PCTEL Inc (PCTI) 2003 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the PCTEL second-quarter earnings conference call. (CALLER INSTRUCTIONS). I will now turn the conference over to Marty Singer, PCTEL Chairman and CEO.

Thank you very much. Good afternoon everyone. I am Marty Singer, Chairman and CEO of PCTEL. On behalf of PCTEL, we thank you for joining us on our earnings call for the second-quarter. In this call, we will address the financial results of the quarter and the outlook for PCTEL in the third quarter of 2003.

Joining me today is John Schoen, Chief Operating Officer and Chief Financial Officer. John will take you through our financial performance for the second-quarter as well as limited financial guidance for the third quarter of 2003. I will then comment on some of those results and then turn our attention to the significant events that transpired during the second 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, expectations regarding our licensing efforts and growth of wireless products, future investment in IP assets and wireless businesses or forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks including the economic recovery, competitive risks, the ability to draw our wireless product of business, implement new technologies and obtain protection for the related IP and the risks associated with potential acquisition. Our litigation expenses are dependent on a number of factors, not all of which are within our control.

Additional discussion of these and other factors affecting the company's business and prospects is contained in our periodic SEC 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.

In May of this year, the company sold its HSP modem productline to Conexant and concurrently entered into a royalty agreement with Conexant. PCTEL will receive approximately 18 million in cash plus ownership of 46 Conexant U.S. patents and applications in the access space including their foreign counterparts. Conexant retains the right to share in royalties generated from those 46 patents after certain royalty thresholds are achieved by PCTEL.

Under FSAB-101, which covers accounting for multiple element arrangements, the two transactions will be combined and accounted for as gain on sale of the HSP productline and related royalties. The fixed proceeds of 10 million are incorporated into the gain on sale and related royalties included in the second-quarter income statement. The 8 million of future payments expected to be received over the next 16 quarters will be recognized as an additional gain on sale of HSP productline and related royalties starting in the third quarter as the royalty income is earned. The Company retained its wireless products comprised of Segue Wi-Fi and DTA software defined radio product. It also retained its licensing revenue, which consists of royalties on its access patents and licensing of its DSP based modem software.

I will now review the second-quarter financial results. Second quarter total revenue was 10.2 million. Of that 7.3 million related to final HSP product revenue through the date of sale. This number includes final matters related to winding up of the HSP productline such as adjustments to final Accounts Receivable reserves and customer rebate programs, which the Company accounts for under revenue. The remaining 2.9 million of total revenue was comprised of 2.3 million for wireless products and 0.6 million of licensing revenue.

It was last year during the second quarter that PCTEL acquired the assets of Cyber Pixie (ph), and the Company had no revenue from wireless operations of that time. With respect to licensing revenue, however, we had just completed our agreements with ESS (ph) and SmartLink (ph) in the first half of last year, and we generated about the same amount of revenue as reported this year during the second quarter.

In the past, we have offered extremely limited guidance on revenue and earnings. We continue to be cautious about guidance as we are pursuing sales in new industries such as Wi-Fi and revenue through licensing activities. Having said that, we believe that it is important to give stockholders a clearer view of our revenue potential over the next two quarters.

Going forward, all revenue will be related to wireless solutions and our access technology licensing efforts. Our outlook for the next two quarters is, 3.7 to 4.2 million in the current quarter and 4.5 to 5.5 million in the fourth quarter of this year. This compares to the 2.9 million in wireless and licensing revenue that we have reported in the second quarter.

Now with respect to gross margin, second quarter gross margin was 63 percent of total revenue. The gross margin on the final HSP revenue was 57 percent including the impact of the reserve activity. The gross margin on the wireless and licensing revenue was 78 percent. The blended gross margin on wireless and licensing revenue is expected to be between 75 and 80 percent for the next two quarters.

Now I would like to address our cost structure. This second quarter was a transition quarter where the Company has added a full quarter of OpEx expense from the DTI acquisition in March of this year and began shedding HSP modem productline related OpEx expense from the sale of the HSP modem productline in May of this year. Total operating expenses in the second quarter were 5.6 million, net of a $4.3 million gain on the sale of the HSP modem productline and a $2.5 million restructuring charge related to closing the HSP operations that Conexant did not purchase. This compares to OpEx of 6.6 million in the second quarter of last year, which included a 0.6 million restructuring charge related to the closure of our DSP modem productline.

