PCTEL Inc (PCTI) 2003 Q4 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the PCTEL fourth quarter and fiscal 2003 conference call. At this time, I'd like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I'll now turn the conference over the Martin Singer, Chairman and CEO of PCTEL. Please go ahead, sir.

Thank you and good afternoon everyone and thank you for joining us for this call. I am Marty Singer, Chairman and Chief Executive Officer of PCTEL. On behalf of PCTEL, we thank you for joining us on our earnings call for the fourth quarter. In this call we will address the financial results of the quarter and the outlook for PCTEL in the fourth quarter of 2004. Joining me today is John Schoen, Chief Operating Officer and Chief Financial Officer. John will take you through our financial performance for the fourth quarter, as well as limited financial guidance for the first quarter and the full year of 2004. I'll then comment on some of those results and turn our attention to the significant events that transpired during the fourth quarter and discuss our plans going forward. 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 our 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 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 the information to reflect subsequent events. This concludes the Safe Harbor statement.

Now, I'll continue with the financial review. Fourth quarter total revenue was $18.3m comprised of $3.5m of wireless revenue and $14.8m of licensing revenue. Our first wireless revenue came in the fourth quarter of 2002 at a $100,000 and has grown sequentially each quarter for a total of $9.6m in 2003. The increase in the wireless revenue for the quarter and year compared to 2002 reflects the acquisition of DTI in March 2003 and revenue traction of our Segue Wi-Fi products. Our licensing revenue was $5.4m in 2002 and has grown to $18.1m in 2003. The increase in licensing revenue for the quarter and the year are attributed to settlements with Intel and Broadcom approximately $13.5m of the fourth quarter's revenue was related to the Intel settlement which is a paid up-license, the Broadcom settlement is not a paid-up license, virtually all of the revenue associated with the initial payment received from Broadcom in the fourth quarter will be recognized gradually over the 2004. On January 2, 2004, PCTEL acquired MAXRAD, a leading manufacturer of wireless communications antennas. During our conference call on January 5, to discuss the acquisition, we gave annual revenue guidance for 2004 including MAXRAD of $50m; that number does not include potential settlements with the remaining litigants in our intellectual property law suits. Our revenue guidance for the first quarter of 2004 is between $9.5m and $10m.

Now, let's turn to gross margins. Gross margin for the fourth quarter was 97% compared to 53% for the fourth quarter last year. For the full year, gross margin was 74% compared to 53% a year ago. The revenue associated with the Intel settlement positively impacted gross margin by 11% on the quarter and 10% on the year. The remaining year-over-year difference for both the quarter and the year arise from the company's transition from HSP modem products to higher margin wireless and licensing products. During our January 5th conference call to discuss the MAXRAD acquisition, we gave 2004 guidance for gross margin in the mid-60% range for total revenues including MAXRAD. At that time, we indicated MAXRAD margins are robust for hardware business but they are lower than the model the company runs with its wireless software and licensing-related products.

Our gross margin guidance for the first quarter is between 64% and 68%. Now, I would like to address our cost structure. The company's activities since the HSP sales have been devoted to developing wireless and licensing revenue. These changes do not make comparisons to last year particularly meaningful. I will be focusing my analysis on comparisons to the third quarter of 2003, which was the first full quarter after the sale of the HSP modem product line. The total operating expenses in the fourth quarter were $7.2m. This compares to $6.1m in the third quarter of this year.

The sequential increase is driven by several investments we made. G&A costs were higher due to legal expenses related to the Intel and Broadcom settlements. Sales and marketing expenses were higher due to heavier trade show activity and further investments in our direct sales force. And finally, the company incurred some additional restructuring cost for the final closeout of its modem operations. Our OPEX profile will include MAXRAD for the entire first quarter of 2004. We estimate total OPEX cost to be $8.6m, which includes $1.1m of amortization related to deferred compensation and intangible, and $500,000 of royalty income. There will not be an in-process R&D charge for the MAXRAD acquisition. Interest income, let's talk about our interest income now. Interest income generated from the investments was $0.3m in the fourth quarter compared with $0.6m a year ago. The total 2003 number was $1.4m, down $1.9m from last year. The difference in the quarter and the year is attributable to the decline in interest rates in our portfolio since last year.

