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Smith Micro Software, Inc. (NASDAQ:SMSI)

Q2 2008 Earnings Call

August 5, 2008 4:30 pm ET

Executives

Charles Messman - President of MKR Group

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

Andrew C. Schmidt - Chief Financial Officer and Vice President

Robert Elliott - Chief Marketing Officer

Analysts

Maynard J. Um - UBS Investment Research

Chad Bennett - Northland Securities, Inc.

Lauren Ye - J.P. Morgan

Richard Valera - Needham & Company

Eric Reiner - ThinkPanmure

Kevin Dede - Morgan Joseph & Co.

Charles Messman

Good afternoon and thank you for joining us today to discuss Smith Micro Software’s financial results for fiscal 2008 second quarter, which ended June 30, 2008. By now you should have received a copy of the press release discussing our second quarter results. If you do not have a copy and would like one, it is available at www.smithmicro.com or by calling (949) 362-5800 and we’ll fax or email you one immediately.

With me today on the call are Bill Smith, Chairman, President and Chief Executive Officer, Andy Schmidt, Vice President and Chief Financial Officer and Robert Elliott, Vice President of Marketing.

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 relating to the company's net revenues guidance for fiscal 2008, our financial prospects and other projections of our performance, the company's ability to increase its business and the anticipated 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 the 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 continuing adverse economic conditions, and the company's ability to compete effectively with other software companies. These and other factors discussed in the company filings with the Securities and Exchange Commission, including its 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.

William W. Smith, Jr.

Today, we announced our second quarter 2008 results and I’m very pleased to announce that we had another solid quarter with record financial results.

The second quarter revenue performance was up 53% year over year, coming in at $23.5 million. This is our sixth quarter in a row now of delivering consecutive record growth, which I think is very indicative of the strength of our business case. From a non-GAAP or pro forma earnings standpoint, we achieved a very respectable result of $3.6 million or $0.12 per share.

As we stated on the last conference call, the first half of 2008 has been about laying the foundation for long-term financial growth. We believe we have accomplished this goal and have achieved several internal milestones by investing significant resources into the development of new products that our customers plan to launch in the second half of this year. In parallel, we are continuing our integrations of new technologies, new customers and employees. Most importantly, we are delivering strong financial results.

For the first six months ended June 30, 2008, we saw our revenues increase to a record $45.3 million, up approximately 37% over last year. And very significantly, we experienced a significant increase in our overall gross profits.

Customer concentration continues to decline with our largest customer representing only a 39.6% share. International sales continues to grow and now exceeds 10% of our total sales. As we look to the overall market, we can start to say that there are strong market drivers and indicators within the broadband connectivity space that are extremely exciting to us, in which I will elaborate on, this and other matters, later in the call.

But now, let me turn the call over to Andy Schmidt, our CFO, to go over the financial results in more detail.

Andrew C. Schmidt

As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results, non-GAAP results discussed on this call and net amortization of intangibles associated with acquisitions, non-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 2008 and 2007 are non-GAAP amounts. Our earnings release, which will 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 measures. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com.

Let’s discuss our detailed second quarter results.

For our second quarter, we posted revenues of $23.5 million and earnings of $0.12 per diluted share. Total revenues at $23.5 million increased from revenues of $15.4 million for second quarter of 2007, an increase of 53%. International revenue was approximately $2.7 million this quarter across all business groups.

Connectivity and Security posted another record quarter with revenues of $12.9 million for the quarter, as compared to $5.9 million last year. Consumer posted a strong quarter of $6.2 million as compared to $2.3 million last year. Second quarter revenue from Multimedia was $3.1 million, down from $5.8 million in Q2 of 2007, due to a shift in product mix, specifically a shift from music kits to higher margin software downloads and CDs.

Device Solutions revenue was approximately $850,000 for the quarter, as compared to approximately $1 million last year. However, Device Solutions did show good quarter over quarter revenue growth sequentially up over 100%.

