Smith Micro Software CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Smith Micro (SMSI)

Smith Micro Software, Inc. (NASDAQ:SMSI)

Q2 2011 Earnings Call

August 2, 2011 4:30 pm ET

Executives

Charles Messman – Investor Relations, MKR Group

William W. Smith, Jr. – Chairman, President and Chief Executive Officer

Andrew C. Schmidt – Vice President and Chief Financial Officer

Tom Matthews – Senior Vice President and Chief Strategy Officer

Analysts

Michael Walkley – Canaccord Genuity

Chad Bennett – Northland Capital Markets

Scott Sutherland – Wedbush Securities Inc.

Lauren Choi – JPMorgan

Jason North – Jefferies & Co.

Charlie Anderson – Dougherty & Company LLC

Kevin Dede – Brigantine Advisors

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Smith Micro Second Quarter 2011 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Tuesday, August 2, 2011.

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

Charles Messman

Good afternoon, and thank you for joining us today to discuss Smith Micro Software’s second quarter ended June 20, 2011 financial results. 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 www.smithmicro.com or call us at 949-362-5800 and we will immediately email one to you.

With me on today’s call are Bill Smith, Chairman, President and 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 the call the company may make forward-looking statements that involve risk and uncertainties, including without limitations forward-looking statements related to the company’s quarterly revenue guidance, its financial prospects and other projections of its performance, the company’s ability to increase its business and the anticipated timing and financial performance of its new products and potential acquisitions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s products from its customers and their end users, new and changing technologies, customers’ acceptance of those technologies, new and continued adverse economic conditions, and the company’s ability to compete effectively with other software companies. These and other factors discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Forms 10-K, 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 and call.

Before I turn the call over to Bill Smith, Chairman, President, and CEO of Smith Micro, I want to point that in our forth coming prepared statements, we will refer to certain non-GAAP financial measures, please refer back to our press release disseminated earlier today for reconciliation of the non-GAAP financial measures.

With that then, I’ll now turn the call over to Bill Smith. Bill?

William W. Smith, Jr.

Thanks Charles. Good afternoon everyone and welcome to our second quarter ending June 30, 2011 earnings conference call. Revenues for the quarter were $16.1 million inline with management guidance provided on the May 4, 2011 first quarter conference call.

Non-GAAP gross margins remained strong at 86%, while profitability played out as we expected with a non-GAAP net loss of $5.2 million or $0.15 per share, as we continued our investments and innovation and adaption of our technology and product line to address the emerging marketplace demands.

Combined results from our top three carrier customers, Verizon, AT&T and Sprint, in Q2 were up approximately 25% sequentially from Q1, 2011, but remained well below the pace of sales for Q2, 2010. Each of these customers represented 10% or more of our quarterly revenues on an individual basis. We saw very nice gains from Sprint, who came in as our largest customer for this quarter.

At Verizon, our revenue recovery remained in the state of cost, as sales of our core connectivity product continued to trail well behind 2010 quarterly levels. They’ve made great progress on their network build out and transitioned LTE and were anxious to see how the launch of new geographic markets and corresponding marketing campaigns impact our sales ahead. We continue to maintain a strong relationship with Verizon and we’re excited about the collaboration that’s taking place to support future device rollouts.

In the phase of what has proven to be a very challenging times for our company, we were encouraged by the interest from a number of customers for our innovative new products that helped them optimize the mobile experience for their end users. We continue to invest in R&D to aggressively prioritize our technologies that will position our company for further participation in the opportunities emerging with new expansion of 4G services on a global basis.

We’ve made great progress in the development of SODA and we are pleased to see carriers such as Sprint, Comcast and Reliance along with other industry leaders such as Alcatel-Lucent, Huawei and ZTE joined as early members of the SODA Innovators Program.

Work on new offerings such as our Mobile Network Director and Mobile Hotspot Manager solutions combined with the evolution of our connection management software to an integrated platform to better engage, monetize and retain subscribers remains a key priority. The investments we are making to enable a more compelling broadband connective experience are critically important to our future.

I will discuss the benefits of pursuing the development of these innovations, the opportunities that they open and the impacts to our expense structure in more detail after I turn the call over to Andy Schmidt, our CFO to discuss our financial results for the second quarter in greater detail. Andy?

Andrew C. Schmidt

Thank you, Bill. First, let me go through 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 we furnished to the SEC on 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 $2.3 million for the current period broken out as follows: $5,000 cost of sales; $643,000 selling and marketing; $385,000 R&D; and $1.23 million for 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, $780,000 selling and marketing, and $62,000 R&D.

