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Smith Micro Software Inc. (NASDAQ:SMSI)

Q3 2010 Earnings Call

November 03, 2010 04:30 am ET

Executives

Charles Messman - IR

Bill Smith - President and CEO

Andy Smith - CFO

Tom Matthews - CSO

Analysts

Rich Valera - Needham

Chad Bennett - Northland Capital Markets

Scott Searle - Merriman capital

Larry Harris - CL King

Scott Sutherland - Wedbush Securities

Tim Joseson - Zach Investment Research

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro third quarter 2010 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, November 3rd, 2010. I would now like to turn the conference over to Mr. Charles Messman. Please go ahead sir.

Charles Messman

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

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 related 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 the anticipated timings and financial performance of its new products and potential acquisitions.

 

Among the important factors that could cause the actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s product from its customers and their end-users, new and changing technologies, customer's 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 are discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Forms 10-K and 10-Q, and could cause actual results to differ materially from those expressed or implied in any forward-looking statements. The forward-looking statements contained in this release 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 the call. At this time I’d now like to turn the call over to Bill Smith, Chairman, President, and CEO, Smith Micro. Bill?

Bill Smith

Thank you Charles. Good afternoon, everyone, and welcome to our third quarter ending September 30th, 2010 earnings conference call. We are pleased to report another great quarter with solid financial results. We posted our sixth consecutive quarter of revenue growth generating the highest quarterly revenue results in our company’s history of $34 million. This represents an improvement of 6.2 million over Q3 2009 or a 22.2% increase in revenue or with the same period last year.

In addition to our strong revenue growth in the quarter, our bottom line was very solid with non-GAAP net income up 19.6% over Q3 2009. Our non-GAAP net income of 7.9 million or $0.23 per share compared to 6.6 million or $0.20 per share in the third quarter of 2009. We are delighted with our third quarter results along with our continuing record of consecutive revenue growth over the past year and a half.

For the past nine months, we've made great progress towards fulfilling our financial goals for 2010. We successfully met our key operational initiatives designed to prepare our company for the growth opportunities we expect will develop over the next several years.

We are about to embark on a new era of broadband mobile internet services with an eminent launch of LTE. These new higher feed services will enable our ability to serve and expanding audience of users with the adoption potential and demographic characteristics that are much broader than today’s mobile broadband user base.

We view the upcoming quarters where we expect LTE to launch an earnest at the beginning of the next growth phase in Smith Micro's history. And I have to say we are pretty excited about what we see ahead of us with our continuing roll out for 4G, WiMAX, and LTE networks.

Revenues generated from our wireless and mobility product sales, continues to drive the growth within our business. Our wireless and mobility unit posted 31.3 million in Q3, which is up a very strong 38.3% year-over-year. This represents an increase in the revenues of 11% or $3 million over the prior quarter.

Revenue from this unit accounted for over 92% of the total revenue for the company in the quarter. We see this increasing sales volume as evidence that our customers are pleased with the value proposition for our smart mobility software products and platforms.

Before I get into discussing the quarter and our future prospects, I'd like to turn the call over to Andy Smith, our CFO to discuss the third quarter financial results in more detail. Andy?

Andy Smith

Thank you, Bill. First, let me go over 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 our comparable operating results.

Accordingly, all results today referred to in my prepared remarks for 2010 and 2009 and prior years are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on form 8-K contains a presentation of the most directly comparable GAAP financial measurements and a reconciliation of the differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In detailed manner, for the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $2.8 million for the current period, broken out as follows.

$23,000 in cost of sales; $766,000 in selling and marketing; and $650,000 R&D; and finally 1.34 million in G&A line.

In terms of amortization, the total for the current period was $2.25 million, broken out as follows

$1.5 million in cost of sales; $721,000 for selling and marketing.

Moving on, for third quarter, we posted revenue of $34 million and diluted earnings of $0.09 GAAP and $0.23 non-GAAP. The revenue for the quarter was an all-time record of 22% from third quarter 2009. International revenue was approximately $1.8 million this quarter across all business groups.

Our wireless segment reported record revenues for the quarter of $31.3 million as compared to $22.7 million last year, an increase of 38.3%. Within the wireless segment, connectivity and security posted revenues of $27.4 million compared to $21.8 million last year, an increase of 26%. Multimedia, backup and messaging and mobile device products posted revenues of $3.9 million compared to $800,000 last year.

Offsetting overall gains in our wireless sector, our productivity in graphics group posted revenues of $2.6 million as compared to $5 million last year.