Finally, we reported approximately $400,000 of other revenue, which compares with approximately $330,000 for second quarter of 2007. Total deferred revenue at June 30, 2008, was approximately $3.1 million.

Switching to gross profits. Non-GAAP gross margin dollars of $19 million increased $7.1 million or approximately 59% from the same period last year. Of key significance, while our revenue increased 53% year over year, our gross margin dollars increased 59% for the same period. As follows, non-GAAP gross margin as a percentage of revenue was approximately 81% for Q2 2008 compared to 77.6% for Q2 of 2007.

Non-GAAP gross margin by business unit was as follows:

Connectivity and Security, 91%; Consumer, 74%; Multimedia, 66%; for Device Solutions and Other Revenue, gross margin dollars totaled approximately $600,000. As we’ve noted before, our margins are driven strictly by product mix.

Switching to operating expenses. Non-GAAP operating expenses for the second quarter of 2008 increased to $14.6 million, or an increase of approximately $400,000 from Q1 of 2008. The increase is as expected and is attributed to additional engineering resources deployed to meet new customer product deliveries scheduled for the second half of the year.

Non-GAAP operating margin for the current period was approximately 18.7% and is within our previously stated guidance range of 17-20%, and is up from Q1 2008 operating margin of 16.6%. Current period operating margin compares to approximately 28.6% operating margin for Q2 of 2007.

Non-GAAP net income for the third quarter was $3.6 million or $0.12 per diluted share, as compared to $5.1 million or $0.16 last year. From a balance sheet perspective, our cash position closed at $26.2 million at June 30, 2008, a decrease of approximately $61.4 million from the beginning of the year and consistent with our cash position at March 31, 2008. The decrease from the beginning of the year is attributed to the PCTEL’s MSG Group acquisition on January 4, 2008.

Looking at accounts receivable at June 30, 2008, accounts receivables increased to $19.7 million from $13.2 million at the beginning of the year, driven by increased sales, the timing of new sales which is typically at the end of a quarter, and newly acquired customer accounts associated with the PCTEL MSG Group acquisition.

Net working capital at the end of the quarter was $38.3 million. Cash generated from operations for the first half of the year was approximately $600,000 and was affected by an increase in accounts receivable, which again, is simply timing related. Taking out the accounts receivables timing effect, we generated approximately $7.5 million in cash in the first half of 2008. Primary uses of cash included the acquisition of PCTEL’s MSG Group and related legal and banking fees for approximately $60.3 million. Capital expenditures totaled approximately $1.2 million.

Looking forward to the balance of 2008, we are on track with our previously stated guidance of revenues between $95 and $105 million for the year. We expect post non-GAAP gross margins between 78 and 80%. In terms of non-GAAP operating margins, we expect a consistent improvement from our first half year operating margin of 17.7%.

As our revenues increase over the next two quarters, operating margin will also increase but in an incremental manner. We expect operating margins to improve to the lower 20% range in Q3 but when we look at Q4, operating margin will vary depending upon our needs to invest in engineering resources to support possible new customer wins, which will drive 2009 revenue. However, while we expect to have significant sales wins in Q3 and Q4, we feel at this time that we can run the business at a mid-20s percent operating margin range in Q4 while investing in engineering resources to support 2009 customer deployments.

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 report in Form 10-Q on time. This point, I’ll turn the call back to Bill.

William W. Smith, Jr.

At the center of the company’s growth performances is our Connection Management business. I’m extremely pleased with the Connectivity and Security business groups’ tremendous growth performance, which was up over 119% year over year to $12.9 million. This growth is the largest contributor to our revenue as we grew 18% from the $10.9 million we posted in Q1 of this year.

We expect this business segment to continue to be a strong growth driver for the company during the remainder of the year, as the overall wireless data market continues its rapid adoption rate throughout the world. We are excited about this market segment’s continued prospects in 2008 and beyond, as we see our strong penetration of wireless carrier customers offer new and innovative pricing models in the U.S. to attract an ever expanding appetite for wireless data.