Moving on, for the second quarter, we posted revenues of $16.1 million and a loss of $0.22 compared to GAAP and $0.15 per share non-GAAP. Revenue for the quarter compares to $31.4 million for the same period last year. International revenue was approximately $1.8 million this quarter across all business groups.

For 2011, we are reporting revenue as Wireless and Productivity & Graphics. As we’ve spoken to over last year, we view the future of our Wireless business as being a platform of interconnected wireless technologies rather than standalone product initiatives. To be consistent in our financial reporting, we will report Wireless revenue as a whole versus components of the platform offering.

Our Wireless segment reported revenues for the quarter of $13.8 million as compared to $28.3 million last year. Our Productivity & Graphics segment posted revenues of $2.2 million as compared to $2.9 million last year. Total deferred revenue at June 30, 2011 was $716,000.

Switching to gross profit, non-GAAP gross margin dollars of $13.8 million compares with $28.9 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 85.7% for Q2 2011 compared to 92.5% for Q2 of 2010. The reduction in gross margin is due to lower sales volume covering fixed, maintenance and support expense.

Non-GAAP gross margins by segment were as follows: Wireless 87%, Productivity & Graphics 79%.

Switching to operating expenses. Non-GAAP operating expenses for the second quarter of 2011 of $22.6 million decreased by $0.7 million from Q1 2011 driven primarily due to the timing of trade shows and corporate sales meetings. From a year-on-year perspective, non-GAAP engineering expense has increased 15%, selling and marketing expense decreased 2%, and administrative expense, which includes cost of facilities increased 25%.

Total non-GAAP operating expense has increased 13% year-over-year primarily driven by planned headcount additions and infrastructure investment.

Non-GAAP operating loss for Q2 was $8.8 million as compared to an operating profit of $8.9 million in Q2 of 2010. Non-GAAP net loss for the second quarter was $5.2 million or $0.15 per share as compared to a $6.8 million or $0.20 per share profit last year.

From a balance sheet perspective, our cash position closed at $62 million at June 30, 2011, a decrease of $10.6 million from the beginning of the year primarily due to the investment in capital equipment to build out our data centers.

Net working capital at the end of the quarter was $69.3 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.

William W. Smith, Jr.

Thanks, Andy. Before, I get into further details on the quarter and our vision, I want to take a moment to acknowledge the recent changes made within our Board of Directors. I want to thank each of the Directors who have departed the Board for their service to the company along with their advice and council during times of growth and challenge throughout their tenure.

I also want to recognize our newly appointed member of the Board, Andy Arno and Greg Szabo. Andy and Greg each bring unique skills and seasoned business experience that will add strength and diversity of perspective to the team. And I want to officially thank them and welcome them to Smith Micro.

There is no doubt that we are experiencing an onslaught of change in trend transitions in our industry. Some of these changes may pose threats to our business if we remain in a static state, but we see great opportunities that can be seized during these dynamic times. The key to our financial recovery are innovation and execution, and that’s we are focused on. The global trend for increased connectivity to the mobile internet across an increasing range of mobile devices is stronger than ever and that is driving our innovation.

Our core mobility business has long benefited from our unique ability to help customers better reduce the complexity of making and monetizing mobile broadband connections from personal computing devices. The task that we are now focused on is making the transition around supporting mostly PC users connected to a single network to support in many new devices like smartphones and tablets, which maybe connecting to multiple network types and services.

I want to give you a brief overview of our vision for delivering new products and then discuss how that relates to our business model, growth prospects and underlying infrastructure our company needs to transition back to a profitable growth business.

As the industry, devices, technologies and business models have been evolving, so too have we. We have been working hard on new software architectures to enable the ability to go to market with a platform strategy.

Over the course of the last several quarters, we have completed initial development of what we call our core software strategy. This approach essentially makes the key components of our primary products in the software modules that can plug-and-play together in new combinations. This architecture supports the foundation of our integrated mobile platform that can adapt and expand rapidly as customer needs change and new opportunities arise. It also enables us to deliver solutions rapidly across many different mobile platforms from handhelds to tablets to mobile hotspot devices as well as fixed platforms such as set-top boxes and IT-enabled televisions.

We have been aggressively developing and refining new applications that are leveraging our core architecture for new products including our Mobile Network Director, our Mobile Hotspot Manager and other solutions not yet announced. Most importantly, it enables us to deliver solutions at a lower development cost with higher functionality, greater differentiation, and an improved user experience.

