Smith Micro Software's CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 4.11 | About: Smith Micro (SMSI)

Smith Micro Software, Inc. (NASDAQ:SMSI)

Q1 2011 Earnings Call

May 4, 2011 04:30 PM ET

Executives

Charles Messman – IR, MKR Group

Bill Smith – Chairman, President and CEO

Andrew Schmidt – VP and CFO

Tom Matthews – SVP and Chief Strategy Officer

Analysts

Richard Valera – Needham & Company

Michael Walkley – Canaccord Genuity

Chad Bennett -Northland Capital Markets

Howard Smith – First Analysis

Scott Sutherland – Wedbush Securities

Lauren Choi – JPMorgan

Larry Harris – CL King

Peter Misek – Jefferies & Company

Kevin Dede – Brigantine Advisors

Charlie Anderson – Dougherty & Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Smith Micro First Quarter 2011 Financial Results Conference Call. During today’s presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today on May 4th of 2011.

And I would now like to turn the conference over to Charles Messman of the MKR Group. Please go ahead, sir.

Charles Messman

Good afternoon and thank you for joining us today to discuss Smith Micro Software’s financial results for our first quarter ending March 31, 2011. By now you should have received a copy of the press release discussing our quarterly results. If you do not have a copy and would like one, please visit at www.smithmicro.com or call us at 949-362-5800 and we will email one to you.

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

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

Among the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in demand of our 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 filings with the Securities and Exchange Commission, including its filings on Forms 10-K, 10-Q, and 8-K, could cause actual results to differ materially from those expressed or implied in any forward-looking statements.

The forward-looking statements contained in this conference call are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this call, and the company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this release or call.

Now, with that then, I would like to turn the call over to Bill Smith, Chairman, President, and CEO. Bill?

Bill Smith

Thanks, Charles. Good afternoon, everyone and welcome to our first quarter ending March 31, 2011 earnings conference call. On February 8th, we reported that our first quarter revenues are expected to be impacted as orders for our core connection manager products from a key customer was far below previously expected levels. In that press release and in the subsequent conference call we set revenue guidance for the first quarter of $15 million to $20 million.

As we anticipated, the orders from these key customers moderated and as a result our first quarter revenues came in right in line with these expectations at $17.8 million. As a combined result of the dip in revenues and our continued commitment to investing in new opportunities, our non-GAAP net income for the quarter came in at a negative 4.7 million with a loss of $0.13 per diluted share.

As we previously reported, we believe that the anticipated revenue shortfall was caused by our key customer carrying a sufficient level of inventory and licenses to support their primary needs for subscriber growth throughout the first quarter. Revenues produced from that key customer in Q1 were down more than $13 million from the prior quarter and were down by over $10 million in Q1 from our average quarterly revenue results from this customer for all of 2010.

We consider this change in sales to be primarily driven by a temporary slowdown of subscriber acquisitions. This positive adoption looks to be due to technology transitions taking place as they upgrade their 3G networks to 4G services and as new devices get rolled out into the market.

The transition to these new technologies is well under way and we anticipate that this evolution will continue on an accelerating pace throughout the rest of 2011. We continue to have an extremely solid relationship with this customer and our commitment as a key technology partner is one that we are confident will prove invaluable as they transition to new network technologies and the rapidly emerging changes in device types and form factors.

I will speak more about the opportunities emerging as a result of the 4G network rollout, the evolution on various device types and what these developments will mean for us after I turn the call over to Andy Schmidt our CFO to discuss our first quarter financial result in greater detail. Andy?

Andrew 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-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 that I refer to in my prepared remarks for both 2011 and 2010 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 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 $3 million for the current period broken out as follows: $17,000 cost of sales; $825,000 selling and marketing; $603,000 R&D; and $1.56 million G&A. In terms of amortization, the total for the current period was $2 million, broken out as follows: $1.26 million cost of sales; $708,000 selling and marketing; and $62,000 R&D.

And moving forward, the first quarter we posted revenues at $17.8 million and a loss of $0.22 per share GAAP and $0.13 per share non-GAAP.

Revenue for the quarter compares to $29.9 million for the same period last year. International revenue was approximately $1.6 million this quarter across all segments. For 2011, we will be reporting revenues as Wireless and Productivity & Graphics.

As we’ve spoken to over the last year, we view the future of our Wireless business as being the platform of interconnected wireless technologies rather than standalone product initiatives. To be consistent in our financial reporting, we will report Wireless revenues as a whole versus components of the platform offering. Our Wireless segment reported revenues for the quarter of $16.1 million as compared to $27.1 million last year.

Our Productivity & Graphics segments posted revenues at $1.7 million as compared to $2.8 million last year. Total deferred revenue at March 31, 2011 was $744,000. Switching to gross profit. Non-GAAP gross margin dollars of $15.3 million compares with $27.6 million during the same period last year. Non-GAAP gross margin as a percentage of revenues was approximately 86% for Q1 2011 compared to 92.6% for Q1 of 2010. The reduction in gross margin is due to lower sales volume covering fixed, maintenance and support expense. Non-GAAP gross margin of each segment were as follows; Wireless 88%, Productivity & Graphics 70%.

Switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2011 were $23.3 million was an increase of approximately 1.9 million from Q4 of 2010 driven primarily by investment in their engineering infrastructure in our Pittsburgh tech center.

