PCTEL Inc (PCTI) 2002 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the fourth quarter and 2002 earnings call for PCTEL. At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation.

I will now turn the conference over to Mr. Marty Singer, PCTEL's CEO and Chairman. Please go ahead, Mr. Singer.

Thank you. Good afternoon, everyone. I'm Marty Singer, Chairman and Chief Executive Officer of PCTEL. On behind of PCTEL, we thank you for joining us on our earnings call for the fourth quarter. In this call, we will address the financial results of the quarter and the outlook for PCTEL in the first quarter of 2003.

Joining me today is John Schoen, Chief Operating Officer and Chief Financial Officer. John will take you to our financial performance for the fourth quarter, as well as limited financial guidance for the first quarter of 2003. After he finishes, I will then discuss the state of the business, including significant events that transpired during the fourth quarter. John?

Hello, everyone. Before I begin my financial review of the company, I will read the Safe Harbor statement. During this call, Marty Singer and I will discuss PCTEL's business, and in doing so, some of our statements may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to some significant risks and uncertainties; in particular, the statements concerning our future financial performance, our ability to improve the performance of our modem business, our ability to manage channel inventory, our ability to improve return on investment on our intellectual property, our expectations regarding our 802.11 product, the expected benefits associated with consolidating WiFi development and the closure of our Belgrade operations, and our ability to successfully invest in businesses that will support our wireless business, are forward-looking statements within the meaning of the Safe Harbor.

Actual results may differ materially from those projected as a result of risks. Some of these risks include the economic recovery and associated PC demand; our ability to forecast customer demand in this environment, the cyclical nature of the semi-conductor and PC industries, the demand for the market acceptance for new, alternative Internet access devices; the ability to successfully address the costs of our modem products, competitive risks, including, but not limited to, competitive pricing pressures, the ability to successfully develop and grow our wireless products business, the ability to develop and implement new technologies and to obtain the protection of the related intellectual property, and the risks associated with potential acquisitions.

Operating and financial results can also be affected by market conditions resulting in revenues deviating from projections, increased operating expenses, additions to reserve positions, lower gross margins, and higher working capital ratios. Our litigation expenses are dependent on a number of factors, not all of which are within the company's control. These as well as other risks and uncertainties including, but not limited to those detailed from time to time in our SEC filings, can affect results. These forward-looking statements are made only as of today and we disclaim any obligation to update or revise the information contained in any forward-looking statement.

This concludes the Safe Harbor statement, and now I will continue with the financial review.

First, let's start with revenue. PCTEL's revenue is a combination of product and licensing revenue. The product revenue is related to the sale of modems and wireless LAN products. The licensing revenue is related to royalties associated with our patent portfolio, and software license revenue related to the use of our modem software under license.

Fourth quarter total revenue was $16.3m, up 30 percent from the third quarter and 117 percent from the fourth quarter of last year. Of that number, product revenue was up sequentially $4m, to $15.3m, and included $0.1m of wireless product revenue. Licensing revenue was down $0.3m to $1m. The sequential increase in product revenue was driven by strong orders from two of our major customers, combined with a fourth quarter seasonal increase in PC manufacturing. The sequential decrease in licensing revenue was due to the third quarter containing upfront payments from several licensees related to the delivery of embedded modem software code.

The company continues to enjoy an expanded revenue base. During the fourth quarter, our largest customer accounted for 37 percent of revenue. We have six customers who, in the aggregate, accounted for approximately 82 of revenue in the quarter. This compares to last year, in which a single customer accounted for 47 percent of the company's business on an annual basis. We continue to offer limited guidance with respect to revenue. Based on our market inputs, we are projecting a seasonal decrease from the fourth quarter, down to a level between $11.5m and $12.5m, depending on the PC sell-through achieved by our customers for the units they placed into their channels for Christmas and the Chinese New Year.

