PCTEL Inc (PCTI) 2003 Q3 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the PC-Tel third quarter earnings call. At this time, I would 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 the conference up for questions and answers after the presentation. I will now turn the conference over to Marty Singer, Chairman and CEO of PC-Tel. Please go ahead, sir.

Thank you. Good afternoon, everyone.

I'm Marty Singer, Chairman and Chief Executive Officer of PC-Tel. On behalf of PC-Tel, we all thank you for joining us on our earnings call for the third quarter. In this call, we will address the financial results of the quarter and the outlook for PC-Tel in the fourth 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 third quarter as well as limited financial guidance for the fourth quarter of 2003. I will then comment some of those results and turn our attention to the significant events transpired during the third quarter and discuss our plans going forward.

Also, I have Biju Nair, the head of our Segue business unit with us today to respond to any questions regarding the product that we are releasing with the NTT DoCoMo launch of their Wi-Fi service. John?

Hello, everyone. Before I begin my financial review of the company, I'll 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 and expectations regarding the future growth of its wireless and licensing businesses, 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 ability to successfully grow our wireless products business, implement new technologies, and obtain protection for the related IP and the risks associated with potential acquisitions. 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.

Third quarter total revenue was $4.0 million comprised of $3.2 million of wireless revenue and $0.8 million of licensing revenue. A year ago in the quarter ended September 30th, 2002, PC-Tel generated $1.3 million of licensing revenue, $11.2 million of HSP modem revenue, and no wireless revenue.

As you know, we divested the HSP modem product line earlier this year. The increase in wireless revenue reflects the acquisition of DTI earlier this year and our traction with the Segue Wi-Fi products.

Last year, licensing revenue was higher in the third quarter but it should be noted, however, that licensing revenue varies for a variety of reasons, including one-time payments from new licensees, changes in periodic fixed payments, and changes in the market share of our licensees.

For wireless and licensing revenue this represents a 200% increase from the third quarter last year and a 38% increase from the second quarter this year. Our revenue guidance for the fourth quarter is between 4.7 and $5.3 million of wireless and licensing revenue.

Now let's turn to gross margin.

Second quarter gross margin was 81% of total revenue. This compares to 78% gross margin for wireless and licensing revenue achieved in the second quarter of this year. Our gross margin guidance for the fourth quarter is between 75 and 80%.

Now I would like to address our cost structure.

Total operating expenses in the third quarter were $6.1 million. This compares to $5.9 million in the third quarter last year. However, as you know, the change in our business model following the sale of our HSP product line to Conexant in May does not make a comparison to last year particularly meaningful.

Our current expenditures reflect our investment in wireless product development and sales as well as legal expenses associated with licensing and patent enforcement. Opex expense is also impacted by amortization of intangibles related to the DTI acquisition, higher restructuring charge related to the HSP modem divestiture, offset by gain on sale of HSP modems and related royalties from Conexant.

With these investments and increases as context, we are estimating that total opex will be $6.2 million in the fourth quarter, which includes $0.5 million of amortization related to deferred compensation and intangibles, $0.3 million of restructuring charges related to the portion of the HSP modem product line that was not purchased by Conexant, and a $0.6 million gain on sale of HSP product line and related royalties.

The $100,000 expected increase in opex from the third quarter is primarily due to increased legal activity related to the patent lawsuits.

Interest income generated from investments was $0.3 million in the third quarter, compared with $0.6 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 as current levels or decline further. Fourth quarter interest income is expected to be $0.3 million.

Net loss for the quarter was $2.3 million. This compares to net income of $3.2 million in the third quarter of last year. The primary driver of the change is gross margin.

Last year's third quarter included a $3.8 million favorable HSP modem inventory reserve adjustment in cost of goods sold and the growth of the wireless and licensing revenue in the third quarter of 2003 was not yet able to replace the gross margin associated with the HSP product line a year ago.

