfolio which is designed to support a comprehensive set of applications across the wide universe of connected devices is being accepted by our customers.

Through revenues resulting from the Core Mobility acquisition continue to track with our guidance and we are delighted with a very successful launch by Verizon of our new Push-To-Talk version for the BlackBerry devices in this quarter. In addition we have picked up a new Visual Voicemail win with an emerging wireless operator that we expect to roll out by year’s end. We have also expanded a key relationship with a current customer to include a Visual Voicemail version that will include enhanced voice to text transcription services in the coming quarters.

We see these as positive results, and an indication that our strategy to deliver Smart Mobility products for both the client and server are meeting the requirements of our customers.

The Smith Micro Smart Mobility platform strategy leverages multiple technology components to support many applications that share common modules, architecture and code in an efficient manner. We have designed our platform frameworks for both client and server application and we designed them to work together. One recent example of successfully deploying our platform strategy is with the Sprint EVO 4G phones where every phone ships with a Smith Micro Device management client and the Smith Micro Visual Voicemail client.

With the embedded Device Management client, we can automatically update the Visual Voicemail to add new features such as in the future use for our voice to text module then provisioning enable the service over the year without having to touch the device.

On server side, we leverage multiple Smart Mobility components to address policy management for our Connection Manager and DM clients. In addition, we support management of applications and device updates, data collection for analytics and diagnostic reporting, and we also enable service provisioning and activation. These capabilities not only differentiate our products but serve to help our customers better understand the end users’ habits. And in doing so, provide an improved user experience. This ultimately assists our customer in improving subscriber retention while reducing the challenging cost associated with customer churn.

Our server platform development is a key component of our Smart Mobility strategy and we have made great strides over the past year building a comprehensive suite of offerings that create value for our customers and enhances the capabilities of each of our client applications. We have seen new applications and demand for our mobile device management products.

During the quarter, we have added our second seven-figure European customer outside of Nokia to use our DM suite. We had made this technology a key part of our portfolio for the future and we see these capabilities for managing policies in an intelligent way as a clear differentiator for our entire mobility product line.

We continue our work on integrating our full compliment of technologies such as compression and optimization, IP mobility, security, and analytics into the Smith Micro Smart Mobility platform. These technical capabilities server to enhance our product value and improve the connected digital lifestyle experience. As we move into the era of 4G wireless with mobile Internet access available anywhere, we will be prepared to further capitalize on the growth presented by these developments.

Our productivity and graphics unit has been hit hard by the softness in consumer spending. Frankly, this consumer softness has been deeper than we anticipated and is showing little ability to recover in the near term. As a result, we have chosen to retool this unit around their technologies of compression and graphics and to infuse our corporate strength of Smart Mobility into a new dynamic business case for the unit.

We are shifting more of our product lineup toward online solutions that can address opportunities for not just consumers but for professionals and enterprise users as well. The shift toward a Software-as-a-Service model can build recurring revenue stream that develops nicely over time.

We launched the first of our new offerings called SendStuffNow, which is an advanced cloud-based secure file delivery service. SendStuffNow leverages our StuffIt compression and security technologies to deliver and manage files providing the most secure method for transporting important information and file to the new connected mobile world.

Embracing our position as the leader of Smart Mobility, we have released SendStuffNow apps for the Apple iPad and iPhone. We will also release a Microsoft Outlook plugin and an app for Android later this month. We will follow these with new releases that support BlackBerry and Windows Phone 7 in short order.

This is our first cloud-based service initiative in this unit and we anticipate several other productivity and graphics, animation products emerging in 2011 that will utilize the cloud-based service model. We have a great vision for the productivity and graphics units, going forward, but next couple of quarters will be challenging with the consumer on the sidelines.

Before I turn the call over for questions, I would like to offer some further observations and perspective on our business. Our core wireless and mobility business is very healthy and performing well as we move towards the next era of emerging 4G high-speed wireless data.

Looking ahead to the coming quarters and beyond, we see opportunities for software and solutions to help deliver better experiences for the mobile Internet user as we prepare for the emergence of more and more globally connected devices. The coming deployments of higher speed networks such as LTE with Verizon planning to launch in a number of markets by year-end will drive more users to new mobile broadband services.

We are still in the early stages of what is sure to be a long term trend to an increasingly connected and mobile world. Smith Micro’s core competencies in the field of connecting devices, networks, content and people continues to evolve, expand, and increase in relevancy.

