PCTEL Inc (PCTI) 2003 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen, to PC-TEL incorporated first quarter earnings release conference call. At this time I'd like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the company we will open up the comments for questions and answer. I will now turn the call over to Mr. Marty Singer Chairman and Chief Executive Officer. Please go ahead, sir.

Good afternoon, everybody, I'm Marty Singer chairman and Chief Executive Officer of PC-TEL. On behalf of PC-TEL we thank you for joining us. In this call we will address the financial results of the quarter and the outlook for PC-TEL in the second quarter of 2003. A great deal happened during the first quarter including our acquisition of Dynamic Telecommunications, Inc, DTI, our ability to secure a contract with (inaudible) for elements of our segway roaming client, new products and interest election actual property dispute with 3 come. We have a lot to cover in today's call. Joining me today is John Schoen Chief Financial Officer. John will take you through our financial for the first quarter as well as limited financial guidance for the second quarter. I will then comment on some of those results and turn our attention to the significant events that transpired during the first quarter and discuss our plans going forward. John.

Hello, everyone. Before I begin my financial review of the company I will read the Safe Harbor Statement. Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, ability to improve return on investment on our IP, expectations regarding our 802.11 products and integration of DTI products and our ability to successfully invest in businesses that will support 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 and uncertainties including the economic recovery, increased compression, the ability to grow our wireless products business, and obtain protection for the relate IP and the risks associated with potential acquisitions. Additional, (inaudible) is contained in our periodic FCC filings. These statements are made only as of today and we disclaim any obligation to update information to reflect subsequent events. This concludes the safe harbor statement. Now I will continue with the financial review.

Let's start with revenue. PC-TEL's revenue is a combination of product an licensing revenue. The product revenue is related to the sale of modems, wireless LAN products an software find radio products. The licensing revenue is related to royalties associated with our patent portfolio and software license revenue related to the use of our modem revenue under license. First quarter total revenue was 13.1 million dollars up 27 percent from the first quarter of last year. Of that number product revenue was up 3.3 million to 11.2 million and included zero.6 million of wire less product and software find radio revenue. Licensing revenue was down 0.5 million to 1.9 million. The increase in product revenue was driven by two factors. Last year several modem customers; particularly those in Taiwan were still working off excessive inventory through the first half of last year. As a result our business with that industry segment was down last year. The second factor pertains to the addition of wireless and software defined radio products since the first quarter of last year. At this time last year PC-TEL had no position in Wi-Fi or in software defined radio products. Conversely last year's licensing revenue was higher because of a one time settlement payment with the FCC that was reported in last year's first quarter. The company continues to enjoy a diversified customer base. During the first quarter our largest customer account for 20 percent of revenue, we have 7 customers who in the aggregate accounted for approximately 70 percent of receive new in the quarter. We continue to offer limited guidance with respect to revenue, based on our market inputs we are projecting revenue to be between 13.0 and 14.0 million for the next quarter as compared to the quarter just ended there will be a full quarter of DTI revenue offset by a seasonal decline in modem products and related licensing.

Let's move to gross margin. First quarter gross margin was 50 percent of total revenue and included a 1.3 million dollars recovery of excess inventory reserves which were originally established in the third quarter of 2001. This compares to 49 percent in the first quarter of last year which did not contain an inventory reserve recovery. When stated without inventory reserve recoveries normalized first quarter gross margin in 2003 was 40 percent compared to 49 percent achieved in the first quarter of 2002. Percentage decease is due to higher modem shipments this year, particularly into the Taiwan motherboard market. Looking forward to the second quarter we anticipate some light erosion in gross margin percent as our sales into the Taiwanese motherboard channel will remain relatively high on a modem products but on a seasonally lower normalized gross margin should be approximately 39 percent in the next quarter. There is approximately 0.4 million of the remaining inventory reserves, we expect those reserves to be completely recovered in the second quarter. Now let's move on to operating expenses. Total operating expenses were 7.9 million in the first quarter up 2.2 million from the first quarter last year. The increase is attributed primarily to a 1.1 million dollars charge for the acquired in process research and development related to the DTI acquisition. The increased sales, marketing and G an A expenses for 802.11 products and the DTI operating expenses incurred after the March 12th acquisition date. Research and development expense, although lower than last year now include our investment in 802.11 products.