A recent industry report from AVI Research highlighted USC modem adoption for cellular modems was about four times greater than forecasted. Internal modem shipments for computing devices such as notebooks grew by 120%. Today, both of these market segments are projected to ship about a little bit over 27 million units worldwide and are expected to exceed shipments of 100 million for USC modems and 80 million for internal modems by 2013. What this says is that we are still just entering a high gross markets, where we are the leading supplier of connection management solutions worldwide.

While we are also in the very early stages of adoption for true enterprise connectivity, we are beginning to broaden our enterprise delivery channel through our most recent agreement with British Telecom’s BT iNet for the European market. This enterprise market is a core business initiative and we are investing to support both our customer and our future customers as we move through 2008.

Turning to our Consumer business segment, I am extremely pleased that again we saw a very strong performance. This unit achieved the highest revenue in its history, coming in at $6.2 million, which represents 175% growth rate over 2007 second quarter. I think it is very noteworthy that we achieved this growth during a quarter that seasonal shows slower buying trends.

During the first half of the year, we saw our top titles Stuffit Deluxe, Poser 7, and VMware Fusion ship over 400,000 copies. While many in the news are reporting a slowdown in the U.S. economy, it has not affected our business model and we hope that this trend continues. And furthermore, we have no indication whatsoever of a reversal of this trend.

Now looking at our Multimedia business segment, our performance was in line with our expectations as revenues came in at $3.1 million. We continue to see changes at how our customers deliver their products, moving towards downloadable software usually as a link on a CD or a CD with a link and a new style of retail kit. This results in lower revenue per unit but a higher margin per unit. We were also pleased to be part of Sprint’s launch of their Instinct mobile phone. This was our first carrier win for our new PC multimedia manager for a mobile phone. And this new product borrows a lot of design technology from our review PC companion products.

Looking at our Device Solutions group, we continue to make good progress with support for our mobile device management suite for HTC and Huawei Already this year, China Mobile has shipped four new HTC smartphones utilizing our technology and Huawei continues to deploy 2-3 device management solutions per quarter for carriers in Asia, Africa, Europe and the Middle East, the most recent being in the Ukraine and Zambia.

As announced earlier this year by our customer, the second quarter we shipped to British Telecom, their first Voice Call Continuity product, that allows their subscribers using a dual mode handset to seamlessly and automatically switch between wireless, land and WI-FI networks.

In conclusion, we are very pleased with the progress we’ve made during the first half of 2008, as we continue to position the company with a very strong foundation for long-term sustainable growth. During the first half, we have worked very close with our customers on several new product launches which will hit in the second half of 2008.

We made significant progress on the integration of our recent acquisitions. But most importantly, along the way, we achieved record revenue growth for the sixth quarter in a row.

We are working very hard to build upon our leadership as the premier wireless software provider in the world. Our strategy for growth could not be more relevant in the world where mobile devices and mobile laptops require broadband wireless connections. And as a result, our wireless products are becoming key assets in nearly every company today. We remain confident in the financial guidance we provided earlier this year to the investment community and reiterate our top line revenue guidance of $95 million to $105 million. With that said, I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Maynard Um - UBS.

Maynard J. Um - UBS Investment Research

Can you just give us the GAAP to pro forma reconciliation sales and marketing, R&D, G&A and then also the pro forma tax rate? Then I have a couple of other questions.

Andrew C. Schmidt

First, pretty noteworthy, our stock comp has come down year and year from $4 million to $3.1 million. And then when we look at the break up for current quarter, the total in the cost of sales line stock comp was $130,000. In the sales and marketing, $750,000; R&D $920,000; G&A $1.3 million.

Maynard J. Um - UBS Investment Research

Okay, and the pro forma tax?

Andrew C. Schmidt

And the pro forma tax is 20%.

Maynard J. Um - UBS Investment Research

And when we go to amortization?

Andrew C. Schmidt

Amortization for cost of sales is approximately $875,000; for sales and marketing $560,000; and R&D about $300,000.

Maynard J. Um - UBS Investment Research

Great. Okay, and then just on the operating margin guidance, can you clarify? Did you say that low-20 percentages in the Q3 and mid-20s for Q4?