Without the gain on sale and the restructuring charges in either year, OpEx was $7.5 million in the second-quarter of this year compared to 6 million in the second quarter of last year. This increase is attributed to the investment in wireless products through the acquisitions of Cyber Pixie (ph) and DTI, the increased legal expenses associated with the license patent enforcement offset by declining expenses in the modem products business that we divested.

The Company will continue to invest in its wireless products and licensing programs. The legal expenses were related to the lawsuits that have been filed in Federal Court against 3Com, U.S. Robotics, Broadcom, Lucent and Agere. We have additional expenses related to a complaint that we filed on behalf of the consumers against 3Com for unfair business practices in the state of California. As we have indicated to stockholders in the past, we anticipate spending between $3 and $4 million per year in legal expenses related to these lawsuits. We recognized the burden on OpEx, but we are convinced that this is a worthwhile investment in our licensing program.

Total OpEx is expected to be about $6.2 million in the third quarter, which includes 0.6 million of amortization related to deferred compensation intangibles, 0.3 million of restructuring charges related to the portion of the HSP modem productline that Conexant did not purchase netted with a $0.5 million gain on sale of the HSP productline and related royalties. The expected decline in R&D, selling and marketing and G&A in Q3 from Q2 is due today to a full quarter without HSP modem related expenses.

Now let us turn to other income. Interest income generated from investments was 0.4 million in the second quarter compared with 0.9 million a year ago. The difference is attributed to the decline in interest rates since last year. The amount per quarter is expected to further decline over time should interest rates stay at current levels or decline further. Third quarter interest income is expected to be $0.3 million.

Now let us turn to earnings. Net income for the quarter was $1.1 million. This compares to a net loss of 0.1 million in the second quarter of last year. Significant items favorably impacting the earnings difference were the gain on the HSP sale, final reserve adjustments for modems related to our customer rebate obligations and collecting all of our Accounts Receivables, as well as a transition to higher margin wireless products from last year.

Significant differences unfavorably impacting the earnings difference were the increase in restructuring charges year-over-year and the increased investment in OpEx for wireless and litigation this year. Also, the modem inventory reserve coverage was higher last year.

Now let's turn to the balance sheet. Cash and short-term investments ended the quarter at 111.8 million compared to 101.1 at the end of the first quarter of 2003. The initial $6 million of proceeds from the HSP modem productline sale and $4.5 million from the exercise of stock options positively impacted the cash position net of share repurchases.

Shareholders will recall from our July 11th press release on the HSP modem sale that former employees who either were hired by Conexant or took severance packages needed to exercise their vested options within a window period of leaving the Company. That drove the majority of the stock option activity in the quarter. The Company repurchased 20,000 shares in the quarter under its share buyback program. Since inception, the Company has repurchased 1.281 million out of the 2 million shares authorized by the Board of Directors. Going forward, we will be selective in our buying, rather than utilizing a uniform purchase approach. 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 thank you all again. We have just completed a watershed quarter for PCTEL. Entering the quarter, we just completed the acquisition of DTI, the second milestone in our transition to a wireless future. As the books closed on that transaction, we set about the task of divesting our lower growth modem productline. In the process of achieving that goal, we strengthened our intellectual property portfolio and recovered the cash that we had spent in our acquisition of DTI.

A year and a half ago, PCTEL had 146 people departed to a modem productline. Today we have a total of 83 people with most of them working on wireless access and software defined radio products. Today is the first time we can review the performance of PCTEL as a company with significant technological assets and the wireless assets, wireless optimization tools, wireless products for the government and an outstanding patent portfolio.

In my comments about the quarter and our business as we move forward, I want to focus on three areas -- our progress in Wi-Fi and intelligent wireless solutions from DTI; the status of our licensing program, and our plans to grow further through acquisitions. With respect to this last topic, I am sure that stockholders will recognize that we can not disclose the specific acquisition or investment targets. However, the management team does want to outline the areas of investment that are of interest to us.