Excluding the acquired in process R&D charge, on ex-was 6.8 million, up 0.2 million sequentially from the fourth quarter last year. There were some increases related to the company's intellectual company's licensing program and PC-TEL's participation in wireless industry shows. Additionally we redirected 0.4 million in modem resources to accelerate our Wi-Fi investment rather than shed the costs as we had anticipated. The company began shifting resources from modem products to our other products second quarter last year. Operating expenses in the quarter included one.9 million invested in the Wi-Fi product development and distribution which were zero in the first quarter last year. We expect total OPEX costs to be about 8.5 million in the second quarter this year. This includes 7.8 million of research and development, sales and marketing and G and A expense and 0.7 million for amortization of intangible and deferred compression. The increase in R&D sales and G and A expenses from the first quarter is related to having a full quarter of DTI and increase in legal expenses related to the expanded licensing program.

Other income. Interest income generated from investments was 0.5 million in the first quarter compared with 1.1 million a year ago. The difference is attributable to the decline in interest rate. The amount in quarter should (inaudible) interest rate stay at current level or decline further. Second quarter interest income is expected to be 0.4 million dollars. Earnings. Net loss for the quarter was 0.9 million. This compares to net income of 0 five million reduced costs in the modem operations offset by the 1.1 million dollars one time expense for acquired in process R&D related to DTI. The OPEX increases previously discussed and the 0.6 million affect of declining interest rate since last year on our investment portfolio. We now have 65 people related to modems and G and A compared to 110 in these functions at this time last year. Over half our resources support wireless initiatives at PC-TEL.

Cash and short-term investments ended the quarter at 101.1 million compared to 111.7 at the end of the fourth quarter 2002. During the first quarter the company used 3.4 million of cash to purchase 485 thousand 4 hundred shares of the company stock pursuant to a 1 million share stock buyback program announced in August 2002 and a new program announced in February 2003. The company plans to continue its share buyback. To date the company has repurchased 1 million 261 thousand 200 of the 2 million shares authorized by the board of directors. In addition to the share buyback the company utilized 10.8 million to acquire dynamic telecommunications, Inc.. despite the 14.2 million in stock repurchases and asset acquisition payments cash declined only 10.6 million. The company continues to have no debt. That concludes the financial review. I would like to turn the call over to Marty for summary comments.

Thank you, John. Approximately 18 months ago the new management team made 3 commitments to its employees and stockholders. Those were to streamline the modem operation, realize the full commercial value of our intellectual property and effect a transition to a wireless future. Although we can't claim complete success, we have made some progress in all three of these areas. I would like to spend some time describing that progress and provide some thoughts regarding our future. During the first quarter we continue to ship our world leading modem daughter card to MDC for use on the most popular laptop chunlt (inaudible) platforms. We ship 1.1 million modems to EPS in Taiwan and remained a strong presence with other motherboard manufacturers. On the negative side we continue to see rapid erosion in the average selling prices operating without licenses to critical modem. We took action during the first quarter to support the integrity of our licensing program. We signed a licensing agreement with a major modem vendor and filed suit against another. While we regret legal expenses that we incurred in the pass during 2001 in support of our intellectual property value the strategy of consistently defending our IP position was correct. It was unfortunate, however, that in 2001 we were focused on vendors with relatively small market share and financial lie ability. Going forward we will be focused on unlicensed modem vendors past and future. We will also take action to strengthen our intellectual property portfolio through acquisition of IPS from other parties. Our segway product line is beginning to achieve tracks. During the first quarter (inaudible) signed a client in its offer to carriers providing cellular and wide buy service. We had an outstanding peremptory challenges at leading shows including CTIA. At (inaudible) using our infrastructure system. At CTIA we hosted a wireless Internet cafe where hundreds of attendants were able to identification our gate wail and controller. We have now shipped over 40-gate way to (inaudible) reseller to supply our equipment to the cruise line industry. We also completed development offer our new pocket PC version of the roaming client. Our clients offer is now compatible with the Dell, the Toshiba E 740 and the HP ipek. Finally we launched our web based sales program last quarter. We believe we will ride this momentum into the third quarter with important wins among carrier and hardware companies. Our acquisition of DTI was consistent with our commitment to effect a transition to wireless.