We are delivering results for our customers today and we are committed to investing in R&D to create smarter mobility software and service platforms that will offer further growth for our business going forward. We had executed on another solid quarter, growing revenues and earnings. We are now focused on the challenges ahead for the balance of the year. We faced this challenge while difficult economic conditions linger, particularly affecting our consumer-facing productivity and graphics offerings.

As a result, we see revenues from this group coming in softer than internal expectations over the next two quarters. When we announced revenue guidance at the beginning of the year we told you that we would update you at the midpoint. We’ve posted two solid quarters of revenue and profitability and we are reiterating our guidance with annual revenues landing within the original range of $125 million to $135 million.

However, given the persistent softness we see in the consumer segment, we believe that the challenge of getting into the upper end of the range will be more difficult without a meaningful improvement in the macro economy in the back half of the year, for their realization of faster-than-expected deployment and adoption of 4G networks.

We do, however, feel more certain than ever that when 2010 comes to an end, our second half will be up sequentially from the first half and we will have delivered strong profitability to the bottom line. By delivering the strong results, we will have achieved solid year-over-year growth for all four quarters of 2010.

With that, operator, I would like to turn the call over to you for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Larry Harris with C.L. King. Please go ahead.

Larry Harris – C.L. King

Wow, thank you. Question about the new product initiatives such as SendStuffNow. We have seen certain margins from that business segment. Could those margins change? Could there by additional R&D? What should we be thinking about profitability in that segment, going forward?

Andy Schmidt

Hey, this is Andy. Let me give you a (inaudible) P&L what that looks likes. Again, as you know, we are just launching the product. Once we get to more meaningful revenues in that area, again it’s just launched. So, getting started here. It should run at about an 80 point gross margin basis and of course we wouldn’t – we would expect all of our businesses to contribute at an op margin at 25% as with all of our businesses.

But like any other initiatives that we have you are pretty much needed to get into seven-figure per quarter revenue to actually get to the right operating metrics. Right now, again, there is not a – what you would expect is we are going to put some marketing spending to getting that product out over the next couple of quarters. And 2011 is when we’ll start seeing that particular product. Our expectation is it will start performing at those types of metrics.

Larry Harris – C.L. King

I see, okay. And in terms of Verizon, you mentioned that it was a 10% customer this quarter. Is there a more precise number available?

Andy Schmidt

Yes, sure. It’s a 10% plus customer. It was actually 38%.

Larry Harris – C.L. King

38%. Okay, great. And then finally, and I know certainly you can't speak for customers and such in terms of their launch dates and how many markets and there is lot of I guess commentary out there but if they were to move things forward a few weeks or move them back a few weeks, could that have in terms of launching out the – could that have an impact on fourth quarter revenues or it probably wouldn’t have a material impact.

Bill Smith

Well, (inaudible) obviously it would give us more cell [ph] time assuming that the offering and I really assume this, is something that the market wants to invest in, so I think LTE is probably going to de-lever on the promise. So, if it moved, obviously that would help. If it slipped back, that may not really impact this, because the first customer to launch is Verizon. You will see a build out as they get ready to the launch and we probably realize pretty much the same revenues.

Larry Harris – C.L. King

Understand. Okay, thank you.

Operator

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

Lauren Ye – JPMorgan

Hey, guys. Hey, guys, how is it going?

Bill Smith

Great.

Lauren Ye – JPMorgan

Just had a question about the connectivity. It looks like it was just down a bit sequentially. Anything going on there? Is it more volumes or pricing?

Andy Schmidt

Hi, Lauren, this is Andy. You know, it’s all rev rec. That has to do with a legacy AT&T contract from the PCTEL MSG acquisition. And if you look at deferred revenue, you got a jump there for the period of over a million dollars. So, it’s a bit of timing from Q1 to Q2. In essence, the quarters were somewhat consistent in terms of connectivity and the slight difference you see is just revenue accounting. But when we look at especially the top three carriers, they are growing consistently year-over-year from our perspective. So, perhaps that helps a little.

Lauren Ye – JPMorgan

Yes, definitely, great. The next question is I guess specifically that $7.2 million in the multimedia and other areas or not other but the – everything that’s in there. That’s a quite a large jump on last quarter. Was a there a specific product that’s making this ramp or is that the Verizon sort of – ?

Bill Smith

Here is the great news. The great news is the portfolio plays is really starting to kick in and all three product groups that comprise that area, backup, messaging, multimedia, and mobile device management, all three were seven figure players in the quarter so that’s great. It’s all looking good across all fronts. Now you should expect in this area that won't have a – it won't have a material impact on our results in future quarters but for al these businesses there are enough stuffing into the seven-figure per quarter, which is just basically starting from our view point, which means that it will a little bit choppy in each of those areas and each group because when you start out these type of products, there is a mix of customization and adaption as well as recurring revenue and as that shifts around in the beginning quarters of launches it’s a little bit more skewed towards one-time revenue versus the recurring revenue to where each of the product groups will take turns being a lead dog, if you will, each quarter. But it’s a fantastic start in that all three of them are contributing very significantly and we expect them to continue to do so as we going forward.

