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Executives

Charles Messman – MKR Group

Bill Smith – Chairman, President and Chief Executive Officer

Andy Schmidt – Vice President and Chief Financial Officer

Analysts

Mike Latimore – Northland Capital

Rich Valera – Needham and Company

Mike Walkley – Canaccord Genuity

Scott Sutherland – Wedbush Securities

Brian Swift – Security Research Associates

Charlie Anderson – Dougherty & Company

Smith Micro Software, Inc. (SMSI) Q4 2011 Earnings Conference Call February 22, 2012 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Smith Micro Fourth Quarter and Fiscal Year 2011 Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, February 22, 2012.

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

Charles Messman – MKR Group

Good afternoon and thank you for joining us today to discuss Smith Micro Software’s fourth quarter and total year ended December 31, 2011 financial results.

By now, you should have received a copy of the press release discussing our financial 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 e-mail one to you.

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

Before we begin the call, I want to caution that on this call, the company may make forward-looking statements that involve risks and uncertainties, including without limitation, forward-looking statements related to the company’s financial prospects and other projections of its performance, the existence of new market opportunities, and interest in the company's products and solutions, and the company’s ability to increase its revenue and regain profitability by capitalizing on these new market opportunities and interest in introducing new products and solutions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in the demand for the company’s products from its customers and their end users, new and changing technologies, customer acceptance of these technologies, new and continuing adverse economic conditions, and the company’s ability to compete effectively with other software companies. These and other factors discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Form 10-K, 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 release are made on the basis in the views and assumptions of management regarding future events and business performance as of the date of this release, 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, I want to point out that in the forthcoming prepared statements, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for reconciliation of non-GAAP financial measures.

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

Bill Smith – Chairman, President and Chief Executive Officer

Thanks, Charles. Good afternoon everyone and welcome to our conference call to discuss earnings for the fourth quarter and fiscal year ended December 31, 2011.

Total revenues for the quarter were $11.2 million with approximately $8.7 million coming from our Wireless products and $2.5 million resulting from our Productivity & Graphics product line. Non-GAAP gross profit was $8.5 million for the quarter with gross margins as a percentage of revenues of 75.8%.

While these Q4, 2011 financial results are not exciting, they were in line with our internal expectations. As I described in the earnings call last quarter, we continue to steal the revenue impact of a significant technology transition from USB modems to smartphones and mobile hotspots. Our traditional USB connection manager business declined throughout 2011. The good news for us is that these new mobile hotspots have their own challenges and we are getting a renewed interest from wireless operators to help them simplify usability of these devices for consumers.

Ease of use is just becoming increasingly important to operators to reduce support costs and further monetize data services. You'll hear more about our emerging opportunities in this area later.

In our last call, we preview the first commercial deployment of our Mobile Network Director solution for managing data traffic by a Tier I carrier and that news was made official in January with the announcement of Sprint selecting Mobile Network Director also refer to MND. The initial rollout of MND at Sprint is occurring in several phases and we don’t expect to see an uptick in revenues from this deal until Q2. However, the Sprint news has garnered strong interest in our MND solution from around the world, doubling the number of new sales opportunities from last quarter and accelerating product trials with several other Tier I carriers. I will discuss the potential for these opportunities later in the call.

In addition to growing our pipeline with new solutions running our platforms, we have further reduced operational costs in Q1 to better align with current near-term revenue expectations. Just as Q4 revenues were slightly down from Q3, our current line of sight for Q1 2012 looks much the same. Therefore, we undertake as more cost containment measures ranging from headcount reductions across the board, the travel services, to office moves. The changes will reduce our non-GAAP operating expense run rate of approximately $17.5 million per quarter to between $15.5 million and $16 million per quarter.

Compare this to the $23.3 million of non-GAAP operating expense we were incurred in the year ago in Q1 of 2011 and is clear that the belt has not only been tighten, it’s been lopped off several inches long the way.