Now, let's move on to gross margins. Fourth quarter gross margin was 53 percent of total revenue, and included a $1.9m recovery of excess inventory reserves, which were originally established in the third quarter of last year. This compares to 71 percent in the third quarter, which included a $3.8m recovery of excess inventory reserves, and a year ago, a 70 percent gross margin which included a $2.9m accounts receivable reserve recovery. When stated without inventory reserve recovery, normalized fourth quarter gross margin was 41 percent, compared to the 40 percent achieved in the third quarter. The slight increase in percentage was attributable to the leverage of fixed costs over a larger sales base, more than offsetting a larger mix of lower margin products shipped to Taiwanese motherboard manufacturers during the quarter.

Looking forward to the first quarter, we anticipate some erosion in gross margin percent, as our sales into the Taiwanese motherboard channel will remain relatively high, but on a seasonally lower volume than the fourth quarter. Gross margins should be between 35 and 39 percent.

Operating expenses. Now, I would like to address our cost structure. Total operating expenses were $6.6m in the fourth quarter. Op ex increased $0.7m from the third quarter, due to events unique to the fourth quarter, which included costs associated with the exit of our building lease in Milpitas, and costs associated with the start-up of our corporate office in Chicago. Operating expenses were down significantly from the fourth quarter of 2001. Last year, charges reflecting goodwill impairment, restructuring, and the amortization of goodwill, totaled $2.8m. Additionally, we reduced all our operating expenses from $9.9m to $6.5m in this period-to-period comparison.

The company began shifting resources from modem products to our new 802.11 products in the second quarter of this year. Costs directly attributable to our 802.11 product investments were $0.9m in the second quarter, $1.4m in the third quarter, and $1.5m in the fourth quarter. The investment in 802.11 products will continue to grow in the first quarter. We expect total op ex costs to be approximately $6m in the first quarter.

Interest income generated from investments was $0.6m in the fourth quarter, compared with $1.3m a year ago, and $0.6m in the third quarter of this year. The amount per quarter is expected to decline over time, should interest rates stay at current levels or decline further. First quarter interest income is expected between $0.5m and $0.6m.

Net income for the quarter was $2.6m. This compares to net income of $3.2 in the third quarter, and a loss of $6.1m a year ago. The slight decrease in sequential quarter earnings reflects the increase in gross margin of $1.7m on higher revenue, offset by a lower benefit from inventory reserve recoveries than in the prior quarter, and the higher op ex costs previously described. The rise in earnings from last year reflects increased gross margin and higher revenue, the benefit of a higher inventory recovery, the reduction in ongoing op ex costs, and the absence of charges and amortization related to goodwill impairment and restructuring.

Now, let's move on to our balance sheet. Cash and short-term investments ended the fourth quarter at $111.7m, compared to $112.2m last quarter, and $125.6m a year ago. During the quarter, the company used $4.5m of cash to repurchase shares of the company's stock, pursuant to a stock buy-back program announced in August. There were 650,000 shares repurchased during the quarter, and an average price of $6.99 per share. The cash flow results in the quarter also included a $2.2m federal income tax refund related to a loss carry-back refund recently filed. The decrease in cash from last year is primarily attributable to the $14.3m licensing agreement paid in the first quarter of this year. The company continues to have no debt.

That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thanks, John, and thanks for a good job over the past year. I'm only going to address a few issues before I open up the conference call to questions.

We're pleased that PCTEL continues to demonstrate progress on many fronts. Our revenue growth suggests that we have gained market share in our HSP modem business; in particular, the MDC or modem daughter card notebook market. Our earnings suggest that we are effectively managing our costs as well.

There were a few fourth quarter sales events worth noting. For one, we booked our first revenue from WiFi-related sales. These sales were to a maritime telecommunications network who services the cruiseline industry. We also continue to restore our business in Taiwan, in particular, TCS. Finally, we shipped our MDC product onto another notebook platform. We were extremely pleased that our product's quality warranted this additional business.

We have accomplished this while maintaining focus on organization effectiveness. Our key measure, revenue per head count, reflects this. On an annual basis, we have increased revenue per head count from $277,000 per employee to $456,000 per employee. Comparing fourth quarter results, we improved to $609,000 per employee from $250,00 per employee in the fourth quarter of 2001. As John mentioned earlier, our operating expenses and head count increased slightly during the fourth quarter, and he explained the reasons for that, and we can go into those reasons in more detail when you have an opportunity to ask questions.

