UPDATE 2-Smith Micro down on concerns over acquisition costs

(Recasts; adds background, details, analyst comments; updates share movement)

By Supantha Mukherjee

BANGALORE, Feb 25 (Reuters) - Shares of Smith Micro Software Inc (SMSI.O) fell 17 percent to their lowest in more than two years on concerns that costs related to recent acquisitions by the wireless communications software developer may hit quarterly results.

An uncertain macroeconomic environment coupled with a move by Verizon Wireless to package its own music download software along with mobile phones rather than Smith Micro's music download kit have also raised worries about the company's future growth prospects.

Verizon Wireless, a venture between wireless carriers Verizon Communications (VZ.N) and Vodafone Group (VOD.L), is the largest customer for Smith Micro.

Shares of Smith Micro have plunged 62 percent since the start of 2007 as the company has posted sluggish quarterly results weighed down by mounting operating costs and made acquisitions to expand its product portfolio.

Smith Micro said in November last year it would acquire media software maker e-frontier's 3D graphics products, and in December the company agreed to buy telecommunications software and hardware maker PCTEL Inc's (PCTI.O) mobility solutions group.

J.P. Morgan Securities on Monday downgraded Smith Micro to "neutral" from "overweight," and said the company's acquisition of e-frontier's products may hit fourth-quarter margins.

The acquisition of PCTEL's mobility solutions group will not immediately add to earnings per share, J.P. Morgan said.

The recent acquisitions by the company brought an additional 75 employees, which translates to about $12 million of additional expenses for Smith Micro, Morgan Joseph analyst Kevin Dede said by phone.

Dede cut his price target on the company's stock to $11 from $20, but maintained his "buy" rating.

Smith Micro's business during 2004 and 2005 was almost completely dependent on Verizon, but the recent acquisitions should bring down that share to about 40 percent by the end of 2008, Dede said.

This signals an effort by Smith Micro to expand its customer list, he added.

The Aliso Viejo, California-based company is scheduled to report its fourth-quarter results on March 5.

Shares of the company fell to a new 52-week low of $5.33, before pulling back some of the losses to trade down about 15 percent at $5.48 in afternoon trade on Nasdaq.

The stock currently trades at about 8 time forward earnings, well below the application software sector average of more than 33. (Additional reporting by Neetha Mahadevan; Editing by Pratish Narayanan)