Now I will turn the call over to Andy to take you through the details of Q4 and the total year-end financial results and our latest and hopefully final restructuring activities prior to the turnaround of our business case. Andy?

Andy Schmidt – Vice President and Chief Financial Officer

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 on this call net out amortization of intangibles associated with acquisitions, stock compensation-related expenses, goodwill and long-lived assets impairment and non-cash tax expense to provide comparable operating results.

Accordingly all results that I refer to in my prepared remarks from both 2011 and 2010 and prior years are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of difference 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 review of fiscal year 2011, we saw significant decrease in our wireless revenues. This is primarily due to a shift in technology, highlighted by introduction and market acceptance of mobile hotspot devices, tablets and smartphones capable of functioning as wireless WAN hotspot. Demand in our North American marketplace for our core connection management product decreased significantly in 2011 and while we launch new wireless products that address the new marketplace we launched late in the year and were not revenue producing in 2011.

Total year revenues for 2011 decreased from $130.5 million to $57.8 million, a decrease of 56%. Wireless revenues decreased $70 million or 59% in 2011. As a result of our significantly decreased revenues, we launched a series of cost containment measures including our structuring plan in Q3 and Q4. Similarly, we made adjustments to our balance sheet to reflect the transitional nature of our business.

In Q3 we recorded an impairment of goodwill and other long-lived assets charge of $112.9 million effectively writing off all of our goodwill and intangible assets. Today we sit with a cleaner balance sheet and significantly reduced cost structure. From a non-GAAP perspective, total year 2011 loss per share was $0.67 as compared to earnings per diluted share of $0.98 in 2010.

From a balance sheet perspective, our cash position closed at $46 million at December 31, 2011, a decrease of $26.6 million from the beginning of the year. In terms of our currently completed quarter Q4, let me provide some detail. First, let's talk about the difference between GAAP and non-GAAP P&L metrics for the first fourth quarter. In terms of stock compensation for the quarter, stock comp totaled $1.7 million for the current period broken out as follows, $4,000 for cost of sales, $283,000 for selling and marketing, $203,000 for R&D, $750,000 for G&A, and $415,000 related to restructuring.

In terms of amortization, there is none in the fourth quarter since all intangible assets were impaired in third quarter. It has been the case in the past years. We prepared a revised tax provision at year end, which based on the total year loss resulted in overall reduction in tax expense. The fourth quarter of 2011 reflects the favorable non-GAAP adjustment of $3.7 million or $0.10 per share for taxes.

Moving on to fourth quarter, we posted revenues of $11.2 million and a diluted loss per share of $0.27 GAAP and $0.12 non-GAAP. Revenues of $102 million compared with $35.3 million for the prior year period. Current period revenue was down 68% year-over-year due to continued softness in our base connection management business. International revenue was approximately $1.7 million this quarter across all business groups.

Our Wireless segment reported revenues quarter of $8.7 million as compared to $32.1 million last year, a decrease of 73%. Within the Wireless segment, connectivity and security posted revenues of $5.5 million compared to $27.6 million last year, a decrease of 80%. Voicemail, Messaging, Push-To-Talk, Mobile Device products posted revenues of $3.2 million for the period as compared to $4.5 million for the prior year.

Productivity & Graphics group posted revenues of $2.5 million as compared to $3.1 million last year, a decrease of 20%. And finally, we reported approximately $51,000 of other revenue, which compares with approximately $118,000 for the fourth quarter of 2010. Total deferred revenue at December 31, 2011, was $878,000.

Switching to gross profit, non-GAAP gross margin dollars were $8.5 million, a decrease of $24.1 million from the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 75.8% for Q4 2011 compared to 92.3% for Q4 2010. Non-GAAP gross margin by product group was follows; Wireless 78%, Productivity & Graphics 73%, and other 50%. As we noted before, our margins are driven strictly by product mix and volume. The year-over-year decrease in gross margins as a percentage of revenue was driven by lower Wireless sales covering a relatively fixed cost of sales.