Now, at this time I'd like to have a reminder here for those investors who are new to PC-Tel.

The analysts who cover PC-Tel and comprise the First Call numbers publish what are called adjusted earnings per share numbers. They add back amortization and one-time events such as restructuring charges, as there was this quarter, to arrive at those numbers. The adjusted earnings per share after adding these items back for this quarter is about 8 cents per share loss compared to the 9 cents that was in the First Call numbers.

Now let's turn to the balance sheet.

Cash and short-term investments ended the quarter at $108.9 million compared to $111.8 million at the end of the second quarter 2003.

The company repurchased 257,400 shares in the quarter, under its share buy back program. Since inception, the company has repurchased 1.54 million out of the 2 million shares authorized by the board of directors. 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. Before providing additional detail on events in the third quarter, I wanted to comment on our overall progress and execution of our strategic plan.

Two years ago I conducted my first earnings release for the company as CEO. At that time we faced significant challenges in the legacy HSP modem product line and we made limited use of our intellectual property. Our investors expressed concern that we had yet to find the future beyond analog modems. Much of this has changed.

We have two strong wireless product lines in high growth areas. We are experiencing early success in our licensing programs and we have maintained a strong cash position despite making two acquisitions and implementing a share repurchase program.

Our management team has remained intact over this period and we are comfortable with the prospect of realizing growth in part through additional acquisitions. We are on track and remain committed to our strategic plan.

Now for some additional comments and perspective on the third quarter.

As John has already mentioned, our new product line showed strong growth during the third quarter. It is important that we acknowledge the contribution made by DTI during this period.

In addition to introducing two new products, claRiFy and the Segue Analyzer, DTI grew both its government and commercial cellular revenue. We will continue to invest in DTI's software-defined radio platforms and in the distribution channels required to realize more fully the potential of those products.

During the third quarter, we recruited and hired three new sales executives and we entered the fourth quarter with sales and marketing coverage in Asia, Latin America, Europe and Israel for DTI products. The DTI team managed three trials of its new claRiFy product and developed important teaming relationships with providers of interference management software tools during the past quarter.

You might recall that we identified distribution as a critical barrier to success during the last earnings release conference call. In addition to DTI's efforts in this regard, we continue to address the distribution challenges facing our Segue product line.

During the quarter, we hired Shoken Kim in Japan as our VP of Asian Sales. Shoken recently represented both Agilent and Skima in that region and has over 10 years of experience in technology sales. We also added a sales professional in Taiwan and established a local distributor.

Our third quarter investment in our distribution channel has already produced sales results. As indicated in a separate press release issued today, we closed just this past Friday a multi-year agreement with NTT DoCoMo.

Under that agreement, we will supply the Segue roaming client for 2.5G cellular, PHS and Wi-Fi Internet access. This is an excellent design win for us and reflects confidence in our Segue development team.

NTT DoCoMo launched this service today using our roaming client. Our announcement is coincident with that launch and we are fortunate to have this opportunity to discuss this contract win with all of you.

The NTT DoCoMo project highlights several of the distinctive advantages of our roaming client. We were able to rapidly localize our product and deliver a con-G based solution for the Japan market.

Our product architecture permits to us quickly translate the client's operation into multiple languages. NTT DoCoMo will also exploit our central server interface, which enables the downloading of Hot Spot and other relevant network information.

Over the long run, the central server interface and related capabilities will position our roaming client as a premier connectivity manager for the enterprise market as well as for the carrier market.

We continue to learn about the sales cycle associated with major carrier wins. We have been working steadily for nine months on this project.

As we have indicated in our publicly available investor presentations, we are working hard to win business with major carriers worldwide. We now have won three carrier bids, NTT DoCoMo, AT&T Wireless and through an OEM relationship with Boingo, T-Mobile.

We still have much work to do and although rewarding, it will take time to secure additional wins in the U.S., Europe and elsewhere.