Let me begin with our efforts in wireless. We continue to have great confidence in DTI and our decision to acquire DTI as part of our transition to wireless. As of today, their Clarify (ph) system, which assessed the quality and performance of commercial wireless networks, is on trial with four large wireless carriers. DTI management anticipates strong sales of this product.

Shortly after the acquisition of DTI, we established a joint development program between our Segue product team and the DTI team. As already announced, we will be introducing the Segue analyzer, a pocket PC-based test tool that will assess Wi-Fi network performance, measure interference and detect intruders. This product addresses the need for IT professionals to deploy and maintain the quality of Wi-Fi networks. We will market the analyzers through DTI's existing direct and OEM channels as well as through new channels that we are actively developing.

DTI also benefited from 3G deployment in Europe. They made important sales of their Seagal WCDMA receiver to Ericsson in the quarter. DTI management also reported sales for the government in the past quarter for security type applications of its software defined radio platform. Clearly securing Ericsson as a customer was a major coup for DTI.

Now with respect to Wi-Fi business and the Segue productline. It has been a year since we acquired Cyber Pixie (ph) and the first full quarter since we released the multimode version of our Segue Roaming Client and announced the Segue Sam (ph) at STIA. At this time, we can report some traction in our Wi-Fi business.

The major news, of course, is that AT&T wireless selected our Roaming Client for the launch of their new wireless LAN service offering. We competed for several months against all the major participants in the industry, and we are delighted with the outcome. AT&T wireless will brand the Roaming Client as its Wi-Fi connector. It will facilitate secure connections and automatic login and authentication to AT&T wireless Wi-Fi locations. Importantly, it will provide the same connection management to AT&T wireless roaming partners such as way port, stay online and others.

Having closed on the (inaudible) contract in the first quarter, we delivered the first version of the Segue GPRS Roaming Client to (inaudible) this quarter. (inaudible) has announced that the GPRS Roaming Client that we provided will be incorporated into a client product for T-Mobile. During the quarter, we were established as a Cisco ecosystem partner, and as such, we are represented in the Cisco exhibit at Supercomm in the wireless service provider space, and we demonstrated advanced EAT (ph) SIM authentication capability at the show.

In addition to these sales and marketing successes, Wi-Fi Texas is a provider of wireless LAN services based in Austin, selected PCTEL Segue Roaming Client for distribution to traveling professionals who have the most need for a roaming service. The Wi-Fi-Texas branded client will allow automated login and authentication to all Wi-Fi-Texas locations. Soon this product will also allow automatic authentication at all Schlotzsky's deli locations, which has had one of the most successful experiences in providing Wi-Fi services at its locations to boost its core business.

At the 802.11 Planet Show in June, we unveiled the Segue Analyzer, our Wi-Fi test and measurement tool, that was mentioned earlier my remarks as an example of the synergy between DTI and our Segue products group. We also demonstrated a fully functional version of our Segue Soft Access module, the SAN as we call it, which helps reduce the cost and complexity of deploying wireless LAN networks in the home and (inaudible) environments by converting a low-cost client Wi-Fi card into an access point and integrating the routing and other functions into PCTEL proprietary software that runs on a Windows platform. This product is already licensed to Conexant, and we are hopeful that other chipset vendors will understand the economic value of incorporating our SoftPoint into their reference design.

We believe that our greatest challenge at this point for both our DTI and Segue businesses are distribution hurdles. I will comment later on our recent investment and expanded direct salesforce, but this is an area in which we must do more. We are actively engaged in discussions with buyers, distributors and other technology companies about commercial agreements and other arrangements that would effectively address this distribution issue. We are also looking for commercial arrangements or acquisitions that would expand upon our distribution footprint toward government sales of our DTI products.

Let me turn for a moment to our licensing program. Our licensing program continues to provide consistent revenue to the Company. The transaction with Conexant early in the second quarter was significant to our licensing program for two reasons. First, we settled with a major industry participant with respect to our modem technology, and second, we expanded our portfolio of intellectual property. We are already putting this new intellectual property to work. For example, we believe that one or more of the defendants in our existing lawsuits may be using the technology described in the router of patents that we acquired from Conexant. We also acquired 11 DAA patents as part of the Conexant transaction.

