PCTEL Inc (PCTI) 2004 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the PC-TEL first quarter earnings conference 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. time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. is time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. 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 CEO of PC-TEL.

On behalf of PC-TEL I thank you all for joining us on our earnings call for the first quarter.

In this call, we will address the financial results for the quarter and the outlook for PC-TEL in the second quarter of 2004.

Joining me today is John Schoen, COO and CFO. John will take you through our financial performance for the first quarter, as well as limited financial guidance for the second quarter of 2004. I will then comment on some of those results and turn our attention to the significant events that transpired during the first quarter and discuss our plans going forward.

John?

Hello everyone. Before I begin my financial review of the company I will read the safe harbor statement.

Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comment concerning our future financial performance and expectations regarding the future growth of our wireless 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 product business, implement new technologies, and obtain protection for [inaudible] IP and the risks associated with potential acquisitions. Our ligation expenses are dependent on a number of factors, not all of which are within our control. Additional discussions of these and other factors affecting the 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 statements. Now I will continue with the financial review.

First quarter total revenue was 10.7 million compared to 13.1 million in the first quarter of 2003. These numbers include wireless product revenue of 8.6 million, up from 0.7 billion last year and licensing revenue was 2.1 million, compared to $1.9 million a year ago. Last year's first quarter also contained $10.5 million modem product revenue related to the HSP modem product line sold to Connections in May 2003.

The $7.9 million increase in wireless revenue for the quarter, compared to 2003, reflects the acquisition of DTI in March of 2003, revenue traction by our Segue Wi-Fi products, and the acquisition of MAXRAD in January 2004.

Licensing revenue was 2.1 million, up 200,000 from the first quarter last year. The increase reflects the addition of the BroadCom [ph], license announced in the first -- fourth quarter last year, partially offset by reductions in older licensing contracts.

I would like to go through the revenue guidance for the second quarter. Our total revenue guidance for the second quarter of 2004 is between 11.2 million and 11.8 million. Wireless' revenue is expected to be between 9.7 million and 10.3 million. That is four times last year's wireless product revenue and between 13 and 20% sequential quarter increase. Licensing revenue is expected to come in around 1.5 million, down 600,000 from the first quarter. As with the first quarter, several our old license agreements are yielding less revenue.

At this time, I would also reaffirm our previous revenue guidance for the year. We continue to believe 50 million of total revenue for the year is reasonable objective. The expected mix in that number is roughly 5 to 6 million of licensing revenue and 44 to 45 million of wireless product revenue.

Now let's turn to gross margin. Gross margin for the first quarter was 65% compared to 50% for the first quarter last year. The first quarter 2003, benefited 1.3 million or 10 percentage points from the reversal of modem related inventory reserves. The increase in gross margin percent is principally attributed to the transition from lower gross margin modem products to higher gross margin wireless products.

Gross margin guidance for the second quarter is expected to be between 63 and 65%. This is a slight decrease from the first quarter due to higher product versus licensing content in the mix.

Now I would like to address our cost structure. Total OpEx was 8.6 million in the first quarter, up 700,000 from last year. Of that increase, total R&D, sales and marketing, and it G&A as a group, are up 1.9 million from the acquisitions of DTI MAXRAD product linea, investment in Segue, investment in licensing litigation costs, and they are partially offset by the sale of the HSP modem product line. Amortization of intangibles and differed compensation are up 600,000 principally due to the acquisitions of DTIN and MAXRAD.

Compared to last year, the first quarter 2004 benefited 1.8 million, in aggregate, from the Connection royalties, the absence of acquired in process R&D expense related to the DTI acquisition, and the absence of restructuring charges. The company will continue to invest OpEx in its wireless products as well as licensing enforcement. Guidance for the second quarter 2004 for OpEx is 8.8 million, including 8.2 million of R&D sales sales and marketing and G&A, 1.1 million of amortization, offset by .5 million of royalty income from Connections. Interest income generated from investments in the quarter was $200,000, compared to $0.5 million a year ago. The difference is due to the decline in interest rates in our investment portfolio since last year. Second quarter interest income is also expected to be a little over $200,000.

