Smith Micro Software, Inc.
Q3 2013 Earnings Call Transcript

Published: 9 Nov 2013

[Operator:]

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software Third Quarter 2013 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) Today's conference is being recorded, November 7th, 2013. I would now like to turn the conference over to Mr. Todd Kehrli of the MKR Group. Please go ahead, sir.

[Todd Kehrli:]

Thank you, operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software’s third quarter 2013 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 email one to you. With me on today’s call are Bill Smith, Chairman and President and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer. Before we begin, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitation, forward-looking statements relating 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 the forward-looking statements are changes in demand for the company’s products from its customers and their end users, customer concentration given that the majority of our sales depend on a few large client relationships including Sprint, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continuing adverse economic conditions, and the company’s ability to compete effectively with other software companies. These and other risk 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 by any forward-looking statements. The forward-looking statements contained in this press release and call are made on the basis of 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, I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial results. Please measure -- please refer back to our press release disseminated earlier today for reconciliation of the non-GAAP financial measures. With that said, I'll now turn the call over to Bill Smith, please go ahead Bill.

[Bill Smith:]

Thanks, Todd. Good afternoon, everyone and thank you for joining our call today. Last quarter we reported that our Board of Directors approved a restructuring plan to reduce operating expense by closing and consolidating certain facilities and reducing our headcount by approximately 26%. This restructuring has been completed, positioning the company closer to our goal of profitability by the end of the year and resulting in a one-time charge that is reflected in our Q3 earnings. What is not reflected in our earnings is the remarkable ability of our employees push through this challenging time and continue to service our customers well, move new deals to closure and evolve our products to solve important problems for the market. Before I dive into what's next for Smith Micro, I will turn the call over to our CFO, Andy Schmidt to discuss the details of our third quarter financial results, Andy?

[Andy Schmidt:]

Thank you, Bill. Lets 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. Non-GAAP results discussed in this call net out stock compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, our results may refer to my prepared remarks for both 2013 and 2012 are non-GAAP amounts. Our earnings release, which will be furnished with the SEC and Form 8-K contains a presentation of selected GAAP financial measures and related non-GAAP financial measures and a reconciliation of the difference between the two. The earnings release can also be found in the Investor Relations section at our website at smithmicro.com. Moving on to reiterate, as mentioned in our last earnings call, our Board of Directors approved a restructuring plan in July. This plan involves changes in management structure in order to streamline our organization, facility consolidations and closures and headcount reductions that amounted to approximately 26% of the company's worldwide workforce. Restructuring resulted in a one-time charge of $5.6 million that was recorded in Q3. We estimate that approximately $1.7 million in cash expenditures will be [keyed] out in fiscal 2013. In terms of our currently completed third quarter, let me provide some detail. For the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $872,000 for the current period, broken out as follows. $6.000 cost of sales, $144,000 selling and marketing, $217,000 R&D and $505,000 G&A. While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we are showing a $4.7 million pro forma or cash-based tax benefit. It also should be noted that we recorded a $5.6 million restructuring charge, which we consider to be an extraordinary event. As such, I will provide our pro forma operating metrics with restructuring expense and without restructuring expense. For the third quarter, we posted revenues of $8.7 million and a loss of $0.35 per share GAAP and $0.20 per share non-GAAP. Excluding the restructuring charge, we took this quarter our non-GAAP third quarter loss per share was $0.11. Revenue for the quarter compares to $11 million for the same period last year. International revenues was approximately $500,000 this quarter across all business groups. Our Wireless segment reported revenues for the quarter of $7.2 million as compared to $9.6 million last year. Our Productivity & Graphics segment posted revenues of $1.5 million as compared to $1.4 million last year. Total deferred revenue at September 30, 2013 was $2 million. Switching to gross profit, non-GAAP gross margin dollars of $6.3 million compares with $8.9 million using the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 71.6% for Q3 2013 compared to 80.8% for Q3 of 2012. The reduction in gross margin is primarily due to product mix. Non-GAAP gross margins by segment are as follows; Wireless 72%; Productivity & Graphics 67%. Switching to operating expenses, non-GAAP operating expenses for the third quarter of 2013 were $12.8 million excluding restricting charges. Q3, 2013 operating expense was down $1.5 million sequentially from Q2 2013 and down $1.2 million year-over-year. Continuing with the year-over-year perspective, engineering expense decreased 9%, selling and marketing decreased 7% and administrative expense decreased 9%. Non-GAAP operating loss for Q3 was $12.1 million or $6.5 million excluding restructuring as compared to a loss of $5 million in Q3 of 2012. Non-GAAP net loss for the third quarter was $7.5 million or $0.20 per share. Taken our restructuring expense, the current quarter loss was $4 million or $0.11 per share as compared to a loss of $2.4 million or $0.07 per share last year. Cash decreased $5.4 million for the quarter closing at $18.1 million at September 30, 2013. Uses of cash this period includes $680,000 for IT infrastructure equipment, primarily to support our CommSuite products. Reviewing our restructuring efforts, as I previously noted, we have completed our restructuring, which included downsizing our workforce at our facilities. We saw the partial impact of our restructuring efforts in Q3, resulting in a reduction of operating expenses of $1.5 million from Q2 2013. Looking forward to Q4, we expect total non-GAAP operating expense to be slightly under $11 million assuming no unforeseen non-recurring expenses. In other matters, as you all know, Smith Micro's a NASDAQ Global Select company. Our stock has traded below $1 for 30 consecutive days now and as expected, we did receive the standard NASDAQ letter outlining their standard compliance terms and informing us that we are not in compliance with NASDAQ's minimum bid requirements for our common shares. In essence, we have until May 6, 2014 to meet the NASDAQ Compliance Rules. We will continue to monitor the minimum bid price of our common shares and will consider all our options in order to regain compliance regarding the minimum bid requirement. We believe that by executing on our business strategy in the near future that our stock price will rise above $1 minimum bid price and we will be in compliance. However, there can be no assurance that the company will be able to regain compliance with NASDAQ stock market listing requirements or better stock or remain listed on NASDAQ. In terms of our 10-Q filing, we expect to file our quarter-end 10-Q by the end of the week, which will represent our final financial statement for the period. At this point, I'll turn the call back to Bill.