Switching to operating expenses, non-GAAP operating expenses for the fourth quarter of 2011 up $18.5 million, decreased $3.5 million from Q3 as a result of our cost reduction and restructuring plans. From a year-over-year perspective, non-GAAP engineering expense decreased 27%, selling and marketing earnings decreased 28%, administrative expense, which includes cost of facilities remained essentially flat.

Total non-GAAP operating expense decreased 22% year-over-year excluding restructuring charges. Non-GAAP net loss for the fourth quarter was $4.2 million or $0.12 per share as compared to net income of $13 million or $0.37 per diluted share. Cash decreased $8.1 million for the quarter end, which resulted in a year end $46.0 million in cash. In terms of housekeeping, we expect to file our year end 10-K this week, which will represent our final financial statements for the year.

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

Bill Smith – Chairman, President and Chief Executive Officer

Thanks, Andy. Despite the fact that our quarterly revenues were lackluster, there is plenty of light at the end of this dark tunnel. The first commercial deployment of our Mobile Network Director software validates our ability to help operators address the critical global problem of congested mobile networks, which is not easily solved. Using an intelligent device client with a centralized policy server to make proactive decisions about where data traffic should run is a level of control operators – two operators not previously available. It also eliminates the burden from end users to manually switch between 3G, 4G, and WiFi networks in order to receive the best possible mobile experience.

While there will be competitive approaches to managing data traffic, we firmly believe that our approach is technically superior in many ways. And this is a direct result of our expertise and embedded connectivity software device integration and wide scale carrier deployment experience. We believe we are leading the way and providing innovative solutions that can solve the problem of congested mobile networks and the need for an enhanced user experience.

The number of trials underway and planned with operators from Mobile Network Director is a strong indicator that the market opportunities are large and has the potential to be converted to contracts within the foreseeable future. The software is not attributable to develop or to deploy and operator commitment to allocate the resources to these trials is significant. There is a definite sense of urgency to evaluate the technology and understand how it can help them with various traffic issues including data offload, the WiFi, automatic connection to preferred roaming partners, on-loading traffic to LTE networks, and several others. These trials do take time as those contract execution and commercial deployment, but the volumes of devices that could be managed by MND are huge and growing. So, the potential payback looks very promising.

Our success with Mobile Network Director is also opening up new opportunities to partner with other wireless industry leaders. We have already completed testing between our MND client and Gateway service solutions from Cisco and Stoke and interoperability certification with several other network solution providers is planned. These vendors are bringing us into new sales opportunities as a result of the value we had in extending data offload strategies down to the device, which is essential to secure seamless delivery of multimedia content over un-trusted WiFi networks.

A traffic management is not the only area in which Smith Micro is offering a compelling solution. Mobile hotspots and smartphone-based hotspots in particular are introducing new challenges for operators and consumers alike. For example, on Android device, WiFi – on Android devices, WiFi tethering plans can be easily circumvented using over-the-top applications from the Android market. This results in hundreds of millions of dollars lost by operators due to unauthorized data tethering.

We will be introducing a new solution that helps operators recruit these dollars by managing application entitlement in real time and provide a convenient way to convert hotspot freeloaders to paying customers. Sales efforts for this new solution have been underway for some time.

From a subscriber perspective, mobile hotspot features our smartphones can be difficult to activate, configure, and secure. Yes, these are sharable devices. The risk of consuming more data than expected is high. And there have been numerous reports of outrageous data bills also known as bill shock associated with data tethering.

Several operators are now engaging us to help make mobile hotspots more user-friendly and easier to lock down through our hotspot manager solution. In addition, we are investing a significant amount of time and expertise contributing to the development of the industry standards related to mobile connectivity. Our announcement today regarding the preview of a new mobile connectivity solution that supports Windows 8 highlights our efforts to extend industry standards, such as the broadband – the mobile broadband interface model being adopted by Microsoft and other platform providers.