In addition, we recently received our first soft AP or Segue SAM purchase order from Taiwan for a PCMCIA implementation. This sale was brought in by Apache, the distributor that we established recently.

Apache will work closely with the new local Taiwan sales executive that we put in place during the third quarter. All of the sales activity suggests that we're making progress in building our distribution channel.

Let me now turn to our product development efforts.

Both of our wireless development teams were extremely active in delivering new products during the third quarter. We have already noted DTI's new product introductions, in particular the successful introduction of claRiFy.

For those of you who attended the ITU World Telecom exhibit in Geneva, you would have seen this new product on display and witnessed the extremely positive response from wireless carriers. Stated simply, the product sets a new level for detecting and resolving interference problems in commercial wireless networks that impact both capacity and quality.

Attendees would have also seen our new Segue Analyzer, a test tool for Wi-Fi networks that permits IT managers to optimally position access points, minimize interference, detect energy levels and detect intruders.

The Segue development team introduced a secure version of its leading roaming client product and also added a broadband dialing capability. The roaming client now supports Wi-Fi, GPRS, PHS, CDMA, analog voice and broadband access. It has become a true connection manager for the mobile worker.

Additionally, the product architecture enables continual updating of Hot Spot directories. These enhancements position the roaming client as an excellent application for the enterprise customer. We are targeting enterprise IT manager as an important customer for the Segue products.

We also introduced our soft access point product, the Segue SAM. Our software works with two different 802.11 chip sets. We are compatible with the wave plus chip set, a product that will be useful in our traditional Taiwanese markets.

It is also compatible with the Globespan Virata chip set. Future releases will expand upon our span of compatible chip sets as indicated in our previously announced relationship with Conexant.

I want to spend a few moments discussing our ongoing patent litigation.

I know that many of you are interested in our progress and enforcing our intellectual property rights. As we have discussed in the past, it is sometimes necessary to litigate these issues to ensure that others respect our intellectual property.

As you all know, we sued Broadcom, U.S. Robotics, 3Com and Agere and Lucent to achieve appropriate recognition for our modem patents and the technology that we created or acquired. As John has pointed out, this is not a path for the faint of heart. We expect to spend between 3 and $4 million a year to realize the potential of our intellectual property.

As you know, we cannot comment on the specific status of litigation but we can confirm that we are in initial discussions with some of the parties.

Let me address our activities on the M&A front.

During the third quarter, we evaluated more than 15 companies for potential investment or acquisition. We continue to evaluate opportunities in several areas, notably specialized wireless solutions, specialized wireless products and software utilities that enhance the experience of the mobile worker. We hope to report more progress on these activities as those situations develop.

Let me close on a personal note. During the third quarter, the board of directors and I came to terms on a five-year employment contract. That contract is consistent my long-term commitment to PC-Tel.

We have made significant progress in making the transition of the company from a modem-only access company to what it is today, a company with a strong footprint in both wireless and intellectual property. The entire management team believes that we are now well-positioned to grow PC-Tel into a much larger company with a meaningful presence in the wireless arena. I am extremely enthusiastic about leading the team towards our business and financial goals and our management team is focused on that commitment as well.

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

Thank you, sir. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push-button telephone. If you would like to withdraw your question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question, sir.

Sure.

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

Congratulations on a strong quarter. Could you guys talk a little bit about, you know, one of the strategies has been -- is you have -- you assemble a pretty powerful management team there. You haven't for quite a while, made any moves really on new acquisitions. Could you talk a little bit about that and, you know, should we be expecting something in the next three to six months? Or have you guys decided you want to continue to assemble with what you have?

Well, thanks for the question. The short answer is not at all. We plan to grow organically to be sure and to continue to infuse DTI and the Segue product lines with the resources they need to grow those businesses, but we are firmly committed to growth through acquisition.

