Smith Micro Software Inc. Q1 2008 Earnings Call Transcript

May.27.08 | About: Smith Micro (SMSI)

Smith Micro Software Inc. (NASDAQ:SMSI)

Q1 2008 Earnings Call

May 7, 2008 4:30 pm ET

Executives

Charles Messman - President of MKR Group

Bill Smith - Chairman, President and CEO

Andy Schmidt- VP and CFO

Analysts

Lauren Ye- JPMorgan

Maynard Um - UBS

Rich Church - Collins Stewart

Chad Bennett - Northland Securities

Kevin Dede - Morgan Joseph

Ian Gilson - Zack's Investment Research

Operator

Welcome to the Smith Micro Software fiscal first quarter and 2008 conference call. (Operator Instructions)

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 financial results for fiscal 2008 first quarter, which ended March 31st, 2008. By now you should have received a copy of the press release discussing our results. If you do not have a copy and would like one, it's available at www.smithmicro.com, or by calling 949-362-5800, and we'll fax or email you one immediately.

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 our prepared remarks, this conference call may contain forward-looking statements that involve risk and uncertainties, including without limitation forward-looking statements relating to the Company's net revenue guidance for fiscal 2008. Our financial prospects and other projections of our performance, the Company's ability to increase its business, and the anticipating timing and financial performance of our new products and potential acquisitions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements are changes in demand for our products from our customers and their end users, new and changing technologies, customer 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 Security and Exchange Commission, including those filings on forms 10-K and 10-Q, 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 call.

At this time, I'd now like to turn the call over to Bill Smith, Chairman, President, and CEO of Smith Micro. Bill?

Bill Smith

Thanks, Charles. Good afternoon, everyone, and thank you for joining us. Today, we announced our first quarter 2008 results, and I'm pleased to announce that we had a solid first quarter. Tracking to our company projections and exceeding consensus street estimates on both the top and bottomlines.

First quarter revenue performance was up 23.9% year-over-year, coming in at $21.9 million, which represents yet another quarterly revenue record for our company. Non-GAAP or pro forma variants were a respectable $0.10 per share, possibly the most impressive metric from the quarter is that revenues grew while at the same time our customer concentration continued to decline.

Verizon represented only 43.6% of sales, from a high water mark of 81% in Q2 of 2005. And historically, Q1 is one of our softer quarters of the year, so we're off to a strong start.

This quarter, we concentrated heavily on the integration of our acquisitions and our new product development that will position us for continued growth throughout the year. We made important progress in these areas and further defined our role as the recognized leader in the mobility software space.

In addition to having alluded to important new customer activities in last quarter's earnings call, I'm happy to say that we've made progress in this area and will be a part of a major new device launch for Sprint already announced for early this summer. In addition, we have begun to ship product to one of our new OEM device manufacturers, but more about these activities later in the call.

At this time, I'd like to turn the call over to Andy Schmidt, our CFO, to go over the financial results in more detail. Andy?

Andy 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 compensated-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 2008 and 2007 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 the difference between each non-GAAP financial measure provided in the press release, and the most directly comparable GAAP financial measurement. The earnings release can also be found in the investor relations section of our website at smithmicro.com

All right, let's discuss our detailed first quarter results. For our first quarter, we posted revenues of $21.9 million and earnings of $0.10 per diluted share, which includes a $0.02 charge for non-recurring integration expenses. Non-GAAP EPS, without the non-recurring charges, was $0.12. Total revenues of $21.9 million increased from revenues of $17.7 million for the first quarter of 2007, an increase of 24%.

International revenue was approximately $2 million this quarter across all business groups. First quarter revenue for multimedia was $4.8 million, down from $8.5 million in Q1 of 2007, due to a shift in product mix, specifically a shift from music kits to higher-margin software downloads and CDs. And activity in security posted another record quarter with revenues of $11 million for the quarter, as compared to $6.1 million last year.

Consumer posted a strong quarter of $5.5 million as compared to $2.8 million last year. Life Solutions revenue was approximately $380,000 for the quarter, and adds a new and growing revenue stream for us.

Finally, we reported approximately $240,000 of other revenue, which compares with approximately $290,000 for the first quarter of 2007. Total deferred revenue at March 31, 2008, was approximately $3.4 million, of which approximately $2.7 million was acquired via the PCTEL MSG group acquisition.