[Bill Smith:]

Thanks, Andy. While we spent much of the third quarter restructuring our business, we now look forward to a very productive Q4. We continue to leverage our strengths and productivity, policy-based control and premium services to pivot our solutions for current customer needs and emerging markets. As a result of these efforts, our continued focus on closing deals and cost savings, gains and deliver structure, we believe a fourth quarter turnaround that allows us to become profitable is within reach. Our goal remains the same, as previously stated, which is to achieve profitability in Q4. Our current product leader is our CommSuite solution, which continued to show good growth in the third quarter, up 58.5% year-over-year and up 14.5% sequentially from the preceding quarter. One of the unique features in CommSuite that contributes to its commercial success is the gateway server. It provides integration to operator billing and notification systems and automatically provisions new services to make it easy for premium features to be rolled out to subscribers using a variety of purchase options. In addition, it automatically re-provisions the premium services when users switch to newer handset models, which is often an expensive support problem for operators. The CommSuite gateway can also play an important role for operators deploying rich communication services. RCS is a set of standards intended to enable enhanced messaging features that work consistently across operator networks. While some operators have launched RCS on their networks, very few have built a monetization engine into their RCS strategy. Our CommSuite solution can be that monetization engine facilitating purchase and entitlement for new messaging features offered through an RCS client or a CommSuite client. Another important strength we are leveraging is our ability to design standards based connectivity components for silicon chip and module makers. In Q3 we delivered mobile broadband interface module or MBIM components to a major chip manufacturer as well as to module makers that are utilizing those MBIM enabled chipsets in Windows based devices. We also delivered authentication software that supports wireless Internet service provider roaming known as WISPr, although chipset solutions take a different form and offer a different business case than our previous connectivity solutions, these deals provide validation that our deep domain expertise and connectivity remains highly relevant and valuable. In regard to our NetWise platform, we were recently selected by a leading cable provider in Mexico to help them connect subscribers to their growing network of WiFi hotspots. Our over-the-top NetWise application will provide WiFi discovery, seamless authentication and mobile data management to their end users while device analytics will provide user experience insights to the cable provider. This will be our first non-carrier customer of NetWise focused on user engagement and branding instead of network congestion and traffic management. The rollout of WiFi access points by cable providers is a growing trend around the world, allowing them to extend their services and enhance their brands outside of the home. This NetWise deployment in Mexico highlights the flexibility of our solution as a comprehensive mobile policy platform that can serve a variety of industries and used cases. As described by several senior executives at the recent Rutberg Wireless Influencers conference, securing mobile devices and reducing the cost and support burden of mobility continues to challenge enterprises of all sizes. Some are trying to implement management policies that support a bring-your-own-device or BYOD mobile environment while others are anxiously waiting for Microsoft to master the tab form factor so they can banish iPads from their workplace. In either case, the need for secure cost effective and compliant mobile access to corporate systems and information is far from solved by device management vendors today. Our expertise in policy-based connectivity can fill critical gaps in the enterprise mobility market and we are formalizing partnerships in several key verticals to pursue new opportunities in this area. Our Productivity & Graphics business continues to benefit on strong retail and channel partnerships. You can now find Smith Micro software products on all 1,500 Staples stores, including ScatterShow, a user-friendly application for creating and sharing slide shows using photos on your mobile device and our newly launched Artist Bundle that contains debut versions of our Anime Studio, Manga Studio and Poser graphics products. Q3 revenue from this area of our business was up 6.5% year-over-year from 2012 and the direct portion of the business was up 30% over the same quarter last year. Manga Studio 5 continues to be the number one best seller among all graphic software products on Amazon, and we have strong marketing promotions in place as we head into the holiday season. As we charge full steam ahead in the market in November, I am reminded that a year ago we celebrated our 30th anniversary reflecting on the ups and downs of our business and the number of times we reinvented ourselves in our face of changing markets and technology waves. We've worked very hard this year to repurpose our vast array of technologies and have made great strides to right-size our expense structure while bringing new revenue streams to bear. I am confident that our hard work will pay off in 2014 and we look forward to a more stable and profitable year that can build upon the improved revenue growth in Q4 of this year. I feel very positive about our future. Operator, we can open the call for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Mike Latimore from Northland Capital. Please go ahead.