That acquisition was consummated on March 12th and we had initiated work to optimize the synergies between our existing wireless product line and the softwardy find radio products fielded by DTI. We'll be announcing some immediate benefits from these early efforts including a specialized test tool for improving the performance of 802.11 or Hi-Fi products. Our cash position remains strong despite 2 acquisitions in the past 9 possible and are share repurchase program our cash remains at 101.1 million while stock holders might be inpatient that we have not invested more of this money our philosophy has been to acquire smaller companies that we can help grow and fit comfortably with our management band width. We also believe that while there are attractive assets available these have been uncertain times and caution has served us well. Having said that, we remain committed to growth through acquisitions and we are examining opportunities that are consistent with one or more of our stated objectives per our product direction. For example, we are exploring companies that would accelerate our ability to provide mobile IP or voiceover IP or our segway products. We are looking at companies with promising technology that can extend the reach of Wi-Fi networks. Finally we're exploring ways to streamline our modem business and strengthen our IP portfolio. This clues cost effective ways to acquire additional IP in modem space and other technology areas while at the same time e-evaluating how we can impact decline of modem price. Again I'd like to thank the associates for the hard work over the pass quarter in particular. We also want to welcome DTI and its entire team to PCTEL. We are excited about the growth prospects and the potential synergies with our existing businesses. Finally we continue to appreciate the support of our stockholders as we gradually but consistently restructure the company in its focus. That concludes our review of PCTEL. With that our team is ready to answer questions.

+++ q-and-a .

The question-and-answer session will begin at this time. If you're using a speaker phone please pick up the hand set before pressing any numbers. If you have a question, please press star 1 or your push button telephone. If you would like to withdraw your question, please press star 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

Two questions, guys. And nice quarter, by the way. But going first you talked a lot about the transition to Wi-Fi and particularly the Wi-Fi product. Are you starting to see -- we're hearing positive stuff a lot. Are you starting to see any acceleration of business and if you could give us a little more detail on how (inaudible) business that you're building for the future, what's the cost of carrying that business as you grow for the future an maybe a little more detail on the legal expenses, related to going after these -- some of these large legal opportunities that you're going to be going. What was the actual cost if we just talk about some of the cost in this quarter related to legal for potential future litigations that you may file?

Sure. Thanks, Doug. Let's start with the legal first and I'll go back to the Wi-Fi. Our legal expenses in the fourth quarter of last year were about 300 thousand dollars. They went up in the first quarter to about 5 hundred thousand dollars and we're anticipating slightly more than that in the second quarter, and those expenses fall into 3 broad categories. One, we're involved in litigation with 3 come and some of the expenses are starting to accumulate in that area. In our mind that's a very worthwhile investment. Secondly, we have ongoing expenses related to both searching for new IP among a variety of companies and in filing continuations and inventing variations of our existing IP and then third we have a continuous effort where we go out to major players in the modem business and present them with claim charts and other information that suggests that they might have an interest and having a license under our patents and so all three of those expenses comprise our five hundred thousand during this past quarter. And as far as those expenses go, you know, we're pretty careful about making sure that investment community has access to our latest presentations and I made a presentation I believe in March at the B really conference and at that conference I indicated to the investment community and then we published that presentation on our website, subjecting that legal expenses were an area that would likely go up because of our strategy of getting the full commercial value from our IP. And we are committed to that strategy. Your second question and Wi-Fi is a great question. We're actually up 4 hundred thousand dollars in Wi-Fi or -- and I distinguish this from DTI by the way in our Wi-Fi related development. We were at 1.5 million in Wi-Fi related development in the fourth quarter of last year, we're at 1.9 million in this quarter. I know you guys would like to see lower expenses but it's important for us to keep this development engine moving forward and basically what we have done is that we have kept our commitment in decreasing our modem development cost and we actually decreased modem development during the first quarter by 4 hundred thousand and we could have shed those costs but what we did instead is we maintained that engineering resource and focused them in the Wi-Fi area. And we focused them on that area for two or three really good reasons. We want to accelerate the introduction of some of our new products rather than have them come out later in the year.

And I'm just going to indicate a couple of the things that we're working on that we think are so important to introduce into the market as early as possible. One of those is a product that we discussed at (inaudible) and we also introduce at CTIA. And as you may recall, we discussed taking our expertise in soft, the capability we had in develop soft modems and applying that to Wi-Fi and in particular what we have done is we have invented a soft only product that takes any PCMCIA card or any PCI card or any other imbedded 802.11 capability and turn that client access capability into a soft AP, a soft access point. It also has basic routing ability. And we feel that this is an important product to get to the market as early as possible.