Our current customer base as well as many new prospects have validated that the end user experience is of critical importance to retaining and up selling their subscribers. As service providers contend with the changing customer relationships, they seek new ways to engage their audience and create a user experience that simplifies connectivity, an experience that gives more visibility and control over their connected devices and data plans, which is becoming increasingly important as operators move to the tiered pricing plans and premium service offerings.

Our integrated platform with all of its components such as connection management, security, device management, IP mobility, network optimization, analytics, policy control and a flexible user interface layer, will allow our customers to create a tailor-made experience for their end users, enabling new revenue opportunities and improving customer satisfaction.

Another component of our platform Adaptive Video Delivery is allowing us to expand our reach into new opportunities where wireless content is being integrated across multiple streams.

In the second quarter, we closed the deal with a leading provider of interactive television systems serving the hospitality industry. This new customer will use our video solution to stream television programming and other content to cruise ships, hotels and casinos, where guests will be able to view their content on televisions in their rooms or on tablet PCs as they roam the ship or lay by the swimming pool.

Until now streaming content to mobile devices as well as IP TV systems require at least two different vendors to support, Smith Micro is able to offer an engaging, multi-stream experience using our video solution to deliver content to IP TVs, desktop PCs and virtually any mobile device from a single content stream. The opportunities to monetize multi-stream content are very exciting and we’re leveraging all of our platform assets to create a flexible and highly differentiated solution to pursue these new opportunities.

Along with innovating and investing in our overall platform, we continue to invest in SODA, which stand for Secure on Device API, designed to extend our platform capabilities across a multitude of device types, manufacturers and operating systems. Our SODA Innovator program continues to expand the new participants joining this quarter from key device OEMs, Huawei and ZTE.

They joined other industry leaders such as AT&T International, Sprint, Reliance Communications, PT Bakrie Connectivity, GCT Semiconductor, Comcast Corporation, Bouygues Telecom, Bell Canada and others in understanding the value of a standardized integration layer across heterogeneous mobile platforms designed to deliver more functionality, higher quality devices to the market, faster.

We're finding that the combination of SODA and our comprehensive platform approach to deliver improved broadband experiences is enabling Smith Micro to better execute on another pillar of our strategy, which is to expand our business internationally. Recent wins with companies like PT Bakrie Telecom in Indonesia and MTS India, along with other active promising opportunities in Asia, Europe and South America have all advanced due to our core architecture, our innovative mobile experience platform strategy, and our thought leadership on SODA.

To execute on our platform strategy and expand our footprint globally, we’ve had to make investments. With the financial position we have been in for the past two quarters of the year, it would be tempting to cut cost to match revenues. Moving too swiftly on that approach would have derailed our ability to create the next generation platform for our products, scuttled our SODA initiatives and halted the development of a sales infrastructure designed to service new global markets opportunities.

Much of the investment needed for the future has been made, but we will need to continue our investment. That said throughout the past two quarters, we have been working aggressively to rationalize products, optimize operations and align costs. We’ve taken dramatic actions to table our number of programs, consolidate offices, projects and teams, and cut costs associated with people resources. By the end of the year, we will have consolidated functions, facilities and teams from our Chicago, Herndon and Austin offices into our Pittsburgh operation. After the expense effects of severance and costs associated with closures, we should begin to see quantitative efficiencies in our expense line beginning in 2012 and improving throughout the year.

We continue to look for new ways to drive cost out of our business and we will remain vigilant to any changes that may cause further course correction. To execute on our plan to drive new revenues through the sales of these new products and by expansion of our customer presence, we will continue to make investments in sales and marketing.

Through the combination of improving our expense efficiencies and increasing revenues, we hope to get back into a profitable state as soon as possible. While we view our mobility software business as our core business and the main driver for future growth, we continue to manage our Productivity & Graphics business in a profitable way. Revenues for this segment in Q2 were $2.2 million, up 28% sequentially from Q1 2011, yet still down from the $2.9 million posted in Q2 of 2010. We have completed the restructuring and have aligned cost within the segment to run it profitably at current revenue levels. We are pleased with the progress and we will continue to refine our operation and strategy for this business in order to maximize overall returns for Smith Micro and its shareholders.

Turning into revenue guidance. For Q3, we anticipate continued pressure on our revenues as the adoption cycle of 4G mobile broadband services particularly in the enterprise remains in the early stage of deployment. As the 4G networks are further rolled out, the mix of USB modems, embedded modules, mobile hotspots and tablet computers sold will begin to get sorted out, and we should be able to get enhanced visibility into future revenues. But as of right now we expect Q3 revenues to be in the range of $15 million to $20 million.