Andrew C. Schmidt

Right, and the [inaudible] in Q4 is we feel that we can run Q4 at least in the mid-20s. What we’re seeing in their sales pipeline right now is we have so many opportunities out there that if we land these opportunities earlier rather than later, we’ll put engineering resources on and that would keep us in the mid-20s. Or else, we could run it higher. So, if you see mid-20s, they’d say that’s a great plan of success.

Maynard J. Um - UBS Investment Research

Okay, and is that different from the guidance you gave earlier in the year or has that changed?

Andrew C. Schmidt

Earlier in the year, we said we’d be getting our business back up to our typical run rate, a rate around 30%. And we still expect to do so but right now, it’s still commented on when we look at the opportunities out there, connectivity has been tremendous. So, right now is the time to actually land these deals and snap them up. And again, usually we preload the expenses, if you will, and engineering a couple of quarters before a customer deploys our particular products. So, from that perspective again, we feel regardless that we’d like to run the business at minimum mid-20s. But the run of that 30% or higher right now, we might actually be letting some opportunities go.

Maynard J. Um - UBS Investment Research

Okay, and I guess as you balance that, how much incremental revenue do you think you can actually derive through that investment as you look into 2009 and I guess when do we get that point of leverage in the models?

Andrew C. Schmidt

Well, we’ll talk more in Q4 obviously in 2009 guidance, so on and so forth, but I will say consistent with giving the top line guidance in 2009 and forward.

Maynard J. Um - UBS Investment Research

Okay, and the last question for me is when you originally gave your annual guidance, you mentioned that it only included contracted deals. Can you just give us any color on the status of the pipeline deals and the potential of getting those done into the back half of this year? Thanks.

William W. Smith, Jr.

Everything is on track. That’s one of the reasons we feel very confident in reiterating guidance that we’ve already given and you will learn about these three customers in due course, as soon as we’re allowed to tell you about them.

Andrew C. Schmidt

And the key, Maynard, again is these are signed deals so they’re completed deals. As Bill just noted there, they’re deployed on time. So, everything’s very consistent.

Operator

Your next question comes from Chad Bennett - Northland Securities.

Chad Bennett - Northland Securities, Inc.

Were there any other 10% customers during the quarter, Andy?

Andrew C. Schmidt

No, no other 10% customers but as Bill commented on, a noteworthy fees in international for the first time is over 10%, which is a nice milestone for international.

Chad Bennett - Northland Securities, Inc.

And should we re--not that it’s an enormous figure but it went up substantially--should we read the international piece? I guess you gave the Device Solutions number, which I assume is mainly international, but you’re seeing some traction on the other sides of your business?

Andrew C. Schmidt

And just to give you some more color to that, Device Solutions was about 40% of the international number; Consumer about 34%; Connectivity about 20%.

Chad Bennett - Northland Securities, Inc.

And then can you give us an update on the three OEM deals that are expected to ramp in the second half that are in your guidance? I know we’re shipping on one of them in limited quantities in Q1. I guess first of all, did that one ramp in Q2 and have we shipped on the other two or any of the other two in Q2? Then also, how much of impact in the Multimedia segment did we see from the Sprint Instinct launch?

William W. Smith, Jr.

All right, let’s try to take all those in order. The three deals: The first one we saw some revenue in Q1. We saw a small amount of revenue, I think, in Q2 but it’s insignificant. We hope to see it ramp up in the back half of the year. As far as the others, as we’ve said, one is PC manufacturer; the other is a carrier. Both are on target for launch and that’s pretty much everything I can tell you about them for right now until it’s in public camps.

Now, let’s see, the last part of your question was on the Instinct. The Instinct showed some good growth. Sprint now represents a more meaningful share of our overall Multimedia revenue and we expect that to continue to grow. I guess while I’m kind of talking about Multimedia, I might as well as a little color to that space as well. We believe that we have some more customer wins in the queue and we will see how those work out. And what we do believe that Multimedia sales going forward once we get through this space that we went through on the Verizon side, we’ll see it go back up and we’re looking forward to some strength there. So, we still feel very positive about the Multimedia business overall.

