PCTEL Inc (PCTI) 2004 Q2 法說會逐字稿

Good afternoon. And welcome ladies and gentlemen to the PCTEL Second 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. 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, PCTEL's Chairman and CEO. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and thank you for joining us for this call. I'm Marty Singer, Chairman and CEO of PCTEL. On behalf of PCTEL, we thank you for joining us on our earnings call. In this call, we will address the financial results for the quarter and the outlook for PCTEL in the third quarter of 2004. We anticipate that the call and the questions will take about one hour.

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

Hello, everyone. Before I begin my financial review of the company, I will read the Safe Harbor statement. Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance and expectations regarding the future growth of our wireless and licensing businesses, including expansion through investment and acquisition 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 prospect 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, let's start with revenue. Second quarter total revenue was $11.5 million, compared to 10.2 million in the second quarter of 2003. These numbers include the wireless -- include wireless product revenue of 10.1 million, up from 2.3 million last year, and licensing revenue of 1.4 million, compared to 0.6 million a year ago. Last year's second quarter, also contained 7.3 million in modem product revenue related to the HSP modem product line. As you recall, PCTEL sold its modem product line to Conexant in May of 2003.

Now, I would like to speak to our wireless product segments. This is the first time that we are providing a discussion of revenues by business segment, although, our first quarter 10-Q included this level of detail. The Mobility Solutions group, which includes our Roaming Client, the Analyzer and the Soft AP, represents our software segment.

Revenue was 1.8 million, up 382% from last year, and up 59% sequentially from the first quarter. The increase is due to the accumulation of carrier contract wins over the last year, as well as initial traction of our Soft AP product. Initial software customization fees from carriers and Roaming Client licensed revenue from carriers and OEMs represented the majority of revenue in the quarter and the first half.

As a reminder, the life cycle model for carrier contract revenue starts with customization fees before and during initial service deployment, with the replacement of that initial revenue level with license and maintenance revenue over time.

Our RF Solutions Group, formerly DTI, represents the test and measurement segment. Revenue was 2.5 million in the quarter, up 34% from last year and 7% sequentially. The increase over last year is attributed to carrier spending on tool that will assist them in making the transition to new technologies, such as, UMTS, which is the general designation by the International Telecommunications Union for approved 2.5 and 3G technologies. The increase also reflects the introduction of the company's CLARIFY product line in the fourth quarter of last year.

Our MAXRAD product group represents the antenna segment. It was acquired in the beginning of January 2004 and this is the second quarter of operations. Revenue was 5.8 million, up sequentially 14% from the first quarter this year. The growth in this segment is being driven, primarily by success in the Wi-Fi market, with large OEM manufacturers and improved results with a few of our major distributors.

Licensing segment revenue was 1.4 million, up 124% from last year, but down 33% sequentially from the first quarter this year. This segment continues to be affected this year by completion of older licensing agreements. Now, I would like to speak to revenue guidance for the third quarter and the year.

We continue to guide 50 million in revenue for the year at an approximate mix of 6 to 7 million of licensing and 43 to 44 million in wireless product revenue. Our guidance for total third quarter revenue is between 12.5 and 13 million. Wireless revenue is expected to be between 11 and 11.5 million, and licensing revenue is expected to be around $1.5 million. This total represents a sequential quarter-to-quarter increase of between 9 and 13%.

Now, let's turn to gross margin. Gross margin for the second quarter was 63%, compared to 63% for the second quarter last year. Gross margins for the licensing and test segments were in line with last year, and all segments were in line with the first quarter of this year. Modem segment gross margin was favorably impacted last year by the utilization of 0.5 million in inventory reserves. Gross margins for the third quarter are expected to be between 62 and 64%, consistent with the second quarter.

Now, I would like to address our cost structure. Total OpEx was 8.4 million in the second quarter, up 2.8 million from the second quarter last year, and down 0.2 million from the first quarter this year. Comparisons to last year are not particularly meaningful, as it included modem operations and excluded the MAXRAD acquisition.

