So, basically what it's telling you to do is add in the 3.44 gallons to hit whatever mash temperature you are looking for, and that will be the only water in there for the actual mash. The mash out step is Beersmith having you add x amount of water at x temperature to bring the temperature in the mash tun up to about 168 degrees. This is the temperature that is generally considered best for sparging (draining the mash tun of that sweet, sweet nectar).
Fly sparging is a sparging process where you slowly drain the wort from the bottom of your mash tun while simultaneously slowly adding water into the top of your mash tun, so that the water level never really decreases. I would suggest reading into fly sparging your own. It requires some extra equipment. So all of that water isn't in the tun at the same time, and you don't actually collect all of that for your boil kettle, so that's why it seems like too much water.
Instead of fly sparging, a lot of people batch sparge (which I'm going to assume is what you either do or are looking to do). Again, a quick search will tell you about batch sparging if you aren't already familiar. You just need to change a couple of settings in Beersmith for it to calculate batch sparging for you. When your'e in your recipe, click on the Mash tab then under "Mash Profile" you just need to change your mash type. If you have "Single Infusion, Medium Body" selected, for example, just change it to "Single Infusion, Medium Body, Batch Sparge" and it will switch you to batch sparge. I would also recommend clicking the little check mark to the right of that, and under "Batch Sparge Options" checking "Drain mash tun before sparging"
Hope that helps.