We still anticipate sell through of existing software inventory at our key customer to get work through by summer’s end. As a result business for our core connection management software should begin to pick up in Q4 as new devices get launched, expanded network deployments take shape and as marketing campaigns kick in. We continue to work to balance the cost of investing in innovation and in next generation products with an eye toward prudent cost management while revenues build from our new initiatives. We remained confident that we have the strategies to rebuild the momentum and to get our business back to quality revenue growth and profitability over the next four to six quarters. We look forward to updating you on our progress and the new initiatives as developments happen.

In closing, I’d like to point out that the company has faced tough headwinds in the past. Each time we’ve analyzed the situation and devised a strategy to get the business back on course. We are fortunate to have a massive wireless market in front of us that is undergoing an exciting transition to 4G services in some parts of the world and 3G services in others. And we intend to leverage our assets to capitalize on these opportunities ahead.

With that operator, I’d like to open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question is from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Michael Walkley – Canaccord Genuity

Okay. Thank you. Bill, maybe if you can elaborate a little further just on the relationships with your top three carrier customers. Have you lost any market share within those customers or is it just the mix of products with the technology upgrade more to hotspot you’re not in versus USB modems? Just a little more color kind of what you’re seeing at each of your top three customers and what am I take to get your revenue to reaccelerate from the current levels?

William W. Smith, Jr.

Okay, let's start with our largest customer for the quarter, which was Sprint. Sprint, the momentum there continues to grow. We have multiple products that they are currently shipping; we look forward to having other products shipped by them either later this quarter or next. So we believe that our growth at Sprint if anything is just getting faster and we look for good things there.

Switching to Verizon. Verizon, we haven't lost any market share there whatsoever. What really is more of the driver is as you mentioned, a transition away from USB devices and embedded modules towards mobile hotspots and that has impacted our sales of our core VZAccess Manager that we sell to them.

At AT&T, everything is on track, nothing has changed. We continue to build the software for the enterprise side of their business and look forward to add its sales of other products not only to the AT&T but also Verizon going forward. So I would say in general, our relationships at all three of our large accounts are very much intact and very positive, and we see nothing but opportunities for growth going forward.

Michael Walkley – Canaccord Genuity

Okay. Great. And then just building on that with the growth in these hotspots and the carriers, because two of your customers moving to more tier data plans. What is the feedback from maybe your Hotspot Manager product and when do you think this could be any one of major customer that help drive some growth for you?

William W. Smith, Jr.

Okay. Actually I think I’ll kind of lump a couple of products here that we can look at. Our Mobile Network Director product as well as our Hotspot product, both of which will reside in the devices that we currently are not presence in. When you look at Mobile Hotspot Manager and the Mobile Network Director, you’re starting to look at products that will be in all smartphones going forward and tablets going forward as well as serving more traditional markets. We are getting a lot of traction especially with the Mobile Network Director product, and look forward to being able to announce a new customer in the not too distant future and to actually be able to discuss the deployment; we’re just doing the works on that one.

In the case of Hotspot Manger, we have a number of different opportunities we’re working on; some are more advanced than others. In most cases with the Mobile Hotspot Manager we’re also looking at the deployment of SODA to make Hotspot Manager an effective tool, which requires the integration of our software into the actual devices. That’s a process that’s ongoing and we look forward to be able to talk more about that in the not too distant future either.

Michael Walkley – Canaccord Genuity

Okay. Thanks. One more question and I’ll pass it on. I just want to make sure the cadence of OpEx, it’s sounds like you’re consolidating some facilities to your new Pittsburgh facility but you’re still investing is kind of a flat OpEx run rate, but would you consider for the rest of calendar 2011, then it starts to come down in 2012? Is that a best way to think about it?

Andrew C. Schmidt

This is Andy. I’ll just stick with going quarter-to-quarter on guidance. What you should expect is a slight up tick in the current quarter and that as you pointed we’re closing facilities, so we’ll have certain costs related with new install and then we’ll update you on Q4 go forward at the next call?

Michael Walkley – Canaccord Genuity

Okay, great. Thanks, Andy.

Operator

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

Chad Bennett – Northland Capital Markets

Just a couple of questions. I think they were new at least to me, the SODA partners that you announced the product guys Alcatel, Huawei and ZTE. First of all are those new? And second of all, are those revenue producing relationships?