I will focus my comments on the sequential change. R&D spending increased 0.1 million, as we continued to invest in wireless product development. Sales and marketing was down 0.4 million, due to the first quarter containing seasonally high Trade Show costs. And finally, the first quarter contained 0.1 million of favorable adjustments, previously quoted HSP modem restructuring reserves that was not repeated in the second quarter.

We will continue to invest OpEx in our wireless products, and our patent enforcement efforts. Guidance for third quarter 2004 for OpEx is 8.7 million to 8.9 million. This includes 8.1 to 8.3 million of R&D, sales and marketing and G&A, 1.1 million of amortization, and an offsetting Conexant royalty of $0.5 million.

Now, let's speak to other income. Interest income generated from investments was 0.3 million in the second quarter, compared with 0.3 million a year ago. Third quarter interest income is also expected to be 0.3 million.

Net loss for the quarter was 0.7 million or 3 cents a share, compared to net income of 1.1 million or 6 cents a share in the second quarter of last year. The difference is due to the second quarter of 2003 benefiting from two HSP-related events: a onetime gain on the sale of HSP modems, net of restructuring, and utilization of modem inventory reserves.

Now, let us turn to the balance sheet. Cash and short-term investments ended the quarter at 103.6 million, down 3.8 million from the first quarter. Approximately 3.3 million is due to acquisition related payments, scheduled for the second quarter and expansion of working capital, and approximately 0.5 million of stock repurchases net of stock option exercises. In our last earnings call, we had guided a $3 million decrease before stock repurchase and option exercises.

As of June 30, 2004, the company has repurchased 1.71 million out of the 2.5 million shares authorized by the Board of Directors under our continuing share buyback program. The company repurchased approximately 170,000 shares in the quarter. The company continues to have no debt. That concludes my financial review. I'd like to turn the call over to Marty for his summary comments.

Thanks, John. This past quarter we made progress in several areas. Aside from achieving our financial goals of generating 11.5 million in revenue, all from our licensing and wireless businesses, we are beginning to see significant organic growth within the business that we acquired and are now developing. Organizationally, we took the first significant steps in integrating the three distinct product groups with a particular focus on our sales and marketing efforts.

Finally, our investments in UMTS have positioned to us benefit from the wireless technology migration that is now occurring throughout the world. My remarks will cover these areas. I will also update you on our patent enforcement efforts.

Let me first address our progress on sales. Last year at this time we generated $10.2 million in revenue. Only 3.2 million of that was in our wireless and licensing areas, the remainder being in our discontinued modem product line. We have more than tripled revenue from our new business activities in licensing and quadrupled our revenue when you just look at wireless activities alone. This was our strategic intention when we made the commitment to shift our business from soft analog modems to wireless technologies and products.

More importantly, within each of those product areas, we have delivered new products and penetrated new markets. For example, in our Mobility Solutions product group, we now offer a roaming client that handles Wi-Fi, cellular, dialup and Ethernet connections to the Internet. GoRemote, formerly GRIC went live with their mobile office five service offering, with a branded version of this product. During the same quarter, we introduced an edge and UMTS-compatible version of the roaming client that is being deployed by AT&T Wireless.

This quarter we will introduce an EVDO version of the product. This product will be made available on our web site and will be compatible with leading EVDO modem cards from Sierra wireless. Of course, we are extremely pleased that T-Mobile now offers a branded version of our roaming client for use with approximately 5,000 hot spots and Cingular AT&T wireless and others have introduced the cellular or wireless wide area networking version of our roaming client. The Mobility Solutions product group also shipped 300,000 units of our soft access point and delivered 50 units of our analyzer product.

Progress within our RF Solutions Group also reflects a commitment to UMTS. This past quarter we had our first sales for a Tri-Band GSM /UMTS scanner. This product allows GSM operators that are overlaying their 900, 1800 megahertz GSM Networks with an UMTS 2100 megahertz technology, to simultaneously assess the performance of both networks during the transition and to support ongoing operations. We expect this to be a high growth area as the transition to UMTS accelerates. We also released a new UMTS indoor transmitter system that enables users to generate UMTS signals for indoor propagation measurement and mapping.