Net loss for the quarter was $0.5 million or 2 cents a share. Compared to a loss of $0.9 million or 5 cents a share in the first quarter of last year. The higher loss before income taxes compared to last year is attributed to the increase in gross margin being offset by higher OpEx and lower interesting income as previously discussed. The favorable income-tax benefit, compared to last year, is due to the carryback available to 2003, which was principally created in Q4 of 2003 from the Intel license agreement. All other deferred tax assets have a full valuation allowance.

Now let us turn to the balance sheet. Cash and short-term investments ended the quarter at 107.4 million, compared to 125.5 million at the end of the fourth quarter 2003. The difference is primarily driven by the acquisition of MAXRAD.

Before the effect of any share repurchases, cash is expected to decline about 3 million in the second quarter, primarily due to acquisition related payments scheduled for the second quarter and expansion of working capital. As of March 31st, 2004, the company has repurchased 1.54 million out of the 2.5 million shares authorized by the Board of Directors under our continuing share buyback program. No shares were repurchased during the first quarter.

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. John's financial review suggest some revenue strength. We posted, as he already mentioned, 10.7 million in the first quarter against guidance up 9.5 to 10 million. However, as John pointed out, we had a very strong quarter for recurring royalties, 2.1 million, a high number by historical standards for PC-TEL. Still, revenue from our wireless products more than doubled from the fourth quarter. Last year at this time we had .7 million in revenue from our wireless products. This quarter we had 8.6 million.

We're pleased to report that our MAXRAD, DTIN Segue product groups all contributed to this growth. Some specific sales and marketing events weren't mentioned. During the quarter, MAXRAD deepened its relationship with Cisco and began to explore international opportunities to the PC-TEL sales force. We can also report their DTI product group appears to be gaining momentum with its Clarify Interference Management System. Through our teaming relationships with those who provide frequency planning tools, we sold the system to AIS, the largest mobile phone operator in Thailand. AIS is owned, in part, by SingTel [ph] and we hope to leverage the success into additional regional sales of Clarify. Other Clarify sales include shipments to customers in Canada, the United States, the Caribbean, and South America.

During the quarter, DTI signed a distribution agreement with MCI, a Western European distributor, that is expected to strengthen our sales presence in the EU. In general, DTI is well positioned to exploit the transition of GSM to UMTS networks. They have always had the right product and technology, now they have an increase sales presence globally.

Many of the Segue accomplishments have been noted in press releases. It had been an exciting quarter for this group. First quarter revenue approached their revenue total for all of last year. We established an internal goal of distributing 5 million copies of the Roman Client this year. To accomplish that goal, we focused on winning long-term contracts with public and private carriers and we believe that our strategy is working.

As previously announced, the T-Mobile launched the T-Mobile Connection Manager which is based upon a branded version of our Segue roaming client. The product launch has been a success and T-Mobile has experienced significant downloads of the client and customer accesses across its global network of hot spots.

As previously announced as well, Singular [ph] became a Segue roaming client customer during the first quarter and SBC also signed an agreement to distribute a branded version of our roaming client. Eventually, all of these customers will deploy our dual mode client that will support GPRS network access in addition to Wi-Fi. This will assure us of cellular as well as Wi-Fi subscription. We believe that these carriers will distribute in excess of a million copies of their branded version of the roaming client within the next few months. While we cannot conclude what actual sales will be, this distribution channel is positioning us for success in this marketplace, as it develops.

We also penetrated the market for providers of secure managed remote access solutions that serve large enterprises with mobile workforces. We have a small direct sales force and we have no plans to invest in a an enterprise focus sales force. Our principal distribution path to these enterprise customers is through solution providers and private carriers. We are pleased to report that Grick [ph], the leading managed remote solution provider signed an agreement with us to leverage our roaming client engine as part of their integrated solution. We can provide no further details other than to confirm that we have signed this agreement.

This was also the first quarter of meaningful integration of the three product groups. We participated at both the GSM World Congress and CPIA as single company under the PC-TEL corporate identity. We made, progress in integration of our sales force as well. By the end of this quarter every PC-TEL account executive and sales engineer will carry a PC-TEL business card and represent all products from each group. In general, we will promoting the PC-TEL corporate identity in maintaining three critical brands, MAXRAD, Clarify, and Segue. Let me update you briefly on our litigation and our M&A activities.