And finally, we reported approximately $53,000 of other revenue, which compares with approximately $169,000 for third quarter of 2009. Total deferred revenue at September 30, 2010 was approximately $2.1 million.

Switching to gross profit, non-GAAP gross margin of $31.8 million increased $6.3 million or approximately 25% from same period last year. As a testament to the quality of our revenues, while our revenue increased 22% year-over-year, our gross margin dollars increased 25% for the same period.

As follows, non-GAAP gross margin as a percentage of revenue was approximately 93.5% for Q3 2010 compared to 91.6% for Q3 of 2009. Non-GAAP gross margin by product groups were as follows: wireless 94.6%; productivity and graphics 81.8%; and the other category was negligible. As we noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expense for the second quarter of 2010 of $20.9 million is an increase of approximately $800,000 from Q2 of 2010, which is driven primarily by increases in headcount and facilities expense. The increase in expense is as expected. From a year-on-year perspective, non-GAAP engineering expenses increased 26%, selling and marketing expense 27% and administrative expense increased 18%. It should be noted that administrative expense includes the cost of additional facility space and leasehold improvement.

Total non-GAAP operating expenses increased 24% year-over-year, driven by planned infrastructure growth and by acquisitions. Non-GAAP operating margin for the current period was 32%. Current period operating margin compares favorably to operating margin of 31.2% for Q3 of 2009.

Non-GAAP operating profit for Q3 was $10.9 million, an increase of $2.2 million or 25.5% from the prior year. Non-GAAP net income for the third quarter was $7.9 million or $0.23 per diluted share as compared to $6.6 million or $0.20 last year. Cash generated from operations for the quarter was approximately $3.5 million. Primary uses of cash for the period were capital expenditures of $900,000, capital expenditures for primarily lease hold improvements and investment in ERP system and IT infrastructure.

Overall we had posted yet another quarter of improved operating metrics with a strong cash flow. Looking forward to the balance of 2010, we hold steady with our previously guidance revenues between 125 million and 135 million, gross margins will be between 92% and 94% and we expect operating margins at 30% with a caveat that acquisitions tend to lower op margin for one to two quarters post acquisition due to integration-related expenses.

Finally factors continue to be in a state of change given state and federals efforts in spending. At this time we are so estimating that our 2010 cash fees tax expense will be 25% to 27% of non-GAAP net income. 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

Thanks, Andy. As I said earlier we are pretty excited about the growth we are seeing from our wireless and mobility segment. We saw revenues from these product lines grow 38.3% over the third quarter of 2009 giving us confidence that our value proposition and strategy is working. On a normalized basis excluding the revenues from our Core Mobility acquisition that we completed in Q4 of last year, we handily grew this business a solid 27% year-over-year.

Our efforts paid off with outstanding results in our connectivity and security area posting Q3 revenues of $27.5 million which is up nearly 26% over the same period a year ago. These results were largely driven by our QuickLink mobile products used for connecting devices, the 3G and WiMAX networks. None of the sales in the third quarter were attributable to the launch of LTE which we believe demonstrates the overall growth prospects for 3G mobile offerings are still in an early cycle.

Outside of the robust sales we are seeing for 3G and WiMAX, we are optimistic with the large of Verizon’s new LTE network projected to happen by yearend will usher in a new and extended growth phase for Smith Micro and with that we expect to see a ramp up of new license sales starting late in Q4 and expanding throughout 2011 as network deployments progress.

The initial Verizon launched has been announced for 38 markets including 62 airports and is planned to cover over a 110 million [pops] by the end of this year. We are working diligently to support this rollout and we expect to see immediate benefit from the launch of LTE in a number of ways.

We anticipate that the early deployments were focused heavily on broad and mobile data services and modems designed to work with personal computing devices. The focus on these broadband mobile services to the initial launch will enable opportunity for us QuickLink mobile family of connectivity products.

We see deployment of our products being driven in the following ways. One, many current users of 3G service will opt to upgrade to enjoy higher speed on the 4G networks giving a new license opportunity to adoption from new users who may consider LTE mobile broadband as a replacement service to fix broadband in the home.

Three, the adoption of more flexible pricing plans that will draw new users such as occasional travelers or casual users and four, the adoption of pay-as-you-go services as an alternative to Wi-Fi hotspot services. All of these scenarios are positive drivers for Smith Micro and for further adoption of our suite of connectivity offerings. 4G, WiMAX and LTE services will be a major catalyst for our wireless software business which will enable opportunities for the next several years.

And while we anticipate the coming launch of LTE with Verizon we continue to deliver our market leading and intelligent connectivity solutions to several other key wireless carrier customers including AT&T and Sprint. These customers contributed nicely to our results in the quarter with each growing sequentially and accounting as a 10% plus revenue customer.