Again, in the context of simplifying pervasive wireless broadband, we believe that these products will be important in extending pervasive wireless broadband inside buildings. Finally, we continue to invest heavily in our CLARIFY interference management system. Our CLARIFY sales doubled from Q1 to Q2, and we have now penetrated Canada, the US, and Asia with our CLARIFY products.

The MAXRAD product group also invested in emerging areas. During the second quarter, we launched seven new antennas focused on the rapidly growing unlicensed area. These products cover 2.4, 2.7 and 5 gig frequencies, and address multi-beam widths and wide band wireless performance. Additionally, these products simplify SKU management for our large distributors and simplify installation. A single antenna meets the technical requirements of several wireless scenarios. MAXRAD also introduced several Wi-Fi antennas for special installations. These new products have helped us grow our direct OEM sales.

Our comments today regarding organic growth should indicate to our stockholders that PCTEL's long-term growth strategy includes internal investment as well as aggressive acquisition. We acquired cyberPIXIE, DTI and MAXRAD to build a strong foundation in wireless and more specifically to support our goal of simplifying mobility. Indeed, we continue to explore additional acquisition opportunities, but will not be timid about investing in product development or the growth of our sales channels.

With respect to acquisitions, we are currently investigating companies that would accelerate the growth of our existing wireless platforms. These include companies that provide specific types of antennas, connectivity tools, extensions of our software defined RF applications, and other companies related to our government activities. We will update you when we decide to pursue any of these potential investments. Our business focus, which is to simplify mobility, is now reflected in how we will represent ourselves to our customers.

As of July 1, Jeff Miller, who had been heading up our business development and strategy activities, is now PCTEL's Vice President of Global Sales and Marketing. Jeff's new role was made public in a press release that we issued last Friday. Soon after the acquisition of MAXRAD, we recognized that we had an opportunity to achieve some efficiency in how we sell our products? As some of our customers pointed out, PCTEL's product portfolio addresses the implementation of pervasive wireless broadband, and we provide high quality antennas that extend the reach of wireless, connection management software that simplifies wireless broadband access to the Internet, and software defined test and measurement tools that help carriers and others improve the performance of their wireless networks.

Our integrated sales force, under Jeff's management, will carry that message. All of the regional managers outside of North America will now report to Jeff. We'll complete the integration of the sales force by the end of the year. In addition to the integration of our sales efforts, Jeff is leading our efforts to establish PCTEL as the corporate identity associated with our leadership in simplifying mobility. You will note that we now refer to our product groups as Mobility Solutions, formerly Segue RF Solutions Group, formerly DTI, and the PCTEL MAXRAD product group. Our web site marketing collateral exhibit and conference presence all reflect this change.

PCTEL is our corporate identity and simplifying mobility is what we do. We have two matters of significance to report on our litigation with Agere's, Lucent, 3Com and US robotics. Agere's and lucent and have filed a motion to dismiss certain legal theories from our lawsuit. Just recently, on July 23rd, their motion was dismissed. In addition to this, we received exciting news from the US Patent and Trademark Office, as we disclosed last Thursday; the PTO reexamined one of our key modem patents at the urging of a former competitor.

After a lengthy process, this patent has emerged stronger than ever. The patent which, which describes implementation of critical modem functions and software, instead of in, hardware represents an important aspect of our lawsuit against Lucent and Agere. We can see also report that we have had multiple settlement discussions, but I cannot disclose the content of those discussions where the parties involved in those discussions.

Based on the current schedule, the time line for PCTEL's case against 3Com is ahead of 3Com's case against PCTEL. We continue to believe that the defendants in this case have substantial liability and the litigation represents the most appropriate strategy for PCTEL to enforce its patent rights and to obtain adequate value for its investment and modem technology.