We remain in litigation with Lucent [inaudible], 3-Com and US Robotics over their use of our patented modem technology. We believe that U.S. Robotics, 3-Com and [inaudible] continue to sell infringing products and PC-TEL expects to be compensated fully for any unauthorized and unlicensed use of its technology. We have had limited conversations with some of the defendants, but at this time, we remain committed to litigation as our path to enforcing our intellectual property rights. We continue to advise our stockholders to anticipate $3.5 million annually in litigation expenses and we continue to believe that this expense is appropriate and wise to defend our strong patent portfolio and protect our rights.

We are active on the M&A front. This year we must address the challenge of integrating our three product groups. Instead of pursuing a fourth growth engine to bring under the PC-TEL tent, we are looking for properties that would accelerate the growth or enhance the value of our existing product lines. For example, we believe that our MAXRAD product group could effectively manage a much larger business. To that end, we are exploring opportunities to consolidate complementary antenna or intelligent RF product lines. Our TTI product has a small, but growing government presence. DTI's success in this market book could be accelerated by an acquisition of a company or asset that included personnel with appropriate clearances and credentials. Similarly, Segue's network management system, which permits management of millions of connected devices by carriers, could be strengthened by other capabilities. Security modules, a mobile workforce management modules for peer to peer communication capability. We are therefore, exploring companies that could help the Segue product group enhance its product offerings.

Although John has addressed our cost structure, I will elaborate on how we have been spending our money as the first quarter sets the stage for the remainder of the year. As already mentioned, we participated in the GSM World Congress, STIA, and the IWCE. These are important shows to promote our products and to establish relationships with customers and vendors. During the first quarter, we spent approximately $400,000 on these trade shows. In our view, this is money well spent.

Similarly, our contract wins with T-Mobile and TT-DelCoMo [ph], ATT Wireless, Cingular, and others carried with them the responsibility to deliver key releases to our new customers. To meet all of these obligations we added contractors to our team. In general, none recurring engineering payment cover these expenses. Again these investment are worthwhile because they set the stage for successful sales for the remainder of year.

As most of you know already we continue to spend between 700,000 and 800,000 per quarter on litigation and $600,000 per quarter on public company expenses. Which have increased significantly over last year due to Sarbannes-Oxley and related FCC regulations. In all, we increased OpEx from 7.2 million to 8.6 million from the fourth quarter last year to the first quarter this year.

To summarize we doubled our wireless revenue, but increased OpEx by 20% from the fourth quarter to the first quarter. We have established critical mass in our wireless operation with contributions from all product groups. We are continuing our patent litigation and exploring additional acquisition opportunities. We've also made significant progress in integrating all PC-TEL operations.

Let me end by noting this is the 10th consecutive quarter that we have met or exceeded guidance. While that is important we are proud of the progress we have made since October 2001, we recognize that there is much work to be done in order to satisfy our stockholders expectations and our commitment to a profitable 2004.

That concludes my prepared remarks. We would be happy at this time to answer any questions that you might have at this time.

Aside from John, we also have Jeff Miller, our VP of Business Development and licensing with us, and available to answer your questions. Thank you. ..

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Thank you. The question and answer session will begin at this time. [Operator Instructions] Your question will be taken in the order in which it is received. Please stand by for your first question.

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

Just a quick housekeeping question. I missed when you mentioned for -- [inaudible] but I missed when you mentioned SBC. Who was the company that you mentioned before SBC, Marty?

I believe it was Cingular. I also -- oh, in terms of contracts that had not been announced I guess it may have been Grick [ph].

Okay. Thank you. And going, John, to the -- the -- the outlook -- I wasn't quite sure if I followed the outlook for the revenues for the second quarter. If I understood what you were saying, was basically you were ahead of expectations, obviously this quarter and one should look for the second half -- the first half to be similar to what we have been talking about overall for the first half. I wasn't quite sure if you gave out a number there, as I was trying to follow you, and also, you gave out for revenue accounts receivable -- in the past your have given guidance on accounts receivable -- what the day should be lie and is that still what we should look for as a range?