The amount per quarter is expected to further decline over time. First quarter interest income is expected to be $0.2m. Net income for the quarter was $8m compared to $2.6m in the fourth quarter of last year. For the full year, net income was $5.9m compared to $6.1m a year ago. On the year, the transition from HSP modems to wireless and licensing products yielded $3.7m more in operating income, which was offset by $2m less in interest income from the company's cash position and $2m more in income taxes as the company utilized its remaining tax losses in 2003.

Now let's turn to the balance sheet. Cash and short-term investments ended the quarter at a $125.5m compared to $108.9m at the end of the third quarter 2003. The difference is driven by the settlements with Intel and Broadcom. As of December 31, 2003, the company has repurchased $1.54m out of the 2.5m shares authorized by the Board of Directors under our continuing share buyback program. No shares are repurchased during the fourth quarter due to the impending acquisition of MAXRAD on January 2, 2004. 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.

Thank you, John. Nice job. We are certainly pleased with our financial progress. We have successfully met guidance now for nine consecutive quarters. Without consideration of the settlements with Intel and Broadcom, we grew our wireless businesses as planned during the fourth quarter. In fact, in each of the past four quarters, our wireless revenue has grown. We are also pleased that with the benefit of the licensing agreements that were completed during the fourth quarter, we were able to generate earnings for our shareholders. We have continued to recover from our losses in 2001 and now we have two consecutive years of profits behind us.

Aside from our moderate financial success, 2003 has been a successful year for PCTEL. During 2003, punctuated by events during or shortly after the fourth quarter, we achieved many of our strategic goals. Over the course of the year, we shared six objectives with our stockholders. We encourage investors to evaluate PCTEL's management team by monitoring our progress and meeting those objectives. Those objectives work to: One, effective transition from a modem-only to a wireless company. Two, license for financial and commercial benefit our intellectual property. Three, acquire growth engines in wireless for the company. Four, control operational expenses in our modem business. Five, establish momentum for our Wi-Fi products. And six, address our distribution issues. With the exception of successfully developing our distribution channels, we have met all of these objectives. To review our progress, it might be helpful to reflect back on the company's status in January 2003. Last January, we had an HSP modem product line that had low growth prospects and generated extremely low margins. We had patents but a very tentative licensing program.

Our investment in wireless products has just delivered a Multimode version of the Segue Roaming Client for which we had no customers. We had no other Wi-Fi or wireless products. Since that time, we have delivered several versions of the Segue Roaming Client and the Segue Soft AP. We have successfully licensed the Soft AP to Conexants, Arcadyan, and MSI, and our software is compatible with three 802.11 chipsets. We have announced commercial agreements with the Segue Roaming Client, with BOINGO, ATT Wireless, NTT DoCoMo and most recently with Cingular. We expect to announce additional wins over the next 90 days. In all, we believe that we have captured or will capture half of all the major request for proposals on the market for Roaming Client type products. We are the only supplier to provide a true Multimode capability compatible with PHS, the major cellular standards, Wi-Fi and state-of-the-art security solutions for wireless access. In summary, we believe that we have established momentum for our Wi-Fi products. In the past year, we have also accomplished two of our other goals.

We have acquired exciting growth engines and effected a transition from a modem only to a wireless company. During 2003, we sold our HSP Modem product line, which strengthened our intellectual property position and sharpened our focus on wireless opportunities. We have replaced the HSP modem products with an outstanding software-defined radio product line provided by the DTI acquisition in March of last year. The products there performed as expected and brought revenue in both the government and commercial test and measurement markets. Their margins have been outstanding and we are confident that the products under the DTI brand will continue to fuel our wireless growth. On January 2, as John already mentioned, we consummated a second acquisition. We announced the acquisition of MAXRAD, a leader in antenna technology. MAXRAD brings to PCTEL a strong revenue source, an established presence in wireless, and a dedicated network of distributors and manufacturers representatives. Since the acquisition, we have uncovered additional synergies. For example, many of the problems that DTI products are confronted with in meeting customer requirements pertain to antenna performance issues.