On a year-on-year perspective, non-GAAP engineering expenses increased 16%, selling and marketing expense increased 19% and admin. expense increase 22%. Total non-GAAP operating expense has increased 18% year-over-year primarily driven by planned head count addition and infrastructure investment. Non-GAAP operating loss for Q1 was $8 million as compared to an operating profit of $8 million in Q1 of 2010. Non-GAAP net loss for the first quarter was $4.7 million or $0.13 per share as compared to $6.1 million or $0.18 per share profit last year.

Cash used by operations for the quarter was $2.3 million. Primary use of cash for the period was capital expenditures of 6.6 million used for leasehold improvements and IT infrastructure.

On a balance sheet perspective, our cash position closed at 64.4 million at March 31, 2011, a decrease of 8.2 million from the beginning of the year. Accounts receivable at March 31, 2011 decrease to 24.8 million. Net working capital at the end of the quarter was 79.8 million. In terms of housekeeping, we expect to file our quarter end 10-Q this week, which will represent our final financial statements for the period.

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

Bill Smith

Thanks, Andy. There is no denying that the macro trends for increased connectivity to the mobile internet are stronger than ever. Our industry is in the midst of a number of significant transitions related to these trends. Carriers are making staggering investments to support growing demand for more bandwidth and faster network services and this is creating both opportunities and challenges.

Our customers are grappling with some of the most exciting and fast pace product and technology innovations the world has ever seen. The tusk is supporting these new devices such as smartphones, tablets and machine-to-machine connectivity is challenging the operators, their suppliers and Smith Micro in new ways.

The competitive need to more rapidly support these new devices in the most cost effective way with the best possible user experience is driving how decisions are made. We have technologies to help carriers simplify the complexity and manage the accelerating change and we are in a great position to help them compete more effectively.

As the industry devices and technology evolve we are progressing and adapting as well. The adoption of tablets, mobile hotspot devices and smartphones with Wi-Fi hotspot capabilities have been viewed by some to present either an opportunity or threat to our core businesses. We believe that these developments present opportunities for us that hold immense potential.

The market opportunity to support the proliferation of connected devices in the complex mesh of networks, rated service plans and a variety of network standards calls for transformative approaches. We are innovating and evolving a new approach in the field of connectivity with our Secure On-Device API or SODA.

We apply a standardized way of solving the complex problem of connecting dissimilar devices by using a common approach to their interface. We’re pleased with the initial support that we are receiving from industry leaders such as AT&T International, Sprint, Reliance Communications, PT Bakrie Connectivity, GCT Semiconductor, Comcast Corporation, Bouygues Telecom, Bell Canada, and others.

We’re working closely with several of our customers to bring forward new connectivity solutions such as our mobile hotspot management software, our mobile network director and our analytics engine that will make the connected mobile experience simpler. I want to make it clear that the software demands for connecting embedded modems and USB devices still dominate the mobile broadband service market.

These form factors remain critical to our success of the opportunity for innovative solutions to support the rapid growth of new form factors is very strong as well. We’re working hand in hand with several of our customer creating new solutions and we’re on a great position to lead the charge into these new connective applications. We are focused on executing and reporting meaningful successful on this front in coming quarters.

With respect to working with our customers, I’d like to say a little bit about our relationships going forward. One of the key assets that has been the strength of our relationships with our top customers. We believe that these relationships are strong as ever. This is particularly true in the case of our three largest customers, Verizon, AT&T, and Sprint, where we are being asked by each of them to assist in the development of new solutions needed to handle some of their increasingly complex challenges.

Over the course of the past few years Smith Micro has succeeded in becoming the clear market leader in North America for our core connectivity and mobility products. While we continue to cope with the relation within our primary markets, we spent much of 2010 building the sales infrastructure and gearing up for the acquisition of new customers in exciting growth markets outside of North America. Throughout Europe, Asia Pacific, and Latin America we have begun to develop relationship with Tier 1 mobile operators who see the value of our stock or pipeline and solutions.

We have had early wins with Telecom New Zealand and PT Bakrie and announced new relationships with Reliance and AT&T International. Moving forward one of our primary strategic objective is to grow new business relationships throughout the world and turn Smith Micro into a truly global solution provider.

Our mobility software business continues to be the main driver for our future growth. While our revenues in this area would challenge in the quarter, this business segment still accounted for 90% of our total revenues.

The Productivity & Graphics business produced 1.7 million or approximately 10% of the total revenues. We have made significant changes in the way we operate that business segment and we will continue to refine our approach to maximize returns with this product line in the future.

While we navigate through the exciting transitions in the wireless industry, we are continuing to evolve and adopt our technologies to address new opportunities in the market. Through Q2 we expect to see continued impact in our revenues as choppiness in the adoption of 4G services will continue while the networks get rolled out in the near term. As a result we expect Q2 revenues to remain in a similar range to our Q1 guidance of $15 million to $20 million.

We expect sell-through of existing inventory to get worked through by summer’s end and business for our core connection management software to pick in Q3 and further grow in Q4. We are working to strike the right balance of investing in the next generation product lines for smarter mobility while aligning resources as necessary to move the business back into a profitable state.

We are energized by the early-stage reception for our new products and expect to see these new technologies begin contributing to our growth in the near term. We are excited by the collaboration that is taking place with our customers on several new initiatives. We are confident that we have the strategies to bring our business back to a solid growth and capitalize on the exciting macro trends for broadband mobile data services. Clearly our business has been challenged by customer concentration in the first half of 2011.