Let me close by reiterating John's comments on the relative performance of our various product groups. All of our wireless product groups grew revenues in the second quarter. We are particularly pleased that Mobility Solutions has grown from 1.6 million in revenue for all of 2003, to 1.1 in the first quarter to 1.8 million in the second quarter this year. We anticipate continued growth in Mobility Solutions, however we note that prices for the Soft AP are lower than we anticipated and that our growth is somewhat dependent on the rollout by the large carriers that have taken a license to our product.

Our RF Solutions Group did an outstanding job of growing their commercial business; they grew from 1.9 million in the second quarter of 2003, to 2.5 million in 2004. Finally, the MAXRAD product group sales were strong across the Board, and are clearly meeting our expectations at the time of the acquisition. We remain excited about our future and pleased with the consistency of our performance over the past 11 quarters. PCTEL's management hopes that it continues to earn the loyalty and support of its stockholders.

Thank you for your attention to these remarks. I hope they weren't too long. We are now ready to answer your questions.

Thank you. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. If you have a question press, "star" "one." on your touchtone telephone. If you wish to withdraw your question press, "star" "two." Your questions will be taken in the order received. Please stand by for your first question.

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

Hi John, if you could do some quick housekeeping details. If you can go over kind of the outlook for receivable days based on the different business blends and kind of whether -- what should be the right level of receivables, or is it very dependent on which piece of business ships?

Yes, Doug. Right now I would -- receivables went up for us about 10 days in the quarter. The driver of it was between our Mobility Solutions group, but -- and also in our RF Solutions group. We had a lot of large deliverables that were done in the last month of the quarter. So I really didn't get a chance to do collections in the quarter on them. I would characterize, because of that, the current receivable level to be about $1 million higher than normal levels, and that I would expect that to regress back down to a normalized level by the end of this quarter.

OK. And then, you may have mentioned the figure, just the -- Marty talked about litigation, that could you guys give out the expense figure on legal for litigation in the last quarter?

Yes. This quarter that number ran close to $1 million.

So operations were basically breakeven, if we look at on an operating basis independent of patent suits?

I'm sorry, say it again. Yes, you would deduct that out.

OK. And then, if you could talk a little bit -- if you guys talk about antenna growth going forward and what's going to be the driver there? And you talked about the commercial business, and should we be looking for the commercial business again to drive future quarters?

Doug, I think it may have been the way I phrased my remarks, but when we talk about commercial business versus government, we're referring to the RF Solutions group, and, which we formerly referred to as DTI. The MAXRAD drivers are somewhat different, but let me answer both your questions.

We think that the drivers dominantly for the RF Solutions group have to do with the transition to new technologies, such as UMTS. There seems to be a greater demand for our Tri-Band and Dual Band scanning receivers that help cellular operators make the transition from one technology to a new technology.

In the case of the MAXRAD product group, really the primary driver there has been the huge growth in the unlicensed band and the new products that MAXRAD has developed to exploit that increase, a lot of those products dealing with Wi-Fi, but also with other frequencies in that unlicensed spectrum.

OK. And there's been a lot of press about -- the changes going on in Europe with GSM to UMTS could you talk a little about with the change in the system. Is that prompting them to look at new vendors such as yourself, and opportunity there?

Well, it certainly prompts them to look at new infrastructure vendors to be sure. But what it does for us is it increases the demand for tests and measurement equipment. A lot of these operators have the difficult task of overlaying an existing system with a new technology. Furthermore, when you're planning these new systems, it becomes important to do a lot of testing related to interference management. And the claRiFy system in particular collects and then helps collate data on interference that the operators use in designing their system. So the transition to UMTS is really a positive driving force for that business.

And last question and I'll give the floor after that. Can you talk -- you talked about some of these patent wins, and you haven't given us a dollar figure on what might be a reasonable expectation from these patents -- perhaps you can give us kind of percentage increase that you think you might get because of these patent decisions that you've had recently, how much bigger it could, whatever number that we're using out of the patent wins because of this.