[Mike Latimore:]

Thanks a lot. Let's see, so I guess in terms of fourth quarter sequential growth, what are the core sources of kind of sequential growth you might see in the fourth quarter from a revenue standpoint?

[Bill Smith:]

Yes, as we sit here today, we have already booked a pretty substantial growth over Q3. We are not to the profitability number yet, but we know exactly how to get there. We just have to execute at this point. We are going to see some pretty strong growth in revenues coming out of a very strategic chip manufacturer in Q4 and we will see some continued recovery and probably our largest customer is, they are now coming out of their merger period. So that’s really the drivers for the return to profitability for Q4 and our growth going forward into 2014.

[Mike Latimore:]

And what's the percent of revenue came from your top two customers in the September quarter?

[Andy Schmidt:]

Hey Mike. We just had Sprint as a 10% customer and they are 61.5%.

[Mike Latimore:]

Okay. And the -- what's the revenue opportunity at this cable company in Mexico?

[Bill Smith:]

This is just the first step in that particular business relationship. So I really don’t want to go into the detail of that as yet. We’ll talk more about it after we can actually discuss who it is and take it from there, but it's a meaningful transaction for us going forward.

[Mike Latimore:]

Okay. Thank you.

[Operator:]

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

[Charlie Anderson:]

Yes good afternoon. Thanks for taking my questions. I wondered if you could help me by segmenting out in the quarter some of the revenue in the wireless division, CommSuite being one, the connection manager being one, NetWise, just any sort of a mix to give us a feel for that and then the trajectory of each of those into Q4 might be helpful.

[Andy Schmidt:]

Sure Charlie. This is Andy. So let’s go through the kind of as we have in the past. Our legacy connectivity products as well as kind of some [offshore quoted] about $1.5 million for the period. Our CommSuite, about $4.7 million, NetWise about $500,000 and then we have other types of mixed technologies to our enterprise channels and so on and so forth of about $460. And you know, as Bill was alluding to in his prepared remarks and so on is when he looked to Q4, our net technologies are really starting to take hold and there is going to be different customers that we look forward to announcing in our Q4 that as you work with us for quite some time, we can’t announce them until we get approval to. But, it's been kind of a long road working with the new technologies and I think we are getting a good foothold on our go-to-market tactical approach with these technologies and it's going to start bearing fruit. As Bill said, we expect a recovery here in Q4 in revenues and that combined with our improved expense base should be again a good signal for everyone that we are getting this show back on the road.