We're looking at three areas. As I mentioned in the script, that we just went through, we evaluated about 15 companies this past quarter and we're focused on three specific areas of interest. We're looking at high margin, somewhat protected product areas in wireless and also some high-margin protected areas in wireless network solutions.

In addition to that, we would like to really expand upon the scope of what the Segue product line can do and go beyond a simple connection management and provide a suite of tools for the mobile worker. So, we're looking at three areas of acquisition. I can't comment on the exact status of any of those efforts.

I will, though, remind investors and anyone else interested in our company that when we consummated the deal with Conexant, which was in May, I gave a general view that we were going to take about six months to evaluate companies and hopefully that we would consummate another transaction by the first quarter of 2004.

Okay. And then also, maybe on a -- part of your strategy also in the buy back shares when the stock's been attractive, and last quarter, obviously, you bought some shares back, have you guys given any thought moving it to one of those plans where you can buy even during blackout periods? Or do you currently have that capability? Or will you have to stay out of the market once you get close on an acquisition?

We don't currently have that capability. We haven't filed one of those plans and in the event we would get close to an acquisition or be involved in a deal, we would have to back off from share repurchase during that period. Even of it were to occur in the middle month of a quarter.

Okay. And, John, a little bit -- you've had pretty good accounts receivable controls, certainly done a great job since you've been there. Can you talk a little about what are the different receivable days by maybe the DTI and Segue and also MPT has been pretty famous for paying, but also being a slow payer at times.

Sure.

Should that change what you're long-term outlook is?

I would say our long-term outlook, is that, and just as a reminder as a baseline, in the modem business, we had gotten that down to a very quick turn business of about 25 to 30 days as a norm and that's because we had broken our shipments into regularly scheduled shipments that people would pay before they got their next one.

Now that we're in the DTI business and beginning to look at systems businesses, those carrier customers typically are in the mid-40s days for receivables. Our actual receivables for this quarter were 41 days and I would expect them to pretty much operate in that same range in the mid-40s as a business model.

Okay. And NTT, the last question is, when is a reasonable target to start receiving a decent amount of revenues from NTT?

We will start receiving some revenues immediately. In terms of a decent amount, I can't comment on the specifics of the contract other than to say that we share in the growth of their network. As the number of subscribers or as the number of day users increases, the revenue that we receive will go above the fixed monthly amount that we receive today.

Thank you.

Thank you, Doug.

The next question comes from Matt Robison with Baker Watts. Please state your question.

Yeah, congratulations on the solid quarter and the progress, you guys look like you're making. I wanted to ask if you could comment a little bit, Marty, on the economics around the software access point deal that you did with Apache and also what you've done or plan to do in terms of channels for Segue Analyzer? I know it's probably tough for you to get too specific on the Soft AP, but maybe you could kind of bracket it for us.

Let me start with the easier question first, the Segue Analyzer. The Segue Analyzer is primarily going to be distributed through DTI as they have a long-standing presence in the test and measurement arena and they will be distributing that product through their traditional OEM channels. You know, very often how they sell is somebody who is a systems provider into a carrier or into some other group will take on one of their radio products.

In addition to that, DTI is actively establishing distributors for that product that will carry the product into the enterprise market. We're making progress in that area right now, we're close to establishing a major distributor and, you know, we will inform all of you as soon as that is consummated.

Now, with respect to the Soft AP, I would prefer not to comment on any specific PO but I do want to review how we plan and how we are going to market with that product. First and foremost, we are calling on the users of chip sets from the vendors that we have relationships with, so that they have the opportunity to bundle our software with their chip set and turn their USB-based or PCI-based client card into a router and access point when integrated into a PC.

So, relationships with the chip set vendors and joint sales efforts with them is the number one way in which we will distribute that product.

Secondly, we are going with some chip set providers into NIC markets, network interface card markets, and that was the nature of this deal in Taiwan, and providing a license to our software for so much per copy associated with this.