As of now we are running -- we ran 49 days in receivables, that was comparable to where we were in the fourth quarter when you pulled out the Intel agreement, because, you know, it had such an influence on the number. We do want to tighten that up, we are going to make some investments in additional headcount in the -- in one of our Subs in order to address that -- see if we can drive that closer into the 40 to 45 range. The biggest issue we have there is some of our biggest customers, especially MAXRAD, the distributors, they have 45 day terms, before the invoices are even due, where the terms are shorter than some of the others. As far as first half guidance, effectively I know there are a lot of numbers flying, you know, we did 10/7 in the first quarter, and we are looking to do, in total, between 11/2 and 11/8, so that is between a sequential increase of somewhere between 13 and 20%, as a range. Buried inside that number, all the variability is in the product -- the wireless product revenue, because it -- in that range it is a solid 1/5 for the licensing and then all the variability is in the wireless revenue. Does that answer your question Doug?

Uh yeah it does. Thank you and thanks also both of you for the -- and the company for the great numbers you delivered. And last question would be, is if you could talk a little about what -- you guys are becoming basically quite a standard out there, but there is also -- and and with Grick [ph] going with you even more, but there seems to be a bunch of companies there who are going their proprietary ways and can you talk a little about what's been the user reactions and whats -- is that causing and difficulties for you?

I will take that one, Doug. And it is a good question.

As we have said many times, we believe one of our competitive advantages is that we're committed to working with anybody's network, with anybody's hardware, and with anybody's system. And we're also committed to allowing our customers, whether it is a private carrier or public carrier, to distribute our product as their own branded version. We have some competitors that are very similar to that. But there are other competitors that associate their client with their network and they require, for example, their client to be used to access their network. We don't think that that's the way to go, particularly in 802.11 where these networks have grown virally in a way that people are very comfortable with and open to all types of users and where you have standards such as 802.11making access uniform and inexpensive. So we believe that our approach, of a client that is available to any network, any piece of hardware, any type of device is the path to be on and we think that that is one of the reasons we're getting market acceptance for our product. Thanks a lot.

Thank you.

Thank you, our next question comes from Matt Robinson with Ferris, Beaker, Ross. Please state your question.

Nice job guys. Let's say I am positively surprised, not just with the first quarter but with your top line guidance. North of 11 million for the June quarter, in light of the dissipation of some of your older legacy IT license deals. I wanted to get a little bit more flavor, how you're going to make that up. Should we be thinking more in terms of hardware or software licenses? You had a good Segue client quarter in the March quarter and is there more to come in that? Or are we going to look for -- SAM [ph] licenses? How should we be thinking of that sequential growth in the June quarter?

If I could, Matt, I think I would like to answer that, not just for the June quarter, but you know that should be obvious if you look at guidance that you've given, it suggests an acceleration for the third and fourth quarter as well. We would respond by saying that we're anticipating greater product sales across the board for the MAXRAD product line, for the DTI product line, and also Segue.

Let me give you a little bit of flavor why we are optimistic on this revenue growth. In the MAXRAD, the product line, we're going to be introducing a dual band antenna for 2.4 and 5.8 dominantly for in-building but also for outdoor use with broadband wireless canopy type systems, etc.. We've also recently introduced a very innovative above ceiling antenna for in-building applications. Those products don't -- well one of them hasn't been released yet to the general market and one of them is just gaining traction. We view these emerging products as an important source of revenue for the second and certainly for the third and fourth quarter.

DTI, I believe the story for accelerating revenues is a bit stronger. DTI has, as you know, long provided scanning receivers and one of their strengths is in dual mode receivers and their GSM and UMTS dual-mode scanning receiver is getting some traction that -- a very robust product. We're getting some strong -- we are starting to see some strong orders and some real interest in that. You're going to see the EVDO/3G mature in the U.S. later in this year, we'll be introducing an EVDO product later in the year. We finally are getting traction on Clarify. Paul Kline and Larry Swift, founders of DTI, have really worked hard in moving from a technology component business into more of a system business and they are now being rewarded with some strong traction for that product and we expect to see Clarify gain some momentum. Finally, in June, we will be releasing our Insight Data Collection Software that goes along with these products. I would say if DTI historically has had a weakness, and far be it from me to criticize the company that we purchased and think very highly of, but I think they would tell you that in data collection software, they had some maturing to do and we are starting to see that. I think this product, this software is going to be well-received by customers and add to the quality of their product.

Finally, we do see some additional government business related to various defense activities.

Finally, in Segue, we see an addition to the traction on Wi-Fi, the multi-mode or a single mode cellular product starting to get traction in the second quarter. We have customers that use this general connection manager now, dominantly for Wi-Fi. We think there will be strong cellular use and the multi-mode product will have a real place in industry and then finally in Segue we are going to see our first decent [inaudible] key shipments in the second quarter. So I hope that answers your question.