[Bill Smith:]

I can add that if you like and just say that while we've seen very consistent growth on the CommSuite side, I think you should expect Q4 and beyond to see some fairly strong growth on the NetWise side. Deals are in place or getting finished at the present time that give me great comfort in saying that the NetWise product is about to take hold.

[Charlie Anderson:]

Great, and then on the core connection manager, is that sort of in some sort of path down to zero eventually, I mean you were so running at sort of a headwind down that or does it flatten out at some point?

[Bill Smith:]

Well, there is two ways of looking at the USB business is definitely a trail down to zero, in which case, we still support our customers that had business clients that had needs and will continue to do so definitely. However, there are offshoots that Carla can speak to that show where we do have opportunity that it's not a market that completely goes to zero and I would like it to device management over their update type software that’s been out for quite some time, but still has foothold and still has needs in our different new products or a standalone products.

[Carla Fitzgerald:]

Yes, absolutely. When you look at different vertical markets, some of them are at different stages and the evolution to new platforms until one example of that is public safety for example where there is a lot of Windows based devices that are still being used out in public safety vehicles as well as carried by field agents in that industry and so they still need basic connectivity, they need secure connectivity and they are starting to need the ability to automate some of that connectivity to secure WiFi etcetera. So all of our [equipment] capabilities are still applicable in markets like that where secure connectivity that has continued to utilize Windows platform even as they start to adopt new form factors. There are still some long shelf life over there with the Windows connectivity we've offered.

[Bill Smith:]

Let me add one thing to that line of product as well and that is that it's very difficult and clearly we've gone through some challenging quarters in the last few years that are driven by the fact that we had a very strong legacy business that was paving the way and the good news, there is a good news to this and that is that, that business is pretty much gone and so we don’t have to constantly sell new stuff to fill the hole because we are not going to have a hold to fill. We know it now goes back up on top. And so from my perspective, the most difficult times are behind us. Now starts the [final] trying to move ourselves back out and get ourselves to a meaning market cap and I think this company really deserves.

[Charlie Anderson:]

Thank you for that detail. So the chip related revenue, is that a onetime sort of front end license or is that a tied to units and we will see that actually grow over time?

[Bill Smith:]

This has been actually a series of deals and so the most positive aspect is it's not a single deal, it's been multiple and numerous deals that actually show the strength and these deals are building and building. So it's not a one type shot. It's actually very encouraging to us just based on the numerous deals and actually they are fairly broad in their application as far as what we are doing for this industry.

[Charlie Anderson:]

Got you and then just one last one for me, on the CommSuite side, I think it's primarily been at Sprint and you are basically riding the attach rate of visual voice mail, have you been able to broaden that out to any other carriers and where do you stay on the pipeline for that?

[Carla Fitzgerald:]

We do have some opportunities in play now. There are ways that we are looking at extending that technology over the top and as Bill talked about the supportive RCS types of messaging services will allow us to get engaged with some other customers on initiatives that don’t have to tied to voicemail. So that is something that opens more doors for us as well.

[Bill Smith:]

Yeah I think another way to think about that is that for many carriers, may be even most carriers around the world, voicemail, visual voicemail is just viewed as the cost. It's the cost that they have to put up with because that’s the business they are in. In the case of Sprint, it's viewed as a profit center. We make money for Sprint. The more money we make for Sprint, the more money we make for us. That message is getting out there and carriers are now coming to us and saying okay, exactly how does this work? And I think this is all part of the recovery that we see ongoing. We are looking at recovery on the NetWise side with some meaningful growth. We are looking for growth in the CommSuite area as well. And there is some plays on the connectivity front that just aren’t the old traditional plays and not necessarily PC based applications. They are applications that are found in devices, in modules and in silicon and it's really just taking sort of our core strengths and repositioning them to a new market and a market that has significant upside.

[Charlie Anderson:]

Thanks so much for taking my questions.