Sometime in June when we formally announce that product, we will have a conference call and other invest or presentations on what we believe the tan is for that markett and why we think this is so important. The other product area that consume that additional 4 hundred thousand dollars in resources had to do with what we are doing to take our client product, our segway client and move that from the hop spot market only into the enterprise market. And as you may know, one of the significant barriers to Wi-Fi in the enterprise arena pertains to security so we have been investing a substantial amount of resource in the so called 802.1 X security into the roaming client and the corresponding security method such as ETTOS, TOS, and peep. I'm sure you will remember all those Doug if they test you later in this discussion. But that's where our investment has gone, and those are the two major OPEX increases, the two hundred thousand in legal expenses and the 4 hundred thousand in Wi-Fi related development.

Maybe one last housekeeping question for John. You beat street expectations by something over a million dollars in revenues. If you're not willing to break out DTI revenues could you let us know if DTI was less than that figure?

Yes, I called 0.6 million of combined wireless revenues, both in DTI and Wi-Fi and that's contained in that number. And most of that was DTI.

Okay.

With a --

March 12th on, the combined revenues an revenue were 600 thousand.

In wireless were 600 thousand.

Okay. Got it. Thank you.

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

Hi. That was a great quarter. I wondered if you could just clue us in according to my math it looks like you were pro forma about a Penny and the consensus, just so you know was for a loss of 2 cents, so I just wanted to confirm that. And also since you did exceed the guidance, I wondered if you could just update us on what you view as the revenue outlook and maybe some issues about the (inaudible) outlook and then in the second half, you know, according to the numbers on first call the second half is for a pretty big jump in revenues versus the first half, about a 40 percent jump. If you could let us know if that's some sort of change that you see that would be great.

With regard to overall revenue as we go threw the components, the largest quarter easily for the modem business is the third and fourth quarter with the fourth quarter being largest. That's a natural pattern that goes with PC sales. That's going to have upward on our sales in the second half. The second thing is obviously we will have DTI for a full half and only have them for a quarter in the first half. And then we will continue to seek traction in our licensing program. As we move forward. So while I can't speak specifically in guidance to what's on first call the trend is definitely correct.

So, Susan, just to review that, a full DTI in the second half for all six months and I think people are anticipating something like a million a month and that certainly was the case in the previous few years and then we anticipate that our licensing program is going to pick up, particularly with investments that were putting into that. But the last thing of course that I would add to John's comments is that you will start to see some additional traction in Wi-Fi even in the second quarter and we are anticipating stronger results for the second half of the year

Great. And then could you just give us an idea if they are still on target for kind of the outlook that you had before for the full year?

Yes. Absolutely.

Okay. Probably a little bit better, a touch better?

I wouldn't want to -- I wouldn't want to enhance any expectations here.

Okay. Thank you. It was a great quarter. Congratulations.

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

A couple of thins here. Could you just quantify on the modem business, I mean we continue to see the ASP erosion, just what it was like in the quarter versus the fourth quarter and if you have seen any kind of acceleration or if it's just kind of what you've been experiencing for the last year?

No, I think I will say that there was -- I don't want to quantify any exact changes by customer or even by industry type or region. I will tell you this. I think what you're seeing is in the PCO oem space pricing demands that are starting to get close to what you see in some markets out of Taiwan and so there seems to be an impatience on the part of the PC oem vendors to get to the pricing that exists in other parts of the world and perhaps with customers that aren't as consumptive of services. And that poses something of a challenge. In additional to that, we think there have been some issues related to certain vendors providing modem products into these markets. We don't have a license to a lot of the critical modem patents, whether they are from us or whether they are from other industry players and because of that, you know, they have the opportunity to a lower price without the same type of royalty burden that other parties have. And you know, that's a dynamic that's going to have to be addressed.

Okay. And can you comment along with that on your guys pricing for with silicon labs?

Yeah, I will say, as I have always said, silicon labs is an outstanding partner and we have nothing but positive things to say about how silicon labs has supported PCTEL during this price erosion while you know you could always request sharper price declines I think that the leadership of silicon labs has looked at the situation and they have helped us deal a little bit with sharp ASP erosion.

Okay. On the Wi-Fi business, can you comment you know what your out look is for this quarter as far as customer wins. Do you have what you feel are substantial customers on the radar screen at least

Yes, I think we have two substantial wins in the second quarter. I can't give specific names because these carriers are very sensitive to announcing awards like this consistent with introduction of their services and we wouldn't want to preempt any of their plans. But we anticipate two major carrier wins and then we also anticipate two wins associated with equipment vendors. So we think second quarter is going to be a good quarter for us in terms of customer activity.

Okay. When you talk about equipment vendors are we talking about PC guys?