In addition to the Conexant transaction, we acquired four additional patents as well as the foreign counterparts that cover DSL modem implementation. We spent approximately $300,000 to acquire these patents. Excuse me for a moment. We will continue to explore other opportunities to acquire relevant technology and to incorporate new assets into our licensing program.

We are pursuing additional opportunities through our litigation activities in parallel with business discussions with those parties using our intellectual property. We expect that settlements will be a combination of onetime payments, ongoing royalty streams and commitments to product purchases. On the cost side of the licensing activities, we are continuing to review our patent portfolio and rationalize our expenses with respect to U.S. and foreign filings and the revenue that each may generate.

I thought it might be worthwhile to make a few operational comments. One is that we continue to carefully monitor the size of our executive team. As a result of our transaction with Conexant, we will have four fewer Vice Presidents by the end of the year. We recognize the elevated costs associated with our legal efforts in building a stronger distribution channel. Each member of our executive team has taken on additional responsibilities, and we are getting a tremendous work effort from every PCTEL employee. We will continue to observe caution in our buildup of the executive team.

We have noted at investor conferences and other forms that our business requires additional investment and distribution. I made similar comments earlier. To that end, we have recently hired two senior level account executives. One will have responsibility for Asia with a special emphasis on Japan. The other will address sales opportunities in Latin America and Europe. We also working hard to develop distributor relationships for all of our wireless products.

I mentioned earlier that I would discuss our investment activity. Our investment basis reflects our current business interests. We are committed to the growth of our wireless initiatives and our licensing program. For example, over the past year we have explored the acquisition of companies with outstanding IP portfolios as well as certain portfolios that available from companies in various stages of their lifecycle. Indeed, as previously discussed, we invested $300,000 in the acquisition of four patents along with their foreign counterparts that cover DSL technology. There are additional opportunities to grow our IP portfolio, and investors should anticipate that we will leverage our balance sheet to strengthen the Company's licensing program. Investors should further note that acquisition of intellectual property entails considerable legal expense and often expert consultants.

Our primary area of focus, however, has been the support of our wireless initiatives. We believe that we have significant work ahead of us in building an effective distribution channel for our wireless products. As such, we are exploring the possibility of acquiring companies that enhance our product portfolio but at the same time have strong distribution channels into our target customer base. We need better distribution into both commercial and government markets. We also believe that there are technologies that we should incorporate into our wireless future. These include enhanced security capabilities, management software and voiceover IP technology. We continue to pursue our goal of consummating a substantial acquisition.

To summarize, we have had an exciting second quarter. We punctuated our transitional wireless with the Conexant transaction, posted our first quarter of reasonable wireless revenues, expanded our IP portfolio and pursued our licensing strategy, adjusted the organization to achieve greater focus, developed and delivered new Wi-Fi products and continued our efforts to acquire an additional business. There are many challenges and certainly much work to be done, but we are confident in our strategy and path.

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

(CALLER INSTRUCTIONS). Doug Whitman, Whitman Capital.

Congratulations on a nice quarter. A couple of questions, quick things. Marty, you talked about the carriers and some of the ones you had. Are there other potential carrier wins out there?

Well, first thanks for the compliment and second yes. We think we have momentum that should carry us forward in some significant bids that we have underway right now, would carry us both in the U.S. and in Europe. Our goal is to secure two to three more carrier wins by the end of the year. We only expect one of them this quarter.

And, John, a quick question on Accounts Receivable. I don't know if you have been watching The Sopranos, but how did you get your receivable days down so low?

We were actually fortunate in that we actually collected virtually all of our Accounts Receivable related to the modem business by June 30th even though we had made the transaction on May 8, and that combined with our licensing revenue contractually coming in during the same quarter that it is recognized has got us running on a very good cash flow (inaudible).

And the longer question is about if you could talk a little about DTI. You are being judged really going forward on how you make acquisitions and how they succeed, so where are you with DTI and how is it going?

DTI is really going quite well on all dimensions. Organizationally they fit in great. We have very similar cultures in terms of lean executive team and really getting a high-level of productivity from the team. A very active executive team in terms of being involved in sales efforts, and from a sales prospective, what we can say is they have met all their financial objectives. They have a strong backlog going into the third quarter. We are very encouraged by their efforts in securing some alternative payouts into the government. So we are really pleased with the team.