We will continue, however, to manage costs downward going forward. We have consolidated all WiFi development in Chicago and Milpitas, and as a result, closed our Belgrade operation this month. You may recall that the Belgrade operation came with our acquisition of the assets of CyberPIXIE. With additional reductions in staff, primarily administrative, our head count should climb from 111 to less than 100 during the first quarter.

While our confidence has grown in our ability to build PCTEL's business in our current and new product areas, we do see some challenges ahead. As you all know, the modem business is fiercely competitive. That competition will continue, and we anticipate further price erosion. A second challenge pertains to the pace at which cellular carriers deploy WiFi networks. We believe, however, that they must participate in the WiFi market, in order for it to be successful.

Finally, we recognize that our investors are impatient for PCTEL to consummate additional acquisitions. I am focusing my efforts on this, and believe we are making significant progress in the acquisition area in the wireless space. I hope to be able to report more specifics as they develop.

These challenges aside, however, we have an exciting year ahead of us. We have a modem product roadmap that will result in cost and size reduction; a WiFi roadmap that addresses pocket PC's, user interface requirements, and cost of ownership issues, and we are launching a wireless utilities product sweep that will improve the user's experience.

Finally, we are pleased with the management of our interest intellectual property. As we have stated in the past, we strongly believe that our intellectual property represents a valuable asset. We have extensive work on claim charts this part quarter that suggest that several major competitors might be interested in taking a royalty-bearing license under our patents. This is true for both our formidable ITU essential patents, as well as our non-essential patents. At this time, we are conducting active discussions with several parties. We have increased our resources, focused on licensing, and continue to pursue our interests in this area.

Additionally, since our last call, I am pleased to report that PCTEL has been granted one new patent that pertains to HSP signal communications systems, and directly relates to our [software] [phonetic] business. We also filed two new applications.

As we said last quarter, the management team believes in a simple formula for our future. One, continue to force efficiencies in our HSP modem business. Two, realize the full commercial value of our intellectual property. Three, aggressively develop and distribute software products that enable the rapid growth and utilization of WiFi networks. And four, successfully integrate, through acquisition, new businesses that support our wireless initiative.

That concludes our review of PCTEL. With that, our team is ready to answer your questions.

Thank you, Mr. Singer. The question and answer will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press *, 1 on your pushbutton telephone at this time. If you'd like to withdraw your question, please press *,2. Your questions will be taken in the order they are received. Please stand by for your first question.

Our first question comes from Doug Whitman with Whitman Capital. Please state your question.

Thank you. Congratulations on a great quarter, guys. If you could maybe talk a little bit – I was trying to work way back through what free cash flow was this quarter, if you exclude your stock repurchase and other unusual items from operations – what would the cash flow? And then also, the receivable days are exceptionally low. Does that talk about linearity, or just that you have an incredible CFO?

Well, cash flow from operations were $4.3m in the quarter. And as far as accounts receivable, it's pretty much an even flow of sales. We're at 30 days. And as I recall, of the $5.5m of net receivables, we've already collected $3.3m of it through yesterday. So our receivables are in pretty good shape. And once again, the model we've got of linear sales and only accepting orders for what our customers need to get their current month's shipments out continues to yield a really tight balance sheet for us.

Doug, thanks for the question. We do have an incredible CFO. One of the things that both John and Les Sgnilek, our VP of Finance, have done, is really imposed a lot of discipline on how we do business for some of our overseas customers. And it really has helped reduce our accounts receivable.

And the last question would be, if you could talk a little bit – the modem market historically, your traditional business, has been very price competitive. Are you seeing it become more or less or staying about the same? As far as from what you're seeing from competitors to win business?

There's no question that it's becoming increasingly competitive. We have had to take some price actions over the last quarter, and we anticipate taking additional price action as we move forward, and that would place some pressure on gross margins. On the other hand, we feel that we're actively taking share in certain areas, and that the growth in our gross margin through our newer businesses should offset that trend.

Great. Thank you. And congratulations on a great turnaround.

Thank you.