We expect that the expansions offered by Smith Micro will enable advanced features such as usage metering, diagnostics, and security controls, which can be implemented by operators to differentiate their services. By driving and expanding industry standards, Smith Micro continues to help reduce the cost and complexity of supporting fragmented mobile platforms and operating systems while ensuring a consistent connectivity experience for subscribers running Windows 8 or Windows 7 as well as Android, iOS, and other popular operating systems.

As always, the majority of our new revenue opportunities are coming from carrier customers both existing and new. But we are also getting traction in the enterprise market with new customers in North America and Europe ranging from banking to utilities, hospitality, and government agencies. Recent federal legislation pertaining to private broadband spectrum has created new budgets for public safety agencies across the country and our connectivity and traffic management solutions are well-suited to facilitate these deployments. To help us engage these agencies, we have signed agreements with government resellers, which should open the door to new opportunities, where secure mobile connections are needed over the government's private wireless networks. We hope to announce new enterprise deals for our QuickLink Mobility solution over the coming weeks and months.

On the consumer side of the business, the P&G Group has shifted away from the lower margin utility and publishing products and it is now focused largely on our growing and profitable graphics tools. 2011 culminated in a return to health and profits as the division benefited from the rightsizing of the staff and from the success of several key releases in the graphics portfolio.

Poser and Anime Studio both developed in-house continued to grow share in their respective markets in 2011. And the team is invested heavily in advancing our position as the provider of new cutting-edge tools that can turn the imaginations of artists into digital art.

Finally, last quarter we reported that the Board of Directors had approved the buyback of up to 5 million shares of Smith Micro common stock. The repurchase was contingent upon the completion of the Sprint contract for MND. And now that the contingency has the math the Board of Directors does intend to initiate the repurchase over the coming months, which I see is a show of confidence in the future recovery of our business case.

Before I turn the call over for questions, I'd like to close by reiterating that our ongoing cost containment efforts combined with the revenue opportunities that we believe we can execute on should allow us to get back to profitability before the end of 2012. Of course, as the business and economic environment changes, we will make appropriate adjustments and report back on our progress.

With that operator, I'd like to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mike Latimore from Northland Capital. Please go ahead.

Mike Latimore – Northland Capital

Great, thanks. Mike Latimore. So, thanks for the time. In terms of the Sprint deal, can you provide just a little more clarity around how that deployment is going, do you think you'll get since current users of the phones – of the Android phones implemented in the second quarter just a little more color on the deployment would be great?

Bill Smith

Okay, Mike. I guess the way to look at is this. We expect to still launch the first deployments of the software to Sprint users beginning late this quarter and it will go through at least to probably about a six-week period of slow rollout before it then expands into a more rapid expansion. We are initially deploying our software on all of the HTC-built handsets at Sprint. We will then be working on additional handsets after that. But this will provide a very significant base of many millions of users utilizing our software during the current year. Hopefully that answers your question.

Mike Latimore – Northland Capital

Yeah, that's great. And then would you for some of the other deals that you are working on or in trials. Would you expect the deployment timeframes to be similar on those or is Sprint somewhat of a unique situation?

Bill Smith

Yeah, actually I think because Sprint is the first, it's not – is the first for us obviously it's – it takes a little bit longer because I think for tier – tier one carrier, there is a lot of testing, a lot of reviewing to make sure that they are going to get the results that they are looking for that is already been proven that was very lengthy about six-month trial. We are going a little slower on the deployment than originally expected, primarily to make sure that there are any unexpected problems created for the network. So, again it's the first time it's ever been deployed. Sure, we'd love to have seen it deployed faster. But in all honestly, we are as exposed the Sprint, we want to make sure that this thing goes very well and so a more measured approach does seem prudent.