Yes. Clearly we can't give a dollar figure on that. It's dependent on litigation. I will suggest, though, that people who follow us look at our settlements with Intel, for example, and I think a fair assumption is that we're not going to settle for anywhere near what we settled with people that we didn't have to take to court. But that's as far as I can go in giving you guidance.

We do believe that the patent that we have asserted against Lucent and Agere's, has emerged as a bulletproof patent. First it's fundamental to the implementation of soft modems. We think it's a very important patent. And second, in this review process there were those who tried to put up all types of references to derail this patent. You know, to invalidate it because of prior art. And what this means is that Patent and Trademark Office considered all of those arguments and dismissed them. So we're very confident about the strength of this patent.

Thanks for another quarter of delivering good numbers.

Thank you.

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

Marty, can you hear me?

Yes. Anton, how are you?

Outstanding. I wonder if you could talk about addressing the competitive concerns on the software side. I mean the classical dilemma that Netscape had at once upon a time was that Microsoft built in the functionality and there wasn't much left. What in terms of the various devices that will need wireless roaming, even starting out today with laptops did you going to more traditional PDA wireless devices and then that was down to a cell phone format where you would think the volumes are going to be the most interesting ones over time. You know, how do you see yourself competing for those markets and how do you see chip vendors and others trying to create different types of roaming and Soft AP software that go into these devices?

Well, let me sort of divide my answer into three parts. First, you mentioned Microsoft. Second, how do we compete? And third, what do we think that some of the chip set vendors will do to compete in this space? And I'll separate my comments both on the Roaming Client and the Soft AP.

As you know, Anton, we used to be in the soft modem business, and quite frankly, there was no reason that Microsoft could not have jumped into that business. But if you deal with the PC vendors and you ask them, what gives you the most trouble at your Help Desk? Why are products returned? They will tell you over and over again that the single biggest contributor to Help Desk calls and to return problems are problems with access. And if Microsoft were to have built the soft modem, they would have received those calls and been responsible for the performance of that PC.

That's why access issues in general have been turned over to specialty vendors. We certainly feel the same about the Soft AP. We think it's unlikely that they will want to take on all the responsibility there and take on the security and the access issues associated with implementing on access point and software.

With respect to the Roaming Client, you know, I would just ask you to go through the experience of moving in and out of different hot spots, and moving in and out of different cellular connections with a generic tool that you might find under Microsoft, and our tool, I think the experience is quite different.

With respect to how we compete, we compete on the Roaming Client and Soft AP in a couple ways. First, we measure ourselves from the Soft AP by the cycles that we consume on the host processor. We do the Soft AP extremely efficiently so that your PC is not disabled when you are implementing the Soft AP function.

Secondly, in both the Soft AP case and the Roaming Client, we are agnostic. For example, in the Roaming Client we're now compatible with approximately 160 different Wi-Fi cards and basically all of the cellular cards.

Third, unlike a generic vendor, either from the Microsoft or a chip set vendor, we are committed to branding our product to key customers, whether they're private carriers, and, you know, the private carriers that we refer to in the United States, are people like Gric or iPass or Fiberlink and the public carriers such as, you know, AT&T Wireless or Cingular. We make sure that the product looks and feels like a product associated with their service. That's not the kind of look and feel you would get in using a generic connection manager.

Finally, I do believe that the chip set vendors are going to incorporate some of these capabilities, but that leads to problems. Suppose that you are a card vendor and take any one of them, take somebody like NETGEAR or take somebody else, where they're dealing with multiple chip sets. They don't standardize just based on one chip set. They have cards with all different sources of chip sets in them.

Well, are their different cards that are comprised of different chip sets going to then have a different Roaming Client, a different user interface? And I think the answer is no. What you want to have is you want to have a single user experience across the range of your products. So competition is going to be there, but we feel pretty comfortable in some of our distinctive capabilities there, Anton.