Okay, switching to gross profit. Non-GAAP gross margin dollars of $17.8 million increased $5.5 million or approximately 45% from the same period last year. Of key significance, while our revenue increased 24% year-over-year, our gross margin dollars increased 45% for the same period.

As follows, non-GAAP gross margin as a percentage of revenue was approximately 81.4% for Q1 2008 compared to 69.6% for Q1 of 2007. Non-GAAP gross margins by business unit were as follows: multimedia, 64%; connectivity and security, 96%; consumer, 74%; and for device solutions and other revenue, gross margin dollars were not material. As we've noted before, our margins are driven strictly by product mix.

Okay, switching to operating expenses, non-GAAP operating expenses for the first quarter of 2008 increased to $14.2 million, or an increase of approximately $4 million from Q4 of 2007. The increase is as expected and is attributed to a full quarter of e frontier expenses, a full quarter of PCTEL MSG group expense, one-time acquisition costs of approximately $700,000, and seasonal trade show and SOX expenses.

Non-GAAP operating margin for the current period was approximately 16.6%, or 19.8% without the non-recurring acquisition expenses, and it is within our previously stated guidance. Current period operating margin compares to approximately 30% operating margin for Q1 of 2007.

Non-GAAP net income for the third quarter was $3.1 million, or $0.10 per diluted share, or $3.8 million or $0.12 per diluted share, taking into account non-recurring acquisition costs as compared to $6.2 million or $0.20 last year.

From a balance sheet perspective, our cash position closed at $26.2 million at March 31, 2008, a decrease of approximately $61.3 million from the beginning of the year. The decrease is attributed to the PCTEL'S MSG group acquisition on January 4, 2008.

Accounts receivable at March 31, 2008 increased to $16.8 million from $13.1 million at the beginning of the year, driven by increased sales, the timing of Verizon billings, and newly acquired customer accounts associated with the PCTEL MSG group acquisition. That working capital at the end of the quarter was $36.4 million.

Cash generated from operations for the quarter was close to neutral, and it was affected by an increase in accounts receivable, which is simply timing-related. Taking out the accounts receivable timing effect, we're significantly cash flow positive in Q1.

Primary uses of cash included the acquisition of the PCTEL MSG group and related legal and banking fees, for approximately $60.3 million, and capital expenditures totaled approximately $200,000.

Looking forward to the balance of 2008, we're on track with our previously stated guidance of revenues between $95 million and $105 million for the year. We expect the post non-GAAP gross margins between 78% and 80%, and non-GAAP operating margin of approximately 17% to 20% for the first half of 2008, where the returns were expected operating margin of 30% for the second half of the year.

Finally, we expect our 2008 cash based tax expense to be 20% of non-GAAP net income. In terms of housekeeping, we expect to file our current reporting period 10-Q on time.

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

Bill Smith

Thanks, Andy. We continue working hard throughout the quarter to ensure that our goals will be achieved in each of our business units. As we commented during our last call, the first half of 2008 will be focused on integrating our recent acquisitions. These integration activities include consolidating strategic assets in many areas, including human resources, technology, products, customers, geographic markets, and senior management.

I'm pleased to announce that our integration of e frontier has been completed on schedule, and that we have made tremendous process on the integration of the Mobility Solutions Group that we acquired from PCTEL in January. MSG product integration is well under way, and technology synergies are being realized in the connection management portfolio.

Just on the subject of the e frontier integration, I'd like to give you an update on our consumer group. This group had a very successful Q1, with results pointing to an optimistic trend for the balance of the year. And as we're all aware of possible economic uncertainties across many segments of the U.S. economy, we have not seen any evidence of this trend developing within our consumer product segments, with sell-through and orders remaining strong.

Our Q1 consumer sales performed at a similar level to our strong Q4, 2007 results, and we view this as a very positive indicator as historically, Q1 and Q2 consumer sales trail the other quarters in sales volume. Q1 results year-over-year increased 97.9%. In Q1, the consumer group launched four product upgrades and began expanding our product line into new, international distribution channels.

A highlight for the consumer group's graphic team was the delivery of a new professional edition of our leading 3D animated graphics program, Poser Pro. I'm happy to report that this new product launched in Q2 has been met with enthusiasm by both the industry press as well as the growing customer base for animated products.

During Q1, Revue, our multimedia manager for Windows Mobile devices began making its way onto major online resellers and retailers. We're seeing initial promotions from several online resellers, including Amazon.com, which plans on launching an aggressive bundling promotion later this quarter.