Thank you. Our next question comes from [Susan Calla from FBR] [phonetic]. Please state your question.

Congratulations on a great quarter. It's refreshing to hear someone have such a resounding quarter in this market. Wow, that was really a very, very strong performance.

Thanks, Susan.

Could you give us an update on the progress of wireless and what you anticipate the outlook to be there? And also, I know you gave us some insight into op ex for next year, but that was a very, very good improvement, and I wondered if you could give us an idea on how to model going forward.

Okay. Thanks for the question, and thanks for the kind comments. With respect to wireless, as we stated, we booked actually our first revenue on the [MTN] [phonetic] sale of our equipment into the cruiseline industry. We anticipate that that particular channel will grow during this year. In addition, we have our products not only been evaluated and under consideration at the wireless carriers, who we believe will really promote this business, but at PC vendors, network interface, card vendors, system aggregators, and various 802.11 WISP's. We believe that we're going to see some slight increase in revenue in the first quarter, some additional in the second quarter, and we're looking for real traction by the third quarter in the wireless arena.

And as I said -- and I'm not going to pre-announce any products – we have an exciting road map in this area that we'll be unveiling over the next sixty days. With respect to op ex, there was a lot of low-hanging fruit for us to take advantage of in lowering our operating costs over this year. For example, we had extraordinarily high legal bills in 2001, which we were able to bring under control. We had high consulting fees related to the company trying to sort out exactly what it wanted to do to respond to some of the challenges in 2001. We had very high administrative and management expenses. I think we reduced the number of VP's, or we exited 9 VP's over the year. And then we looked for opportunities to consolidate facilities and to eliminate certain non-productive areas of the company. And finally, we simplified some of our relationships with resellers of our software that generated revenue without an underlying expense.

Going forward, we're now at a level that's a little bit higher than we want to be, at $6.6m. And we believe in the first quarter, as we complete our transition to the Chicago office, we'll be reducing the duplication in our finance team. We've had to overlap those teams to ensure there's continuity and seamless transfer of much-needed competency in this area. We'll start to see the benefit of closing the Belgrade office, the development office that we had as part of the acquisition of assets of CyberPIXIE. We'll start to see some benefit for the consolidation of our offices in Taiwan. And then we believe that there will be a reduction in other recurring expenses.

Having said that, our goal is to have a steady state now for this core business of about $6m per quarter. And it's not that we're not continuing our efforts to eliminate all unnecessary costs. It is that as we're able to make some of our processes more efficient in the HSP modem arena, we will move those resources into wireless.

One last thing, Susan, that was key in the reduction of operating expenses, and I'd be really remiss if I didn't mention it. When we stepped in over a year ago, into PCTEL, we had 7 different modem drivers with 83 different releases per quarter. Through the efforts of Jeff Miller and Biju Nair and Gary [Wom] [phonetic], our core team in this area, we were able to reduce the number of drivers to 2. It is going to 1 in this quarter, and we've reduced the number of quarterly releases to 16, and will continue to manage that down. Having done that, we were able to take significant resources off of our legacy product line, because the code and the process became much easier to manage.

Does that answer the question?

Excellent. Thank you.

Okay, thanks a lot.

Thank you. Your next question comes from [Mark Ellston] [phonetic], with Morgan Stanley. Please state your question.

Good afternoon. Inventories and the balance sheet look quite well, but I wonder if you could just give us a view as to what the level of inventories are like on previously written-down product. And what period of time do you expect to be able to use that over at this point?

There's approximately, we believe, to be about $1.8m of written-down inventory that will be consumed over the first half of 2003. I would expect it would be pretty evenly consumed. And then we are – to date, we've been able to sell that inventory in non-marked-down price situations at normal selling prices.

And can you just give us a sense as to what the complexion of that inventory is? Is that all raw materials? Or are there some finished goods in there as well?

It's chips.

And it's primarily from silicon labs.

Great. Thank you very much.

Thank you. Our next question comes from Anton Wahlman with Needham & Company. Please state your question.

Hey, there, John and Marty, can you hear me?

We sure can. Hi, Anton, thanks for joining.