Chad Bennett - Northland Securities, Inc.

Since the timeline hasn’t changed and I know you guys don’t like to get into quarterly stuff but should we assume that maybe two out of the three or three out of three OEM deals ramp, I guess, in the immediate future? I guess I’m trying to get a sense for linearity in the back half of the year and what we should expect from these OEM deals more near-term.

William W. Smith, Jr.

Yes, I mean I kind of know what the consensus level is right now and we’re comfortable with that and that would put us pretty much right in the center of our overall guidance but we’ll just see how that all works out. I think the models that are out there are fine on a revenue standpoint.

Chad Bennett - Northland Securities, Inc.

I guess the only other question I would have is clearly the connectivity piece is chugging along great and you guys are executing. And it seems like we’re still early on the penetration side if you listen to Verizon and their call a couple of weeks ago. I guess, what do you guys see in terms of pricing in that space and also the shift from PC cards to more embedded modules and kind of how you see that playing out over the next, maybe, 6-9 months, if you can phrase it that way?

William W. Smith, Jr.

Well, our price’s inconsistent so let’s just say that but then let’s try to zero into the other parts of your question. We’ve seen across the board growth in the Connectivity space. I mean there’s none of our carriers are not showing fairly strong growth. So, that’s all very, very positive. We have more carriers coming online in the Connectivity space.

There are other plays, obviously, on the embedded side with the Gobi as well as the Ericsson solution for the PC manufacturers. I think I quoted some numbers from AVI, where they say that they see very strong growth continuing for both the USB based modems as well as the embedded. They kind of gave a nod to USB over embedded. That’s a subject reasonable people could argue about but then you either take its strong numbers. I mean they were looking at 100 million units for the USB modems and 80 million units for the embedded modems by 2013. That’s up from a total of about, I think, it’s 27 million right now. So, this is just enormous growth going forward. And we’re going to see some changes in the mix of our customers. We’re also going to see changes with the advance of 4G. The first rollout of 4G you’ll see by the end of this year here in North America, with the launch of WiMAX. We certainly plan on being a very significant participant in that effort and I also think you’ll see some other large names that are now heavily centered in the cable business enter the wireless race, the rollout of WiMAX. So, I think there’s a lot of reasons to be very excited about what’s happening in wireless data going forward. Clearly, we’re seeing traction offshore now and we’re starting to get a little bit more. I mean clearly 10%. Step one. Now, we’ll try to grow it some more.

I think overall everything looks very rosy.

Chad Bennett - Northland Securities, Inc.

And then just one quick question regarding Gobi and Ericsson. Is it fair to say that you guys are working with Gobi and Ericsson and probably have been for some time and there’s no threat that they’ll go up the stack in near space?

William W. Smith, Jr.

You should guess that we’re working with both firms. We are the leader in this space and we don’t plan on feeding that leadership role to anybody in the near future for that matter, anytime.

Operator

Your next question comes from Lauren Ye - J.P. Morgan Chase.

Lauren Ye - J.P. Morgan

I just wanted to dig into the pipeline a little more on the potential wins in the second half. Can you talk about specifically, like maybe where those deals are coming from and what area they’re from? And then also are they international or domestic? Just more color on that.

William W. Smith, Jr.

I’ve actually kind of talked about this. So, I don’t have any follow up. It’s a PC manufacturer. Second is a carrier. It’s North American based. And the third is a device manufacturer.

Lauren Ye - J.P. Morgan

Okay, but these are the ones that you’ve talked about previously though. Is there anything else in the pipeline that maybe we’ve not heard of?

William W. Smith, Jr.

But I have to keep some secrets of ours.

Lauren Ye - J.P. Morgan

Then could you just update us on Verizon in multimedia player? Has there been any progress or new things set up from that front?

William W. Smith, Jr.