Yeah, great answer to the deployment of new protocols and spectrum for MAXRAD and DTI plus some government business and then -- sounds like some follow on client software for Segue as people -- carriers offer the mobile service.

Next time I'm going to have you answer the question, you did it much shorter than I did.

Thank you.

Bye. the to plant new book protocols are up in MAXRAD Sound like a fall on client for Segue mobile service.

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

Marty and John, can you hear me?

Yes.

All right, just following up on your most recent answer, that -- you said the first shipments of the soft access point, I assume that is with the customers that have been announced [inaudible] that are primed to becoming Connection's, right?

I not sure that I understand the question --

-- you announced a few customers, but I guess the highest profile customers were both [inaudible] and Connections respectively.

I think you might be mixing apples and oranges here. In the sense, Anton, the software is compatible with ship sets from those type of vendors, for example, we did our first announced deal with InterSoul [ph], but the sales that we have been announced with other parties. For example, one of the mother board manufacturers in Taiwan, MSI, with a distribution agreement that pushes the soft AT into ODNs, that was with Apache, and then finally we announced a deal with Arcadian where they bundle of our software with their 802.11 finished product cards, not a chip set, and they provide that into some PC vendors.

Let me restate my question. Those deals with the system level vendors are based upon the connection set of chips?

Yes and no. Some of them are and there is others with some other chip sets that we have not been allowed to announce to the general public.

Okay, so that is what I was getting. Do you have one additional soft AT --

We have three --

[inaudible]

Anton, we have three in total, we have only announced one.

Okay. John, if I understand your comments on OpEx for 2Q correctly, stripping out the amortization of deferred stock, comp, and intangibles and so forth, basically you are -- let me think about 8.1 here this quarter and rose 8.2 in the June quarter?

That's correct. It's up about 100K.

Okay, so -- I just want to make sure I got that right. Also, the most complex thing -- I don't think I heard you address it in your prepared remarks is on the tax plan, you had a substantial tax benefit here? Now if I start stripping out some of those other things that you did here in the quarter that were in the income statement for the various amortization of deferred comp intangibles and acquired in process and also the 500K that comes in from Connects, if I take away all of that, basically I guess to break even, but only with -- including the basically a round number million dollar tax benefit, is that fair or an unfair statement? Should that really -- the tax benefit also go out the window in whole or in part if I were to do that that way?

I think the way that I tracked that you have been characterizing the tax plan in your guidance, you exclude that tax benefit. Because effectively, is going to drive me a second tax rate for the year so I become profitable it goes back the other way on a percentage basis.

Okay.

So for your presentation, you would ignore it.

I should take that down to zero then, so that means that, let me see here, you basically then -- its more like -- you lost 5 cents basically according to that calculation in the quarter?

Well you would add back -- what you would do is you add back roughly a million dollars in amortization and restructuring and the offset would be 900K and it is literally the wash that you see there.

Basically, that comes to about a penny -- sorry a nickel loss?

Right. You could do that. Right now of the analysts that cover us, I believe -- one of them actually keeps the tax rate in and the rest don't.

All right, so keeping that at zero then, that means that doing it that way it looks like you lost 5 cents in the quarter then. That the number it would be apples to apples?

Yes. Exactly. OK.

Is that versus the 8 cent loss that you had?

That's right. Basically that means that you did 3 cents better.

Okay

I just want to make sure we were not double counting the taxes or throwing too much of the good stuff there.

And just for clarification for the rest of the folks on the call, each analyst that covers us does it a little different.

We are very happy with diversity. Just one final question for you, Marty, in terms of the Segue functionality here, are you seeing that -- in terms of the -- also the larger markets for this I would have to believe is going to come from some characteristic of a hand held device, call it PDA, call it cell "phoneish" looking device, that will have that type of functionality, whether it is the Palms or the Microsoft of this world, or Simbian [ph], or Nokia or whomever, that have something going there, are you hearing anything about them trying to develop a functionality that in whole or in part looked like Segue or is it something that you think you will have an opportunity to come in and bless these people with?