That's very good. Now, I have a separate question, more on the sort of the DTI business, and that is we are currently in the midst of sort of two major carrier deals. One is, of course, Cingular's pending acquisition of AT&T Wireless. The other one is as a result of that the dissolution of the Cingular/T-Mobile joint venture in the three states, California, New York and Nevada. Have you seen any impact on their behavior in the last couple of months from any slowdown in spending, the executives being busy with meetings, things like that, that they just have a slowdown, or is your sales -- you just haven't seen anything of the kind?

Well, a couple of things there. One, you refer to DTI. We referred to that now as the RF Solutions, and so we want to get consistent on that branding. Not to bust your chops or anything, but just to drive home that branding concept.

Secondly, our business ultimately in RF Solutions is dependent on what is happening with base stations, not what is happening at sort of the administrative or corporate merger to the extent that base stations are changing, towers are going up, interference is a problem, we have business. So, churn and expansion and transition to new technologies is what drives RF Solutions. And so, I will report that out of our commercial business, in RF Solutions, the strongest activity was in North America. And they're selling GPRS, GSM products, so we have not been hurt by this consolidation.

OK. Well, that's great to hear. Thank you.

OK. Thanks Anton.

Our next question comes from Sid Parka (ph) from The Robbins Group. Please state your question.

Hello everybody. I had a question; you mentioned about the pickup that you've seen in the transition of technology to UMTS. Now, how long do you think this transition will go on? I mean I know it's going to be an ongoing thing from UMTS to move on to something else, but especially you've said that you've seen some strength in North America. What do you see happening in Europe and Asia?

I have no prediction on the duration. It's by region, and it's dependent on carrier decisions there.

OK. Also, on the timelines, do you have any sense of when all the cell phone carriers that you have based your Roaming Clients with -- to roll them out?

Well, we certainly have seen a lot of activity from T-Mobile, and AT&T Wireless started but your question is a good one. We are dependent on the pace of those rollouts, and we think that the strongest activity that we'll see will be the end of the third quarter, the beginning of the fourth quarter.

OK. And could you just explain how the revenue model will work once users start using these roaming clients?

We've explained that previously, and basically we sell licenses to the operators, we receive NRE, we receive some amount for day pass use of our roaming client, and finally we get paid usually based on activation.

OK. And we should expect to see this start flowing in towards the end of third quarter into the third quarter into the fourth, right?

Yes, and we received some revenue this quarter as well.

OK. Great. Thank you.

Thank you.

Our next question comes from Matt Robinson from Ferris Baker Watts. Please state your question.

Good afternoon. It's Mark McKetney(ph) calling for Matt. Thanks. Good quarter, guys.

Thanks. You actually sound like Matt.

Don't say that. That's all right. A couple of quick questions. On the -- just housekeeping, gross margins, a touch down sequentially but I guess within guidance.

That has to do with the mix of the MAXRAD product. They had a really good quarter in volume.

Now we had -- as we explained, we had stronger growth sequentially from MAXRAD versus all other areas, and although MAXRAD product group has exceptional gross margins for being in the antenna business, they are going to be lower than software products.

Got you. OK. That makes sense. And then, visibility on the September quarter and I guess December by default you gave full-year guidance sticking to the 50 million number. Would you say your visibility is in line with going into a quarter and maybe try to quantify that a little bit?

By visibility, you mean backlog and things like that?

Exactly.

We wouldn't comment on that, but we will make these comments. The fourth quarter, we believe will be significantly bigger than third quarter, and that's consistent with our $50 million number. And there are really six elements to the growth that we anticipate.

One, we think we're going to see continued impact of the transition to UMTS. Two, as Sid asked us just a call ago, we think in the fourth quarter is when we'll see the impact of new subscriptions that will reflect the rollouts that are occurring now by our two major North American customers. Three, we think we're going to see a continued ramp on the Soft AP. We shipped 300,000 units last quarter, and we think that will grow throughout the year.