All righty. First, the b-hounder question here, in the limited amount of minutes I had to string this together. Basically, if you peel out the benefit from the inventory recovery, could you get to what the real pro forma number would have been. So I'm on the same page with you guys, I have a number here – I just want to make sure it corresponds with what you have.

Okay. In the model that I saw, that you use, I think the pro forma number is about $1.050m, because what you do is, you pull out the reserve number. And then as I also recall, you exclude deferred compensation and amortization of goodwill. And when you pull those three numbers out, it was about $1m, a little over a million dollars, in net income.

Okay. All right. Good enough for that part. Marty – I think, you mentioned that you had won an MDC win with, quote, another notebook platform. What does that mean? Does that mean that it's actually a new customer, or a new platform that was already within the framework of an existing customer? What does that signify?

What that means is that our customers will have different platforms for consumer or for commercial markets, or they may have a low end and a high end. So within one customer, we were qualified and then put onto a new platform. It is as significant, in my mind, to doing it at a new customer.

And you did only one of them in the fourth quarter, so, you know --

We did one additional platform in the fourth quarter.

But no new customer as such.

Correct.

Okay. So there's like – the equivalent of a Dell Latitude versus Infera and their equivalents.

That's the concept, right.

Okay. All right. In terms of the distribution/slash/sales and marketing strategy for the WiFi products, in particular the clients, but for that matter, the two hardware infrastructure products as well – what resources do you believe, manpower-wise and otherwise, do you think you need to devote to that? In the sense that you now have a product, there are a lot of players that are gunning for this space in one format or another; we're still in the Wild West; nobody has much clue of where this whole things will shake out. Kind of if you run faster in the beginning, maybe you could get there first. Do you have enough people, do you have enough channel resources, whatever, to go to where you want? Or what is your level of plan and satisfaction in that regard?

Well, I think that we will be making some investment in distribution over the next six months and, indeed, over the next 90 days. But that investment will come out at the expense of existing op ex for the most part. We still think there are efficiencies for us to gain in some of our existing operations.

With respect to specifics, we see the distribution issue as crucial and you are quite right to point that out as an important challenge. If you look at our opportunities, first and foremost, we have to be effective with the wireless carriers. They really are the entity that can move the WiFi market most rapidly. And we have a sales team calling on all of the carriers within the U.S.; we have people calling on the carriers in Japan and in Europe and elsewhere, and we'll continue those efforts. In addition, from a business development point and sales, there are people calling on a network interface card vendors.

One of the key characteristics of our product and our approach to this, is we are really without an ego. We don't need to brand this as ours when it appears on a PCM/CIA card. Or when it appears on a pocket PC, or when it appears on a notebook, or it appears as part of some airtime aggregator's package. So we want to be able to sell our client software into the network interface card vendors, the PC vendors, the aggregators, as something that they can brand and label as their own. One of the characteristics of our product is that it comes with a skinning engine so that it can be customized for any resellers' use.

We also are going to be opening up Internet sales of our Roaming Client software, and we think that is going to be effective as well. With respect to the infrastructure, all of those channels that I mentioned are important, but there's one other extremely important – and this has been not adequately attended to by PCTEL, and that is the value-added reseller channel. When you look at our successful sale to date, MTN, selling it at a cruiseline – they are really operating as a value-added reseller with a satellite connection to their target market, and they have expertise and focus in that area.

We are going to be putting resources on developing a buyer distribution channel, and I think that will help us quite a bit as we attempt to move our infrastructure products and WiFi.

Okay. Final question. In terms of the intellectual property you mentioned, on the HSP side, you know, Conexant – they have settled with Townsend as well as you. Would you say that the bigger guys left that are more exposed, or some combination of BroadCom and Agere?

Yes, and there are others as well. But I don't want to get into commenting on the potential exposures or vulnerability of our competitors.

All right. Well, that's all I have for now. Thank you.

Thanks, Anton.

Thank you. Our next question comes from Wes Cummings with B. Riley & Company. Please state your question.

Hey, Marty; hey, John.

Hey, Wes.

A couple of questions here. One on the cost of your HSP products, the soft modems. Can you actually say how much price erosion you saw during the fourth quarter?