We believe the bad news is behind us and we are now focused on turning the corner and getting back to a growth pattern for the second half of this year and throughout 2012. We have strong visibility into the causes of this slowdown and are executing on our strategy to rapidly reverse this trend. I look forward to reporting further on these developments shortly in future quarters.

With that operator, I’d like to turn the call over to you and start the questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Richard Valera – Needham & Company

Thanks, good afternoon. Bill, last quarterly call you talked about the potential having a slack year-over-year back half, it would seem given the second quarter guidance is that’s not where you thinking you’d be, but can you give us any sense of where your thinking might be in that third, fourth quarter timeframe at this point?

Bill Smith

Yeah, it’s a fair question. I can’t give you exact guidance as obviously this has been challenging year so far. What I can say is that the way we view it is that this represents somewhat of a one quarter shift. So, I think if you take a look at the thinking basically take second quarter shifted into third, third shifted into fourth and then you’re into 2012. That’s probably the best guidance I can give you.

Richard Valera – Needham & Company

So rather we’re self-implying the fourth quarter was still up in that 30 million plus type of range?

Bill Smith

Yeah, I can answer that question. We will give you guidances as this quarter continues – or this year continues to evolve. Obviously, it’s been a very challenging year. It’s been a big surprise for us and it’s one that we’re dealing with and grappling with. We’ve got a strong strategy. We have clear visibility as to what the cause and factors are. Some of this is frankly right now out of our hands. We got to wait for other events to take place.

Richard Valera – Needham & Company

Sure. Well, within your largest customer which is going through this 4G transition, one of the development there which might sort of mitigate the bounce back is that I think on the My-Fi device for the LTE network you guys are not on there I understand with the connection manager. Do you have any sense how much maybe the growth of My-Fi for 4G is impacting your connection managers built at this point?

Bill Smith

Yes. Let me just talk about numbers that had been publicly discussed. It’s stated fact that about 500,000 units of 4G devices have been shipped since the launch of 4G in early December. About half of those are handset devices, the other half are data devices, that’s a very small number. I think clearly there is a period of confusion in the consuming public as to what 4G means. There is a variety of 4G standards, it’s very fuzzy. Everybody is talking about 4G and it’s not everywhere to be had.

I just think that right now what you’re seeing is a reaction to a technology transition that we all I think initially hoped would be very positive, turned into being somewhat missed the point. So, I think this all work out. Time will cure this but we just have to be patent. As far as your comments on mobile hotspots we think mobile hotspots offer a very strong opportunity for Smith Micro, whether our new mobile hotspot software that will ship for the degree first time the end of this quarter.

We also see other products that will come into play as our Mobile Network Director also starts shipping this quarter. And unfortunately as I’ve always stated on OEM transactions, they tend to start smaller in the beginning and then build up over time. So, I really think that for significant numbers that come through from these product initiatives you’re probably looking at early 2012.

Richard Valera – Needham & Company

Fair enough. And one more question if I could Bill. I asked this last quarter and we’re sort of a quarter further in so I’ll as it again that when do you think about cutting your expense level to lower your breakeven point. If you’re not back into this day 30 million plus by fourth quarter, do we start thinking about reducing the expense rate just to bring down the break even?

Bill Smith

Well, you know we take a rather prudent approach to business around here and you should rest assured that we are already taking efforts to rationalize some of our expenses but we also are mindful of the opportunities that lay ahead of us and the need for manpower resources to fulfill those and make them come to fruition. So with that in mind we walked that very sensitive balance between being prudent on our expenses yet not short changing our future. We are very mindful of that.

It’s something that the entire executing team is highly focused on but the number one thing we have to be straighten of is we close the number of opportunities we have in front of us that represent significant upside for us going forward and so maybe we have to just be careful. But I think we just got to grow our revenues back up to a level that we would find acceptable and will go back to profitability.

Richard Valera – Needham & Company

Okay, I appreciate, and thank you.

Operator

Thank you. And our next question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Michael Walkley – Canaccord Genuity

Great, thank you. Just building on Rich’s question I was just trying to maybe if you could just help us understand a little better the sequentially flat guidance is it all primarily due to the same customers and the LTE timing of new modems shipping into Verizon or are there any share losses or any deltas you could share at maybe the other customers and then is it also one the productivity side if you could just help us think about that smaller division going forward? Thanks.

Bill Smith

Yeah, that’s a good question, you know, I would have to say that as I said, that one customer was down over $13 million in sales in Q1 over Q4. It is potentially possible; it could be even slightly smaller in Q2, before we would see a resumption purchasing activity in Q3. So that’s probably the way we view it and I believe that we have some pretty good visibility into that and that will, time will bear that out, we just have to wait and see. The other part of your question was...

Michael Walkley – Canaccord Genuity

Is there potential share loses at other customers if there is anything like that.

Bill Smith

Yeah, this is really about a particular perfect storms situation at a particularly large customer. At one point that customer was lot smaller, obviously would have lesser effect. But Q4 was a 50% customer and when a 50% customer catches a cold, we catch pneumonia and that’s really what happened here. As far as, the other part of your question on Productivity & Graphics, it’s a smaller units we have some timing issues on some orders I would expect that that unit’s revenue will grow in second quarter, but you know that’s all I can say.