Sales of connectivity-related products for 3G and WiMAX continue to perform well at AT&T, Sprint and our other customers. Connection management software to support the USB modem and mobile hotspot products performed exceptionally well in Q3. We are excited about our intelligent mobility strategy and the mobile hotspot management offerings that we are bringing to the market. The emerging trend of mobile broadband subscribers carrying an arsenal of connected mobile devices such as a smartphone, a mobile laptop and a tablet device will need a new way of managing their connections in usage across their devices.

This trend adds complexity for carriers and we are building the connectivity and intelligent management platforms to deliver solutions for these challenges. While product sales at Smith Micro continues to be fueled by making, managing and monetizing connections to mobile internet services, we continue to see progress with the adoption of the balance of our loyalist product offerings. These mobility products would conclude mobile device management, messaging, multimedia and content management application, dealers’ revenues of $3.9 million for the quarter, but they find trends in the pipeline as the business continues to build as we present our customers with an opportunity to have single trusted vendor serve multiple needs leveraging for mobile needs, leveraging column contracts and technology components.

We have worked hard to integrate components and create common architecture across many of the products in our portfolio to establish the Smith Micro Mobility platform. This platform client and server applications and cloud services have become a strategic poor style design to deliver customers more comprehensive and differentiated solutions. As we move forward in the era of 4G, our further development of our platform and application supported by this platform, will serve to lower costs, brings faster time to market and more values for each of our customers.

Turning to the productivity in graphics group. Revenues for this group were 2.6 million or 7.7% of the revenues in the quarter which is consistent with the previous two quarters. We feel this has business is stabilized and plan to running this business at smaller but profitable part of the Smith Micro portfolio. Given the incredible 4G opportunity to handover we plan on focusing on the LTE play in near term while continuing to integrate key technological components and products from our productivity in graphics business into our smart mobility framework.

Before I turn call over for questions, I would like to summarize my observations and perspective on the quarter and our business going forward. First our core wireless and mobility product line is performing exceptionally well, driving solid growth and outstanding margins. We had a great third quarter and with the coming launch of LTE, we have every reason to believe opportunities for continued success in the coming quarters are outstanding. We are really just now at the beginning at the era of 4G mobile internet services.

The launch of these new high speed networks will enable new subscribers, connected devices and business models. We believe our line up of product offerings, technology innovation and our strategic growth from there served to help our customers drive new business. We have just launched several new products such as our video platform and QuickLink mobility, our universal connectivity and security solution that are addressing new opportunities emerging in the market.

With confluence of higher speed mobile networks a proliferation of devices, new applications and content accessibility is driving a long-term trend towards an increasingly connected and mobile world that Smith Micro will prosper from.

We are fortunate to have some the world’s foremost mobile operators, cable MSO and device manufacturers as customers. And these customers depend upon our technology to help them deliver mobility services and add value so that their end users can experience mobility and exceptional productivity in exciting new ways.

With the continued rollout of WiMAX and the launch for LTE and HSPA plus Smith Micro will have the opportunity to serve over 200 million pops with 4G service in North America alone by the end of next year. We are continuing to advance our R&D efforts for our platform readiness to able to support this new growth and adapted technology and business models to serve this market for the long term.

We’ve executed on three solid quarters in 2010 with record revenue and strong profitability and we remain comfortable with our guidance with annual revenue’s landing within the original range of 125 to $135 million. Looking forward, we expect continued strong quarterly performance that is tied directly to our customers’ 4G initiative. While there are many variables at play still affecting timing, including very significant and complex network upgrades for our carrier customers, we are looking for 35 million in revenue in Q4 this year. And as Andy noted a very strong operating margin profile. There is strong upside remodel, but the timing of the upside will coincide with the customers marketing spend and the timing of the network upgrades. We look forward to taking your calls and discussing these results and future opportunities at our upcoming analyst day on November 11. We are preparing for a full day on the 11th that will also include product demonstration for many of our new products.

With that operator, I'd like to turn it back to you for questions.

Question-and-Answer Session

Operator

Thank you, Sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question will be from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Unidentified Analyst

First of 20 (inaudible) indicating strong overdrive sales in part due to payment with iPad and also wireless during the same. How do you think these changes impacted in activity business in terms of timing for revenue recognition? And then I'll follow up.

Tom Matthews

We are seeing obviously opportunities today with various mobile [Mi Fi], that are out there starting the 3G markets, with respect to the Apple product launch is probably early to really tell at Verizon however it will tell you that we are quite some time a number of the Verizon customers has been buying the Wi Fi cards in mobile hotspots and [feathering] those and connecting them to their iPads. So we think that trend will continue and that will be good for us at Smith Micro.