I'd rather not comment on that. You know, we have competitors listening to this, and that's, I think, closely held information.

Okay. And then the follow-up to that is, as you try to reduce your costs of the modem going forward, the primary cost there, I'll assume, is the silicon that you're shipping with the software. What is your ability to reduce the cost of that silicon? And also your ability to work around with different vendors or maybe work to a different solution to reduce costs there?

That's a great question. And cost comes in a couple of ways. Certainly the cost of the silicon from our supplier, Silicon Labs. But we have a lot of coincidence in them, and they're doing a great job. And one of the areas that their silicon influences is what's referred to in the industry as the RBOM – the rest of the bill of material. And that bill of material is influenced a couple ways -- how many other functions can be integrated into the silicon lab's chip set, and what is the ease of assembly?

And what they are doing with us, and I think we're in a leadership position in terms of using their components, is we're coming out with a new form factor, smaller, headed for single-sided, easier for PC manufacturers to assemble and test. And there will be a lower part count that will mean higher quality. And all of those go to cost of ownership issues, as well as the reduction of the RBOM associated with this new chip set. So we do expect progress on the costs, and this is due to cooperation with Silicon Labs.

Okay. So do you expect to be able to keep your costs pretty much in line with your price erosion?

Well, that's always a challenge, and I wouldn't want to make that commitment. But clearly, what we do as a discipline here, is we look at what is referred to as an experience curve. Where we're looking at the total cumulative shipments of modems and the prices associated with that, and we look at the experience curve price reductions, and we make every effort to keep pace or perhaps even stay ahead, in some cases, with price reductions that are occurring.

I will report to you, without naming any particular customer, that we actually had a slight increase for one of our Taiwanese customers in the fourth quarter. So you know, quality, availability, responsiveness, support -- all make a difference, even in a highly commoditized market.

Okay. And on the acquisitions front, you said you're very active there on the wireless side. Can you give us an idea of what we should expect, as far as what type of wireless products? Should we still look for something in software, maybe hardware, services?

Yes, I think that I actually spoke publicly on this at the Needham Conference in the session that was hosted by Anton. And I mentioned two areas that we will continue to focus on. One, we are always looking to simplify the roaming experience for the WiFi user. And so that is an area of investigation. Secondly, we believe as the WiFi spectrum becomes more crowded, that there will be a need for planning and optimization. And we are aggressively looking at companies that have a potential play in that, and also have a foothold in the commercial cellular market, doing the same type of work. And we also believe that those type of products have other applications as well. For example, secure communications. That's what we're currently looking at.

Okay. And lastly, we keep hearing some more noise in the WiFi arena from carriers – AT&T kind of jumping in, in a bigger way recently, and we know that Team Mobile expanded their network beyond Starbucks. What are you guys seeing, when you're chasing these guys down – what kind of timeline are you expecting for them to make a decision for this type of a product that you're offering?

Well, we think decisions are going to be made this quarter, next quarter, and the third quarter, but we think in terms of traction, it won't occur until the third quarter.

Okay, but you think you'll actually get wins, you'll sign contracts in the current quarter and maybe the second quarter?

Could be.

Okay, also, who are you competing with on those accounts?

Well, we compete with people at different levels. On the infrastructure side, there's a whole host of competitors with gateways and access points and controllers. And then of course, on the client side, there will be network operators that have their own clients, and in addition, of course, the network interface card manufacturers have their own clients. And you know the names of those guys as well as we do.

I think that we're unusual in that we're really unattached to hardware in our software business, and that we have a product that is so suitable – products – to OEM reselling and bar reselling and relabeling.

Okay. Great. That's all the questions I have. Thanks.

Okay. Were you happy with the quarter, Wes?

Thank you. Our next question comes from Steve [Rudd] [phonetic] with ITE. Please state your question.

Hi. Two questions. First, I'm very impressed with your cost cutting abilities and your view of the future. I guess one thing that concerns me is basically, it feels to me like I'm investing in a $111 million dollar blind pool. And maybe could you just give me some comfort that the parameters you look for, and hurdle rates you look at, in your acquisitions.