Mike Latimore – Northland Capital

Okay. And just a last question, Bill you mentioned, you think the first quarter is looking similar to the fourth. Did you mean in terms of absolute dollar numbers or in terms of the kind of the change that you saw in fourth quarter versus third quarter?

Bill Smith

Yeah, I think it's really looking more similar in terms of trend. So, I mean, I would look for slight – flat to slight – slightly down the first quarter and then as the launch goes on in second quarter, we can start to build things backup.

Mike Latimore – Northland Capital

Okay, great. Thank you.

Operator

Thank you. And our next question is from the line of Rich Valera from Needham and Company. Please go ahead.

Rich Valera – Needham and Company

Thank you, good afternoon. Bill, I was wondering if you can be willing to give us any sense of how much revenue you think you might be able to recognize from Sprint in this calendar year for the Mobile Network Director deployment.

Bill Smith

No, I can't give you an absolute number, I mean, clearly we've got to get the deployment rolling, we've got to make sure that there are no pickups along the way and then based on that if everything goes smoothly, it's going to have a very profound effect on our numbers. But I think I made this point a number of times at various conferences and everything that this deal is just the first deal. This is where we get started and building our business case back. And it by itself is not large enough to recover back to the level we were at in 2010.

What we need to continue to do is to close additional deals either from Mobile Network Director or Hotspot Manager or some of our other technologies and all of this is in process, I wish I had the perfect crystal ball, I could tell exactly when these deals were hit, but I don't. The good news is that we have a very full pipeline. The good news is we have a lot of carriers literally around the world that are either trailing or about to trial some of our software and all of this does well for the future, but obviously it isn't done until it's done. We have to get the contract signed.

Rich Valera – Needham and Company

Fair enough. And with respect to OpEx for the first quarter, can we assume you'll actually be at that sort of $15.5 million to $16 million level in the first quarter or you still be sort of approaching that level.

Bill Smith

Yeah, I think you should look at about the $17.5 million and then it will drop down to the $15.5 to $16 in the second quarter.

Rich Valera – Needham and Company

Okay, that's helpful. And then just one question on sort of the bigger picture architectural approach to sort of WiFi offload or cellular offload, you guys actually have – obviously have sort of a client maybe focused approach with the centralized policy server. I think some folks were working on more of a sort of core network approach, which at least in theory would seem ideal, but perhaps in practice turns out to network as well. So, just wondering, I am sure you guys have looked at that, just wondering what you can say about sort of the different types of architectural approaches to doing cellular offload?

Bill Smith

Actually, I am kind of glad you asked that question. So, let me kind of step it through, because I think it's a very strong story. When you look at a client-server approach, which is what we have, whether in all cases the client is ours, but whether the server is ours or whether it's coming from the likes of the Cisco or Stoke, there are certain things you can do when you have a client-server approach, you cannot do on a server or a network-based approach only. For one thing, if you just look at the biggest numbers somewhere between 80% and 95% of our trial data suggests that about that percentage of time, the average user spends in either his home or in his office, a network-based solution cannot offload to WiFi in the home or the office. So, therefore, it cannot even have an effect on 80% to 95% of the usage that a user has. A client-server based approach can take care of that and does take care of that and therefore allows for much more effective offload to WiFi.

The other thing is that these devices use WiFi, they use 3G, they use 4G, so you have to have the ability to turn the various radios on and off to establish a transitional connection, let's say, to WiFi from 3G. Will you make the hook up the WiFi before you break the line for 3G? Network-based solutions can't do that either. There is a lot of really compelling arguments to be made for a client-server base. You put intelligence as the point the users have, that intelligence can then detect what various networks are available if a network is having a problem you don’t try to change them to a network, that's going to cause a poor user experience. All these are the reasons why client-server based applications are the right way to go and as the way we believe over time will win up.

Rich Valera – Needham and Company

Okay, thanks for that Bill. Good luck.