Bill Smith

And just following on revenue recognition and that type of product is pretty straight forward. We have recognized revenue in those products are shipped into our carrier customers.

Unidentified Analyst

Okay great another trend is on anyone with Verizon on track to launch in Q4 for LTE and then AT&T and HSPA clause and then likely of the second half of ‘11 do we anticipate steady growth for your connectivity business quarter-over-quarter or could there be some lumpy quarter and can you comment on that please?

Tom Matthews

Okay I think the issue that you are looking for is steady growth, I gave you four drivers in my prepared comments as to why we think the larger 4G is going to be really good for us I mean clearly you are going to have a number of folks that are 3G users in order to go and actually take advantage of 4G on the new hardware, I am going to do that the software and we get another royalty, clearly 4G offerings are very competitive to landline offerings there’ll be a number of users who will say I think I’ll just go with my LTE offering and so that there will be an expansion of the market there as well I think some of the new pricing models are going to make it very easy and very attractive for a much broader audience to start using wireless capabilities. And then some of payers as you go offering will be fairly competitive I guess the Wi-Fi hotspot business model and I think in the we will continue to grow and expand the price of the total adjustable market all in all I think its real positive.

Andy Smith

And then just calling if you recall those Mark as far as how fast it goes and how soon its going to depend again on our customers network readiness and then based on that its going to then probably depend on your marketing spend. So we basically have to travel. We expect to see consistent growth but how fast it grows will be dependent on our customer’s point of lever.

Unidentified Analyst

And one quick clarification for Andy. Could you talk a little bit about your pro forma expected tax rate in 2011, I know you talked a bit about what you expect for 2010 and if you could comment on 2011 until we basically expect that to be the impact rate for future years if you can comment on that, please?

Andy Schmidt

I am going to wait until early January when we give guidance. And the primary reason is right now the State of California and Federal too no one has passed the R&D tax credit legislation. It’s Federal overall or the State level. So while there are expectation is that some parts will pass and some won’t pass, so no one has taken any action right now. So (inaudible) short is we have to wait by the end of December they have to make a movement one way or another and that will [Federal] give me a better idea exactly where are those alike.

Operator

Thank you. And our next question will be from the line of Lauren [Ye] with JPMorgan, please go ahead.

Unidentified Analyst

In terms of your visibility of the Verizon LPE launch. Can you talk about if you’ve already gotten initial kind of orders for certain products or anything like that?

Bill Smith

Well we have a certain amount of visibility, we have an idea obviously based on how we go through QA and testing of devices and so on but we really can't give you a full picture until December 31, given that where the real time vendor comes the delivering software and they are going to basically play it close to divest all the way through the end of the quarter.

Unidentified Analyst

And then I just noticed your multimedia line, its 30.9 million this quarter, 7.2 last quarter. Just wondering what's the (inaudible) in this area and if you could give us some color in terms of what drives this part.

Bill Smith

Let me correct the thing you said is not the multi-million line, it is all the other wireless software alliance 3.9 million, so that includes a number of products, the device management, policy management, a number of different offerings including multimedia.

Charles Messman

Messaging and backup products as well as multimedia. So I think on the last quarter, we had a good quarter, we had a good up-tick, obviously we're up year-over-year as well. We tried to set the expectations that we would see this early stage set of products moving in the right direction and at the right trend but also that it would be somewhat lumpy from time-to-time. So a lot of early stage deployments where you have initial license arrangements. We don’t have the scale with those businesses to see the thing sort of consistency that we see out of our connectivity business and we're excited to point obviously about 4G driving the business, we think that some of the marketing spend from our carrier customers is probably going to lean more towards promoting those new various defenses, network upgrade and promoting those products as opposed to some of the others. We expect this to continue to grow, look for it to be lumpy from time-to-time.

Unidentified Analyst

Okay and what is it in this area that’s driving this lumpiness, like what product?

Charles Messman

Well the device management, all of those products actually. Right so if you look at device management and multi-media products there are license revenues that frequently are revised upfront and there are some trailing maintenance and additional licenses that the customers continue to grow that you see some times that they get upfront. There has been some customization and adaptation fees associated with some of the early stage deployments as well and I think we got to sell the pipeline, we got to keep making those sales and as we build the scale then you'll see more consistency coming from all of those products.