William W. Smith, Jr.

Yes, they are new in the current quarter. Let’s talk about how we make money with SODA. The way we make money with SODA is by selling products that utilize SODA and that’s why it’s particularly important that you see device manufactures of the likes of Huawei and ZTE joined the program. By getting SODA embedded into their devices, it enhances our ability to leverage that capability and sell additional product to either our current customers or new customers going forward.

We make our money by selling our software. We don’t necessarily make our money by selling SODA. What SODA does is it enables our capability to enhance the speed it takes to bring new devices for the market and just make it a lot easier process and a lot more pre-predictable. So we’re pretty excited by what we’re seeing with the SODA of program. We’re pretty excited about what we’re seeing from the standpoint of carriers who are either in the process of mandating or have already mandated or who are thinking about mandating going forward. That’s the essence of really some of the drivers of our growth leading into 2012 and beyond.

Michael Walkley – Canaccord Genuity

Okay. So with respect to the connection manager business and Verizon, I guess part I’m trying to reconcile is, you listen to the Verizon calls and the most recent one, and I know its early in terms of device deployment for them, but they talk about their dongle and hotspot business, which I know you’re not involved with, actually being good or growing and they are talking about pretty descent, again, they don’t give a lot of detail, but ramps into the September quarter. I guess how bigger then inventory builds because they have done if we’re stilling trying to work off inventory into the September quarter; I’m trying to reconcile that stuff?

William W. Smith, Jr.

That’s a fair question. I think the bigger issue that really where I want to concentrate is the fact that we’re seeing a technology shift in the marketplace where more and more devices that are being used for getting users connected to the wireless internet are mobile hotspots. Mobile hotspots in the form of box, mobile hotspots in the form of smartphones whether those Android or iPhone and they are impacting and eating in to some of the market that we traditionally would ship our connectivity software to.

The good news is that we have products like a Hotspot Manager and a Mobile Network Director that put us dead square into that market transition. So while it is painful at the present time, I think there is a lot of reasons to be very positive and very hopeful going forward because we do see a lot of traction with those products.

Michael Walkley – Canaccord Genuity

Okay. And then can you help, one our your, I guess, per se new competitors out there. Synchronoss reported the other night, last night and talked about their SmartMobility business unit and talked about having a product from that business unit by year-end. And they indicated they are already working with a Tier 1 domestic carrier, any comments there?

William W. Smith, Jr.

I guess you have to ask them, who they won the business from. I kind of – on the prior question, what’s our relationships with our top three carriers, and they are solid. And we value them, they are important customers to us, we work hard to service them and provide them with great software product and I think we've done that. So, hey look, we all have competition no matter what business we're in, whether we’re building wireless mobility software or working for a bank. We all have to compete in our markets. The competitors’ come, competitors go. And I'm sure that the competitor that you mentioned will be working hard to try to win business. I don't think they’ve won any business in their top three accounts.

Michael Walkley – Canaccord Genuity

Okay, fair enough. Then Andy last one from me. Is there a target or something a range we should be thinking about in terms of cash towards year-end? I mean how do you view it?

Andrew C. Schmidt

We're not doing as far our guidance right now, Chad.

Michael Walkley – Canaccord Genuity

Okay. but you’ve extracted probably as much as you can extract in terms of working capital and receivables and what not, is it fair to say that your operating loss going forward should kind of near what your cash burn is?

Andrew C. Schmidt

I think that's a fair assessment.

Michael Walkley – Canaccord Genuity

Okay, thanks.

Operator

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

Scott Sutherland – Wedbush Securities Inc.

Hi, great, thanks, good afternoon. Kid of a follow-up question, at the start of the year, you recognized a inventory deployment, your largest customer Verizon, at that point you thought maybe a Q2, late Q3 recovery, and now it’s looking like a Q3 recovery. So what difference in the inventory given that Verizon’s commentary that they are still in pretty well, these dongles and other units. What's different now or what's causing the recovery to take longer than you expected?

William W. Smith, Jr.

Well, first off, we didn't identify that customer as huge as to sort of or I’ll just keep it to that. But secondarily, I think that you have seen a transition that is caused by a technology change away from embedded modules and embedded devices towards mobile hotspots and that is eating in to the market share that we would normally service. So that's really the driver.

Scott Sutherland – Wedbush Securities Inc.

When you look at your SODA partners, I mean you have Sprint, I think AT&T International, but your two other, two or three large customers Verizon, AT&T, as far as I have seen they haven’t announced report yet for SODA, is that something that we should look for that gives more comforts that these relationships remain strong or maybe you’ve never seen it?