As we mentioned before, the collaboration on the Segue analyzer has produced a really an absolutely beautiful product now we are excited about. We are leasing during the quarter, and we think it is going to be a strong product for us, the Segue analyzer.

Congratulations on the positive outlook, and I am most impressed by the deli pronunciation.

Susan Kela (ph), FDR.

Good afternoon. Great quarter. I wonder if you could give us a view of what the new base of revenues looks like and the potential sequential growth for the next couple of quarters as well as what you anticipate the EBITDA or EBIT or whatever to be for the next few quarters?

Well, if we go through what my guidance was, we are basically going to take a $2.9 million second-quarter of our core products. We believe we will be up in the 3.7 plus or low 4 range, so call it 4 million-ish in the third quarter and in the fourth quarter to potentially add another $1 million to that sequentially.

The drivers in the short run and obviously from a revenue prospective, is on the DTI side, and it gets a little bit muddied in that because we had signed our Conexant royalty licensing deal concurrently with our sale of the assets, I actually have to account for that as a reduction of OpEx expenses, a gain on sale as we collect the royalty income. However, both of our programs are showing a sequential growth. It's just unfortunate I have to put 500,000 a quarter of that down on the gain on sale on the royalty line of my P&L.

With regards to the EBIT or EBITDA, if you follow the guidance that we have given, it is a 4-ish revenue number at a 75 to 80 percent gross margin revenue, and the OpEx guidance that I gave says that it will probably be in the $2.5 to $3 million EBIT loss range just by adding up the math of the guidance that I gave. But once again, that is heavily ladened with continued investment in our legal costs as we had this quarter, as well as some further restructuring charges as we had a portion of our team exiting in the third quarter as opposed to the second quarter. Does that cover the question?

On the free cash flow basis, you will probably remain positive for the next couple of years.

Yes. I think if you look just at the second half year, I had mentioned of the original 10 million in the purchase price for the HSP set, we got 6 already. We have got another 4 coming in the fourth quarter, and so I believe that will completely offset any operating cash flow investment that we have in the second half.

Anton Wahlman, Needham & Co.

The question I have here is a couple of things. You mentioned in regard of 600,000 amortization of deferred comp. I am just looking here at my model.

If you look at the P&L, you see 339 for one and 241 for the other in this quarter. It is essentially the same numbers.

Okay. So the 600 is for both income combined? I thought it was just for the comps, not for the goodwill. Okay. So you are talking about numbers continuing there similarly and then 300,000 ongoing restructuring part of the 6.2 million as will be a 500,000 gain?

Yes. Now the difference here in the way, as an example, that you happened and many of the other analysts happened to have, they have straight GAAP numbers, and then they have numbers that they look at on an EBITDA basis.

One of the issues that you will have to change is that we do have ongoing for the next 16 quarters a potential $500,000 a quarter in royalty income that I will be receiving from Conexant; however, I do need for accounting purposes to not recognize that is revenue because I had done the transaction at the same time as the sale. I have to account for that on a line that is in OpEx. If you wish to continue to follow me the way you currently do, you will have to make an adjustment to your adjusted income numbers.

Alright. I can work on that. Is there an estimate on ongoing legal expense as part of the overall expense? What portion of that --

Let me give you some prospective. In the quarter, we spent $900,000 on licensing related legal expenses. That was up from $300,000 in the first quarter, and a year ago in the second quarter, we spent 100,000 on the same kind of stuff. So in the numbers that I have indicated for Q3, the $800,000 to $900,000 range is the level that I have in those numbers. Consistent with 4 times 8 of 3.2 -- $3 to $3.5 million range per year.

So going forward, it will be 900,000 or higher?

That is right, and that is reflected in the OpEx guidance I just gave. That shows up in the G&A line.

Yes, I saw this quarter the G&A --(multiple speakers)

You should have seen it spike.

There was $2.8 million, up about a million even though you got rid of some business and so. (multiple speakers)

Legal expenses. About $650,000 to $700,000 of that is spiked with the legal expenses.

The revenue you had, 2.9 million of wireless and licensings at 600,000 was licensing, and how much were the other 2.3 (inaudible) DTI. Was it really all of it?

Unfortunately we don't do segment reporting because the businesses are really targeting the same customer base, and we would prefer not to break those apart.