Operator

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

Mike Walkley – Canaccord Genuity

Great, thank you. Bill, just maybe building on some of the earlier questions, you said revenues were flat to slightly down, you have to get to almost double in revenue to get back to profitability exiting the year. So, could you just walk us through kind of the thought process to get there one and maybe another way to ask it is how long did the Sprint trial go and what's the expectation on trials, how long it might last until it generates into a contract with some of your Tier 1 potential clients? Thank you.

Bill Smith

Let me take that last part first and try to work into first part. If I don't answer it all, come back at me. The Sprint contract or the trials were lengthy. It was about six months. And then we are going to launch in the slower pace than we initially thought we would do just to make sure that we don't have any negative effect on the network, which we don't expect to happen by the way. I think this is really a phenomenon, because they are first. This type of technology has never been deployed at a carrier before. And so everybody is trying to be very cautious about how we go to market.

Now, when we look at other carrier opportunities and we have a number of them in the pipeline and on the number of trials that are ongoing, lot of the trials are because they see it's already gone through the trial process. At Sprint, they are willing to accept a much shorter trial period. So, our fond hope is the trials will go a lot shorter and eventually they will not be a need for trials at all as we have more and more carriers deploying our software. So, that’s the first things about the trial and how we see trials going.

Now let me talk for a second about the revenue build up. The revenue build up for the Sprint deal is a significant growth over the first 12 months in the deployment. That alone is going to have a strong effect in the outer quarters on what we can build up as far as revenues. But we expect to have other deals either done or being completed that will hit in third or fourth quarter that will have a similar effect and in doing so that will bring us back to the point, where we can be profitable.

Keep in mind that our gross margin percentage is low right now because there are many costs that are fixed and we don’t have enough overall revenue to allocate those costs across. As we recover our revenue base, our gross margin percentage should improve that also will make it easier than to get the profitability. So, it’s all about execution and that’s we are all focused on here. Did I answer your question Mike?

Mike Walkley – Canaccord Genuity

Yeah, that did. That’s helpful. And just building on that as you work with companies such as HTC it doesn’t matter on the OS, on the smartphone, is it mainly Android that you are working with today or can it work with IOS of Apple and other ecosystems going forward?

Bill Smith

Yeah, at the present time, we are focused on the Android and that’s the platform that we work with. We are working on a couple of different approaches to provide somewhat of the same service level to IOS users. Unfortunately because of the fact that the IOS environment in Apple are not particularly open about various things that we need to gain access to. We can’t build a product that does everything that we can for Android. By and large our prospects and our customers going forward are satisfied by what we can do in the IOS area and are more than willing to move forward with us.

Mike Walkley – Canaccord Genuity

Okay, great. And maybe you can discuss maybe some of the other opportunities such as your connectivity solution with carriers in India. Just trying to rank quarter, I mean clearly it looks like the MND solution is the big revenue driver, but you layer in other areas to get back to profitability. How do you rank quarters some of your other opportunities?

Bill Smith

As we look at our pipeline for MND opportunities assuming that we can be successful in a large of majority of cases that on its own could probably get us back into a profitable spot. But we have other opportunities that are also very exciting. When I talked about in my script one being we are really focused on what we can do to make the whole mobile hotspot experience a lot easier on the consumer and how we can reduce costs for the carriers and then number two our application can control product that I have talked about.

It really helps build the fence to cut down on those folks that are free loading on the carriers wireless data service without paying them and giving them away to regain a lot of other revenue that with loss. And then lastly based on the release we put up this morning, we see some new plays for expanding our role in the connectivity space with our QuickLink Zero product. This product is a zero install, everything digitize on the USB device. There are no drivers is a particularly simple approach to getting users up and on the year and we see traction there as well. So, actually, I think when you really look at it, there is probably four different product focuses, all of which can have a strong impact on our revenues. And I say that not because I want to diminish the impact of products like Visual Voicemail or Push-To-Talk or some of the other products like device management, they also have opportunities and we see some of these that will close. So, I think there is a lot of place. It’s all about execution.