Bill Smith

I think one of the key points that you are going to hear a lot about is on the analyst day presentation is to build out of our overall platform and how that’s going to really impact the overall sales. So I think when if you bear with us and until the (inaudible) will try to give you some more color and probably give you a better understanding of exactly what we are up to.

Unidentified Analyst

Great just around the connectivity. So that looks like it was even in a quarter-over-quarter basis pretty aggressive, just wanted to see or understand without LTE is there any specific product that are doing better than you had expected?

Bill Smith

Well obviously we're very pleased with the sales and sell through of Verizon AT&T and spread a number of the other a number of the other customers are showing some good leverage as well because it's not as big. We are pretty excited about what we're doing in the mobile hotspot area for global hotspot management. We'll probably be demonstrating some new products in that area on the 11th as well and I think once you see it and you go out. It really does, still in some huge voice in that marketplace and speaks to a real need. We’ve been out aggressively demonstrating these products to all of our carrier customers, we've gotten some very, very strong responses and we think that we'll be a very exciting new market or added market for us.

Unidentified Analyst

Great and just last question around margins. I guess when you looking at margins this quarter is 26.5% which is ahead of the large rollouts. Just curious in terms of (inaudible) and then if you add on new customers. Are we seeing a better or more efficient maybe operating model now where even in times when you do invest pretty heavily ahead of a rollout that we could see mid-20’s margins.

Bill Smith

Well we were 32 for the period so that’s leaps and bounds above the 25 and…

Unidentified Analyst

I am sorry I didn’t add in the, yes you are right.

Bill Smith

And then as I guided, we're coming off the 25 now. This is demarcation point, Q4 will be 30 and we don’t look backwards. I think this will be a new step for us.

Unidentified Analyst

Okay so I guess I am just wondering if you have another like let’s say AT&T rollout and then in next year obviously you have to spend ahead of that. Can you maintain that kind of margin structure given your model now or you're still going to be see a step down ahead of the large rollout.

Bill Smith

We don’t go backwards, 30 is our new benchmark.

Operator

Thank you. And our next question will be from the line of Rich Valera with Needham. Please go ahead.

Rich Valera - Needham

Question on the connectivity revenue level, obviously a very impressive jump here and a new high watermark for you. Just wondering how comfortable you are and that that level is sustainable. Was there any non-recurring element to that, like maybe some upfront licensees like you referenced in the other wireless segment in there?

Bill Smith

Well Rich, I'll take this. No matter what, we do between five and maybe a higher watermark at 7.5% each quarter in non-recurring engineering, that’s just normal for us. Our contracts are always built leverage per unit but in many cases we had the opportunity of monetizing upfront work and we just take advantage of it. Keep in mind in the prepared remarks, this current quarter did not include any LTE sales. So that’s yet to lever the fee deployed here which gives us great confidence that not the ones we maintain this but do better than this in the upcoming quarters.

Rich Valera - Needham

And just to be clear, generally with connectivity it seems that they are, it reaches for subscribers Bill, you don’t get big chunks of revenue in advance, its pretty much a per subscriber royalty for you, is that correct?

Bill Smith

That’s correct statement.

Andy Smith

We should lend itself to a more gradual build as opposed to bigger lumps I would think as the LTE ramps.

Bill Smith

I think if the discussion the lumpiness is coming off of the comments made around the non-connectivity product offerings, and a lot of those product offerings are server-based product offerings which have a larger fee upfront with maintenance spend that goes on for years and years, so you're just going too inherently, because you are not dealing with big numbers. In Q2 was 6 million, this quarter was $3.9 million, but in anyway you look at it those aren’t huge numbers. Any kind of movement around that is going to cause a little lumpiness. If we can get the non-connectivity or platform sales up to a much higher level then I think you'll see the lumpiness totally go away and one just a sort of a national course.

Rich Valera - Needham

Okay, that’s helpful. And then just wanted to get an update on WiMAX, I know its been pretty small, I don’t think particularly material at least as of last call any update on how you're seeing WiMAX connectivity related revenue ramp.

Bill Smith

Clearly it’s doing well. Clearly they are going through some financial issue and that’s quite public so you know that’s really no, no. Sprint continues to prosper here and they seem to be executing well and holding their customer base. So those are all fall outs of WiMAX. But when you look at it, you look at how it clears, launching a couple of cities under LTE in a trial basis. So, I don’t think anybody is totally wedded to WiMAX, they may switch to LTE. That’s one of those things we will just respond to. We don’t take sides in this issue. We'll support WiMAX services just as well as we'll support LTE services, the hallmark of how we go to market.

Rich Valera - Needham

I get the point of view that probably the Verizon LTE footprint and the potential subscriber base there would probably [dwarf] the clear virus update very quickly as they start ramping.