We continue to work with them on the Multimedia front. Obviously, as with announced with the deal with RealNetworks, we’re working closely with them. On their music offering as well. We are building disc chips for them and business goes forward in the Multimedia space and Verizon overall.

Lauren Ye - J.P. Morgan

And then just from details on your British Telecom, I guess, relationships, was this something that you customized for them because they asked for it or are you actively selling the dual mode voice connectivity product maybe to your other current customers?

William W. Smith, Jr.

You got that mixed up. The dual mode was Brazil Telecom.

Lauren Ye - J.P. Morgan

Oh, Brazil. Yes.

William W. Smith, Jr.

And is that what your question is or is it British Telecom?

Lauren Ye - J.P. Morgan

Yes, yes. Did the Brazil? I just wanted to see if you’re selling this or trying to sell this to other customers as well.

William W. Smith, Jr.

Oh, absolutely, and this just happens to be one of the first to deploy. It’s still, I would consider, early stage. I sort of categorize it more of somewhat of a trial but we feel very positive about it. Brazil Telecom feels positive about it. And we’re happy to have them.

Lauren Ye - J.P. Morgan

Okay, and this area I guess the dual mode voice connectivity, is this a different gross margins or is it pretty similar to the normal connectivity margins?

William W. Smith, Jr.

Very similar.

Operator

Your next question comes from Rich Valera - Needham & Company.

Richard Valera - Needham & Company

Andy, I just missed your break out of amortization by line item. Could you quickly repeat that?

Andrew C. Schmidt

Sure. So, you got the stock comp okay, right?

Richard Valera - Needham & Company

Yes.

Andrew C. Schmidt

The amortization cost of sales line $875,000 approximately, selling and marketing approximately $560,000, and research and development right around $300,000.

Richard Valera - Needham & Company

And then just wanted to address the op margins in 4Q, the sort of more conservative op margins. Just wanted to be clear that, that’s purely a function of increased spending. Is there anything else going on there like a change in mix that would change the gross margin or is this purely a function of higher OpEx to go after some opportunities you see in the first half of ‘09?

Andrew C. Schmidt

First, margin is going to be rated at 70-80% range. So, no change there; no change in pricing. Nothing at that level. You’re going to see everything probably on the R&D line and with this case in point, we’re running at about $380 all time equivalence right now. And the way we can move up and down and manage that is we make effective use of engineering contractors and areas such as key way and others not necessarily the key code crunching aspect. Although, perhaps we do that as well. Point B is we can run anywhere from 40, 50, 60 contractors, turn them on and off. And that’s where, again, we have to lever that if we get some of these other wins in line, which again as Bill likes to point out, now we are the leader in this space. So, people come to us as much as we go sell. At that point then, we turn the contractors on full blast and we get products out.

As we’re going through all this growth phase, we’re going through a rationalization process of how many full-time people do we want on board versus the balance of contractors because it is quite a growth spread as you can see in this area. So, that’s why we have a good lever we can pull and we can run at mid-20s. We can run it higher. Again, the key is very positive story which is the opportunities. These are very large opportunities that are very impressive.

Richard Valera - Needham & Company

Great, and just to clarify, it sounds like the bulk of that activity that you’re pursuing is in the Connectivity area. Is that correct?

William W. Smith, Jr.

It’s a mix. I would say that it probably tilts more towards Connectivity but you’ll find some healthy deals above the Multimedia as well as the Device Solutions side.

Richard Valera - Needham & Company

And one final one, you kind of alluded to this in your prepared remarks, but at one point, Bill, I think you had thought Multimedia might be able to be sort of flattish year over year and clearly, it would look like with the first half start that, that’s not likely but is there any kind of way you can frame what you think of as a sort of more normalized run rate for Multimedia as being sort of get back to a more normal level?

William W. Smith, Jr.

I guess some of the newer deals that we have in the Multimedia space officially closed in shipping and then I might have a better clarity as to how to answer your question.

Richard Valera - Needham & Company

Okay, that’s helpful. Thanks, Bill.

Operator

Your next question comes from Eric Reiner - ThinkPanmure.