Michael Walkley – Canaccord Genuity

Okay. And then you said you’re going to ship your first hotspot, have announced the customer for that yet and how do you see that, the potential revenue opportunity in the back half of the year?

Andrew Schmidt

Yeah. We have not announced any new customer relationships for our hotspot products or our mobile hotspot products or the Mobile Network Director, they are working diligently with a number of Tier 1 carriers around the world. We expect to announce deals as soon as those customers are shipping, which means that there may be an offset on the time that we close the deal to the time they start to ship depending upon how they cut in the new product offering. There is always a challenge of trying to cut in new product offering especially in fourth quarter around the holiday selling season at least here in North America. So, we’ll have to continue to monitor that, but we feel very bullish about the traction we see for these new products as well as for SODA, which is really the backbone of a whole lot of our product strategy. So, it feels very, very bullish and positive about those. I just don’t have the numbers to talk to you guys about this quarter.

Michael Walkley – Canaccord Genuity

Okay, great. Thank you very much and Andy, just quick question for the model, how do you think about the tax rate for this year and next year given some of the losses in the first half of the year?

Andrew Schmidt

Sure, the best way to model is at our GAAP tax rate which is 40%, which is considered fully taxed. So, both GAAP and pro forma model 40%.

Michael Walkley – Canaccord Genuity

Okay. Thank you very much.

Operator

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

Chad Bennett –Northland Capital Markets

Yeah, good afternoon. Andy, could you give us the 10% customers?

Andrew Schmidt

Sure, the usual suspects, AT&T, Sprint, Verizon, we also had as you know we were in the PSO OEM business for a few years there. We had contract closed out payment in the first quarter from Hewlett-Packard which cut it down somewhat a little higher than they usually run out. So, those were our key for the period.

Chad Bennett –Northland Capital Markets

As a percentages or the percentage for the largest at least?

Andrew Schmidt

Our largest was 20%.

Chad Bennett –Northland Capital Markets

Okay. And who was that?

Andrew Schmidt

That’s Verizon.

Chad Bennett –Northland Capital Markets

Okay. And then can you talk about Bill or Andy for that matter. So, you think overall mobile broadband subscription industrywide with your three or four top carriers have declined since the back half of 2010, just because of the pauses or transition of 4G. I’m trying to get the sense of if there’s been an overall deceleration in mobile broadbands and subs that your carriers have seen?

Bill Smith

I think there are a couple of things to kind of think about. When you make a transition as is going on between 3G networks and 4G services, the biggest consumers for 4G at least early on will be the enterprises. The enterprises, however, need to see a couple of things. They need to see a network footprint that covers all their operating areas, that’s large enough to provide effective service and they need to then to be able to test the new devices, the new service offerings to make ensure themselves that they indeed can reap the benefits from the faster speeds that 4G is out advertised to give to them.

I think that’s the interesting point they also need to be made, the question earlier about hotspots enterprises are going to probably be the last to adopt mobiles hotspots. You know there is a lot of security issues and things going on that need to be dealt with there that the enterprises are going to need to try to satisfy themselves that they are not opening themselves not to any security breaches.

So, I think the enterprises will be buying either embedded modules or laptops with embedded modules or USB dongles going forward. I really think and I think I’ve said this before that their entry to the marking will be a phenomenon in the second half of this year and one into 2012. So that’s maybe the best way I could answer that question.

Chad Bennett –Northland Capital Markets

Do we so – so if we were to look out may be this time next year I know that’s long ways out but, do you feel like your share of the connection manger market with your top four carriers in the U.S. will change from year to there that is your share of devices that actually have third-party Connection Manager on them.

Bill Smith

Yeah, if you are asking me if you think our share of the market is going to get smaller by answers is an obsolete no. You know I think our market share if anything will continue to grow and it will be driven by the fact that we have solutions that will speak to the needs of a variety of different devices and form factors and it makes easy to do business with Smith Micro. These companies have been doing business with these carriers and have been doing business with us for years.

They know, we know the space, they know we are leaders in this space. That’s why we’re scoring wins offshore. We’ll have more wins to announce on Asia Pacific in the not too distant future. We are clearly in a dominate roll. There is always going to be competition, all others have competition.

But I think the biggest factor is to compete against Smith Micro competitors really only have one thing they can play with and that’s probably price. To stay up this on the technology side to keep in front of us or just, try to stay even it’s all most impossible because we’re moving too fast.

So while I am always very respectful of our competitors I believe that, that right now is the least of our problems and I know many have thought that that’s one of our major problems I don’t agree with them. And I do so respectfully, but we’ll see.

Chad Bennett –Northland Capital Markets

Got it. And then one clarification I think Hotspot Manager GAs at the end of the quarter same type of timing on the hotspot maker product maybe they’re one and the same or maybe they separate. And....

Andrew Schmidt

Let me, let me clarify that quickly. We’re going to one Hotspot Manager Products that will have a variety of features and capabilities. We’re not going to have two products that that nomenclature which was one we used earlier became confusing to the market and so we’ve kind of consolidated our naming conventions and that’s the way to think of it.

Chad Bennett –Northland Capital Markets

So, are you – the Hotspot Manager, are you as confidence that of your ability to get on tablet, Android tablet type products as you are on the hotspot products?