And then finally, we will have some opportunity to bundle our software with a finished NIC product or with a computer vendor, a computer or PDA vendor where they will either buy an annual license that has a site license characteristic to it or a per-unit license. And prices will vary tremendously depending on volume and the amount of sales effort that we have. But prices will range in very high volumes from anywhere from 75 cents and certain models to over $5 for other models.

Can you comment on how much you spent to buy back shares in the quarter?

Certainly.

John do you have those data?

Well, to date -- let me give you some to date numbers. We bought back a little over 1.5 million shares, we've spent $11.5 million for an average price of $7.48.

How about for the third quarter?

It was a little bit over $10 per share in the third quarter. I don't have the exact extended dollar figure.

Okay. Thanks.

Thank you, Matt.

The next question comes from Anton Wahlman with Needham and Company. Please state your question.

Hey, Marty and John, can you hear me?

Sure can. Hi, Anton.

I just wanted you to discuss a little bit if you can, what you perceive to be the intermediate to longer term competitive landscape in two of the product areas. One is the Soft AP functionality. And the second one is the Wi-Fi-only part of the roaming client in terms of just the basic functionality of allowing a user to be automatically longed on, having his ducks lined up in order and so forth. In those areas, I mean what are, you know, what are sort of your barriers to entry in that business?

Okay. Anton again, your question is the competitive landscape and the barriers to entry?

Yeah, yeah, sort of the future barriers in the competitive landscape resulting from either lower or higher barriers to entry in those particular two fields.

Yeah, let me deal with the Soft AP, our Segue SAM product, first. You know, there's two classes of competitors here, we believe.

One, there's certainly competition from some of the chip set manufacturers who will develop their own software solution. And I think that they're on that path for the same reason that we're now seeing some success in selling our product and I think that you may have mentioned in a note that you put out, primarily that as there's pressure on 802.11 chip sets, vendors are going to try to maintain prices as best they can by adding a new functionality.

And so the chip set vendors will be motivated to either make or buy solutions that will do that. And it will be dependent somewhat on the control that the chip set vendor has over the market, the freedom that their target customers want from those chip set vendors and having to accept the entire solution.

But I'll mention this: This is a much better opportunity than the modem market where we were dependent upon a single DAA chip set supplier who had a propriety solution. In this case, we can provide our software across any chip set that gives us minimal information such as the mini port driver.

So, you know, we're not in the position of being OEM software resellers of somebody's propriety solution. Rather, we're in a position of being able to provide an attractive solution that's compatible with a standard chip set.

So, there is that one class of competitors. Another class of competitor, I would have to say, are people that provide operating systems. You will see, you know, some version of a soft router or a file sharing system from Microsoft. And in the early 2006 timeframe you'll see Longhorn and so on, but you'll still always have issues with downed versions. You know people who have earlier versions and would like to be able to use a software-based solution for router and access points.

In terms of barriers to entry, I think our greatest challenge right now is establishing a strong distribution. I think we've got a great product, we're finding different applications for it and it's really the distribution challenge that we've got to continue to work on.

With respect to the roaming client, it is true that you're going to find very skinny versions. I think there's just a limited market for that, though, Anton. The real market is to provide tools for the mobile worker where Wi-Fi access is one of those tools but mobile users are going to demand that their PDAs or their notebooks or their telephones are able to connect to the Internet via variety of media. And that's where our product has a great advantage.

Other advantage we have is the basic architecture. You know, we have an architecture similar to something like Internet Explorer, where you get information about upgrades that are available or important downloads.

When we sell our product to a carrier, they're not simply buying an application, they're buying a system. They buy a back-end server that they can populate with all types of information and move into the roaming client application that resides on your device.

That's an advantage. That's something that we're making increasing use of. We have, you know, higher levels of security related to this. And special features that are meaningful to the mobile worker, automatic VPN configuration and access and so on. I don't know if that answers your question fully or not.