No, I mean equipment vendors, people in the Wi-Fi space.

Okay. Understood. And can you make some comments on the traction you have seen for your infrastructure product on the Wi-Fi side?

Yeah. Well, for 1 with existing customers we're doing pretty well and there is -- we have really a sat is identifying response to our (inaudible) program. We have always told you, Wes, and others that we think it would be a mistake for PCTEL to attempt to distribute its infrastructure products with a direct sales force. In our approach has been twofold. One, to attract value added resellers who can attack an inch vertically using our products and we will be signing (inaudible) during the second quarter of this year. An additional (inaudible). Secondly, we would remind everybody that our core product in infrastructure is still software, it's 11 objection based software that can reside on anyone's hardware and we are working hard to make that software available to other infrastructure and service vendors in the industry and we expect some progress in that area.

Okay. Good. And last question, on DTI, is there a -- I might have missed this on the call, but a Wi-Fi product in the works there?

Yeah, I did actually say that, but I noticed I was mumbling a A little bit. So let me go back over this. We have a product road map that includes a planned release of an 802.11 test and measurement tool that will measure interference in 802.11 LANs, it will help identify potential improvements and in addition to that it will allow you to detect wireless intruders on your system, whether it's an enterprise system, a hot spot, a home system or whatever. It's a natural extension of our current segway roaming client and actual DTI scanners, receivers, that they already field in their commercial and other markets. And I would again point out that this is a software only product, and that is the direction that we are moving.

Okay. Thank you.

Okay, Wes. Thank you.

Thank you. Our next question comes from Stan Turling from UBS.

Good afternoon. Two quick ones. The consolidation that was going on in the soft modem business, is it continuing?

By consolidation are you talking about our internal consolidation or --

No, I'm talking about the industry consolidation.

Well, there certainly have been people who have fallen out. Marketplace and I would anticipate that there would be additional consolidation, particularly around larger vendors who are vertically integrated, but there's no specific transition or event that I could really comment on.

Okay. Well, the reasons the question is, does it eventually put a floor under the pricing of soft modems?

Well, you know, it's hard for me to discuss what might happen in pricing with respect to the action of competitors. But I would think that there are a couple things that could establish a floor. One, when patents are acknowledged and fully recognized and everyone has to bear the burden of paying for the technology they are using, there will be a floor to the applications of that technology. However, I think that modems are an area that are going to have or going to manifest considerable (inaudible) combination of modems with 802.11, combination of modems with other types of LAN technology and you'll see competitive offers to let's say even the silicon DAA types of products that you see from silicon labs or connect center or others that may further decline. So will there be a floor? Yes. Are we likely to see it next quarter in no.

Okay. On the two possible carrier wins in the quarter, how rapid do the wins convert into revenues?

There's typically two parts to it, one NRE component where you're doing some work for that carrier and they get some skin in the game as a result of that investment, and then there's ongoing annuity payments that I think as you're suggesting take some time to mature into a really interesting revenue stream. You would see some revenue within the first 60 days of a win.

Okay. Thank you very much.

Thank you

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

Can you hear me?

Yes, Anton, thank you for joining us. I got a message that you had another earnings call to listen to.

Yeah. So we joined a few minutes later than anticipated. But I wanted to ask you on the kind of a long term competitive question on the Wi-Fi side and that is you know you have served three product lines there, the base station controller effectively and the access link and then the software, I mean when clearly on the two hardware sides you have some semblance of random compression especially on the access point side and haven't cleared on the software side doesn't appear to be today a significantly competing product out there, certainly knowing that can incorporate the wide area connect it. When do you see and from what type of players do you see compression emerging in the time frame where you think you won't be the only game in town on at least one of these 3 things and what will enable you to remain competitive on the access point side and what do you think is the competitive landscape over time on the bay station controller side?

Well, let me see if I can break down your question into three questions and answer them separately. First, how do we stay competitive with respect to the segway roaming client on the consumer side; second, how do we stay competitive in two areas of access, both on the gate way and on the client side; and then third, I suppose your question is how do we stay competitive on the controller, you know, the raid just compatible HLR triple A broker type of system. Is it okay if I answer it in three parts there, Anton

That's fine. What type of players in each do you think will be emerging as your (inaudible) there?