Andrew Schmidt

Yeah. I’m very confident in our ability to demonstrate both the touch market as well as the Android whether that be handset or tablet market and I look forward to be enabled to talk about that. But that’s a conversation we’ll have to hold for future conference calls and we deal with, at least we had to deal with today and then we’ll move forward from here.

Chad Bennett –Northland Capital Markets

Got it. That’s all I had. Thanks, guys.

Operator

Thank you. And our next question comes from the line of Howard Smith with First Analysis. Please go ahead.

Howard Smith – First Analysis

Yes, thank you. Most of my questions are answered. I just want to confirm, do you think HP was a 10% customer in the quarter?

Andrew Schmidt

Yes.

Howard Smith – First Analysis

Okay. And could you talk a little bit about the receivables, it looks like there is somethings that have been hanging out since the year end; maybe you can provide some color on that?

Andrew Schmidt

Sure, that one is pretty sensible. We had one of our large customers, it’s probably balance sheet gains and we held a $10 million payment till April 1st. So, as of April 1st the DSOs were down at 70 days which is normal for us.

Howard Smith – First Analysis

Okay, very good. Thank you, that’s all I have.

Operator

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

Scott Sutherland – Wedbush Securities

Thank you. Good afternoon. If I am not having the Mobile Hotspot Manager out maybe say in the first quarter, can you quantify maybe how much money you’re left on the table, you think this was like the $1 million or $2 million revenue opportunity that you just will not be getting because it’s knocking on so GA this end of this quarter?

Tom Matthews

Yeah, Scott this is Tom. I think when you look at our largest customer they did really launched the 4G LTE mobile hotspot PUK until I think literally the last day of the quarter. So, it had virtually no impact on our first quarter revenues, right. So, going forward I think time will have to past here and we’ll have to get a better understand of the product mix as before we can really report more accurate answer for you.

Scott Sutherland – Wedbush Securities

Okay. And so when we look at the international markets, you’ve signed a couple of customers and you announced some interesting support for SODA from some international guys is large like Reliance. Can you describe kind of what kind of phases obviously some of these markets are still 2G going to 3G, what kind of phases and how big they can be, Reliance has a lot of customer but they are moving to 3G, talk about the transition there and maybe what kind of percentage of revenue your international to be as you guys exit this year?

Andrew Schmidt

Well, let me just talk about the transition because I think it might service us all well. I mean it’s just kind of a thought that I’ve have as we gone through this move from 3G to 4G. I think a lot of us thought that the move to 4G would be probably about as dynamic as the moved to 3G and it really hasn’t played out that way as yet. And I think there’s some causal effect.

Effectively when the carrier moves from 2G to 3G, it’s the first time that carrier can really offer a quality mobile broadband experience. This is the case that’s going on right now in the Asia Pac marketplace and therefore as the timing to sign a number of Tier 1 carriers in Asia Pacific area, this is very crucial and when we are able to announced exactly what products they are taking you should rest assured that the first product announced is just that and that there are others to follow.

We are in the process of signing deals with these carriers for multiple product offerings. By and large, almost all of these carriers are very strong supporter of SODA and they will help drive the adoption of SODA by some of the world’s largest device manufacturers. So, I think that covered part of your question. You may want to come back now with the other part.

Scott Sutherland – Wedbush Securities

Yeah, the other part is, do you guys have a goal or kind of an international revenue goal or percentage of revenue that you’d like to exit this year in international?

Andrew Schmidt

Yeah, Scott, this is Andy. Not really, I mean when you start looking to have what’s going to happen this year, the new product initiatives whether SODA driven Hotspot Manager, Mobile Network Director and so on, our largest adoption is going to be here in North America just based on sheer scale of our customers. We’re going to keep announcing wins, but just like anything else we’ve been idling around somewhere little bit less than 10% international, maybe 10% moves into 12% and 15% you kind of exits it’s way in. But still North America is going to be the first big push for our new initiatives. While we sign these other carriers and as you know all of our contracts typically start relatively small and grew from there, it’s good seeding for 2012 and 2013.

Scott Sutherland – Wedbush Securities

When you look at custom (inaudible) carries like Reliance had announced the pull for SODA how should we interpret that for them becoming actually a real customers buying products versus being a supporter of a standard?

Bill Smith

You just need to be patient and wait for the releases to come out Scott, that’s all I can say.

Scott Sutherland – Wedbush Securities

All right, all right, my last question is can you talk about some of your smaller competitors you know their got-to- strategy, are they coming in with price they go to market, do any of them haven’t seen or addressing these transitions in more of a platform like SODA that could be competitive in the future?

Bill Smith

Let me just answer that in a couple of ways. You know when you talk about some of our smaller European competitors, even Asian competitors their reach from platform perspective is somewhat limited. As many of you are well aware we look like we have a new competitor entering our space with the announcement yesterday an acquisition they made. And they are taking, at least taking some of a platform approach.

Of course, they were clear that the company they bought has no revenues and hasn’t really shipped any products you we’ll just kind of have to wait and see. Will be very mindful, they could be reasonably challenging competitor but they have to catch up with eight years of experience which they don’t have so we’ll wait and see.

Scott Sutherland – Wedbush Securities

Okay.

Tom Matthews

This is Tom, just a couple of things I want to add to that as well, with respect to the complexity associated with actually delivering the next generation technology having a platform play there is a variety of technologies that in and of themselves are very complicated that we have integrated into a platform that we go to market with today. And things like, creating an API standard and interfacing with hundreds of different types of devices on multiple protocols, multiple network protocols are not a simple thing to do.