It's pretty good. Just one thing on the Soft AP competitive landscape over time. You mentioned earlier that prices for the Soft AP software functionality could be anywhere from below a dollar to a few dollars and if .11 chip sets now are well down into the single digit number of dollars with a very, very basic .11 B gear, it would seem to provide a pretty good inventive for these players to develop their own, as you suggested.

Well, you know, depending on their resources and their expertise in this area and their willingness to get into the full range of connectivity. As I said, I don't think that there's going to be a terrible urgency among some of the chip set vendors to do this by themselves.

Time to market --

You know, there's a big time to market issue. They're going to want to have these advantages baked into the product and it won't -- you know, they're going to want to have solutions that have been successfully trialed.

How much of the Soft AP functionality came from, if any of the old soft dial-up modem technology? Or is this really a whole new strain of R&D that was really brought in, you know, with your acquisition in the late spring of 2002?

Well, we'll let Biju comment on that.

Anton, we used some of the IP that we had from the modem spaces, like wake-up on LAN, we extended that into wake-up on wireless LAN and there is some IP on the core architecture itself. But the actual development of the product was development from scratch. We obviously leveraged some of the expertise that we had in our modem organization.

Okay. Thank you.

Thank you, Anton.

The next question comes from Susan Calla with FBR. Please state your question.

Hi, I wondered if you could give us a view of, you know, the outlook for the revenues by product and then also the gross margins had a nice rise I guess because of the mix of your licensing revenues. I wonder if you can give us an idea of how that looks going forward? Or just a viewpoint on it?

Well, thanks, Susan. The gross margin actually reflects a strong contribution from DTI. As we've pointed out, the software-defined radio products from DTI are in strong margin areas, they're somewhat protected markets and a lot of it depends on willingness of carriers to pay for products that eliminate the need to make huge capital investments.

Also, in some of the government sales that DTI enjoys, there's some insensitivity to margin for special purpose, Department of Defense-type products.

We think that margin is going to remain in the 75 to 80% range for quite some time in these product lines and we're comfortable with forecasting that going forward.

In terms of revenue by product, we're really just talking about wireless as a group and licensing. We anticipate that both of those will increase in the fourth quarter and we think we're going to see licensing revenue increase throughout the entire year next year as a result of some of our activity in this IP initiative that we have.

Excellent.

Thanks a lot.

The next question comes from Ken Heller with Kenel Capital. Please state your question.

Good afternoon. Marty --

Hey, Ken, how are you? I can barely hear you.

Sorry about that.

That sounds better.

Marty, could you give us an update maybe on your expectations with respect to revenue contribution from AT&T and the other carriers that you've announced thus far? And maybe a follow-up for Biju, if he could speak to when you may have a roaming client available for NTT that will allow them, users to hop between WCDMA and Wi-Fi and PHS. Thank you.

Okay. I'm going to have Biju answer first. Again, we can barely hear you, but I think your questions were this, have Biju discuss the product that we're delivering to NTT DoCoMo and when it will be able to go between the different types of wireless connections. And the question for me was to provide some more detail on the contribution from our various carrier wins.

Correct.

Biju, why don't you go head with that.

So, Ken, the product that NTT launched their service with today is a Wi-Fi only product that is fully branded to NTT DoCoMo and localized to the condu script. It contains, some of the highlights of that are, it contains a local location database for RFNTT Wi-Fi Hot Spots as well as their roaming partner's Hot Spots in there. And NTT DoCoMo had chosen specific security mechanism to give secure access to all their users at their Hot Spot. It's called 802.1X. It's a standard within the defined by our EEE and specifically within that standard they use the methodology called [EMPPTLS]. As you know, these TTLS, like modulars are called supplicants and we embedded one of the supplicants that we developed in-house for DoCoMo's use.

Going forward, in December, they will launch a second version of the product that will allow them to roam back and forth between Wi-Fi and PHS and Wi-Fi and [FORMA], which is their wideband CDMA service that's available in Japan. So, that's the basic product that we had available.