I think we are going to have an opportunity -- we think there is a potential market with cellular phones, vendors who are migrating to Wi-Fi, cellular chips sets for their phones and I think they will be looking for an application like ours and we're going to be focusing on that. I don't want to comment more on that, Anton, because obviously there is a whole strategic element that I don't really share in public.

Do you agree with the notion that instead of this being a laptop oriented market, that ultimately for this -- even for this type of functionality -- its currently associated more with laptops?

Absolutely

It's more PDA highend? Okay. Very good.

Thank you, our next question comes from Wes Cummins of B Riley, please state your question.

Good afternoon guys. Great quarter. I just wanted to get a couple last questions here. On the roaming client on the Segue side, the numbers you were giving, the 1 million going to be distributed by carriers and the 5 million expect to attribute, in general, what percentage of those would you expect kind of converge into being a paying customers versus prior --

First, I really couldn't comment publicly, Wes, because it would be discussing private data that is shared with us by our customers and they would be unhappy with that. But also, given that we just started to rollout these products with the carriers, we really don't have a good feeling on the conversion rate at this time. The key is for us to get the product into the hand of carrier subscribers.

Okay. Another thing if maybe the carriers would share this view with you at all or maybe not maybe you guy's own view of when we see next generation data roll out, you know, these guys start launching edge or edge becomes more prevalent on the GSM side [inaudible] CDMA side? Do these guys or do you expect an acceleration in wireless data subscribers on the carrier side?

Absolutely. Absolutely. As data -- as wireless data becomes more meaningful and useful to consumers as offered by a cellular carrier, we're going to see greater use. You will see greater sale of cellular modem cards, but also the fact that our product conveniently allows a consumer to make an infrared, a blue tooth, or a cable connection to get access to that on -- cellular network connection is going to be extremely useful to the subscriber.

Okay.

And we're going to sell this is as a packaged solution. And we will be there and available for the subscribers.

Okay. Another thing on this side, the Segue, especially with the roaming client this quarter, I'm assuming most of your revenue with an initial licensing and NRE revenues, what would you expect as far as margins go as your initially ramping up the Segue roaming client compared to maybe later this year when we see more against royalty type revenue after people are actually using the roaming client?

Let's separated couple of things. The way we do our accounting, all of the engineering that was into delivering, I'll call it the set up code, at the beginning, is in the R&D line. So the gross margin percentage for Segue as it shows in revenue and gross margin is 100% and would continue to be 100% minus some third party licensing that we have. So if it is not in the hundred percent, it is in the upper 90s. The issue, as we transition, as you correctly stated, we are in the phase of installation in the systems where the majority of the revenue we are getting are the setup of software and the customization software that we're delivering. While that will dwindle over time as our customers go live, then it will be replaced by licensing [inaudible] so it is more an issue for acceleration of revenues then it is for margin.

That is really all my questions. Thanks guys.

Thank you Wes.

Thank you, our next question comes from Edward Ching [ph] with Broadman and Rentchaw [ph].

Hi guys, going back to this SBC relationship you have with Segue and the roaming client., they put out a press release that they have an arrangement with UPS. The UPS store -- about 3,000 EPS stores. Is there plans for people to download the roaming client for UPS so they could use those as they get into those Wi-Fi hot spots and use the system there?

I simply can't discuss what our customers are going to do. All I can say is that we're pleased to have a signed agreement with them.

OK. Great. Correct me if I'm wrong, but didn't -- wasn't -- were you guys talking to Motorola last quarter and if so, what is the situation with that relationship going forward?

We have no announced relationship with Motorola and we never announced any discussions that we're having with them.

Okay. I was mistaken. Thank you.

Thank you. Our next question comes from Susan Kal with FDR, please state your question.

Good afternoon, I was wondering if you could just maybe give us an idea of the growth margin through the end of the year. What the expectations are and whether you plan to raise the R&D and the SG&A at about the same rate as revenues or if you plan to keep those flat on an absolute basis?

Sure, as we had previously talked about in our first quarter guidance for the year we do expect gross margin is going remain in the mid-60s. Just as we in the first quarter and we're expecting in the second quarter. And I would expect that our core cash based OpEx of R&D sales marketing and G&A, other than for the litigation costs, will have very modest increases in the 100K order kind of range and you are going to see significant leveraging of those costs.

Thank you. Great quarter.

I'm sorry. Susan?

That was a very good quarter.

Thanks a lot.