Yes, as we have said at the Needham Conference, at the B. Riley Conference, and in other public forums, we're looking at acquisitions that we feel will be accretive. And our appetite right now is for companies that would have, let's say, between $10m and $20m of revenue and that would cost us somewhere between $5m and $20m. And we're looking at acquisitions that we feel are compatible with current management bandwidth, our current initiatives in wireless, our backgrounds in wireless and cellular and communications, and that have a reasonable cost associated with them.

Okay. I mean, it's always a good start to buy something at less than 1 times revenue, so I'll take it from there. And I apologize for not being at the Needham Conference. I only got wind of it pretty late in the day, not through any fault of theirs, but through my own.

In the area of products that you have that you would say distinguish you from competitors, I pretty much understand your Roaming Client product, and I think it's a good one. Maybe you could just give a little – maybe pick two others, and give a brief description how they really are so different from your competitors. With the WiFi, I think you're, obviously, headed in the right direction with WiFi, but it seems to me it's getting pretty crowded pretty fast. I'm just looking for two specific products where you say, 'we've got this, we've got that,' and here's how it's different from everybody else.

Okay. Is that the question, or are there any more variations of that question?

No, that's it.

It's tough to answer.

No, that's it, just exactly like that.

Okay. Well, with the WiFi, you know, what you have there is really more than just one product. We have a WiFi only, 802.11, that facilitates roaming from one WiFi network to another. But in addition to that, we have a 1XRTT and GPRS module that facilitates the access to 2.5G cellular networks. And third, we have a combined module that allows you to access, with the same piece of software, both 802.11 networks and cellular networks. And that is really a strong, distinguishing characteristic of that product.

And, as I said before, we think also a distinction between that product and others on the market is our ability to offer a skinning engine so that other people can label or design the user interface in exactly the way that they want. The two other WiFi products are our Gateway and Controller. I would recommend that you go to our website, that has a complete description of all these products, but let me just make one comment.

We recently had a sales meeting. And we were at a hotel. And we took our Gateway with an access point, and put it down in the room, and connected it to an Ethernet connection in the hotel, and with our Controller back in Chicago – and we were far, far away -- we were instantly up. And if we had wanted to, we could have billed that session. So what we have is a controller that can be partitioned by multiple buyers or multiple networks into hundreds of networks, and with the simple purchase – and really, the cost of ownership is extremely low – of our Gateway product, the buyer or distributor can instantly set up a hotspot using a centrally located controller to initiate service immediately.

We believe that that's a distinguishing characteristic, and there are several capabilities embedded in the combination of our Gateway and our Client that are unique. For example, our ability to have this IP proxy or IP Anywhere characteristic, so that you're immediately able to secure an IP address. No matter what your enterprise IT manager may have done to your PC. So I think that's a sufficient description. And again, we're happy to send you product literature, or -- you know, if you can't get sufficient information off the web.

Okay. I appreciate that. Marty, just sticking for a second with the Gateway and Controller, and the question really goes to, basically, the lack of my knowledge base, so forgive me if I'm going over something that's second nature to you – but is there anybody else who's offering that particular product? Not necessarily exactly as you described it, but close to it?

Yes, there's different functional partitioning from the different vendors. So it's hard to do an exact A, B, comparison between the vendors here.

Okay. What I was trying to get at is, we've got some things that we've combined in such a way that others really don't have it yet. And it sounds like yes.

I believe we do, in particular what we're able to do with IP addressing is unique in our constellation. With that, I'd like to see if there are other questions.

Sure. Thank you.

Thank you.

Thank you. Our next question comes from Stan [Turling] [phonetic] with UBS. Please state your question.

Hi, guys.

Hey, Stan, how are you?

Very good. You guys don't disappoint. Is there any way to track the growth of 802.11 hotspots?

You know, right now I have not seen a report like you see on RCR Wireless on the number of cellular subscribers. But you do get specialized report with the number of hotspots.

If you look at silicon shipments for the appropriate 802.11 gear, you can get an idea.