Okay. Thank you.

It should be pointed out that the product that we delivered, however, has the multimode capability today, it's just that they have chosen to launch the Wi-Fi-only characteristic.

In terms of contributions by customers, I, of course, cannot comment on that and again, I know it's a little frustrating to you, Ken, but we're not breaking out our wireless businesses separately. You know, I can just say that we continue to build momentum in a base of revenue in the roaming client and Soft AP arena and that we'll continue to have additional carrier wins that will add to that base.

Okay. Thank you.

Thanks, Ken.

The next question comes from Jeff Schreiner with MS Capital Management. Please state your question.

Good afternoon, gentlemen. Just a couple of housekeeping issues here. What were legal expenses in the quarter?

John?

Legal expenses were about $650,000.

Okay. So down a little bit sequentially, then.

Yeah. 25K.

And are we still expecting some sort of an announcement in Q4 '03 regarding Segue SAM and some type of deal with another provider?

Well, I think what we've said all along is we did announce that we delivered the product in the third quarter, that hasn't changed and we continue to work on additional chip sets manufacturers. I think we already announced that we have an agreement with Conexant to implement the Soft AP and we're confident we'll have additional details but we can't discuss the status of them right now.

Certainly I understand. And what were the total number of patents and patent applications at the end of Q3?

Well, at the end of Q3, I'm not exactly sure. I think what's relevant is that after the transaction with Silicon Labs, that about 116. And that transaction occurred just after the end of the third quarter. It was over 130 prior to that point.

Right. So now we're at 116, you'd say?

Yeah.

Okay. And then in terms of the Web site and downloads you might have had in the quarter for the Segue roaming client, how many did you have in the quarter per se? Or how many have you had year to date?

About 413 --

About 400 downloads a day, about 34,000?

We have about 400 downloads a day and a total of 34,000 downloads.

Great. So, we saw almost a double in terms of the daily downloads from Q2?

Yep, yep, yep.

Last question here, kind of combining one, the backlog for DTI heading into Q4 of '03, is it as strong, let's say, as it was going into Q3? And how has the testing proceeded for the DTI with the various contractors you were working with in the, I believe there's four of them, you said, last quarter.

I think I said three. Are you talking about the testing for claRiFy?

Yes, sir.

The testing has gone very well. We've actually done some dry testing in some key U.S. markets. The carriers are extremely excited about the results.

We believe that our results, when coupled with some of the major frequency, planning and sell planning tools in the market are yielding the best results that carriers have ever seen in terms of accurate optimization plans. Could you repeat the first part of your question? I didn't quite get that. I got the testing on the claRiFy, but what was the first part?

Yes, certainly, I apologize it was just the backlog for DTI, heading into Q4 '03 versus how strong it was proceeding into Q3?

John?

Yes, this is John Schoen. The test and measurement business isn't really a backlog-driven business. I go back to the days when our management team ran Safeco and at the end of any particular quarter you pretty much -- actually, at the end of any particular month, you were able to ship every order that you got because of the way you staged your inventory.

For DTI it works even better because that the largest piece of the value add for them is their software content and that was one of the reasons that attracted us to them is because you can fulfill an order pretty much at the same month that you get it. And then you'll notice, you'll also see that reflected in our SEC filings is that we don't actually print any backlog numbers because they're immaterial, we're able to deliver everything pretty much when ordered.

Okay. Thank you very much, gentlemen.

Thank you.

The next question comes from Matthew Campbell with Knott Partners. Please state your question.

Yes, I have two quick questions. The first, the acquisition strategy you're looking at, do you -- should we expect those acquisitions to be accretive off the bat? And the second question is related to the Silicon Labs agreement. What is the strategic significance to your company with regard to that announcement? It seems like Wall Street was a little, misunderstood that announcement.

Yeah, thanks for both of those questions. An opportunity clarify them.