In the few short weeks since the acquisition, we have already shortened our design cycle because of the cooperation between the DTI and MAXRAD product teams. Since June 2002, PCTEL has invested $33m in the acquisition of wireless companies. This is less than the money received or committed under the IT settlements consummated in 2003 for royalties, lump sum settlements, and the divestiture of the HP modem product group. Last year we committed to investors that we would aggressively assert our intellectual property rights. We explained that while expensive, litigation was essential to a program of patent enforcement.

We spent approximately $2.6m in legal cost for our licensing efforts in 2003. In addition to the Broadcom and Intel agreements, we received royalties from Smartlink, Conexant, ESS Technologies, and others. We recently licensed without litigation, our V.34 low speed modem technology to . As we have stated previously to investors, we will spend approximately $3.5m per year on the litigation in front of us. Management continues to believe and the evidence strongly suggests that this investment makes sense and will benefit PCTEL stockholders.

In addition, even though we have not entirely accomplished our objective with regard to distribution channels, we have made progress. We added three regional sales managers for our DTI and Segue products. We signed an OEM distribution agreement with a major cellular infrastructure company and signed on a new distributor for Taiwan and China. MAXRAD brings a new dimension to PCTEL. It has a well-developed web-based sales system that links to their distributors in different territories. In 2004, we will explore ways in which we can leverage this valuable asset. Independently, we began to sell the Segue Roaming Client on the PCTEL Web site. Despite this progress, we are yet realize the full benefit of our investments in distribution channels. Although we successfully controlled 2003 OPEX, particularly in our modem product group, our expenses in the fourth quarter were higher than the third quarter. As Schoen has already discussed in some detail, there were three contributors to our higher fourth quarter expense run rate. We invested money on trade shows in expanding our sales force to both Segue and DTI products. We experienced greater legal fees associated with the Intel and Broadcom settlements. And we have residual restructuring charges related to the HSP modem product line sales. We will work hard in 2004 to ensure that these cost stay in line.

Although not a formal objective at the outset of 2003, PCTEL management focused on improving our corporate governance. The ISS evaluation of PCTEL's corporate governance was average for companies in the technology sector and below-average for all companies. Throughout the year, we took a number of actions to address specific shortfalls identified by ISS and we are pleased to report significant progress. Our most recent ISS score has moved us to the 77% in our industry. More important than the score are the substantive changes that we made over the past year in our corporate governance regiment. Among other actions, we have established a nominating and corporate governance committee. We will be posting our corporate governance guidelines and our code of conduct on the Web site. Our directors are attending ISS-certified courses and we are putting in place a succession plan. We will continue to treat corporate governance as an important matter as we build the company in stockholder value. We believe that excellence in corporate governance represents a competitive advantage, as our customers attempt to distinguish between potential suppliers, particularly for long-term relationships.

As we look forward to making further progress during 2004, PCTEL management again wants to set forth our objectives. We request that investors measure our success by accessing our progress against the following objectives that I will now share with you. One, we will successfully continue our acquisition strategy in support of our wireless initiatives. Two, we will achieve revenue traction in all product areas, particularly Segue. Three, we will generate revenue growth outside the US. And four, we will demonstrate continual improvement in our corporate governance. Hopefully, a year from now, we will again be able to report our success in meeting these commitments.

This month we celebrate the company's 10th anniversary. We have an exciting history of innovation and flexibility. During the past year, we demonstrated both of these qualities -- introducing new products and weaving new acquisition into the PCTEL fabric. This year, we will demonstrate operational excellence. Our new colleagues for MAXRAD will help in that regard, our manifest to introduce this exceptional management team to the investment community. We have established three growth platforms in the wireless communication space and we have a cash generating intellectual property asset. The challenge in 2004 will be to fully realize the potential of these platforms, as we continue to create everyday a great company with an exciting future. Thank you. We are now ready to answer your questions. Please open up the line.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. If you do 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 questions will be taken in the order they are received. Please stand by for your first question. Thank you. Your first question comes from Doug of Whitman Capital. Please state your question.

Thank you. Congratulations on a great quarter guys.

Thank you, Doug.

Can you talk a little bit about, you kind of talked about it, but kind of the traction that you are getting with Segway, with some of these wireless carriers?