As in previous quarters, the consumer groups republishing model continues to attract new independent software vendors that want to reach Smith Micro's vast consumer channels.

Turning our attention to multimedia, the division delivered consistent performance in Q1, with revenues increasing 15% from Q4, 2007. As we continue to work through the various changes in our customers' distribution models, we have seen our gross margins increase from the high-40s to the mid-60s for this product segment.

We continue to enhance our music offering and announced a new version of our product, QuickLink Music 2.0. I am pleased to report that Smith Micro has been included in an elite group of developers selected by Sprint to contribute software to one of the most significant devices to be launched by Sprint and Samsung in 2008. This device, the Instinct, will bring leading edge innovation to a new class of multimedia phones.

In addition to providing a multimedia manager for Instinct, we also began working with a major device manufacturer to deliver a PC suite for media and contact management. We've shipped our first order to this manufacturer in Q1, and they plan on initial rollout of this new product in Q2 of this year, with broader deployments in the future quarters, mostly the back half of this year.

Looking at the multimedia groups market in Q1, we continue to see the music products are driven through downloads, the wide distribution of software, and the phone box. Our QuickLink multimedia products will enter the market in a similar fashion, included as software in the box in some instances and as a complete kit offering in others, as our customers' marketing plans that were based on their distribution models.

Before we leave this space, I know that if I don't address our music offering with our largest customer, the question will certainly come up it Q&A. Today, I can say we expect to be part of the total music solution for Verizon Wireless, and we are here to support our customer on the go forward for both music as well as other multimedia applications.

Now, turning to the cornerstone of our company, the connectivity and security division. I am very pleased with the group's overall performance, which was up 79.2% year-over-year. This is a core technology for Smith Micro, and it contributes significantly to our organic growth. We see this market segment continuing to perform well throughout 2008, as adoption of broadband mobile services continues its strong pace.

This group is the largest contributor to our revenue, and it also forms the basis for many of our long-term strategic relationships with many of our premiere customers, including Verizon, AT&T, Vodafone, Sprint, Alltel, Telus, NTT DoCoMo, Orange, T Mobile, and U.S. Cellular, just to name some of our customers.

In this diverse base of customers we find our opportunities for growth are not affected by the impact of a single customer or their reliance on a single OEM device vendor's product deliveries. As we've said before, we are agnostic as to which device manufacturer is successful at our carrier customers. Our software supports all device offerings. We succeed if our carrier customers succeed.

The connectivity and security group continues its initiatives to integrate technology and product offerings that were part of the PCTEL MSG group. We have completed the organizational consolidation of the teams, and our product integration focus will be completed over the next few quarters.

In addition to delivering our current offerings of products to the marketplace, I am happy to report that all of the MSG customer transitions to the QuickLink brand went very well and are now nearing completion.

We see further growth in the connectivity segment, fueled by the continued adoption of broadband mobile service offerings from the carriers, along with a trend towards embedded wireless WAN technology by the PC OEMs. Products such as the Gobi chipset from Qualcomm will deliver new demand for a connection management technology.

We also believe these products will drive fast adoption of the embedded modem, which today has been relatively slow to take off. All of this adds up to carriers and PC OEMs needing a connection manager they will use to build their brand loyalty in the marketplace, and as the connection manager market leader, we expect to provide the lion's share of this product.

Finally, looking at our device solutions group, this group is about developing better, more complete device management solutions, developing wireless compression technology, and deploying and integrating our new QuickLink IMS technology.

Over the past several quarters, the team has focused heavily on creating a new device solutions product roadmap. Our vision in this business segment is to deliver products that ensure a rich user experience as well as extend the life of the mobile device.

As with all our products, we look for ways to improve our carrier customers' profits and customer satisfaction. We're developing stronger relationships with the leading infrastructure providers as we rollout our QuickLink IMS application layer for delivering next generation fixed mobile convergent solutions.

Earlier this quarter, Brazil Telecom announced that they will begin implementing our QuickLink IMS client as part of their fixed mobile convergent solutions. We look forward to additional deployments of QuickLink IMS in the coming quarters.

As announced last year, HTC began rolling out our photo solution on various smart devices, and will accelerate deployment this quarter. Also, our relationship with Huawei is expanding as they rollout mobile network upgrades, which include our technology to various customers around the world.