[Operator:]

(Operator instructions) Our next question comes from the line of Rich Valera with Needham & Company. Please go ahead.

[Rich Valera:]

Yes, thank you. I was wondering if you could give little more color on the chip related business you are expecting in 4Q? You gave some color on your in prepared remarks, but if you could just kind of go over a couple of different opportunities you have there on the chip related software side. That would be great.

[Carla Fitzgerald:]

Part of what we are doing Rich is taking components that are associated with connectivity and security and we are helping the industry to kind of move those down the stack. So we've seen for a while now that the way applications are evolving is they are either moving over the top of some capability to moving down the stack built into the devices and so we are providing some of the connectivity and security components down the stack that will allow devices to ship with standard based capabilities already built in at the chip level, but what those will still require as those devices will allow whether it's an M2M form factor, into handsets, into other types of tablets etcetera they will still require management and so basically you can think of these devices as now having manageability built in, but they are still going to require management. So as we use our components to make these devices manageable by default built in management and standard capability, we are going to be able to take advantage of that by having management policy available whether it's to operators, to vertical markets and M2M, to enterprises etcetera to new now use our policy capabilities to provide the policy management on top of those devices and their applicability will be broader because it's now built into the chip.

[Bill Smith:]

I can add it's probably fairly reasonable to expect that the silicon customer will cross over the 10% barrier for Q4, so this is meaningful business.

[Rich Valera:]

And just in terms of the specific technology, I think you mentioned MBIM, is that -- and what else you mentioned I think something else as well.

[Carla Fitzgerald:]

Yes it's WISPr. So MBIM is a Microsoft standard for broadband connectivity that we actually worked on with Microsoft and other companies as part of the USB implementer’s forum organization and it allows broadband connectivity to be standard across multiple operating systems. So that is connectivity components that we are providing for broadband connectivity and the other area was called WISPr and it allows for authenticated roaming across the different network types and so we are helping to take those components and make them available into the chipset as well.

[Rich Valera:]

Great. That’s helpful. And then Andy just wondering how you are thinking about cash usage in the fourth quarter and beyond if you are willing to venture that for.

[Andy Schmidt:]

Well, sure I mean the part that probably needs a little bit of clarification is you know we had a -- we showed a $5.6 million restructuring charge and as I mentioned we see how approximately $1.7 million in cash use to support that. We've seen the majority of that cash hit already, hitting in Q3 and what we will see in Q4 will be a lot less because it's more facilities based run rate to facilities as we look to really certain space and what not and those efforts are going very well and are very expedited of course. So that we won’t see a big drain from restructuring on cash. Basically it's going to mirror our operating profit or loss and as you know we are pushing very hard to be profitable in Q4, which means that either we are breakeven, but if we are not, it's not going to be a big cash burn and so I think probably the most fundamental communication really at this time is for the restructuring efforts that we've actually put in place combined with these improved revenue metrics that we've been alluding to. The cash burn if any is going to come way down and so starting with $18 million, September 30, and we look forward, we've taken big steps to mitigate that risk.

[Rich Valera:]

Sure, and I guess the remainder of that $5.6 million, it sounds like it was about $3 million left of that, is that expected to hit in the first part of '14?

[Andy Schmidt:]

Well, again not all of it will be cash based. So part of it is, we are writing off assets, writing off leaseholds improve and so on and so forth and we are writing off the complete leases. In some cases we may have had a 10-year lease where we are choosing to write off based on assumptions and just like any other restructuring reserve we can come in favorable. We are doing our best to be prudent make sure that we have enough reserved and based on our best estimates of course, but we don’t want to miss the wrong way. We want to make sure we cover all the risks.

[Rich Valera:]

Great. That’s helpful. All right. Thank you.

[Operator:]

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

[Howard Smith:]

Yes. Good afternoon and thank you for taking my questions. I wanted to just check if my thinking is right regarding CommSuite. I think of that as a more regular recurring type revenue where the other parts of the wireless business depend on kind of attach rates of devices being sold through, am I thinking about that right?