Yes. Really that is probably one of the most important measures of our success in the past year. As you look around the world at the major carriers that are deploying Wi-Fi, we've really had some important wins with NTT DoCoMo, ATT Wireless, Boingo, we have served T-Mobile, and most recently Cingular. These are really important wins for us because as you know the wireless carriers have now really picked up the mantle for Wi-Fi and they have this large group of wireless subscribers who want wireless data all the time. And we believe they are going to be essential in rolling out Wi-Fi and generating the number of subscribers that will make Wi-Fi an important market. As we look around at competitors in this area, I think that today on those awards that have been announced, we are already at 50%. As you see additional awards come out in the next 90 days, I believe that we will look even stronger in this regard. And our product is really optimized to work with carriers. If we are just focused on Wi-Fi, we wouldn't have taken the trouble to build a multi-mode product. If we were just focusing on Wi-Fi, we wouldn't necessarily have a central server, over which or on which carriers could update and improve the product, send information, provide additional services, and so on. So, this market was extremely important to us, we believe we are doing well, and it also positions us to grow with those carriers as they succeed in attracting new subscribers.

So, it is reasonable to assume by the time we hit the summer, we should have a pretty good landscape of most of the carriers who have made their decisions, those who haven't chosen yet?

I think so. And also, you are going to see private enterprise carriers make decisions such as and other people who provide services to remote users for the enterprise.

Okay. And one just financial question. One thing you haven't talked about John is obviously your DSOs are artificially low this quarter because of the large transaction with Intel. But can you give us a little bit of guidance going forward? You have been talking about historically keeping DSOs in the 50 to 60 range. Is that a reasonable target with this latest acquisition that you have made or should we expect a different DSO model?

I think you should not expect a different DSO model. We should continue to be able to keep total DSOs in the 50 to 60 range. When I actually look at the quarter without the Intel revenue and I pump it back, I mean effectively wireless and in licensing revenue rose 200,000 in the quarter sequentially, but we did have a larger increase in net receivables but that was primarily due to a license payment that showed up in January that was contractually due in December and it's already been collected.

And, on the buyback, were you allowed at all to buyback shares last quarter or were you closed off because of -- ?

No, we weren't. We actually were past the letter of intent stage and we were in contract negotiations during the traditional open window period.

And is that transaction keeping you closed this quarter or do you have to wait for it close, are you able to - ?

No, the transaction is closed. There is nothing closing the window right now.

That is correct.

Thank you. Thank you for the great quarter.

Thanks a lot.

The next question comes from Susan Keller of FBR. Please state your question.

Yes, I was wondering if you could address some of the international strategies, and what you plan to use this distribution there, and what areas you plan to penetrate?

Sure, well first it may not be obvious to everyone, but the SoftAP is actually sold into the Taiwan market. For example, if you look at our announcement about our license to MSI, MSI is a large Taiwanese board manufacturer, and we actually hope to get subway revenues to a 30% or 40% outside the US point. The real challenge are in the other side of the subway business as we look at Wi-Fi, and we've been successful with NTT DoCoMo, our strategy with the roaming client is to look at opportunities to bundle it with chipsets and then to also look at opportunities with other carriers such as an NTT DoCoMo equivalent. And then finally with some of the private enterprise carriers that service multinational companies outside the US. So, that takes care of subway. As we look at MAXRAD, their antenna business is almost exclusively within the US, a little bit into Latin America. We are right now looking at three things. One, we believe that four regional managers we have for PCTEL can simply expand the portfolio that they're selling. For example, when I go to GSM world congress, I'll be going there representing all of our products. I'll be going on to Israel and meeting potential customers there, and others in Europe. So, we think we can use our existing sales channel for MAXRAD. But in addition to that, we're looking at some large distributors. We did sign up a large distributor in Asia. We're looking for other opportunities outside the US. Finally with DTI, they're already benefiting from the regional managers that we put into place. Again, we're looking for distributors outside the United States. The real issue for DTI though is not as much international distribution as it's government distribution. As we pointed out, we've done well in government increasing our sales significantly for their test and measurement products and government and defense, and various secure agencies. And we really need to address getting a special type of distributor to expand our footprint with the government. Does that answer your question Susan?

Yes, absolutely.

Thanks.

Next question.

The next question comes from Matt Robison of Ferris, Baker Watts. Please state your question.