Device solutions also lead the advancement of all of our compression technologies as we see opportunities to leverage our compression expertise to gain strategic advantages for our other technologies. We remain committed to developing and marketing our StuffIt Wireless product line.

Today, we are in various stages of talks with device manufacturers, and we will continue to cultivate these opportunities. It is also noteworthy to point out that StuffIt Wireless is an integral component of Revue, our smart phone multimedia solution.

We are positioning our technology to reach a much broader audience than just updating handset devices, and as more and more companies understand the true value inside our photo and device management solutions, we believe we can continue to expand into new market segments.

Overall, results for the first quarter were solid and tracking to our guidance for the year. Overall, our businesses continue to move forward very well. Plus again, we have all four of our business segments contributing to the Company's financial results.

As we look to the balance of 2008 and beyond, we believe Smith Micro is laying the foundation for long-term success. Through the combination of innovation, acquisitions and execution, we believe the pieces are in place to deliver new product offerings to drive future growth.

We remain confident in the financial guidance we provided earlier this year to the investment community, and see no reason to modify that guidance at this time. The company has had five consecutive years of topline growth. Our product strategies resonate well with our customers, and our reputation is growing as an innovative company that exceeds our customers' expectations.

Our ability to deliver products that help customers reach their visions sets us apart from other software developers. We will continue to look for ways to maximize operating efficiencies, and I'm confident that this will lead to improved performance.

We have a leadership position in a market that has enormous growth opportunity ahead as the trends for further adoption of wireless data and broadband Mobility Solutions continues around the world. We have invested in building a broad base of technologies and products that will enable us to move quickly into new markets and adjust to changing market conditions.

We remain extremely positive about the long-term prospects for Smith Micro, and believe that 2008 will be a very successful year for the company.

With that, Operator, I'd like to open this call for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions)

And our first question comes from the line of Lauren Ye with JPMorgan. Please go ahead.

Lauren Ye- JPMorgan

Hi, guys, how are you?

Bill Smith

Doing great.

Lauren Ye- JPMorgan

Yeah. Can I just ask again around Verizon, can you go into detail a little more about I guess what you're going to help Real Networks do on Rhapsody, and are you providing the actual multimedia player for that product, or is it a separate multimedia player?

Bill Smith

I really have to sort of stick to the script on that. I have a customer, probably two customers to pay attention to in answering this. So why don't we just leave it that we expect to have a play in the overall music offerings of Verizon going forward, as well as we expect to be a provider of other multimedia technologies for Verizon as well. And really have to leave it at that.

Lauren Ye- JPMorgan

Okay. And then just multimedia from Sprint's side, you mentioned that you're going to help them with their new phone. Is the price point on this multimedia going to be higher than I guess the music manager that you're helping them with right now?

Bill Smith

Okay. We're pretty excited about what we think the Instinct phone might mean to Sprint. I think it's a great device. We were very pleased to have such an important role in the development of the software for it, and I think we'll have to leave it at that. As far as pricing, we don't really talk about that. Obviously, we are in business to make money, and we expect that if Sprint and Samsung are very successful with this device, which I think they will be, having seen it and played with it, that take-away is we should make money, too.

Lauren Ye- JPMorgan

Okay. Fair enough. And then just last question is around PCTEL. Are you guys going to break out what you did with PCTEL this quarter?

Bill Smith

No, we won't. First off, PCTEL is another company, and MSG doesn't exist anymore. It's all part of our connectivity and security group. And Andy and I broke out what the performance of that group was, so we'll leave it at that.

Lauren Ye- JPMorgan

Okay. And just around that again, so as you explore, I guess, international opportunities, you have current relationships with the current old PCTEL customers, but are you seeing additional traction? Maybe these customers have been reference points for you to kind of go after other customers? And what are some of the roadblocks, I guess, that may be in place internationally that might be different from U.S. customers or such?

Bill Smith

Okay. Well, I mean I think that clearly that was part of the strategy, was to not only acquire the technology that MSG had, but also to acquire the broad customer base, add it to ours, and end up with a truly global customer base. And we are very pleased with how that's working. Obviously, it does provide very strong market leadership roles for us. They are very well recognized within the industry and around the world.

As far as what obstacles we have as far as closing new deals on the international front, I mean, the biggest barrier is always time. It just takes time, and we are working very strongly on cultivating additional opportunities, both here and in the Americas as well as overseas, and you'll just have to stay tuned.