I would say it's fair to say that as we move forward with our acquisition strategy that we are looking at accretive acquisitions and those acquisitions that will help us establish a critical mass in terms of wireless revenue.

With respect to your second question, let me just mention a couple of things. Silicon Labs is a long time ally and partner of PC-Tel. And some of the patents that we received from Conexant were very specific to DAA technology and we had no intention of going into DAA and we certainly did not have an intention of using those particular patents as a weapon against Silicon Labs.

As part of a broader relationship that we have with them, where we had a previous licensing arrangement and part of our desire to have them be helpful to us in other matters related to our patent initiatives, we agreed to an arrangement where we transferred those patents, it certainly wasn't our -- I think maybe Wall Street thought we were transferring our entire modem portfolio. That was certainly not the case. It was a very limited set of patents and a limited technology arena.

And so we agreed to transfer those and let me make one other comment. You know, patents are not a zero-cost item to maintain. We had applications that there that would have cost us money to prosecute and we would also have ongoing maintenance fees. We think that we probably saved over $200,000 by transferring those patents.

In addition, what happened at the same time in that deal is that in a separate commercial arrangement, Silicon Labs accelerated certain licensing payments to us that otherwise might not have occurred and those are already baked into the 2004 numbers as part of our licensing number. All in all it was really a win-win situation.

We divested patents profitably that were of no real value to us. We cleaned up a licensing amendment and we think that we have strengthened the relationship with Silicon Labs with respect to other licensing matters in front of us.

Great, thanks for that answer.

Thank you.

The next question comes from Stan Turling with UBS. Please state your question.

Hi, Marty, hi, John.

Hey, Stan, how are you?

Pretty good, pretty good. Can you comment on any progress that you've had with Globalspan clients after their announcement of using our product?

I think, if I understand your question, you're referencing the deal that we have with Intersole division --

Correct.

That was called Globespan Virata and the progress that we've made since that point when Globespan Virata acquired them and we signed the contract and I'd be happy to.

We have been on a nonstop sales tour in the U.S. and in other parts of the world, going to all of those who use that chip set and making the case that there is real application for our software with that chip set when it's used as part of a network interface card or some other device. I can't comment on any specific sales call other than to tell you that we think it's going well and that Globespan Virata has been a great partner in making joint sales presentations.

So, you can't comment on when you might see revenue flow from that alliance?

I would say that you can comfortably expect revenue in early 2004.

Thank you.

The next question comes from Matt Robison with Baker Watts. Please state your question.

Thanks for the --

Matt, you didn't get fully fulfilled on your last set of questions!

Yeah, I just thought I'd give somebody else some time. I wanted to ask you if you had any revenue from the new products, claRiFy, Analyzer and SAM, or DoCoMo in the quarter. And if the server side of what you've done with DoCoMo is also related to subscriber additions, in terms of how much you will see from that?

Well, there's been no revenue from claRiFy. There's been no significant revenue from entity DoCoMo in the third quarter we just signed the contract. We do expect revenue from claRiFy in the fourth quarter. We will also see revenue from NTT DoCoMo in the fourth quarter

And I guess in response to your last point, we're not anticipating breaking out the incremental revenue opportunity between the application and the back-end server. We're just going to be compensated based on the number of subscribers and the number of day users for the roaming client.

So, okay, so, we can assume that with all the new products that were announced in the quarter are products that, we didn't see any revenue from those during the third quarter and we should start to see some in the current quarter?

Correct. I will tell you, you know, since this is a publicly available call, that we did have our first Segue Analyzer sale this week. And so that was a great moment for us.

Okay. Thank you.

Sure.

Thank you. Once again, ladies and gentlemen, as a reminder, if you wish to ask a question at this time, please press star one on your push-button telephone. If there are no further questions, I will turn the conference back to Marty Singer.

Thank you and appreciate all of your attendance and your thoughtful questions during this conference call and look forward to updating you at the next call.

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 I.D. number of 306001. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.