Hi guys, and I congratulate you on a great quarter. I noticed that cost of goods sold was down sequentially, did you guys miss out on some of that seasonal DTI revenue in the quarter? Also was curious Marty, you didn't mention anything about SoftAP in your prepared comments, if you did I missed it. I was wondering if you might talk about your prospects for some more motherboard companies to step up here. And then I have a follow-up for housekeeping question for John.

Okay, let me see if I'm just writing down your follow-up within your follow-up. So, first we're going to address the cost of goods. I'll let John do that. Second, we'll address SoftAP, and then third we'll wait for your follow-up hygiene question. So, John would you start off with that cost of goods issue.

Yes. Well, actually raw cost of goods sold versus the third quarter went up from 83 points in Q3 to 97 points. Meaning, if I pull out the Intel deal out of it, which was worth $13.5m, that was worth about 11 points in the quarter. So, I'm sitting at 80, probably I'm up about three or four points quarter-over-quarter, and that is due to the relative growth in the subway area, and the licensing was a little higher than I expected it to be.

John I'm just looking at cost of goods sold of 592,000 versus 755,000 in the September. I'm not thinking about percentage.

Well at the end of the day, we had all of our products ended up with a higher amount of revenue. The issue that I had was in my -- at least in the DTI area, I had a little more government business in Q4 and so the margins were actually higher. But the COGS should have been lower and the higher revenue because it shipped more into the government space, which has a higher gross margin than the commercial space. They are sequentially up. Everyone of our product line is sequentially up Q4 to Q3.

Okay, maybe I'll get a better understanding of it offline. Then the question for Matin was on the SoftAP?

Believe it or not, I actually have a script so I can look back at what I mentioned. We did focus a lot on the roaming client. I mentioned though that we've successfully licensed the SoftAP to connect our KDN and MSI. Those are very important contracts for us. Our KDN in particular shows the value of our compatibility with what was the Intersil chipset, and then became the GlobespanVirata chipset and now it's one of the two Conexant chipsets. And so our KDN, as a vendor of cards and boards, delivers to various OEM PC customers such as HP. So, that means our SoftAP associated with a chipset that we've done testing with goes into a for example a Network Interface Card and it's supplied into the computer market, and I did mention that we are compatible with three chipsets. I won't describe those here and this is really our strategy. Our strategy first and foremost is to get the SoftAP compatible with the primary chipset vendors in the industry and in that way secure a base with those suppliers, hardware vendors who use a variety of chipset suppliers. You can go into some of the major 802 data level infrastructure companies and they are using three different chipsets. So, the real focus is not on the guy who is developing the retail product. The real focus for us is the chipset vendor making sure we have access to micro drivers and so on.

It's sounds your KDN has some other flavor of MSI. Do you expect to see -?

MSI is little bit different. Because an MSI is also very important for us and it requires that we are compatible with the chipset but MSI is a board a motherboard manufacturer. They are one of the top three motherboard manufactures out of Taiwan. There is ECS, there is SwissTech and there is MSI, and what we want to do is get our SoftAP embedded on those motherboards. So, that when they ship to PC vendors, they are using that product. So, as I said, we are concentrating on the chipsets, making sure that we are compatible with the major chipset suppliers and then we are going to both the card manufactures and the motherboard manufactures and getting the widest possible distribution for our product. That's our strategy.

John, the other question was on the deferred revenue. Should we expect that $3m that you had in the fourth quarter to decline over the course of 2004 as you recognize the Broadcom revenue?

Yes, that should all be gone by the end of 2004 and it will be .

Okay. Thanks a lot.

Your next question comes from Anton Wahlman of Needham & Company. Please state your question.

Hey Martin and John, can you hear me?

Yes.

Few things. First of all, just one question about branding. I mean you're sort of running the company now a little bit like a holding company. You have Segue as a strong brand in itself and you have DTI as a kind of almost separate, almost a corporate entity and same thing with MAXRAD. Are you looking at some point into doing more of full integration and doing a more of a unified branding across your various product lines? Is that kind of far out at this point?