The ability to actually manage those devices, this firmware, the software, the device management capabilities that in and of itself is a tough technology. The ability to manage policy management coming from the carriers, the whole policy charging controls rules function that the carriers have today the interface with that is a difficult challenge. Security IPSec, IP mobility, Mobile IP, anchoring to carrier’s home agent.

All of those things are very, very difficult technologies and they take a long time to build and develop and we’ve been working at it for long time. So we think we’ve got a great platform story in the marketplace today in terms of the smaller competitors that you mentioned, a basic point on Connection Manager and Ethernet dialer if you will, that’s tough enough technology. But when you start looking at building an integrated platform and a really comprehensive approach to help many carriers manage in the new network architectures that they have that that’s a different story and we think we still have a big competitive damage there.

Scott Sutherland – Wedbush Securities

Okay, great thank you.

Operator

Thank you. And our next question comes from the line of Lauren Choi with J.P. Morgan. Please go ahead.

Lauren Choi – JPMorgan

Hey guys how it is going. I think you mentioned in the press release that you expecting the space of mobile broadband devices to kind of return to an approved order level in the second half. Can you just give me some details in terms of why you’re confident about what will happen in terms of, are you aware of maybe more new devices coming out from your customer whether it’s maybe internal changes in their sales force, marketing or is it really maybe the broadband uptick might be from new wins that maybe not be your largest customer?

Bill Smith

Well I think lets kind of look at that in a couple of ways clearly, as we stated a number of times our largest customer had a lot of inventory and a lot of licenses of our software that needed to be worked through. And that is an ongoing process that happens throughout Q1, it looks like it will happen throughout Q2. But at some point in time, it’s just sort of law of basic physics driven and run out and they have to start buying and we are monitoring that closely. We are having continual dialogue with our customer. We are continuing to grow our relationship there and we feel comfortable that, that will happen sometime in the third quarter and that would yield the things we’re talking about so.

Andrew Schmidt

Couple of other things Bill too that add to that. We certainly have a better visibility into the network to build our plans as well.

So our largest customer who announced 38 markets in December and 110 million POPs is recently gone public with their plans for the rest of the year of having 175 markets build out by the end of the year. So they’ll undoubtedly be a little bit more aggressive about marketing and we know there is a variety of devices different form factor that is non-embedded types of moderns that we’re actually working on right now to support future rollout.

So, as Bill said in his comments that he has, we’ve got visibility into the causes, we have some visibility into obviously these initiative going forward the adoption rates. We’ll have to wait and see exactly how they turn out but there is a lot of those points us in the direction of growth in the future.

Bill Smith

And clearly the some of the early hiccups both with devices as well as with the network itself, it has been well publicized and need to be worked through and they are being and it just takes a little bit of time but that’s best way I can answer your question, Lauren.

Lauren Choi – JPMorgan

Okay, yeah. So, that’s very helpful. And then just next the 4G My-Fi device they are no longer on. Was there a rationale for why Verizon went there and can you just kind of talk little about I think before I thought, my thought was that they like to use one vendor because you guys taken all devices, was there a technology change or anything that happened where that strategy got changed and would this threaten any of the dongles at this point?

Bill Smith

No, there are very different devices. So, you interface as a user to the My-Fi device through Wi-Fi. And so that the thought was anybody can use Wi-Fi that comes with their PC to get to the device. The primary reason that our software was shift with this mobile hotspot initially was to get them step up. It’s a rather cryptic somewhat crude approach that the user has to go through to get them set up.

That in itself wasn’t necessarily strong enough rationale for carrier to incur the expense and they looked other carriers around them and as Tier 2 one carriers that we’re shipping those software with Wi-Fi I think that’s what led to that the decision. Now let’s talk about where I think things are going. And I think you’re going to see a number of carriers Tier 1 carriers as in North America as well as other places that will start shipping software with the Wi-Fi devices or mobile Hotspot devices.

And this has been done through experience. There is a very large carrier in Europe, that initially made a decision that they just didn’t think there was a need for any software with the Mobile Hotspot. And as they’ve gone through the experience of deploying these devices into the market they come with 480 degrees and their back talking with us about the need to deploy Mobile Hotspot software product also. So these are the kinds of things that will happen and just kind of sometimes to have to sit back and let the market take its course.

Lauren Choi – JPMorgan

Great but why were the, 3G devices you guys were on versus the 4G was there some technology there that’s....?

Bill Smith

We predominantly helped with the activation process for that. And given that we have done a lot of work with that customer to help with activations for all of the their mobile broadband services and supported the activation and provisioning function both on the point side and on the service side it was an easy way to get to market with a consistent activation procedure they move to, sort of an over the error telephone call for activation. That was the primary reason why that customer chose to work with us initially.

Lauren Choi – JPMorgan

Okay, understood. And just last question, I thought Dell kind of had a fixed fee structure a bit. And I think one point you guys talked about they were kind of running in the 3 million levels. Has that relationship changed that all given I think you didn’t mention then as a 10% customer?

Bill Smith

Well, (inaudible) about the last fourth quarter conferences I’ve said consistently that the PC OEM market is one that we found difficult to function in and difficult to make money. We pretty much told everybody we were going to kind of exit from that space. So, that’s where the event is all about.