Okay. Now, that should be a leading indicator of what type of traction you should have. Is that a --

Yes, and right now I think the numbers are still pretty low. And as I said in the prepared remarks, we think that 802.11 still has been slow to deploy, partially due to the reluctance of some of the wireless carriers to hop in aggressively to this market. We think that's going to change. We also think, Stan, that there are some other trends which are going to facilitate the growth here. And we do see a sharp growth occurring. One is – and you're already starting to see it – the combination of gateways and routers, which reduce the cost of ownership. You're also starting to see a so-called soft access point; the ability to take away some of the hardware in this configuration. And as the costs go down, we believe that you're going to see 802.11 grow more rapidly.

One of the hurdles that people still have to get over, I think, is the cost of connection into the CS-10 or CS-N. You know, the back-call costs are troubling to some of the service providers.

And finally, as you start to see the transition from B to A to G, and the higher bandwidth, we think that 802.11 will do a little better.

Okay, thank you. And you had mentioned that you think the traction will be larger in the third and fourth quarter. Is there any way you'd care to quantify that at all?

No.

I didn't think so. Thanks.

Okay.

Our next question comes from Ted Morrow with RW. Baird. Please state your question.

Hi, Marty.

Hey, Ted, how are you?

Last but not least. Since it's the first time on my call, I'm just going to ask kind of a macro question. But is there anything going on, on the regulatory side, and at the FCC that will help or hurt or lead to no change in several of these markets? Either on the wireless side or the broadband side? I'm speaking of some of the SEC broadband rulings; some of the spectrum decisions; maybe even a next wave spectrum issue. Anything, one way or the other, that you see that would be positive or negative for this?

Yes, I think that there are two really important events that occurred recently, that are going to help promote 802.11 growth. The first is this NextWave decision, where the Supreme Court decided that the FCC improperly took away NextWave's spectrum. There's a couple things there that are very important about that. There is no 3G that's going to occur in the United States without that spectrum, and the wireless carriers - I'm talking about the cellular carriers – having access to that. So what do they have? They have 2.5G. 2.5G is inadequate for the current data needs of mobile users. You know, if you use it, you crater the voice system and it's not at the speeds that people want. So I see that decision, and the lack of access to that spectrum, as important in that it will emphasize the need for 802.11 network cooperation with 2.5G.

And that's only one aspect of that Supreme Court decision. The other aspect of it is that all of a sudden, the wireless carriers have a lot more money. They had plunked down billions of dollars to buy that spectrum. That money was on their books, reserved for that purchase. Now that the Supreme Court has decided they can't get it, they don't have to protect that money anymore; they have money for capital spending in the areas that they perceive as potential high growth. And I believe 802.11 will be one of those areas. So I thought that was a big event.

The other thing going on with FCC, of course, is they look like they plan to give away a satellite spectrum, and make it very inexpensive. Well, these satellite connections, I think could be very effective in bridging 802.11 networks from different areas. So you can have disparate and geographically dispersed 802.11 networks, now joined by satellite. And I think you're going to see activity as a result of both of those events.

Great. What about on the broadband side, with the FCC in the wireline? That isn't as big a factor, you don't think?

Well, I think that that's already there. I mean, today, in your house or in your enterprise, you've got broadband coming into the house that's pretty inexpensive, or coming into the enterprise. And you've got 802.11 in the background. So, sure, as that goes, gets less expensive, there will be more data use of those facilities in general. But the really important element there is that as they get more expensive, the cost of back call is less, and it makes 802.11 deployment in hotspots more attractive to the various network providers.

Right. Great. Thanks for the update, Marty.

Okay. Thanks, Ted.

If there are no further questions, I'll turn the conference back to Mr. Singer to conclude.

Okay, Debbie, can I conclude?

Yes, there are no further questions, sir.

Okay. Well, first, let me thank all of you for participating and paying attention to our company. And second, I want to thank all of you for your thoughtful questions. With that, this earnings release conference is over.

Ladies and gentlemen, if you wish to access a replay for this conference call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an I.D. number of 280838. You can also log on to the company's website at www.pctel.com. Please view the Investor Relations section. This concludes our conference call for today. Thank you all for participating, and have a wonderful day. All participants may now disconnect.