Andy Schmidt

And just to add to that, Lauren, keep in mind when we acquired the MSG group that we also acquired their pipeline. So being fairly international-centric, they had a very strong pipeline of international prospects, if you will, that will come into play in probably third and fourth quarter of this year.

Lauren Ye- JPMorgan

Okay. Fair enough. Thanks.

Operator

And your next question comes from the line of Maynard Um with UBS. Please go ahead.

Maynard Um - UBS

Hi, thanks. Just can you give us the reconciliation of GAAP pro forma by COGS, and then each of the OpEx lines?

Andy Schmidt

Sure. All right, just starting here with the COGS line, stock comp was $100,000 reduction, and the amortization on the COGS line was $960,000. And down in the operating expenses, selling and marketing stock comp was about $1.4 million, and selling and marketing amortization about $600,000. Research and development stock comp was about $800,000, amortization about $300,000, and then in G&A, stock comp was about $1.4 million, and no amortization. So total you should have is about $3.6 million in stock comp, and about $1.9 million in amortization.

Maynard Um - UBS

Okay. Great. And then you commented that Q1 is typically a seasonally weaker quarter and you're off to a good start this year, obviously. If I take the comment about receivables being a timing issue, was the stronger Q1 revenue due to a pull in of the revenue into the first quarter from the second quarter? Or is this a function of traction and the strength that we should expect to continue to see it going into the second quarter?

Bill Smith

We don't play those games, so we don't pull sales in from the following quarter, that's a self…

Maynard Um - UBS

Well, no, not so much pulling in of revenue, but by your customer saying we're running a promotion next quarter, so we want to actually take more of the product in Q1. And obviously, at not so much the expense, but the revenues being pulled into the first quarter by your customer rather than the second quarter.

Bill Smith

No, I think your net takeaway is this was the results for the quarter, for the first quarter of 2008. It is what it is. And I think it's a nice, solid quarter. And I'm pleased with it, and we've moved on and we're very busy on execution for Q2.

Maynard Um - UBS

Okay. And then related to the -- well, can you just talk about the revenue recognition for the connectivity kit with the major device manufacturer, and then also on the Sprint Instinct deal? Is that based on activations?

Andy Schmidt

With the new major device manufacturer, that's more of a sell in model, and I believe in Bill's script, he had mentioned that we had our first shipment to that particular customer this quarter, his initial shipment. So that's recognizing it on shipment. And then on the Instinct, I believe that's going to be more of an activation model.

Bill Smith

Correct.

Maynard Um - UBS

Okay. And then, just lastly on the international or the pipelines that you talked about that should come in the third and fourth quarter, you did talk about last quarter saying that you've only really taken into account signed deals, into your guidance. So when you're talking about some of this stuff in the pipeline, is that not included in your guidance? Because you did say that some of these should start to kick in the third and fourth quarter. Thanks.

Andy Schmidt

I think the key takeaway is there is no change to the guidance. Again, you look at all the parts that are moving here, the existing contracts can come in better or slightly -- they may push out due to timing, and then you have other new contracts that come in. So we're playing all the variables, so just the guidance as it sits, we think is appropriate.

Maynard Um - UBS

Okay. Thank you.

Operator

And your next question comes from the line of Rich Church with Collin Stewart. Please go ahead.

Rich Church - Collins Stewart

Thanks. On the Instinct, is that relationship with Sprint or with Samsung?

Bill Smith

Well, we have a very strong relationship with both, but this deal is with Sprint.

Rich Church - Collins Stewart

And this Instinct is going to be carried by other carriers? Would you be involved with that as well?

Bill Smith

I can't comment on that. Instinct is a product developed jointly by Sprint and Samsung, and we were very much a part of that whole activity.

Rich Church - Collins Stewart

And do you have any software that's inside of Instinct, or is it the multimedia on the PC side?

Bill Smith

It's all the multimedia applications on the PC side.

Rich Church - Collins Stewart

Okay. Great. And then with regards to Sprint and Clearwire recent news on the WiMax side, is there potential for Smith Micro with WiMax and can you give us any color there?

Bill Smith

As you're well aware that we have a very strong product with our QuickLink WiMax connection manager, we expect to win most of the connection management business around the world. We don't really expect to lose much in the coming quarter, so maybe that's enough said.

Rich Church - Collins Stewart

Great. Okay. Thanks a lot. Nice quarter.