William W. Smith, Jr.

I think that’s something that I certainly hope we can look forward to and I will be very hopeful that I get to announce that. So I definitely will not take your last approach because I believe that SODA has a lot to offer to all carriers around the world including AT&T and Verizon. And I believe that AT&T and Verizon as well as others will recognize that back and see reasons to deploy. So, yeah, I remain very positive and upbeat about our chances on that side and let’s just stay tuned.

Scott Sutherland – Wedbush Securities Inc.

Okay and last, you’ve announced several international customers this year, but the revenue is not ramping. Obviously some of those markets could be different, how should we think about the ramp up of these international customers and when we will see in the international revenue stream?

William W. Smith, Jr.

Okay. As I have said for years now, when you launch new OEM relationships they start slow and build over time. As you pointed out, we’ve closed new customers but you don’t see a lot of difference in the numbers. That’s because of what I just said, they start slow and build over time. But let me kind of change the focus a little bit, because I think the focus needs to be much, much broader than what’s being implied. When we announced the deal with the PT Bakrie or MTS India or Telecom New Zealand or any of the other opportunities that I expect we’ll be announcing in the coming weeks and months, we’re

talking about the sale of the first product into those carriers. Most of these carriers are new to the data, wireless data business, and they don’t have a lot of infrastructure build out. Therefore in almost every case, the intent on the side of the carrier as well as on the side of Smith Micro is that we will be selling multiple products to these carriers, and the trick is jut to device an effective implementation strategy and schedule to allow that to happen.

So what you’re seeing right now is the first product, start slow and growing. You will start to see second, third, and fourth products announced over the next few quarters, and that’s really what should be particularly focused on and what is really exciting about some of the winds we are getting offshore.

Scott Sutherland – Wedbush Securities Inc.

Okay. Andy, really quick, what was your CapEx and operating cash flow and your Wireless revenue again?

Andrew C. Schmidt

All right, let’s get this quick up for you again. Okay, we’ve got Wireless, up $13.8 million for the period compared to $28.3 million last year. And for CapEx, I will give it to you shortly, CapEx for the period was about $4.7 million, $4.8 million for Q2. We’re about $6.6 million in Q1, so total of the year $11.5 million. And operating cash flow, I’m going to have to get back with you on that one.

Scott Sutherland – Wedbush Securities Inc.

I heard you, correct me, you said Productivity & Graphics was $2.2 million that would get us to $16 million not $16.1 million, I take it as rounding?

Andrew C. Schmidt

That’s rounding. And just back on the cash flow here, total cash flow from operations was $2.3 million, $2.4 million for the period and a lot of that’s aided by a burn off of accounts receivable of about $17 million.

Scott Sutherland – Wedbush Securities Inc.

That’s how you cut that in half. Okay. Great, thank you.

Andrew C. Schmidt

Sure.

Operator

Thank you. Our next question is from the line of Lauren Choi with JPMorgan. Please go ahead.

Lauren Choi – JPMorgan

Hey, guys. I think Bill, you mentioned there was a 25% sequential growth in your top three customers, but your total revenue is down 9.5% sequentially, and Product & Graphics seems like they were sequentially up. Can you just talk about I guess what’s making the rest of it come down or are there specific customers that underperform, there are certain things that went away?

Andrew C. Schmidt

This is Andy, and I will help you with that.

Lauren Choi – JPMorgan

Yes.

Andrew C. Schmidt

In Q1, we had a contract run off with Hewlett-Packard that was a legacy business similar to Dell that we are doing and that was about $3.8 million Q1 revenue, in which case we are not seeing that in Q2, so that was a contract end payment.

Lauren Choi – JPMorgan

Okay.

Andrew C. Schmidt

So that’s your primary variance.

Lauren Choi – JPMorgan

Got it. And Bill, so in Sprint you talked about that you are working with them on several products, can you just go into more detail on what those products are?

William W. Smith, Jr.

I wish I could, but I can’t as I’m sure you guess before you ask the question. But we will get that info out to you as fast as possible and it’s really going to be hooked to launch schedules as well as when our customer will allow us to talk about, but I think in this case they will allow us to talk about in fairly short order. So you just have to stay tuned.

Lauren Choi – JPMorgan

Okay. And what about the existing products that you have mentioned, is that talkable?