Starting with the segway roaming client there's three really strong ways that we stay competitive. One, we are ahead of the curve now on issues pertaining to computer and we will continue to stay ahead of those issues. Secondly, we are ago no, sir particular when it comes to hardware. Our drivers both the Wi-Fi side and the cellular side are not linked to any specific cards. We now are compatible with 80 different PCMCIA or PCI or other imbedded 802.11 solutions. Third we're still really the strongest player in the multi mode operation. So you know, you have our client you go to either side, Wi-Fi or Cellular and as new ways of accessing emerge we will do that. And I'll point out a fourth thing is that even as you look at offers from Microsoft and their browser, you know, that presupposes that you have a current operating system. We are compatible with all the down level operating systems that exist on the various platforms. So that's in one area what our plan is. And of course we want to take our roaming client and also move it into offense as these 802.11 cell all right offense emerge. The second in access you might recall that we really don't have hardware of our own. We're riding the experience curve out of Taiwan. So as they put out increased knowledge we're taking advantage of the increased integration between gate way and access cards and in addition to that what we're doing is we're exploiting our competency and soft. So we're looking at the access areas a way that we can take the hardware out of it and anybody's PCMCIA card can back a essentially an access point. And in the third area the controller, I think what distinguishes us are several characteristics. One is that we can partition our controller so it can support virtually hundreds of networks, second that it is a product that is not meant to compete with a large controller from another vendor, it's a product meant to enable vars to go in and put in special purpose networks. And the third is we're not (inaudible) the hardware again. We would make our LYNX come pabl art hardware (inaudible) variety of platforms I think give us a long-term advantage. Does that help you?

Good. Yeah. And since you mentioned the offense, could you discuss a little bit given that you have their unique software that combines the local area 11 with the wide area several activity when do you think offense based upon -- I mean, have you seen TI I guess in the last few days brought to market at least in some stage, their wonder chip which --

Also Cisco just announced --

Yeah, but a phone. But the benefits of Wi-Fi only, plus cell lar they have at least the foundation from a chip perspective. When do you think and if you think you will participate in that type of market? It seems to me like that's got to be an enormous killer out for Wi-Fi to be connected with cellular and to (inaudible) I we absolutely plan on participating in that market and we're representing our software to all of the interested players in this industry.

All right. Thank you, Marty.

Thank you, Anton. I'm still getting over the fact that you listened to somebody else's call before ours. But go ahead. Next question, deby.

Next question comes from Robert Kats from MS international.

Hi, Marty, John. Nice quarter. Question on licensing. You mentioned that you had a settlement with a major modem vendor.

Yes.

And when will we see an impact or your P and L or balance sheet on that?

Well, you actually saw a little bit of licensing revenue from that in the first quarter and you'll see ongoing licensing revenue from that vendor going forward.

We should expect licensing portion of your revenues to increase?

I think starting in the third quarter that's a reasonable expectation.

And also from the ongoing litigation, will that have a one time settlement as well for back payment or --

Well, you know it's always an interesting thing to see how portion of the settlements when we realize them will have someone-time impact but you know, we are looking at this as we have an opportunity for people to use the IP that we have developed and we want to generate an ongoing revenue stream from this as well as the opportunity for one time payments.

The settlement that you had didn't have that one time payment?

Had it a small one time payment.

So it was more forward looking?

Correct.

On the DTI business it sounds like next quarter should have a 3 million dollars run rate? I noticed, next quarter I think it's the second half that we're talking about, roughly a million a month. Next quarter we're looking at a number between 1.8 and 2. What kind of gross margins do you expect for that business segment

We get pretty strong gross margins in that area but I wouldn't want to discuss them on the p phone here that we are essentially giving information to our customers and competitors.

How overall for the company then would be your gross margin model exiting this year and long term?

Well, I think in the modem business combined with the DTI business and the software business will be in the 40 to 45 percent range.

By the December quarter?

Yes.

All right. Thank you. I'll take some other questions offline then

Thank you.

As a reminder, ladies and gentlemen, if you do have a question at this time please press star one on your push button telephone. If there are no further questions I'll turn the conference back to management to conclude.

Thank you, deby and thank you all of you for participating in this review. And we look forward to the next earnings release as well as perhaps having a special conference call in the middle of the quarter regarding some of our new products. Thanks begin.

Ladies and gentlemen, if you would like to access a reply for this conference you may dial 18004286051 or 9737092089 with an ID number of 289373. This concludes our conference call for today. Thank you all for pa-709-2089 with an ID number of 289373. This concludes our conference call for today. Thank you all for pa-800-428-6051 or 973-709-2089 with an ID number of 289373. This concludes our