I don't think it's out at all. I was just - I don't view us as a holding company with separate subsidiaries or necessarily separate business units. We view it a little bit differently, where we try to develop and your question is really very consistent with a lot of thinking that we are doing right now. We are trying to develop three very strong brands, the DTI brand, DTI really stands for wireless intelligence or simplifying wireless intelligence, the Segway , which is really all about simplifying mobility for wi-fi and cellular users and the brand, which is wireless performance, giving the best possible performance for your wireless network. We think of PC-Tel as a company as being devoted to wireless excellence. Your question is a good one, we are putting a lot of thought right now into our corporate identity, the PC-Tel corporate identity, and what we want that to stand for, wireless excellence certainly, financial stability, excellent corporate governance and experienced management team, innovation and flexibility and then we look to the other product areas as brands that stand for the ideas that I just mentioned, and we are going to have to communicate that more effectively over the next six months.

All right. John, a small detailed question. You said you had some leftover disposition cost with respect to the disposal of your analog modem business. What exactly were those lingering costs that were paid in the fourth quarter and what was the amount that contributed?

Yeah, basically the total amount related with the 500,000 that you see on the P&L, and they were two areas. The first is, as we closed down our office in France, I'm sorry, you've not got all of the severance cost and the accumulation of cost for the closing of the physical office, and then under the rule they've introduced this year for restructuring, we did have several of the, of the folks that were doing the final cleanup for the modem business, they did not exit until the fourth quarter. So I couldn't book their severance until the fourth quarter. So, those are two things that contributed to the $0.5m and now we believe we are done.

Okay. Finally then, in terms of the $50m revenue guidance for the calendar 2004 year, do you have any sense of being able to break out what portion of that $50m is DTI and the Maxred respectively?

Well, we really haven't gone - we really don't disclose to that level. I can't tell you that. On a run-rate basis, the ongoing licensing revenue we believe will be in the $4m to $5m range and the rest will be in the wireless area.

So in other words, $45m to $46m for DTI and the Maxred combined?

DTI, Maxred and Segway combined.

Oh, and Segway. Okay . All right, thank you very much.

Thank you.

Thank you. Our next question comes from Stan of UBS. Please state your question.

Hi, guys. One quick one. How are we doing with the Globespan customers? Do we have any revenues, how many are we working with, and how many are we hoping to work with?

Stan, I think you are referring to GlobespanVirata.

Right.

And GlobespanVirata, as you know was acquired by Conexant and so we are working with Conexant now on two chipsets. The chipset that originated with Intersil that was acquired by GlobespanVirata and the chipset that Conexant has did all up to organically. Particularly the Intersil case, we feel we've been quite successful. If you look at two of our major licensing deals that we announced for the , both of those were based on the Intersil chipset. So again as I - I think it was Matt Robinson who asked the question, what are our plans in SoftAP, it's really more the same. We want to continue to demonstrate how effective we are with these chipsets and how cost-effective it is for either a motherboard manufacturer or a network interface card manufacturer to incorporate our software with those chipsets as they deliver products.

Okay, so you are doing business with two of them. How many more of those intercell connection clients do you expect to do business with?

Well, there is quite a few and we are competing in all of those areas. I don't want to go over our customer list in a public forum, but suffice it to say we go into as many of these customers as possible to promote the use of this product.

Okay. Thank you.

Thanks.

Your next question comes from Matt Campbell of Knott Partners. Please state your question.

Hi, good afternoon. You've deals with both AT&T Wireless and Cingular and there is talk about Cingular possibly taking out AT&T Wireless. Would that affect the contracts that you have with those two companies right now in any way?

Favorably. As you point out, we are fortunate enough to have contracts with two of the major wireless carriers in the United States for Wi-Fi related product, but it turns out that our contract for product with AT&T wireless, it covers a different version of our roaming client product than does our contract with Cingular. So, effectively we would just operate under two different contracts and hopefully continue to maintain both business areas.

Great. Thank you very much.

Sure.

Thank you. Your next questoin comes from J. D. of Pacific Edge Asset . Please state your question.

Hi, Marty nice quarter.

Thanks JD.

Couple of questions. First, we've talked about this before, but just generically how should we view pricing on the soft access point and other upgrade opportunities for the client once he installs it?

Well, I think as I told you before, we can't really discuss our specific pricing, but I can discuss the model...

Right, just generically.