Have you started recognizing meaningful revenue from the Segue stand-alone?

Yes, we have.

Would you say that whatever models that you have with your customers, are they are aware that your customers choose to pay for your Segue, the software Roaming Client itself? Do they differ greatly between different operators, not in terms of their actual dollar contribution over time on that (inaudible), but do some of them do more upfront payments, like a onetime and some do them over time quarter by quarter, year by year? Did the models there vary, or does it stay the same between most of your agreements between the carriers?

Almost all of them are different. In this quarter, I would characterize most of our revenue as NRE based revenue where we had customization to do on the Roaming Client for carrier customers or for other customers. And then going forward, some of these customers want to pay on a per month per subscriber basis, and it is volume sensitive. Others want to pay a onetime licensing fee. And then others want to pay on a volume basis but on an annual licensing term and conditions. So we are seeing three different models with the carriers right now.

And then when you go down into, let us say, the chipset vendors, there really is so much per software copy per chipset, and that could be in the form of a guaranteed volume purchase; it can be on a month-to-month basis. So we try to optimize the commercial terms for the particular customer.

You mentioned in your prepared remarks (inaudible) got the product. I think you were talking about the Segue of Roaming Client this quarter. I was not sure if that meant the June quarter where the current means the September quarter.

No, no. In Q2, what I am saying is that if you will recall (inaudible) is incorporating our GPRS module for the Roaming Client into a product that they are then delivering to T-mobile. We signed that agreement during CTI which was March in the first quarter, and all I was letting you know was that the development has been successful, and we have delivered that module to (inaudible) for their integration into the T-mobile client.

Finally, could you just discuss a little bit the competitive climate on the Roaming Client? Clearly you are first to market with a product here. When do you think -- are competitive products starting to emerge if ever beneath the surface at this point, or is it a clear coast at this point?

There is no question that there are competitors right now. We have mentioned before Smith Micro. We have mentioned that some of the service-oriented guys like (inaudible) and (inaudible) have clients. What I would point, though, is that in each of those cases we have seen opportunities to sell either OEM our clients or OEM a portion of our client to those competitors, mainly because we are not really linked to any particular piece of hardware or wedded to any particular service. We do see competitors, but at the same time, we are working very hard to distinguish our product in the marketplace.

To that end, we were able to strike a deal to get Mobile IP Inc. into our Roaming Client that will allow seamless roaming, not just roaming between 802.11 and cellular. We are doing some other things that I am not going to discuss on the phone that will also distinguish our Roaming Client from the competition.

Well, thank you.

Wes Cummins, B. Riley & Company.

A couple of questions here. First on the Wi-Fi and Roaming Client with the AT&T contract and Boingo, you going to T-mobile, can you give an update on when is that actually going into the market? Is the T-mobile product already being used by the Company, and when does the AT&T wireless product actually go into the hands of the subscribers?

You know one way for us to get in a lot of trouble is to comment on the rollouts for our customers, so I cannot really be too precise on that. I think in both cases, though, you are talking about third and fourth quarter events.

Okay. And just looking at the revenue generation from that part of the business, it seems that in some way it is going to be in two of the cases you mentioned it is going to be tied to subscriber growth. Should we look to the first half of next year, second half of next year for some revenue growth on the Wi-Fi rollout?

I think we have said all along that second quarter of next year is when the Wi-Fi business we think will look reasonably healthy.

Okay. On the soft access module side, any expectations for wins this year with chipset vendors or hardware vendors?

Yes. I think we will be able to announce one particular arrangement in the third quarter, and I believe that we will have other chipsets relationships by the fourth quarter.

Okay. When you are talking about acquisitions and you are talking about a better distribution channel, what products specifically are you looking to enhance distribution of? Is it the infrastructure products or the software products?

Really both. For example, we have a really robust Gateway controller system that can be used in a variety of specialized niches. Systems to go into professional offices to allow access. Systems that can go into hotels and so on. And a real barrier to entry there is distribution. So that is one area.

But also if you look at a Roaming Client, there great opportunities to distribute the Roaming Client as part of bundled services you know with various value-added resellers or equipment providers themselves. And so we think we can enhance the distribution of Roaming Client through different distribution approaches that we have today.