Operator

And your next question comes from the line of Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett - Northland Securities

Yes, congrats on a good quarter, by the way.

Bill Smith

Thanks, Chad.

Chad Bennett - Northland Securities

A couple questions. Not to belabor the Sprint-Samsung launch, but just to make sure I understand it better, it's a multimedia application that's related to phone-to-PC connection. Is this going to be a similar-type arrangement as the music business with Verizon now is, where your software would be bundled in the packaging of the Instinct phone? Can you give us any clarity there?

Bill Smith

Yeah. I first off want to thank the management of Sprint for allowing us to talk about the Instinct ahead of their actual launch, and I really do appreciate that. So if anybody from Sprint's listening, I send thanks. Secondarily, I guess I have to kind of limit it as to what I say. They were nice enough to give us the go ahead to talk, and I think you should expect software to ship with the phone.

Chad Bennett - Northland Securities

Okay. Okay, fair enough. And then another point of clarification. Last quarter, you talked about three OEM deals that you've signed but not yet announced. I guess the major device manufacturer that shipped in Q1, is really rampant in Q2, is self-explanatory. Was the Sprint and Samsung deal another one of the three OEM deals, or is it something different?

Bill Smith

No, it was not. It's another add.

Chad Bennett - Northland Securities

Okay. So the two other OEM deals, are they still on track to ramp in the second half? Has there been any change there?

Bill Smith

No, there has not.

Chad Bennett - Northland Securities

Okay. Which is probably validated by your guidance.

Bill Smith

That's true.

Chad Bennett - Northland Securities

Okay. And then last, or one of the last questions. Andy, the jump in deferred rev, largely due to the PCTEL accounting. So how should we interpret that? Would we say your PCTEL revenue during the quarter, because of transaction accounting, just break that down by four, that jump in deferred revenue, and that's kind of how much you lost, so to speak, from an accounting basis on PCTEL revenue?

Bill Smith

The best way to look at that is that's really maintenance-based with the different accounts. So you take that number, you divide it by four, and that's how it'll rollout in 2008.

Chad Bennett - Northland Securities

Okay

Bill Smith

That's all basically current year. The other takeaway is the business that we did [was up to] -- actually grew over the year, and it's just a bit of a transition on how PCTEL did business and how we do business. As we often state, we do business in a leveraged manner, where we like to actually have a per-unit tie to our customer so that if they succeed, we succeed. PCTEL and somewhat of their strategy is they did a lot of preselling, so we see a little bit of effect of preselling in our first and second quarter, and that basically goes to the wayside on Q3 and Q4.

Chad Bennett - Northland Securities

Okay. Got it. And then you gave overall Verizon revenue as a percentage of revenue. I'll take a stab at this. Can you give us what Verizon was as a percentage account activity?

Bill Smith

No, we better stay away from that one.

Chad Bennett - Northland Securities

I thought I'd take a stab at it. Thanks, guys.

Operator

And your next question comes from the line of Kevin Dede with Morgan Joseph. Please go ahead.

Kevin Dede - Morgan Joseph

Afternoon, guys. Let me add my congrats on a nice job this quarter.

Bill Smith

Thanks, Kevin.

Kevin Dede - Morgan Joseph

Could you give us a little more info on the Amazon promotion? How do you see them sort of couching that, and how do you see it benefiting you?

Bill Smith

Well, let's just say that they're a very major online reseller, very strategic part of what we want to do with the Revue product, and it's a start. This is going to be their first real launch for Q1, and we're excited about it, and we'll see how it works out with them.

Kevin Dede - Morgan Joseph

All right. Is there a price differential between what you think they're going to go out with, and --?

Bill Smith

I really can't get into that. I think we'll let Amazon announce their own promo and do their thing. They're pretty good at it, so we'll let them do it. We don't want to steal their thunder.

Kevin Dede - Morgan Joseph

Okay. Good deal. Can you give us some more information on the IMS deals? I'm not familiar with Huawei. What's going to happen there, and how do you see them promoting your technology?

Bill Smith

Okay. Well, Huawei, we'll take that one first. Huawei is, as you may very well know, is a major provider of wireless infrastructure coming out of China, and is a very strong competitor to Ericsson. They go into a carrier in various parts of the world and they sell a whole package.

It could be a whole upgrade to a 3G network, and one of the things that come with it then is our device management software, and this is growing. It has grown nicely and indications are that it will grow substantially throughout the year. They are already the device group's largest customer. That doesn't really say much, the numbers aren't that big yet, but they will grow, and we think that it's a major play for us.