Bill Smith

This try basis is just a reality.

Operator

Thank you. And our next question will be from the line of Chad Bennett with Northland Capital Markets. Please go ahead.

Chad Bennett - Northland Capital Markets

Just a couple of questions. On the fourth quarter guidance of 35 million with no LTE in the third quarter, careful to try to correlate you guys with any of the hardware guys. But considering Novatel guided revenues up 45% sequentially, third quarter to fourth quarter largely on Verizon brand and their Mi-Fi device. I guess I think I understand and I know the answer but why would there, and their different ASPs from these values, but what would the lag time be between you and them?

Andy Smith

Let me start with it and I think you bring up an interesting point. If I remember correctly Novatel [mix] in Q3 and other guiding, we had a very strong future here and we’re guiding up in Q4 but we are lot more even than they are. So I suspect that our revenue recognition is a little bit different than Verizon's. So in essence, if we put the two together, the percent growth might be more comparable, but I think it’s probably a lot to do with revenue recognition and then anything else why they miss in the Q3 and then have a very big spiking Q4 and we are basically showing nice smooth curve.

Chad Bennett - Northland Capital Markets

And I guess obviously it’s advantageous if you miss the quarter, if you feel comfortable enough to guide up. Kind of takes some of the single wait under?

Andy Smith

Well that’s the pretty guide up for them, so maybe they are just not as obvious as happy as other companies. But anyways. Tom can you talk about other wireless products, maybe how your pipeline or backlog has improved versus last quarter and give us an idea of, I know it’s still early, but is there any type of run rate in this business we should expect from a revenue standpoint, looking out into the next couple of quarters, I mean is it going to bounce around?

Tom Matthews

I think not to stop you here but I think we did 800,000 or so a year ago in that product categories. We did 6 million last quarter and we basically are up to 3.9 in this quarter. So it’s bouncing around a little bit and we expect to continue to bounce. With respect to the product pipeline, I mean we are seeing opportunities across a number of those products. We are optimistic about our device management solutions.

We believe that messaging place will continue to open up. One of the key areas for us to get additional traction in those product lines, those product categories will be additional traction outside of the North American market as well and I think we will try to discuss some of that in our overall macro pipeline at our Analyst Day coming up on the 11 and give you a little bit more color into the areas that we are attacking. It should open up opportunities for us with those new product categories.

Bill Smith

And just a quite a little bit more data to it, keep in mind, keep everyone really positive on this area despite the fact that it can bounce a little. If you look year-to-date, we have done 16 million in these products, year-to-date 2010 versus only 3 million last year. So that’s just a phenomenal change in market for us and a total year, so even though it is a little bouncy, it’s tremendous performance.

Chad Bennett - Northland Capital Markets

Okay can you just give us, I need to do this, but can you just give us any type of insight into what you expect from that in the fourth quarter just that overall segment, just directionally do you expect it to be up down flat?

Bill Smith

Just to be safe in modeling, just model it flat.

Chad Bennett - Northland Capital Markets

Andy, Verizon in the quarter percentage?

Andrew Schmidt

Sure let me get that rate, Andy, take the rate at 41%

Operator

And our next question will be from the line of Scott Searle with Merriman capital. Please go ahead.

Scott Searle - Merriman capital

Just a follow up on a couple of quick housekeeping items, did you give a percentage for AT&T in the quarter?

Andrew Schmidt

What I did id both AT&AT and Sprint are plus 10% customers.

Scott Searle - Merriman capital

Okay, both 10% plus. And. Andy on the OpEx front, you guys have been investing a little bit more is there anything that would change that trend as we are going into the December quarter?

Andrew Schmidt

No we continue to invest and as you have seen we have a announcement obviously out there in Pittsburg, we are going to be building that tech center. We have got a lot going on and you will see a lot of new products out there on the Analyst Day and so on and that gives you a little bit more overheads throughout as far as what we invest in and what it looks like in R&D perspective. But the key is we are running that 30% op margin now, so we will set another op margin goal and we will hit it, but rest assured when you look at our numbers, it’s a heck of a lot of investment in the future going on in that.

Scott Searle - Merriman capital

And then just to circle back I think a couple of questions throughout the call, I’ll try to get at this and I will be a little more direct on it, in terms of productivity and graphics has come down to a base level, in the wireless segment, the multimedia and messaging business has been a little plumpy. But you are not expecting it to be down sequentially and in the fourth quarter we are going to hit beyond seasonality, we are going to hit a big LTE product cycle with Verizon at some point in time. So with the guidance of 125 to 135, at the low end of the range certainly requires that you would be sequentially down.