Lauren Choi – JPMorgan

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Larry Harris with CL King. Please go ahead.

Larry Harris – CL King

Yes, thank you. Good afternoon. I wanted to talk about the Device Management software that you have I guess the relationship with HTC. The sales that the Thunderbolts have had in similar devices has that had any material impact on your revenues thus far?

Bill Smith

Larry that’s an interesting question, it’s a nice piece of business. However, the ASPs for clients on the devices are relatively low and as such to make it really material in our numbers is challenging, by that I would not say that we wouldn’t take a lot more of that business if it was available to us and offered to us. If good solid business is just isn’t – you got to sell millions and millions of unit to generate a meaningful number.

Larry Harris – CL King

Understood. And just my impression is with respect to the Hotspot Manager and similar products that it’s probably going to be driven by the carriers rather than the OEMs in terms of the adoption, is that correct assumption?

Bill Smith

Yeah, I think that’s a very good assumption to take and you know however, and also its going to require lot of corporative efforts between Smith Micro is OEMs to be that handset OEM or all the hotspots talk OEM could help give a uniform experience to all the customers of a carrier that are utilizing the variety of devices that are going to be available.

Larry Harris – CL King

All right, thank you.

Operator

Thank you. And our next question comes from the line of Peter Misek with Jefferies and Company. Please go ahead.

Peter Misek – Jefferies & Company

Hi, thank you this is Jay for Peter. You touched on this a bit already but in addition to the Hotspot Manager could you give us more details if you could for the product roadmap for the rest of the year, especially through the timing and what you expect in terms of having a significant financial benefit that’s finally done? Thanks?

Bill Smith

Okay, well I think yeah we’ve talked hotspot we talked about mobile network director the analytics products is also when the launch space is during the next rev of it. And we’re looking for future adoption the video products we have not announced the first customer however, we have one and may even have a couple and we should be moving forward on that front. We’re also working closely in the video conferencing area really focused on the Cisco telepresence standard as a way to offer a streaming video capability and conferencing capability to a wireless device speed app, a handset or a tablet.

So, that is all on track for the current year. We will be continuing to upgrade it our sense of now product offering and look to further strengthen that. So, I guess all-in-all without getting into the weeds on the subject, we have a strong product roadmap in all categories for the balance of the year and through 2012 into 2013 that we’re executing against. We share these roadmaps with our customers so they understand when different features will be coming to the forefront. We try to match our roadmaps to the customer’s requirements and needs as much as possible so that we can really provide a service offering and a product that that will help them compete in the marketplace.

So, I think we got pretty strong product line up and we’re obviously still working on a number of creative initiatives on the connection management standpoint as well. So, I don’t want to say that that product isn’t going to continue to grow because that is true, there’s a full line up there as well. So, that’s all I can cover.

Peter Misek – Jefferies & Company

And so it’s safe to say that similar to the mobile hotspot for the first six months after launch for those is going to be minimal revenues and then you see it ramp?

Andrew Schmidt

Well, it depends; yes the product is an upgrade to current shipping product as it will be in the connection management space. That can have a rather profound impact immediately. If the product is a first time launch that one will grow over a period of time.

Peter Misek – Jefferies & Company

Great, thank you.

Bill Smith

Yep.

Operator

Thank you. And our next question comes from the line of Kevin Dede with Brigantine Advisors. Please go ahead.

Kevin Dede – Brigantine Advisors

Thanks. Bill from maybe you guys can chime in on this together. I’m curious now that you’ve got Network Director together and heading out the door soon and you consolidate the name on the Hotspot Manager product. Can you offer little more detail on how your marketing strategy may have changed since you talked to it in November at the Analyst Day and maybe offer a little insight on the competitive environment whether or not you think you’re budding up against some of the guys in the OSF or BSF space?

Tom Matthews

Well, I’ll only take the last one first, Kevin, this is Tom. I don’t think we’re budding up against any of the players in the OSF, BSF space and in fact, I think that the opportunity to partner with a number of those types of software and hardware guys there particularly in the policy enforcement and policy control functions, those are the areas where there is actually a lot of collaboration taking place, particularly around the Mobile Network Director functions. So, I don’t really see that as competition, I see that more as opportunities for helping carriers to create good strong ecosystems and build better products together.

With respect to the overall marketing strategy changes I think you know Bill made comments earlier obviously about consolidating what we’re initially targeting as two separate product offerings with the Hotspot Manager and Hotspot Maker. We consolidated that into a single offering with different features and modules that will turn off and turn on depending on the customer’s needs. That will include policy enforcement agent as well as the Hotspot Management, the Hotspot Maker the security elements that we’ve discussed earlier.

Some of the changes in the go-to-market strategy have resulted from the collaboration that has taken place with the existing customers some of the SODA partners what they see is really the key needs. In addition to that we gone out and we worked with focus groups. And we’ve asked random users how this product offering compares to other offerings in the marketplace today whether that’s, just a mobile hotspot PUK or whether that’s hotspot on an Android type device or another smartphone. And that helped us to revise our go-to-market strategy and our marketing efforts. As well we’ll continue to revise those in integrated way – as time moves along and as we see more adoption in the marketplace and get additional feedback from our customers.

Kevin Dede – Brigantine Advisors

Can you stand on that Tom just give me – little insight on how you think that’s changed the sale cycle?