Kevin Dede - Morgan Joseph

Now, does that include the firmware over-the-air software, Bill, or is it more just IMS side?

Bill Smith

No, no, this is all device management. This is all firmware or over-the-air.

Kevin Dede - Morgan Joseph

Okay.

Bill Smith

Yes, we have not really brought other technologies to Huawei yet; they're just getting going with this and starting to become a meaningful part of the business. It is part of our strategy, however, to do so. We do have Smith Micro personnel resident at Huawei; they go to work there every morning. We consider it to be a significant customer for the future.

Kevin Dede - Morgan Joseph

So, the Brazil Telecom and the HTC deals are similar, right? Photo stuff?

Bill Smith

No, Brazil Telecom is a QuickLink IMS customer. They announced in Brazil that they will be rolling out and announced us as their vendor. And we're very pleased to have them on board and we think it's just the beginning.

Kevin Dede - Morgan Joseph

Now, is that app for migrating a voice call from Wi-Fi to the cellular network?

Bill Smith

Yes.

Kevin Dede - Morgan Joseph

Okay.

Bill Smith

It's on the fixed mobile conversion side, which in our case also can include instant messaging as well. So you've got a couple of plays that are part of our overall IMS product. This is a technology that came over in the MSG transaction, and we are pretty excited about it. We think it has legs, but you know, again, I think we should always view this as legs for maybe 2009 and beyond.

Kevin Dede - Morgan Joseph

Okay. It's clear that data trends were very strong, but can you talk to multimedia trends, specifically music. And I know you don't want to drill in too deep on your biggest customer, but it would be interesting to hear how you see or how you saw those trends change from the first quarter to the first quarter, and how some of the music phone launches may have driven that.

Bill Smith

Okay. I'll try to tackle that and Andy, you can bail me out if I get in trouble, how's that? What we'll do is I look at it this way. First off, our biggest customer is who it always has been, they're just not quite as big as they used to be on the percentage of sales, although they're still very significant, obviously.

We see a transition to more software in a box, more download revenue, less kits, and on a very positive side, you see you're taking a 40-some-odd percent gross margin kit product and taking it up to a software product. So you're seeing overall blended a gross margin enhancement in that group that's close to 20 points. So I think it's actually solid business. Andy, you want to add anything?

Andy Schmidt

Sure, sure. When we look at the difference, I mean, fourth quarter's obviously a seasonal quarter that bodes well for a product like music. But from a per unit basis, we saw very strong similar performance. We're actually up in revenue, quarter-to-quarter, from about -- let's call it 3.4 to 4.8.

So as Bill mentioned, we're still transitioning from kits to more downloads. The volume is looking great. The other side of it, too, is we have other customers in this space. Sprint has been doing very well, too, and they're probably one of the bigger step-ups as we see them now really starting to ramp-up, and now when we get into the instinct, they'll actually take another step forward. So everything's growing with the other players actually coming more on line, and probably we'll continue to take more of the pie here as we go into 2008.

Kevin Dede - Morgan Joseph

Okay. Let me piggyback on Rich's question regarding Clearwire. Do you guys have an established relationship with them at this point, or are you going to follow in with Sprint?

Bill Smith

I'd rather not comment on that or try to answer that, I'm sorry. I hate…

Kevin Dede - Morgan Joseph

No, that's okay, Bill, I understand, sensitive topic. Last question for me. How would you respond to the proposition that Microsoft's working very hard to embed a connection manager within their own operating system? And how would you counteract that potential competitive threat?

Bill Smith

Well, in either case, Verizon or Sprint or Vodafone gets to call Bill. You can call Gates and say listen, we have about 10 new devices we want to add, and will you modify Windows and get the release out in the next couple of weeks so we can ship? Or you can call me and say gee, can you build a connection manager product and get it ready go to? And by the way, we want our own branding. We don't want that Microsoft logo on the damn thing, we want it to all look good. So you figure out which Bill's going to come through for the customer, and I think you answered your own question.

Kevin Dede - Morgan Joseph

How about time to market? Do you have an advantage there?

Bill Smith

We have a huge one. They're still trying to figure out how to make Vista work, and it's only been a year.

Kevin Dede - Morgan Joseph

Very good, Bill. Thanks for taking my questions, and congrats again.