I should mention that one of the companies that we are looking at in particular not only has distribution channels but some additional wireless product that might enhance our portfolio in the wireless and unlicensed spectrum area. We are looking at a couple of opportunities there. So I think it is a better way to go than trying to build up the distribution channel with our resources.

Okay. Also, talking about chipset vendors and hardware vendors, are you aggressively marketing the Roaming Client there as well rather than just to the curious customers?

Yes. For example, if you look at Conexant, they are not just using the Segue SAN, the soft access module, but we have also licensed to them from corporation into their reference design the Roaming Client. We think that is a great approach for our product and is something that is consistent with our history in the modem space is working with those suppliers.

Last question. On the lawsuits now that you guys have jumped in with both feet here, can you give any comments as to whether you see any light at the end of the tunnel or if things can drag on for quite some time?

Well, there was a case management conference that was scheduled for today that got postponed until August 18. I think August 18th is the next point at which we will know more. I suspect when we get to that point parties will be more willing to enter into meaningful discussions because that is when expenses will pick up in the form of discovery and so on. So we should know more by mid-August.

I will tell you that we have a strong interest in always trying to settle. We are certainly committed to this path, but I will be discussing possibilities with participants in this lawsuit as we go forward.

Okay. Great job guys.

Matt Robison, Ferris, Baker & Watts.

Most of my questions have been answered, but I did want to ask you first for John. On the nontrade, it sounds like some of that nontrade could be related to licensing arrangements. Is that not the case in the receivables in that you are accounting for some of this as a gain on sale?

Well, actually the portion that I am including in the receivables, yes, there would be some receivables in there related to small licensing deals, but at a $1 million of trade receivables, that was the portion of pretty much the DTI receivables and a little bit less of modem receivables, which were all collected very shortly thereafter.

I wanted to ask you on the product side, when do you think you might see some more adoption of the combo client? It did not look like AT&T wireless signed up for the 2.5G feature. I am interested if you can go back to carriers you already licensed to and sign them up? What would you look for?

I think it is really conditional upon what happens in their subscriber base. I think that right now they are trying to hit guys who are using the wireless LAN. The question is what percentage of those guys are going to simultaneously have loaded onto their laptop a cellular access card for 2.5. I think they will want to make it available as a number of subscribers with both means of access grows, and they will know that as the service gets rolled out. But there is absolutely no issue with us expanding the scope of the tool by making it multimode and not just single mode for any particular licensee.

Are you talking to any carriers that are looking at this as sort of a service that defaults to 2.5G if it is not a hotspot there? Have you had anybody trial it with the built-in Wi-Fi and then with the PCMCIA (ph) with the 2.5G?

That is what T-mobile is all about through Boingo. They are going to be using a multimode, but in the case of our product, it can be set to default to either 802.11 or to cellular. But we are not in a trial with anyone at this point.

Okay. Thank you and congratulations.

Robert Mana (ph), Copper Beech Capital.

(multiple speakers). Congratulations on the progress you guys have made so far. I want to follow-up on the software access module and make sure I understood this correctly. The distribution here is going to be primarily focused on OEMs. You are not going to be pushing after the cable providers any longer?

No. What I am saying is that it is a great product going to chipset providers, but the completed product will also be moved into DSL or cable providers as well who want to extend the reach of their broadband distribution. But the concept of being able to bundle this with a client card or a chipset that goes into a client card and have that as part of its reference design is very attractive to us.

Thanks for clarifying. When do we start to see meaningful traction from that product? Can you give us some color there as well?

I really think we are going to see some traction in the fourth quarter.

Stan Trilling (ph), UBS Warburg.

A little bit of follow-up on the intellectual properties. You guys are making a significant investment in this area with your legal costs. Do you have a targeted return on investment for this area?

Well, I think that that is always subject to the settlement, but I would certainly not settle for anything less than a profile where the percentage of revenue that our legal expenses represented was more than 16 or 17 percent. That is a bare minimum. So if you look at high-tech companies putting in 16 to 17 percent of their revenue on development, I expect to get as a minimum that out of this investment.

But what we have told investors in the past is that we are going after a very large total royalty liability, and we think when we will look at parties that have used our technology, that past and future royalties are in excess of $400 million. That is the bucket of money that we are currently going after.