But it seems like there is, I am hard pressed to figure out a scenario where you would not be sequentially up. So could you just provide a little bit more color on that front in terms why wouldn’t it be up, if that’s a correct interpretation.

Bill Smith

Well I did just guide it, it is like 34 change and I said look to 35 in Q4. We had 35 of what we already done. We are in the upper half, but just in the upper half of the range. There is really not a whole lot secret left because three quarters they are on the books and I just gave you a number for the fourth month. So it is up to us to execute now.

You said a couple of things there, and I want to go back on those and just try to give you some color. Let me talk about some of the other software products in the wireless lineup. Some of the products that are really high are our visual voicemail, our new video product is being extremely well received. Some of things we are doing in the area of analytics. Some of things we are doing in the area of fixed mobile conversions are all really exciting, growing parts of our business.

Multimedia, let’s talk about that for a second because you mentioned that a couple of times. The multimedia market has really changed a lot in the last couple of years. Today we have two particularly strong folks that are really ruling the multimedia space, one of those is Apple and other is Google. I would say going forward that the multimedia space in its classical sense is not going to be a huge play. We really don’t go see it. I think so market is dominated by two giants and they are performing extremely well and that’s where I think that market’s going. But I think the other markets that we talked about are really exciting and you are going to get a chance to see a lot of this product actually work when you are out here on the 11th and the business cycles happen and markets changing, that’s what it’s all about.

Scott Searle - Merriman capital

If I could go, just a quick follow-up on that front in terms of the core connectivity business, has there been anything through the first month of the quarter that would lead to, if there was any sort of a slowdown ahead of the major new product launch cycle for Verizon that I should be thinking about anything really other than traditional seasonality plus through our play cycle in December.

Bill Smith

That’s how you should think about it. I think the core connectivity business is going to perform well. I think its caveat is always the one we all are worried about, that is the, Verizon said they are going to launch LTE, what if they don’t, what if they aren’t ready. Well, I think they are, so I guess I am not as worried about that I'm not loosing fleet on that subject, but on the other hand you got a bunch of new lead devices, the software is going to have to shift with, all those devices have to all the bugs run out of them, and its one of the devices that will ship our trend, that could cause a product to it. But our caveat, it’s not a perfect world, but I think at the end of the day you’ve got one of the largest carriers in the world in Verizon launching LTE and they are going to launch it big. They’ve been very vocal about where they are going to be and how big it’s going to be, and that’s all good for Smith Micro. And I just see a lot of positives, we could all worry about all the what ifs, but I choose not to right now.

Operator

Thank you. And our next question will be from the line of Larry Harris, CL King. Please go ahead.

Larry Harris - CL King

In terms of your 4G products, LTE in particular, is it safe to assume, and I am talking about connectivity here, that the gross margins would be similar to what you historically earned on 3G?

Bill Smith

Absolutely.

Larry Harris - CL King

I think about the smart phones, the EVO has done very well at spreads and I would assume that we not only see additional 3G/4G smartphone, the spread I would have to assume you would see them at Clearwire, you’d see that with Verizon and maybe even at some point at AT&T next year. Are there opportunities in terms of the device management software, some of these additional applications maybe even connectivity being added to some of these 3G/4G smartphones and could this be a significant opportunity for you next year?

Bill Smith

That’s a good point. I think every [eve], the shift includes our device management software, as well as our Visual Voicemail software. So, that’s a good room to you. That was helpful, but I think another thing that’s pretty exciting that happened at Sprint is in the Visual Voicemail area. We’ve gone through the tests and now full launch of our voice-to-text capabilities as an extension to our Visual Voicemail, this is in full launch at Sprint and it’s just another tough estimate to some of the growth drivers for our overall wireless platform.

Larry Harris - CL King

And do you think our opportunities with some of the other carriers in addition to Sprint?

Bill Smith

Of course. We are out talking to all the carriers and we are very busy in Europe and we are out-seeing some pretty big carriers in Asia. We think that there is lot of opportunities for us to play, a very different market in some of the other Geos, we think LTE is a big catalyst for change in Europe, Asia is still really just deploying 3G, but I think you are going to see a lot of other opportunities for us and we know the video product is very, very popular especially in Asia. So there is a lot of positives going on.

Operator

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

Scott Sutherland - Wedbush Securities

Maybe Bill, on the international comment you just made, it still wasn’t about senior revenue. How do you get inserted in these international markets and then you partnered with Motorola a while ago. How do you get there before these 4G launches there, so you are well positioned and then get that revenue up?