Fourth, MAXRAD is getting an increased amount of its revenue from new products, and they're going to be continuing to roll out new products that will benefit us later in the year. Five, claRiFy sales, we really just introduced that product for commercial sales in the second quarter. We had a couple trials in the first quarter, and so we're going to start to see the full benefit of our investment in claRiFy later in the year. And finally, the first and second quarter were really slow quarters for the government business that we get out of RF Solutions. And the third and fourth quarters should be much stronger.

Got it. And then sticking on that number six, and I appreciate that, but the -- was it this government, is it just because it was lumpy is that why it was slow in the first and second quarter is there, I think...

Lumpy and project based. The projects tend to be binary. you know. Yes, you've got it this quarter, no, you don't, and there's a couple projects we're working on in the security area that are just taking some time to develop, but we're confident.

Got you. Great. OK. And then one last one. You gave cash guidance last quarter. Cash flow guidance -- are you giving that this quarter at all?

Yes, I think where we're headed is I believe cash will be between neutral and potentially $1 million investment in working capital, excluding any buybacks we do.

Great. OK. Thanks a lot, fellows.

Thank you

Our next question comes from John Ware from Avondale Partners. Please state your question

Good morning, John.

Hi, John. How's Nashville?

Nashville is good, fellows. The Soft AP, you mentioned the pricing lower than expected. Could you give me some color on that, please?

No, we don't put out details on the pricing, but it was lower than we anticipated at the beginning of the year.

And what do you think some of the reasons behind that were?

Well, it's just a very competitive market. I think the primary reason is this, we're making most of our sales into the wholesale market,

Right.

Rather than selling directly to a PC vendor, we're selling into the Taiwanese motherboard manufacturing market and those prices are lower.

And when you say you shipped 300,000 of those Marty, now is this similar to - in that you ship them, do you recognize that when you ship them or do you recognize that when they sell them?

For administrative ease, our customers typically buy them in blocks and then they use them up in the quarter. And so that would be a block's bought and used up.

OK. Next, on MAXRAD. You talked a bit about MAXRAD, you said it had a pretty good quarter this quarter. Can you talk about some of the specific applications that are some of the growth drivers besides just Wi-Fi?

Yes, I'm sorry if I wasn't clear on that, but they introduced seven new products, and aside from Wi-Fi, their products are addressing the unlicensed spectrum, which includes a great deal more than just Wi-Fi, and their new products are taking advantage of the growth in the use of the unlicensed spectrum. In addition, we had strong sales to some of our OEMs, specifically for Wi-Fi, and finally across the board in some of our other areas like LAN, mobile radio and so on, we had some strong sales through our largest distributors in the US.

OK. And then lastly, on litigation, you said, you experienced approximately 1 million in the quarter litigation expense. Are we still thinking that the litigation expense for the year is 3.5 million?

I think we've guided all along 3.5 to 4 million. It would be in that range.

OK. All right, gentlemen, thank you.

Thank you.

Once again, ladies and gentlemen, as a final reminder, should you have a question, please press "star" "one" at this time. Our next question comes from Ed Ching from Rodman & Renshaw. Please state your question.

Good afternoon, guys. You mentioned EVDO cards working with Sierra Wireless. What networks EVDO -- networks will those work on? Because I know Verizon Wireless -- would it work on the Verizon Wireless network?

Any cards that Sierra works on, it would work on. We're just going to make our software compatible with their card.

The reason I ask -- I thought that Smith Micro had an exclusive agreement with Verizon Wireless that only their software could be used for their network?

Well, anyone's software can be used with a card if you have compatibility with that card. Now, whether Verizon sells it directly is another issue.

OK. And with MAXRAD, with this networking starting to take off, I guess New York City is going to be a test pilot for that. Does MAXRAD serve those kinds of antennas as well?

Yes.

And have you seen any sort of visibility into those kinds of deals starting up?

No.

Thank you very much.

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

Thank you very much for your questions. We look forward to talking to you in a quarter, and I'll be out at the bared conference tomorrow, and if some of you are there, I'd be glad to meet individually with you. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 361989. This concludes our conference for today. Thank you all for participating and have a nice day. All participants may now disconnect.

CONFERENCE CALL CONCLUDED