Lauren Ye – JPMorgan

Okay. Was there any one that made a larger – what was the one with the greatest growth right now – ?

Bill Smith

The largest right now and what we should expect may be for the upcoming quarters is back up and messaging products.

Tom Matthews

And also Bill mentioned that there is another win in Device Management, Lauren, a seven-figure win in Device Management for the quarter. So, that was MySim [ph] and frankly the Push-to-Talk at Verizon was the BlackBerry offering was a nice rollout launch for us as well. So, as Andy said, really all three of those core areas are starting to ramp up.

Lauren Ye – JPMorgan

Okay, great. So, last question is around I guess just the margin guidance at 25% again, so it looks like you’ve increased margins March and June. I guess that – can you just talk about Andy may be the thought of maintaining this 25% kind of guidance when it looks like you are running above that?

Andy Schmidt

We just want to always keep caution in terms of – we are in build mode. We’ve got LTE launching here in Q4, which is going to require considerable effort it has all along, but will continue to require effort. SendStuffNow is a very interesting product that as we were talking now with an earlier caller, we are getting really perhaps for 2011 that’s going to take some marketing spend here in the next few quarters. So, 25% is what we can see to be our benchmark that we’ll hit that for you. But can it go up a little bit, yes, can, but we just like to keep you for caution that we do have some important investment to do for the future.

Lauren Ye – JPMorgan

Okay, so I guess that more specifically are we guiding a little down then for September and December?

Andy Schmidt

We will like to keep it at 25% to model it at that and with the idea that there are investments that we do have in our models that we’d like to make and timing is what it is, will come in more the guidance and that the timing is little bit – skewed a little bit on our timing then we bubble up.

Lauren Ye – JPMorgan

Okay, great, thank you so much.

Operator

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

Chad Bennett – Northland Capital Markets

Yes, just kind of talking about your hitting on the back half language that you used, you talked about solid year-over-year growth. Not to get too detailed here, but I think the blended year-over-year growth rate for the first half is somewhere around kind of 22% to 23% is the region – I mean would you consider that solid year-over-year growth and is there any reason why we would be materially off that kind of up or down?

Bill Smith

Yes, I think I could say that very solid, especially when you consider that we are doing it in the teeth of what is still a very strong recession and we haven’t really come out of it yet. So, I think to continue to grow our business and execute and to enhance our profitability and our cash flow we’ve done a pretty good yeoman job.

Chad Bennett – Northland Capital Markets

Okay. So, that’s – there should be no different way of thinking then for the second half?

Bill Smith

I am not following your question.

Chad Bennett – Northland Capital Markets

In terms of the propensity of your year-over-year growth in the first half relative to second.

Bill Smith

Yes, okay, that I think you have to think of it a couple of ways. We’ve said that because of certain conditions like what’s going on in the productivity and graphics group and the fact is they are so broadbasing to the consumer and the consumer is clearly on the sidelines, is there – that is going to be – you are not going to see the growth that we would normally expect to see in that business unit in the back half of the year. So, yes, that’s going to make you want to be a little bit more cautious as to how you view the back half of the year and make certain changes that that would just fall out to.

Chad Bennett – Northland Capital Markets

Okay. Has – form when we gave guidance early in the year, has our – have our thoughts regarding LTE, 4G impact in this year changed at all?

Bill Smith

No, no, we are very bullish about the entire WiMAX rollout a number of our customers are in the middle of. We are very excited about the first LTE rollout by Verizon and others will follow. So, I think that is a major event and that’s a major catalyst for our business case and will be so probably for the next couple of years.

Andy Schmidt

Yes, the only thing that’s changed from January when we gave guidance if at all is just – and as Bill pointed out several times, the consumer facing products. You go again, everyone is optimistic that second half of the year is going to be better, but all economic forecast is such that it’s not going to be a big change from where we sit today. so when we look at that business, it has been flat through the year, first quarter not growing from first and second quarter where typically we see seasonality in our productivity and graphics group where you see an uptick in Q3 and Q4. We don’t expect to see an uptick in our product groups. We expect it to be flat with first half.