[Carla Fitzgerald:]

Yes. CommSuite is really focused on providing recurring revenue through the purchase either of what the monthly subscription to [us] premium service, but it also has additional revenue options such as advertising components where we can revenue share on advertising out to the handset and being able to do such things like purchase content from within an application, things that we've talked about in the past like Avatar message components where I can create Avatars or send them to peers etcetera. So there is different ways to monetize through CommSuite and that’s one of the reasons why we are excited about it's potential opening up, particularly with their rich communication services because while in the past, it had been part of kind of the voicemail application and to [fixed] sending voice related features. Now it can be managing and monetizing non-voicemail related features. So in other types of messaging, video services, things that involve VoIP, Voice over LTE as well, so there is a number of ways to use the complete platform to monetize different types of messaging applications and our business models are intended to drive recurring revenue out of that.

[Howard Smith:]

Right. And so that being the case and that’s a significant part of the business, historically in wireless there has been some seasonality and I know a lot of things are being shuffled around here, it's tough to kind of gauge as things ramp and otherwise, but do you feel that it looks like you are going to have some nice sequential pick up in Q4, but from a seasonal perspective as we look beyond that, how do you think that might shape as we go into 2014?

[Bill Smith:]

Howard because the revenue coming out of CommSuite is a recurring model, there may be seasonality as to how many new handsets are sold by a given carrier, but in the macro picture, they have a set number of end users that are using their service and because we are on every android and now Windows 8 phone, that’s out there, whether it's a new phone or a phone that’s been in service for a year or two, we are still gaining revenue and so…

[Howard Smith:]

Right now, I know for CommSuite I just meant on some of the non-CommSuite, how seasonal that might be?

[Bill Smith:]

Well, you can’t see some seasonal impact in the NetWise thought because that requires new devices to enter the market, but there is none in the CommSuite.

[Andy Schmidt:]

Sure and Howard let me just add one more part to NetWise. What's been interesting to me is that when you look at the evolution that Smith Micro back in the faxmodem days, we sold technology to a specific industry. Connectivity we are selling to carriers and as we've been talking, we are finding different types of large OEMs and infrastructure players that are very significant to the whole wireless ecosystem that actually are interested in our NetWise product. As we look forward in that area, again it may not be subject to seasonality, it's going to be more subject to rollout as far as catching up. So as far as everything that’s been deployed and where they are going in the future, we are just starting with them. So you are in that beginning part of deployment, so that you wouldn’t see seasonality till you get more mature. So I mean the key takeaway is it's taken us a couple of years here to find really what the best market is for this new technology and I think we are finding it.

[Howard Smith:]

Right. Changing topic just for a second to P&G, first a housekeeping and then may be a follow-up, FastSpring was a significant customer last quarter, what's the revenue recognition for that channel? Is it on sell-through or is there some type of sell-in?

[Bill Smith:]

You are kind of catching me on the [stamp here] fast.

[Howard Smith:]

I will follow-up separately on that. It's a disclosure and a filing. So let me just ask a broader question. Is there anything as relates to P&G? You talked about some of the reasons why some good things that were happening and some products that were up, it did decline some sequentially, I am just curious where is the weakness there at least on a sequential basis?

[Bill Smith:]

Sure, well let me just start with that. Keep in mind that the P&G side is primarily internet sales if you will, let's call it 70% plus and we have a lesser exposure to the big box sales. Those products basically or that business revolves around product releases and there are specific releases at different times of the year that, that will drive quarterly sales. And we've done our best basically to actually pace and phase those depending on product so that we can mitigate seasonality, but the existing products, the business one time was larger, it's down now at a particular size that’s sustainable and it's basically riding key [market] products that have good following and expect to have a good following and a go forward. So once again that’s a business that’s -- right size let's call it that way, but it looks very strong as far as stability and again the [market] products have nowhere to go, but a good stability or even better. They have very strong following.

[Howard Smith:]

Great. Thank you. That’s it for me.

[Operator:]

Thank you. And at this time, we have no further questions. I would like to turn the conference back over to Mr. Todd Kehrli for any closing remarks.

[Todd Kehrli:]

Thank you, operator. I would like to thank everybody for joining us today. We look forward to updating you on our progress over the coming months and of course if you have any other questions, feel free to call MRK and we'll be happy to answer your questions. This concludes our call.

[Operator:]

Ladies and gentlemen, this does conclude Smith Micro Software's third quarter 2013 financial results conference call. Thank you for your participation. You may now disconnect.