Bill Smith

Well I think Kevin I don’t think it’s really changed the sale cycle at all. I think that, you have to the product shipping before you can close the deal and you know you got to go through especially in some of these newer areas you know certainly early trails with key carriers before full deployment can happen and I don’t think the time table has changed really a bit.

Kevin Dede – Brigantine Advisors

Okay, I guess I didn’t ask it the proper way Bill I apologize. It just seem to me that you’re coming to the carrier with a much deeper product that goes much deeper into the network, right. The Connection Manager sits pretty much outside but the thing that you are talking about helping them with now reside much deeper within the parallel of that work and it just seems to me that they need to have much more faith in the capability that you’re, that you are able to bring to them and I guess it would also seem to me that that might be part of the reason that some of these things there are pushing to the race.

Now granted Verizon’s networks isn’t as nearly as pervasive at that would if you would hope it to be and granted that’s coming I am just curious as whether not you think that it’s just taken some time on your side to work with them, demonstrate your capability and have your products in line.

Bill Smith

Okay, let me try and address it a different way. When you look at Connection Manager, Hotspot Manager, Mobile Network Director we’re really talking about products that are primary client products. They may interface with servers within the center office some of the servers for policy et cetera really don’t come from us, they are already there. What our Model Network Director does is respond to those policies based on where the users is in the world and calling patterns of that users, excuse me.

So, I would say that even if you look at products like Visual Voicemail or Push-To-Talk or other products that some of which are both client and server related, clearly Visual Voicemail resides in the Tier 1 carrier here in North America and has prospered substantially in the last few quarters and we expect it will grow even faster going forward.

So, I first off would not endorse the concept that anything has moved out because I don’t think it has. And secondarily, I don’t think I wouldn’t endorse the concept that a carrier will have difficulty doing business with Smith Micro because we are not necessarily known for building infrastructure service.

We’ve had them, we are in the DM area, we’re in the DM area in a lot of places, but so, I think we have the credibility across the board. But when you look at where the real money is going to come from going forward with all the various product offering, they’re predominantly client based products and that’s something nobody knows better than Smith Micro.

Kevin Dede – Brigantine Advisors

Great Bill thanks very much for the clarification. I appreciate it.

Bill Smith

Thanks, Kevin.

Operator

Thank you. And our next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty & Company

Good afternoon and thanks for taking my questions. Just a clarification Andy on your top customer, I think Bill said down 13 million sequentially and you said 20%, I’m getting 25% as my math right there. Or is it little bit higher than 20% in the quarter?

Andrew Schmidt

20%.

Charlie Anderson – Dougherty & Company

20%, okay. And then if you could just talk about ASPs more Mobile Hotspot Manager, I think you guys have talked in the past that that would be in par you’re your Connection Manager, obviously that’s going to price a little bit different right now Verizon has been have had sort of people on a free trial for free using the Hotspot on the phone, won’t be a similar pricing engagement the way it is now on a USB or up or up PUK, I just wonder and how you guys feel like you’re going to be maintain that ASP given that the pricing dynamics might change a little bit for those kind of products. Thanks.

Bill Smith

Yeah, I think that’s a good question that, it’s really a function of volume. When we earlier talking about a product that would suffer effectively a similar ASP is a Connection Manager or even sometime slightly higher, when we really more addressing our focus to the PUK market, which is I believe kind of always be somewhat smaller.

But when we get to the point where a carrier is deploying a Hotspot Management product that shift with every single android device for instant that they shift, you’re now talking about an order of magnitude that just fails probably the PUK market and the Connection Manager market combined and therefore the ASPs will most likely be somewhat lower within that affect is the volume is going to be so huge and it is software at the end of the day. So we’re still looking at 90% plus margins on the software it’s great business.

Charlie Anderson – Dougherty & Company

Just may be a quick follow on to that. You guys obviously have a mix you saw last year in terms of your traditional USBs and PUKS. I wonder how that shifts those versus the smartphones that are being used as a hotspots we get back to, as you guys feel more normal levels end of the year but, what kind of makeshift are you assuming there?

Bill Smith

Yeah, I mean this is toward a crystal ball gazing and you guys are better at than we are but I think that your, I don’t know by the end of the year but may be by 2012, 2013, it might be reasonable to assume that at least in North America that half of the users access the mobile internet via traditional devices that require a Connection Manager and may be the other half will do so utilizing a My-Fi device.

I think most of the My-Fi devices especially in the later timeframe will be either tablets or smartphones and that are operating on 4G where the user can improvise the device simultaneous with the capability of talking on them which will require 4G not 3G. When you look at the current market there are a number of large carries than at this point really have not launched in a significant way, global hotspots created and it don’t even provide for the capability of utilizing mobile hotspots, excuse me, smartphones as mobile hotspots. So that will change, that will change through the balance of the year and into 2012 and that will obviously impact the number.

Charlie Anderson – Dougherty & Company

Great. Thanks for taking my question.

Operator

Thank you. And at this time I am showing no further questions in my queue, I would like to turn the conference back over to Mr. Messman for closing comments.

Charles Messman

Thank you everyone for joining us today. Please feel free to call us if you have any further question. We appreciate your interest in Smith Micro and look forward to speaking to you in early August. Thanks again.

Operator

Ladies and gentlemen, this does conclude the Smith Micro first quarter 201l Financial Results Conference Call. Thank you for your participation and you may now disconnect.

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