Operator

Thank you. (Operator Instructions)

And our next question comes from the line of Ian Gilson with Zack's Investment Research. Please go ahead.

Ian Gilson - Zack's Investment Research

Yes, good afternoon, gentlemen. Right, can you give us an idea of the total revenue in the quarter from acquisitions?

Bill Smith

We're not breaking that out at this point. We're trying to just stay focused on where the guidance is going versus getting down to that level of detail.

Ian Gilson - Zack's Investment Research

All right. And the deferred revenue change is all essentially from the PCTEL portion and acquisition?

Andy Schmidt

$2.7 million is related to the MSG acquisition.

Ian Gilson - Zack's Investment Research

Okay. Fine. Thank you.

Operator

And your next question is a follow-up from the line of Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett - Northland Securities

Yeah. Just on the gross margin guidance for the year, obviously we had a great mix this quarter, considering what's going on the multimedia side. I guess we would assume that piece of the business grows as a piece of the mix in order to kind of get down to the gross margin range that you're talking about for the year. And can you just give us some color there on how you see mix playing out over the next few quarters?

Andy Schmidt

Sure. We're speaking to this really in two halves as we -- you can probably follow that Q2 is going to be similar to Q1. Where we see the gross margin point down slightly is in obviously multimedia. We've often said that while Verizon maybe reducing kit volume and working more towards download, we've other customers that still like kits. And we expect to do more kit business in different segments.

So that type of product movement will actually pull our margins down a little bit. But now, again, we're getting nice and diverse, we're getting very broad. So as we see these movements take effect, we're only going to move margins perhaps 1%, 2%, 3% at a time. So hence the 78% to 80%.

Chad Bennett - Northland Securities

Okay. And I know you don't want to get too detailed, but should we see kind of further progression on the multimedia side? Obviously, you saw improvement Q4 to Q1. Is that how we should look at that business, considering all the deals you have going on? Looking out to the next -- throughout the year?

Andy Schmidt

I think the key is going to be, again, Q3 and Q4, as Bill announced, we've got the Sprint piece going, and we had an initial shipment with the yet unannounced customer. It's like any other OEM deal, they start relatively modestly and then they grow over time but they stick with you, they're very sticky. So we don't expect to see, really, the big traction until later this year. Hence our guidance being a big more skewed towards end-of-year.

Chad Bennett - Northland Securities

Okay.

Bill Smith

And I think I can add to that. There was a question that came up in the year end conference call, and that is how I viewed multimedia. And I think multimedia will, by the end of 2008, have a very respectable year, and will perform nicely. And you'll all be pleased with it. So it's just going through a transition, and in many ways, it could be viewed as a healthy transition to higher gross margin product, we have happy customers, and we look for this space to grow.

Chad Bennett - Northland Securities

Okay. Just a last quick one. Has anything changed on the competitive landscape side or market adoption side of the photo technology within your device solutions group?

Bill Smith

Well, there really hasn't been any change, I mean, you don't see HP out there aggressively selling photo solutions. They're the ones that bought the Bit phone franchise. We see that the photo and device management technology, however, is going to grow into a much broader business than just updating handsets.

We've alluded to this in the past, and obviously we're very active in this front. We have business that we can't talk about yet, but it's moving forward and it's done. And this is all about the convergence of technologies. And as you see more and more processors being buried in more and more things, including street lampposts in China that actually control how the lights work. There's a need to reach out to all those devices and update them.

And we think this is a great market, a great business, and it's very cost effective. It speaks to a need of reducing costs. Depot service for handsets, dealer service for automobiles and other devices, or guys running around in trucks trying to fix processors out in the field is very expensive, very slow, and not particularly effective.

The ability to sit at a remote location with a central server, with software built by us, push the updates out to the devices, talking to clients that are resident in those devices that are also built by us, become a very compelling story.

You mix in other technologies, be that multimedia or connectivity or other types of things like IMS and et cetera, to an overall solution. We become the only software vendor out there that can really talk about doing it all, in-house. And that's a very powerful statement. It works in the marketplace, and it's working for us now.

Chad Bennett - Northland Securities

Okay. Thanks for the color.

Operator

Thank you. There are no further questions. At this time, I'll turn it over to Mr. Messman for closing comments.

Charles Messman

I want to thank you for joining us, and should you have any further questions, please feel free to call us at 949-362-5800, and we'll look forward to talking to you on our second quarter conference call. Thank you.

Operator

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.

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