I can’t fix what happened in 2011. The market changed. What we can do though is leverage on all the investments we made in R&D over the last few years by delivering these new technologies that carrier seem to want to buy, and clearly, the MND one is fully validated now with the Sprint contact. We hope to be able to validate the others with contracts. And then I think the question about how do we get back to profitability becomes a lot easier for all of you out there to gain the same confidence that I might have.

Mike Walkley – Canaccord Genuity

Thanks, Bill. Andy, just a quick question for you and I’ll pass it on. How should we think about the tax rate for 2011 given the transitional business and any expectation for CapEx during the year? Thank you.

Andy Schmidt

Sure. At this point, I'd model a 37% tax rate. Everything we've been talking about is then how do you get to profitability in Q4, so that’s just single quarter. So, expect the year to be at a loss, so then that would be a 37% tax rate against the loss. CapEx, we are not forecasting significant CapEx at this particular time, but it’s subject to probably as new deals rollout as you are well aware we have a number of trials underway. And depending where these trials are located, there is question and a decision between Smith Micro and our customers on how these deployments are hosted. To the extent that we host any of these rollouts, there will be a CapEx spend and to the extent that the customer does, there isn't. So, that's something that we’ll stay tuned to.

Mike Walkley – Canaccord Genuity

Okay. Good luck gentlemen. Thank you very much.

Operator

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

Scott Sutherland – Wedbush Securities

Great, thank you. Good afternoon. When you guys look at some of the potential deals or trials in the pipeline, are there any competitive solutions that those carriers are looking at as well and if not what are the alternatives for the carriers to manage all these devices and the data that they use?

Bill Smith

Well, Scott I think the earlier question about the difference between a client-server based solution or a server-only network based solution is one particular area, where we see some competitive issues. We do see a couple of smaller competitors like Birdstep at some of our carrier opportunities, but they don’t seem to be particularly strong competitors. I think the ones that probably can create the most fun and challenge for us are the large hiring guys that are trying to push a server-only answer, but I think we have such a strong answer for that and the carriers see that quickly that I just don’t see that as a really big issue.

One of the other things that I didn’t mention about the difference between clients and server-based solutions is when you have a client involved, there are many times where the user will never even touch the wireless carriers infrastructure, they will just be placed on to the WiFi that's available. You can’t do any of those kinds of things with a server-only answer you have to have a client. So, we are working closely with a lot of the big hiring guys, where we are the clients and they provide the server. And I think that really is the future. Now, you saw the Stoke press release we put out probably two or three weeks ago, and clearly is very complementary, our client offering with the iron guys, server offering. So, I think there is ways to work with them and mitigate the pressure from competitors.

Scott Sutherland – Wedbush Securities

When you look at Mobile Network Director as the market develops, how should we think about the business model versus your connection manager, would pricing per unit be down, but there will be a lot more units in your traditional connection manager model?

Bill Smith

Yeah, well, okay. The pricing per unit maybe less, but you're right you're looking at all of the Android-based phones to begin with and then following on as we come out with our iOS based solution. We can add that to it. And clearly, you are talking about even at a midsize Tier 1, millions and millions of units, well that’s a number far larger than was ever seen in our prior business case of providing wireless data access for PCs and Macintoshes.

Scott Sutherland – Wedbush Securities

Okay. When you talk about wanting to get to profitability exiting this year, is that based on an OpEx run rate at $15.5 million to $16 million investing into revenue growth and gross margin expansion we get there, is that how you are looking at it?

Bill Smith

Yeah. Why don't you – that’s a good place to look at it.

Scott Sutherland – Wedbush Securities

Okay. Lastly, Andy what was the CapEx in the quarter and the international revenue?