Bill Smith

This is an ongoing effort. We’ve deployed a number of sales and marketing resources into both Europe and Asia, more predominantly Europe than Asia and they have been busy out telling our story and out doing all the things you have to do in order to become or get the opportunity to cost from the customers so while we have not shown a lot of sales offshore yet we believe that there are a lot of opportunities and we are very positive about them and I guess that’s really all that I am saying.

Tom Matthews

And there is some device manufacturers as well that we have been working with. Scott as I think we have announced previously HTC is one customer on the DM front, they can certainly help us open doors with some of their customers in the international market. Nokia as well and clearly as we continue to build our business all options are on the table from an M&A perspective that right opportunity shows up internationally. They are certainly with the rates that we could consider break into the markets faster as well.

Scott Sutherland - Wedbush Securities

And building on kind of the last person’s question, when you look at carriers and all these different devices and all these devices are becoming, daily devices, mobiles phones can become kind of like Mi-Fis or Wi Fi or wireless hot spot. Why do (inaudible) multiple connectivity because it makes sense to rationalize and looked opportunity to support all kinds of different devices, cars you have talked about in the past these Mi Fis and other devices?

Tom Matthews

First of all Mi-Fi is a trading of (inaudible) so. There is a number of players entering the market in this mobile hotspot area. Actually all Android devices going forward are going to have the capability of also supporting mobile hotspot. So the mobile hotspot usage is a big deal and there is simply a lot of growth there well, it also then is a great opportunity for a company like Smith Micro to provide a common user experience across the variety of different hardware and patients so if you don’t have one experience if you guys using another cell device another one for a Sierra or another one for an Android device, its kind of a lot like how we got into the connection management business. And so what we have here is an opportunity for extreme growth in yet another area, the management of mobile hotspot devices and while in the early days we didn’t ship with mobile hotspot devices lets say, AT&T haven’t even shipped fairly forward we have the opportunity to garner all that business. So we think it’s a pretty exciting part of the market, we are going to be showing you some of that product on the 11, so you will actually be able to kick the tires. And we’ll show you all the kinds of different capabilities and I think one of the big issue there is carriers going more and more to different kind of billing systems based on mega wise of data uploaded and downloaded, it’s a real opportunity and if you have three or four years utilizing your mobile hotspot device you’d like to have some visibility as to how much of that usage have been chewed up and what it geographic go into the penalty box and have to pay much higher price, all these various surprise taken away and so these are some of the things that we are focused on and some of the things that we are working towards and basically we think we think we got a great wrap.

Scott Sutherland - Wedbush Securities

A great point couple of finance questions for Andy, kind of drilling down couple of things mentioned earlier. First typically in Q1, I know you didn’t see as much last year. With the LTE launch in Verizon do you expect to see a lot less that seasonality in up tick quarter like you did last year? You have mentioned sequential growth going forward kind of?

Andy Smith

Yes it’s too early to tell and we’ll get in set more of the guidance because you know it’s all subject to like we said there is got to get how deep is the launch. How do they marketed and then that’s going to drive all their buying patterns as far as reloading channels.

Scott Sutherland - Wedbush Securities

I guess is it fair to say we don’t have to see down tick outside I think like LTE launching.

Andy Smith

It’s typically driven by customer marketing. So it is all going to be depended on how customers choose the market in Q1.

Scott Sutherland - Wedbush Securities

My second question please what change in your operating margin go was it less investment in your products or is it just your margin mix or the time to bring it up incidentally in every quarter.

Tom Matthews

Little of everything but actually the key is you know we have a leverage model. And one of the duties of the OEM model and so and so forth is you know its incremental sales does not result in a incremental sales expense and so on and so. We are starting to get the leverage here that 34 to 35 million revenue number and we are feeling very confident that we can take it one step up while still investing very heavily.

Operator

And our next question will be from the line of Tim Joseson with Zach Investment Research please go ahead.

Tim Joseson - Zach Investment Research

My question has been answered. Thanks very much.

Operator

We show now no further questions at this time, continue with any closing remarks.

Bill Smith

Want to thank you for joining us today on our third quarter call we’ll look forward to talking to you fourth quarter and year end earnings call. I would like to remind everyone that we are having upcoming our first analyst day here in Aliso Viejo settled for Thursday, November 11. Should anyone need any additional information about that, please feel free to call any of us and we’ll get you all set up. Thanks again. And we'll look forward to talking to you in a few months.

Operator

Ladies and gentlemen this does conclude the Smith Micro third quarter 2010 earnings conference call. You may now disconnect. Thank you for using AT&T teleconferencing.

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