Thank you, our next question comes Robert Katz [ph] of Sunvest [ph]. Please state your question.

Hi, great quarter guys.

Thanks Robert.

I have a question -- I'm not sure if you did this already -- Can you break out revenues between MAXRAD, [inaudible], and Segue?

No. We didn't do it and we don't do it, we don't do segment reporting.

And also can you sort of walk me through, if you can, how Segue generates revenue, it sounds like you are shipping the client [inaudible] base -- what point do you start recognizing revenues and what should [inaudible] tax rate per client, can you give a range on that?

All I'll tell you is what we have described before in these conference calls. We get revenue in four different ways from Segue customers. One, we charge [inaudible] for customization and for private branding, two, we either charge a monthly or a fixed subscription fee, third in some cases, we get a percentage of day pass use of our client to get day pass revenue, and fourth, we get maintenance in the second year of each subscription. That is the way that we generate revenue. We are dependent upon the rollout of a service from a carrier, both on the Wi-Fi side and the cellular side, and by a attach rate, I don't think I have a way of answering that question.

Okay. Looking out for the year, which part of these revenues chains would be the largest?

You mean in the Segue area?

Yes.

I would hope that our subscription revenue would grow substantially because NRE is something that you hope you'll get a little bit of that every year as you add on new customers where subscriptions are going to vary directly with the success of the rollout of a service that is using your client.

And there is no way of [inaudible] how big the subscription fee is going to be?

Of how big the subscription fee would be?

Yes.

Not really. We give -- you know to give the subscription fee out would be to tell our competitors who are listening in on this call what our pricing is.

Fair enough. OK.

Thanks Robert.

Our next question comes from David Talis [ph] with Indus Capital [ph]. Please state your question.

Two questions. The first one is -- am I correct in understanding that Segue can be used not only for 802.11 but also for edge other -- ?

Yes. In fact, it can be used for more than that. It is really a general connection manager, it allows you to roam from one 802.11 environment to another. It allows you to roam onto cellular or to just use cellular in the hands of other carriers that use this, for example, NTT [inaudible], and then finally it can be used as a connection manager for broadband wired or for analog dail up.

Okay, thank you, and is the revenue the same, so let's say I sign up for a day pass for Wi-Fi contract, do you book revenue equally for that as you would if I sign up for an edge data package?

No. It's different. It really depends on what the carrier gets for that. We sell or license our software on a per subscriber per month basis or per subscriber one time basis or per subscriber per year basis. Those subscription fees vary with what the customer is buying. If they are buying a single mode, a multi-mode, or a single mode cellular versus a single mode 802.11. In terms of what we get for day pass, that's an agreement between a carrier and us and typically the way we recognize revenue there is that we're told what the revenue is from day pass use and then we get a percentage of that that is consistent with the value of our software.

Last question. On Segue, when you install a network do you get a fair amount of revenue up front? I mean, what I expect --

We don't install networks. I'm sorry for interrupting you, but at one time when we bought CyberPixy [ph], they had infrastructure products that we no longer carry. But we are selling software to people who do have the networks. So we're not in the network infrastructure business.

Sorry, but in year one when you sell your software package, I guess I'm wondering do you get a fairly large proportion of up front revenue, in that if you had a subscriber uptake at the rate that you are sort of seeing these days, would you assume year 2 revenue to be lower than year 1 revenue?

No, not at all. It really matters on the nature of the relationship that I mentioned. We do receive NRE, non-recurring engineering funding when we do customization or custom branding for one of our clients. But, if we're for example, licensing our software, we could receive very low revenue in the first year of our commercial relationship with a carrier and; hopefully, much more revenue in the second and subsequent years as their subscriber base grows. Thanks a lot.

Thank you.

I have time for one more question.

Thank you, sir. Our final question comes again from Edgar Ching with Broadman and Renshaw. Please state your question.

I just wanted to hear your opinion on recently Intel said that they're going to broker a deal with roam point for this Wi-Fi GSM roaming going forward. Does that hurt you or help you going on in next couple of years?

I think anything that facilitates roaming between cellular and Wi-Fi it is almost certain to be a benefit to us.

Okay. Thanks.

Mr. Singer, there are no further questions, sir. Thank you very much and I want to think all of you were still on the line for your attendance and your continued support of the company. Thank you. Bye.

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