Eric Reiner - ThinkPanmure

First question is about the QuickLink IMS product. Can you tell us where we are as far as trials and then volume deployment there?

William W. Smith, Jr.

Actually, the Brazil Telecom effects mobile 10 converts its application as part of that IMS deployment. We’re really focused. And two, subject areas, one being Voice Call Continuity and the second being instant messaging. We will expand that application area as it’s driven by our customers. Now, we have a number of deals we’re working on. The Brazil Telecom is one of the first actually deployed and we’re very pleased about it. It does have somewhat of a global look. You’ll see deals all around the globe now. I think we gave guidance earlier in the year. We see IMS as a future’s play and I think I’ll stick to that. But as we’re able to book some revenues and grow the presence, we’ll tell you about it.

Eric Reiner - ThinkPanmure

Okay, but no view as far as how many trials there are or indeed whether that’s a product that winds up going to kind of a standard lab trials, field trials and then deployments or anything along those lines?

William W. Smith, Jr.

When we talk about on varying public hands so you actually have live uses using themselves. I would consider more of field trials to early deployment stage.

Eric Reiner - ThinkPanmure

Okay, fair enough. On the Connectivity side, I don’t know if you have this available but could you talk to us about how many connectivity customers you have and if you aggregate those subscribers, how many subscribers do those carriers have and how many mobile data customers do they have?

William W. Smith, Jr.

Well, we can’t actually obviously give out the carriers numbers but Robert maybe can give some--

Robert Elliott

We have roughly 13 active carrier customers today shipping data connectivity. And so, some of those are quite large customers such as Verizon and AT&T here in the United States as well as some customers outside of the United States. So, their penetration rates on data connectivity and shipments are going to be all over the board. But I think, as Bill alluded, they all are on a growth trend in this area.

Eric Reiner - ThinkPanmure

Oh yes, we’re seeing penetration of wireless growth just absolutely, wireless data explode. So, that’s one of the things that I’m very optimistic about. So, good luck and I’ll look forward to this. Thank you.

Operator

Your next question comes from Kevin Dede - Morgan Joseph.

Kevin Dede - Morgan Joseph & Co.

Andy, can you just talk a little bit more about the gross margin from a mixed perspective? It did really nice in the first half at 81% all over on a non-GAAP basis but your guidance seems to imply that there’s a mixed shift there, if you expect it to turn a little lower in the second half?

Andrew C. Schmidt

Again, all of our products right now are a typical software mix or where you would see primarily sales that are either downloads or what have you, or CD products. For whatever reason in the marketing world, there’s always room for kits. We still sell kits to Verizon, supporting the RealNetworks products, and we have other opportunities out there, other customers that are interested in kits. So, the range basically is a bit of a hedge towards any of those particular kit products can actually gain momentum very quickly. They actually are great accessories for our customers. So, that’s why we give the range of 78-80%. As you had well pointed out, we’re running at 81%. It’s quite as easy to run that high as well.

Kevin Dede - Morgan Joseph & Co.

Bill, on the Consumer side, you mentioned VMware, Poser and the Compression software. Is there any one of those three that was especially strong in June?

William W. Smith, Jr.

In June? I don’t know about June. I come up quarter. You got me on that.

Kevin Dede - Morgan Joseph & Co.

Yes, obviously, quarter.

William W. Smith, Jr.

I would say it’s pretty well dispersed evenly among all three.

Kevin Dede - Morgan Joseph & Co.

And on the Real Network side, do you have an indication on how successful, as much as you can talk about it, Verizon’s been with that application vis-à-vis their standard VCast Music?

William W. Smith, Jr.

I don’t think there’s anything I’m allowed to say. So, I’ve got to duck that question. Sorry.

Operator

And I’m showing that we have no questions at this time.

Andrew C. Schmidt

I want to thank everyone for calling in today and if you have any questions, please feel free to call Smith Micro or myself, Charles Madsmen, and thanks again.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Smith Micro Software, Inc. Q2 2008 Earnings Call Transcript
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