So the 3.2 million in future expenses is going after a $400 million elephant?

3.2 million per year.

Per year? Thank you. The last question, you had mentioned that you had been featured in Cisco's booth. Have you done anything with Cisco beyond that?

Other than incorporate their security profile into our product, which I think distinguishes a Roaming Client from other products on the market.

Thank you very much. Great quarter.

Jeff Shriner, MS Capital Management.

Thank you gentleman. I was just wondering if you could give a number for the number of gateways that have shipped year-to-date at the end of Q2?

I don't know that exact number. I will tell that our primary customer for the Gateway is MTN, Maritime Telecom Networks, who ships into the cruise line industry. I want to say programs to date we have shipped about 40 gateways.

40? So that is about flat with what you had at the end of Q1?

I don't think it is -- our goal is to attain a presence in about 100 ships over the next six or seven months. It will be a pretty steady-state growth in that area.

And would you say in terms of the long-term gross margin target that you had given, I believe maybe in your analyst conference, that is above 70 percent, you are still comfortable with that?

Yes. Absolutely. Absolutely, yes.

In terms of patents, how many patents does the Company currently hold at the end of Q2?

136 patents and filed applications. 84 of them have actually been granted; the rest are still in one stage or another of the approval process. So if you take that 136 total, we then have approximately 120 foreign counterparts for those as well.

Okay. If I could just clarify something regarding the legal expenses, I believe you said in Q1 they were 300,000 to an earlier caller. In Q4 '02, weren't they 30,000, and last quarter, weren't they 500,000? Am I mistaken in my figures?

The figures that I quoted were, first of all, not total legal expenses but legal expenses related to litigation, and they were 900,000 in this quarter just ended; they were 300,000 in the first quarter, and a year ago in the second quarter, they were 100,000. So once again, just related to the litigation.

Okay.

In particular, IP litigation. We have had small other litigation matters, but what John was trying to do for everyone on this call was to clarify the expenses associated with our current IP lawsuits, and he may be looking at a number that characterized total legal expenses for the Company in some other quarter.

Thank you for that clarification gentleman. One last question. I noticed you had the web release of the Segue Roaming Client was going to start being sold via the web. How have those sales been progressing through the quarter?

They have been okay. It really has given us more publicity or traction, and it is a nice way for us to support customers, but that is not our primary means of selling. The more interesting thing is how many hits we have per day and per week looking at it.

On a per week basis, I don't know exactly what it is, but right now we have had 11,000 downloads. There is about 200 per day and about 1400 per week. So in terms of giving visibility to the product, it has been fantastic.

Okay. Thank you very much.

(CALLER INSTRUCTIONS). Ken Heller, (inaudible) Capital.

Just a question with respect to you made a reference about making some progress I think on the hardware side, the Segue. I am curious if you could maybe distinguish whether it is more in the PDA side, or if you anticipate making some inroads in the handset area?

I am not sure exactly what you are referring to, but the progress that I had in my mind when I put together my notes, was progress we had in representing our soft access point module into the chipset vendors. I think there is a real interest in there. We have one relationship that is close to signing that we cannot discuss at this point, but I am very confident of being able to move forward with some of those relationships.

Okay. Thank you.

That is it? I will talk to you next quarter, Ken.

Daniel (inaudible).

Gentleman, I am a among private investor, and I have been following Wi-Fi and publicity on it. I was wondering what is your indirect involvement with Starbucks, and how has the Starbucks experience been with Wi-Fi via the consumer?

I don't have any direct relationship to Starbucks, but I can tell you these things. From my understanding, Starbucks gets a piece of revenue every time Wi-Fi is used at their location. I think for them it has worked out well.

The carrier, T-mobile, we have an indirect relationship with. As I said before, we provide the GPRS client to Boingo (ph) who is providing the integrated Roaming Client into T-mobile. So in that sense, we have a relationship to the effort.

Thank you.

(CALLER INSTRUCTIONS). If there are no further questions, I will turn the conference back to Mr. Singer to conclude.

Thank you very much for your time during our presentation, and we hope to report on further progress at the next quarter. Thanks a lot.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 300375.

This concludes our conference for today. Thank you all for participating and have a nice day.

(CONFERENCE CALL CONCLUDED)