Tom Matthews

Lauren, this is Tom. Existing products are the Connection Management product that we’ve had there for quite a while. Obviously, we’ve talked to you in the past about the Visual Voicemail product. We’ve added additional functionality with the Visual Voicemail product over the past couple of quarters with our voice-to-text offering on top of that. In addition to that we do some back-up restore and synchronization over the air for them as well.

Lauren Choi – JPMorgan

Okay, got you. And I guess the other one is just can you give the exact percentage of total revenue from your top three? I’m just trying to understand sequentially how the three grooved?

Andrew C. Schmidt

All right, Lauren, sequentially lets go through, Sprint, in Q1 was about 13% and they went to 34% in Q2. Verizon was 20% in Q1, but 18% in Q2, and AT&T was about 13% in Q1, 11% in Q2.

Lauren Choi – JPMorgan

Okay, great. And just last question, Andy. So I think last quarter when asked about kind of cost controls and I realized that Pittsburgh move has been going on for some time. I think the answer was something like, lets wait, we’re not ready, it’s a kind of realigned cost but now it sounds like you are. Was there any changes in terms of – was it a strategy change or whether there is some actual revenues sources that may have created the less opportunity, so you’re reducing costs?

Andrew C. Schmidt

No, I think the way to view it Lauren is that we had a plan in place for the deployment of the Pittsburgh center. That plan was not fully disclosed internally and therefore we couldn't disclose it externally. We're executing on the plan that we've had and it's just coming to the logical clause that we thought it would.

Lauren Choi – JPMorgan

Okay, but there is nothing else in cost for your realigning like revenue streams with costs or anything like that, it’s just really from the move.

Andrew C. Schmidt

(Inaudible)

Lauren Choi – JPMorgan

Okay. Great, thank you very much.

Andrew C. Schmidt

Okay.

Operator

Thank you. Our next question is from the line of Peter Misek with Jeffrey. Please go ahead.

Jason North – Jefferies & Co.

Hi, this Jason North in for Peter Misek. I have a question about in terms of the milestones for SODA adoption and the Mobile Hotspot Manager. Just to put things you look for in terms of broader adoption there, and then the lag between those milestones and when does these come forward in results? Thank you.

William W. Smith, Jr.

Okay, I think the way to look at this is the first deployment of Hotspot Manager will be around devices most likely utilizing a joint operating environment. Those devices could be either smartphones or tablets that will probably come first followed by the deployment of Hotspot Manager that supports more traditional power packed technologies. Does that answer your question or come back to me if I didn’t?

Jason North – Jefferies & Co.

And when will those announcements take place? What’s the lag you think in terms of when you’ll see that in terms of revenues?

William W. Smith, Jr.

Well, okay. Traditionally in this kind of a product, we can’t announce it until the product is actually ready to ship. So in that case there will be revenues almost immediately, but I’ll go to my comment to an earlier question, all OEM business tends to start slowly and build over time. So yes, I would not expect this to be any different?

Jason North – Jefferies & Co.

Great, thank you very much.

William W. Smith, Jr.

Okay.

Operator

Thank you. Our next question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty & Company LLC

Good afternoon, thanks for taking my questions. Just a follow up on the Sprint revenue, you were up I think over $3 million sequentially. How much of that was sort of the connection manager product versus how much was another product. What I’m trying to kind of horn in on is, is it recurring revenue that the big jump ups that you had?

William W. Smith, Jr.

Let me put it this way, we try not to break this out specifically in product groups here, but as Tom was mentioning, we had a enhancement of our voice-to-text Visual Voicemail product that created a nice bump in revenue this period, so that was one of the key drivers. Connectivity is strong there, but the key driver for the period was that particular enhancement.

Andrew C. Schmidt

The actual option and utilization of Visual Voicemail and voice-to-text has been a very pleasant surprise for both to us and across customer, it has been a very hot ticket and it continues to grow at a very rapid rate.

Charlie Anderson – Dougherty & Company LLC

Is that revenue driven on a per unit basis or is it more sort of project based where we will see it more lumpy?

Andrew C. Schmidt

No, it will be a per unit base.

Charlie Anderson – Dougherty & Company LLC

Got it. Good and then Bill, you talked a lot about these technology transitions we’re seeing this sort of move to mobile Hotspots Box and then smartphones. What I wondering is do you feel personally like you’d seen the end of this or you’re still holding out hope that we go back to sort of the mix we’ve had traditionally and that gets it back to sort of prior revenue levels or do you think to get back to prior revenue levels, you sort of need contribution from other products.