Andy Schmidt

Sure, okay. International was I believe, I said here $1.7 million for the quarter. And let me get you some CapEx, CapEx for the period about $331,000, total CapEx for 2011 was about $13.4 million.

Scott Sutherland – Wedbush Securities

Okay, great. Thank you, gentlemen.

Operator

Thank you. Our next question comes from the line of Brian Swift with Security Research Associates. Please go ahead.

Brian Swift – Security Research Associates

Yes. Most of my question have been answered except could you give a little bit color on the Stoke announcement that was made a week or so go just from the standpoint of – we view that more of a reference type of an account or it kind of gets you into some areas, some companies that you haven't been in before or just kind of how do you view or how should we view that relationship?

Bill Smith

Sure. As the Stoke answer as well as the interoperability testing we've done with Cisco are both similar. Obviously, Cisco is much larger. And where this has a impact is were certain carriers want to go with a hardware answer for the server side and then they use our client. Now, in many cases, the carriers in question already have a business relationship with us. So, we don’t necessarily view Stoke or Cisco as potentially being a customer as much as being a partner in building the final solution.

Brian Swift – Security Research Associates

Okay. Are there any other – is it open up opportunity get to some other customers that?

Bill Smith

Of course, it does. And there are certain carriers where all of these folks are bidding and in most cases they were all bidding and using our client. I mean, that’s a very compelling situation to have.

Brian Swift – Security Research Associates

Okay, thank you.

Bill Smith

Okay, thank you.

Operator

Thank you. (Operator Instructions) Your next question is from the line of Charlie Anderson from Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty & Company

Good afternoon. Thanks for taking my questions. Just a piggyback on the earlier question iOS and Android, I think you said there maybe some limitations, some things you couldn’t do in iOS that you could do in Android, I wonder if you could maybe provide a little bit more color there?

Bill Smith

We have the most obvious one is really fairly straightforward. In the iOS case, Apple does not provide us with the APIs to turn radios on and off as needed. That's something that’s really important to doing the couple of things run down the battery on the devices fast because you don’t have more radios on than you need ad on and that also allows us like I said earlier it could be online with the data call unless say you are in 3G or 4G and you want to move to WiFi that just become available to you. We will make the WiFi connection before we break the 3G or 4G connection that guarantees a seamless handover for the user. Totally transparent the user and then doing so it provides not only the most effective use of the various wireless networks available at the time, but also provides the most cost effective approach for the user.

Charlie Anderson – Dougherty & Company

Got it. Thanks for the color. Just a couple of housekeeping questions, to look at your short of core connectivity business, it took a couple of legs down earlier, but it seems to short of found level around $.5 million. I wonder we are short of steady on that level for a while given how some of those contracts are structured or just kind of how we should view the trajectory of that line item?

Andy Schmidt

Yeah, that’s a good assessment and probably you will see more than anything else. Some accounts are going to continue to decline, while we are also picking up new accounts in this offshore and as Bill pointed out the zero install is part of that whole evolution of that product line. So, I would say we found the floor.

Charlie Anderson – Dougherty & Company

Good and then Andy, have you guys bought any stock back in Q1 here?

Andy Schmidt

We have not bought back any stock at this point, but as Bill announced we have got approval now to do so and we anticipate taking a hard look at that over the next couple of months.

Bill Smith

Actually the reason for that is quite simple. The trading window doesn’t open up for a couple of more days after this call and the company must abide by the trading window just like other insiders have to do.

Charlie Anderson – Dougherty & Company

Go it. Thanks so much.

Bill Smith

Okay.

Operator

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

Charles Messman – MKR Group

Thank you again for joining us today. Again if you should have any other questions, please feel free to give us the call in the office and we will look forward to updating you on our first quarter conference call, which will be late April. Also I would like to invite anyone that’s attending the Mobile World Congress next week in Barcelona, please come stop by and say hello at our booth. Thank you.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and at this time, you may now disconnect.

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