Chad Bennett – Northland Capital Markets

Okay. Okay. And the 10% customers in the quarter-end, I didn’t quite catch them all. I heard Verizon, AT&T, and was there a third?

Bill Smith

Sprint.

Chad Bennett – Northland Capital Markets

Who is the third?

Bill Smith

Sprint.

Chad Bennett – Northland Capital Markets

Sprint. Okay. Okay. And then I guess in terms of – I think you talked about new products on top of the SendStuffNow product that you announced a couple of weeks ago in the back half and I heard you talk about and a server based provisioning in analytics and what not. I guess are – what should we expect for new products in the second half of the year?

Bill Smith

Okay. You know, we have two products that are very close t launch right now. So, I would say they have sort of set some kind of expectation. Assume that they launch within the next 30 to 45 days. You will then probably have at least two more launches and possibly more before the end of the year.

Chad Bennett – Northland Capital Markets

Okay, alright, guys, thanks.

Bill Smith

Okay.

Andy Schmidt

Thank you.

Operator

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

Scott Sutherland – Wedbush Securities

Great, thank you. Got to tell you, good job in the quarter, guys.

Bill Smith

Thanks, Scott.

Andy Schmidt

Thanks.

Scott Sutherland – Wedbush Securities

Couple of questions. First of all, when we get back to the margins, are you implying 25% for the year or just getting – your goal is 25% for Q3 and Q4 and you are going to actually exceed the guidance for the year because of the outperformance in the first half?

Andy Schmidt

Yes, just three and four, so we will exceed the 25% for the year.

Scott Sutherland – Wedbush Securities

Okay, great. And can you – on the connectivity and security, can you talk about – are you still seeing some customers ramp and what’s the pipeline of potential new customers, potentially, especially device OEM or international customers?

Bill Smith

Okay. Let’s first talk about our larger customers in that you know first off you are seeing they are continuing to roll out WiMAX. The numbers and the adoption continue to look promising and it’s clearly growing. When you look to the rollout by Verizon LTE, we think that’s a significant game-changer and you watch the other carriers as they move to 4G as well. All of this is a very dynamic, very exciting part of our business case and should really fuel our growth, as I said, for a couple of year if not more.

So – and now to talk about offshore, we are getting a lot of traction offshore. We haven’t really talked that much about it. And I think what I am going to probably say is yes I think we are going to have some more customers in the connectivity and security space as well as our other wireless spaces, but I’ll just wait and tell the deals we’re done, and inks dry, and then we’ll talk about them.

Scott Sutherland – Wedbush Securities

And lastly, on the device OEM side, are you seeing any more traction there?

Bill Smith

Yes, some, but you know if you catch the spirit of what it is we are doing, we are talking about a Smart Mobility platform and that platform is designed for carriers. And that’s where all of our investment and all of our real heavy focus is going. Yes, we are still selling Device Management and we are out selling that to other device manufacturers. But if you really want to focus on where the real growth is going to be and where the real money is going to come from, going forward, it’s in the build out of this software platform that provides a couple of access points. You can access the platform either through the connection manager or the DM client. It provides you all the basic services in the area of analytics policy management, video capabilities that we are going to talk more about video in the next month or two and allows you to layer on top of that a number of service applications that can enhance the carrier’s ability to generate profits and they all work in concert with each other.

And so when we talk about where we are going at our major customers, we are going to more and more and more products. It doesn’t mean we are moving away from the ones we already have, we are enhancing our offering and we are going to sell them more things. And that gives us a much stronger role and a much more important opportunity for us going forward. I hope that answers your question.

Scott Sutherland – Wedbush Securities

That does answer the question. The last question I had is, obviously 4G is a big driver, how would you or how can you guys benefit from people upgrading Windows 7 on their laptops and portable computers? Is that driving a lot of increased adoption now or is this more of a 4G opportunity that – ?

Bill Smith

Scott, I think we are still seeing a replacement cycle going on from XP to Windows 7 devices and every time there is a new client is added to Windows 7 device for a user that previously had XP, that’s a new license royalty for us. So, we continue to see that. Obviously we view 4G as the primary lever in the marketplace for us, but there is a nice little benefit from Windows 7 upgrade cycle.

Scott Sutherland – Wedbush Securities

Okay, great. Thank you.

Operator

Thank you. (Operator instructions) And at this time, I am not showing any further questions. Management, please continue.

Charles Messman

I want to thank everyone for joining us today on our conference call. Should you have any further questions, please feel free to give us a call and we’ll look towards you – speaking to you at our next quarterly conference call. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: Smith Micro Software, Inc. Q2 2010 Earnings Call Transcript
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