Andrew C. Schmidt

Yes, it’s a fair question. If I could share with you our internal plan, obviously we can’t, but we look at it the following way. We believe that USB devices and embedded modules will continue for some number of quarters, years, whatever as a vehicle for gaining access to the wireless Internet. But we did not believe based on the transition that we’re seeing to Mobile Hotspots that it will ever go back to the level that we were able to see and benefit from in 2010.

That said, we still believe that as a company we can return to the level of business that we enjoyed in 2010, it will require contribution from our new products. The good news is our new products are being very well received, and I think that’s the positive side of it. That company after recovery will be a much stronger company. It will be based on a number of different products, so there won’t be a concentration around a single product offering and will also be based around a much broader set of customers. So we will not see the kind of customer concentration issues that plagued us in the past. So I think there is a very good story, but you just have to kind of bare with us a little bit until we can kind of get everything rolled out and into public hands.

Charlie Anderson – Dougherty & Company LLC

And in terms of near-term is it Mobile Hotspot Manger that will get you there the quickest of all the products?

William W. Smith, Jr.

Well, it’s the easiest to deploy right now, because – did you say Hotspot Manager or ?

Charlie Anderson – Dougherty & Company LLC

Yes, Hotspot Manger.

William W. Smith, Jr.

I will say that the lead product will probably be the Mobile Network Director, the Hotspot Manger because in some cases requires the deployment of SODA that tends to take a little bit longer. So I think if you look at where the quickest hits will come from, it’s probably in the Mobile Network Director. And then in some other technology areas that we haven’t talked much about on this call.

Charlie Anderson – Dougherty & Company LLC

All right, thanks so much.

Operator

Thank you. Our next question is from the line of Kevin Dede with Brigantine Advisors. Please go ahead.

Kevin Dede – Brigantine Advisors

Hi Bill. I was kind of curious, if you could elaborate on your confidence in the enterprise sector picking up as the year plays out. What sort of hints have you got and information do you feel comfortable that you could talk to regarding that?

William W. Smith, Jr.

I think the enterprise sector could pickup in a meaningful way. The deployments of 4G need to be broad enough on a geographic perspective to allow the enterprise to really focus on it. I think the ongoing testing at the enterprises of 4G technologies continues. I would expect to see the enterprise become more active in their purchasing towards the end of this year or early next year. I also believe that, that group will tend to focus more on traditional USB and embedded modules, they haven’t necessarily broadly endorse Mobile Hotspots as yet. There are some security aspects they haven’t got comfortable with at the present time, but we expect that they too will start to embrace Mobile Hotspots sometime in the mid to late 2012.

Kevin Dede – Brigantine Advisors

Okay. Thanks. You also have talked about lots of partners, but we really haven’t seen many of them convert if any really convert to software purchases. And I guess, what I am hoping I granted you plan on making some announcements in the near-term. I am just kind of wondering, if there is any sort of rough gauge you can give us on the time it might take you think for someone to enroll in that partnership program to actually rolling out software with your name attached to it.

William W. Smith, Jr.

Yeah. I think you’ll see some carriers very active in this space, throughout the rest of this year and early next year and hopefully some of that mystery will be solved.

Kevin Dede – Brigantine Advisors

Okay. Fair enough. Now you talked about this TV programming deal with a leader company. I was wondering if you could give us a little insight on the economics of that, quantify it all and maybe talk to how the software used in that solution applies to the carrier world.

William W. Smith, Jr.

Yeah, this is our video product that’s video spelled with an IVIDIO I know it’s spelt wrong, but that’s our marketing people at work. Anyway, that product offering is getting some traction in a number of different areas, the particular opportunity I just spoke about is fairly exciting opportunity because it really brings the three screen concept to provision and something that we talked about last year and now you’re actually starting to see these deployed. There is other place for extending telepresence, video conferencing in the corporate world to mobile devices with our extended telepresence video client. There are other opportunities that you’ll see toward the delivery of video content, that will be focused more on our traditional carrier base, you should see a win in that area in the not too distant future.

Kevin Dede – Brigantine Advisors

Great, okay. Thanks, Bill.

William W. Smith, Jr.

Okay.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to management for closing remark.

William W. Smith, Jr.

Okay. I’d like to thank everyone for joining us today. If you have any further questions please feel free to give us a call in the office and we look forward to talking to you and speaking to your in our third quarter conference call. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. If you’d like to listen to a replay of today’s conference please dial 303-590-3030 or 1800-406-7325 followed by the access code of 4459786 and the pound sign. Thank you for your participation. You may now disconnect.

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