Under which we do business. So, generically we try to provide a site license for the soft AT, that is either volume sensitive or one time site license up to a certain number of units, either one of those models works very well for us. With the roaming client, in our most recent contracts, they usually have three or four elements. There is typically an NRE for customization for their carrier's purposes, there is typically a fixed monthly fee that we get independent of the number of subscribers. Then there is a per subscriber fee for the software, not per year, but there is a maintenance fee after the first year for a subscriber. And finally, in those cases where the carriers offers day passes, we get a flat rate of day pass use that uses our roaming client. So, the type of contract that we have is really effective if the number of subscribers grow and the number of day passes grow and we feel that we are aligned with the right customers at this point to have a strong model.

Right. So, you actually answered my second question. Basically what the carriers is building an annuity base essentially?

Correct. Excatly correct.

Okay. A final question, on the three chipsets, I know you can't really disclose that but sort of again generically speaking what sort of percent of the 802.11 chipset market can the soft access point work on now?

I would say about 50%, right now, maybe, 60%.

Right. Okay, Thank you, Marty.

Thank you. Our next question comes from Mike of Zachson Investment . Please state your question.

Hi.

Hi, Mike.

Last year, you had mentioned that one of the main objectives was to acquire growth engines. I guess the question is, is that still a major objective and is there anything that you can say about our current status and activities in this area?

Well, I think as I mentioned, perhaps our top objective that I asked stockholders to measure our strength. 2004 is our success in continuing our acquisition strategy. I believe, however, that there is a little bit of a shift in our emphasis. Whereas 2002 and 2003 we were really enthusiastic about acquiring distinct growth engines potentially in unrelated areas. 2004 will probably be a different focus. We have three very strong growth engines right now and what we are actively exploring are acquisitions again of revenue generating companies, although we would also look at assets that will help us fuel the growth of one of our existing product areas. That is a little bit different than our focus during 2003 and 2002. As far as commenting on specific activities, I can just tell you that we are extremely active, but we have nothing to report at this time.

Okay. Thank you very much.

You are welcome.

As a reminder, ladies and gentlemen, should you have a question, please press star one at this time. Thank you. Your next question comes from Sid of the Robins Group. Please state your question.

Hi, hello everyone. I had a question on your international strategy. India and China are the fastest wireless markets, though I mean they are just in an emerging phase, not really developed. How do you see PCTI entering those markets? And what would be a good timeline as to when that happens?

Well, we have already entered the China market. We have a distributor Apache that handles both Taiwan and China, and we believe that there will be very effective. In addition, we have recently put a resource in China to support our DTI product area. And then finally you may have not seen this in the information on MAXRAD, but we have a factory operation in the area, and we plan on leveraging that for distribution and support, not only of the MAXRAD product but perhaps of the other products as well. You mentioned China and India correct?

Right.

Yes. Japan, you already that we have a Japan office. But in direct response to your questions about China and India, I would say that with respect to India, that's a strategy that we are still developing at this time and we have nothing really to report.

Okay. Could you also give us a sense of how the wireless data service is begin offered by the cellular companies in the US right now, are being accepted by people? I mean, they are relatively new and what is the rate of adoption of these services, can you just -?

Well, many of them had not rolled out a national service at this time. I can't really comment on the rate of adoption. The way that they are being offered though are as an adjunct to basic cellular service, where they are being offered as stand alone Wi-Fi service, where they are being offered as a data anywhere service. And then finally, as far as I can tell, all of them are offering some type of service.

Okay. And another question, now have you seen -.

Go ahead, is this a follow-up question?

It is a question on DTI.

Yes.

They, like the government put into effect the number portability recently, now have you seen a growth in interest in your DTI product line from the cellular carriers or not?

In general, we have seen a strong interest in test and measurement products at DTI to offer to the carriers because of the increased focus on quality, but I am unable to report specific results related to that change at this time.

Okay. And I mean, do you think could you link this surge in interest to the number portability or is it just a general --?

As I said, I'm unable to do that at this time.

Okay.

Thank you very much.

Thank you.

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

Well, I thank all of you for joining us for this conference call. We appreciate the questions and we look forward to providing you with an update at our next quarter earnings release. Thanks.

Ladies and gentlemen, the webcast of this conference will be available on the PCTEL Web site. If you wish to access the replay for this call, you may do so by dialing 1800-428-6051 or 973-709-2089 using ID number 326192. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.

Thank you.