PCTEL Inc (PCTI) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to today's PCTEL, Inc., fourth quarter 2004 earnings conference call. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to the Chairman and CEO, Mr. Marty Singer. Please go ahead, sir.

Thank you and good afternoon, everyone. I'm Marty Singer, Chairman and CEO 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 fourth quarter and the outlook for PCTEL in the first quarter of 2005.

Joining me today is John Schoen, COO and CFO. John will take you through our financial performance for the fourth quarter, as well as limited financial guidance for the first quarter of 2005. I will 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 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, the ability to integrate acquired businesses and products and the risks associated with future acquisitions. Our litigation expenses are dependent on a number of factors, not all of which are within our control.

Additional discussion of these and other factors affecting the company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today and we disclaim any obligation to update information to reflect subsequent events.

This concludes the safe harbor statement. Now I would-- will continue with the financial review.

Fourth quarter 2004 total revenue was $15.3 million compared to $18.3 million in the fourth quarter of 2003. The 2004 number includes wireless product revenue of $14.2 million, up from $3.5 million last year, and licensing revenue of $1.1 million compared to $14.8 million a year ago.

I will speak to the trends by segment. Our Antenna Products Group, formerly MAXRAD, was acquired in January 2004 and we recently completed the fourth quarter of its operations under PCTEL. It was supplemented by the acquisition of several antenna product lines from Andrew Corporation on October 29, 2004.

Revenue in the fourth quarter, including the Andrew acquisition for two months, was $9.8 million, up 72 percent sequentially from the third quarter this year. Organic sequential quarter growth, without the Andrew product line, was 14 percent. The company saw a return to increased revenue growth from its OEM customers in the quarter, which had slowed in the third quarter.

RF Solutions Group revenue was $3.3 million in the quarter, up 13 percent from the fourth quarter last year, and up 27 percent sequentially from the third quarter this year. The company saw a return to traditional levels of seasonal spending by its wireless carrier customers in the fourth quarter. The company continues to see increased traction from its CLARIFY product line as a driver of revenue growth.

The Mobility Solutions Group revenue in the fourth quarter was $1.1 million, up 83 percent from last year and about the same as the third quarter. The increase, year-over-year, reflects the accumulation of carrier contract wins for our roaming client over the last year. The sequentially even revenue levels are indicative of the early-stage subscriber traction of the carrier customer base.

Licensing segment revenue was $1.1 million, compared to $14.8 million in the fourth quarter last year and $1.3 million in the third quarter of this year. The fourth quarter of 2003 included a $13.5 million one-time licensing settlement from Intel, as well as the final quarter of several older licensing agreements. This segment continues to be affected this year by completion of older licensing agreements. It will continue to shrink in 2005 absent any intellectual property litigation settlement.

Now I would like to speak to revenue guidance for the first quarter of 2005. Total revenue is expected to be between $13.5 million and $14 million, comprised of wireless revenue in the range of $13 to $13.5 million and licensing revenue of approximately $0.5 million. The wireless revenue compares to $8.6 million in the first quarter last year. We continue to maintain our total annual 2005 revenue guidance of between $60 and $64 million.

Now let's turn to gross margins. Gross margin for the fourth quarter was 73 percent compared to 97 percent for the fourth quarter last year and 59 percent for the third quarter of this year. Gross margin at the total level is not comparable year-over-year or sequentially due to antenna products being acquired in 2004, the one-time licensing settlement from Intel in 2003, and the one-time 3Com royal expense reversal in 2004. I will speak to each of the segments individually.

The Antenna Products gross margin was 37.6 percent in the fourth quarter, compared to 41.7 percent in the third quarter of this year. The difference in margin is attributed to the duplicative manufacturing costs related to the transition of the Andrew product line out of Andrew's factory, as well as slightly lower margins on the Andrew products versus our organic product mix. The transition will continue through the first quarter. We expect total antenna margins to be between 36 and 37 percent in the fourth quarter, inclusive of transition costs. We expect margins to settle in the 39 to 40 percent range after the transition is complete.

RF Solutions gross margin was 65 percent in the fourth quarter, compared to 80 percent in the fourth quarter of 2003. The fourth quarter of last year contained a heavy concentration of OEM receiver software. We expect margins going forward to be in the 65 to 70 percent range.

Mobility Solutions' gross margin was 94 percent in the fourth quarter compared to 96 percent in the fourth quarter of 2003. We expect gross margin to remain in the 95 percent-plus range going forward.

Gross margin for the first quarter of 2005, in total, is expected to be between 47 and 49 percent due to the addition of the Andrew antenna product line and the related manufacturing transition costs previously mentioned.

Now let's turn to operating expenses. Total OpEx was $10.3 million in the fourth quarter, up $3.1 million from the fourth quarter last year and up $1.5 million from the third quarter this year. The increases from last year are related to our two antenna acquisitions, our investment in patent litigation, our increased investment in MSG and RFS distribution and our compliance costs for Sarbanes-Oxley.

I will focus my specific comments on a sequential order change. R&D, sales and marketing and G&A were up $1.2 million sequentially. $900,000 relates to the antenna acquisition, $200,000 relates to a one-time spike in finishing our 2004 Sarbanes-Oxley compliance and $100,000 relates to variable distribution costs on higher volume. Amortization was higher by $100,000 from the antenna acquisition. The restructuring costs in the fourth quarter related to the closure of our office in California.

Guidance for the first quarter 2005 for OpEx is $9.9 to $10.1 million. This includes $9.1 to $9.3 million of R&D, sales and marketing and G&A, $1.3 million of amortization and an offsetting Conexant royalty of $0.5 million. This represents a decrease from the fourth quarter. The company is expecting lower first quarter costs from variable distribution expense and reductions taken in the fourth quarter related to SoftAP.

Interest income generated from investments was $0.4 million in the fourth quarter, compared with $0.3 million a year ago and in the third quarter this year. First quarter 2005 interest income is expected to be $0.3 million.

Net income for the fourth quarter 2004 was $1.1 million or 5 cents a diluted share, down from $8 million or 39 cents per share compared to the fourth quarter 2003. Approximately $7.5 million of the difference in net income in the quarter is the result of the net effect of the modem royalty reserve recovery in 2005 and the one-time royalty settlement in 2003. The remaining $0.6 million increase in profit contribution comes from ongoing operations. As discussed previously, 2003 was a year of transition out of HSP modems and the full year-over-year results are not particularly comparable.

Now let's turn to the balance sheet. Cash and short-term investments ended the quarter at $84.1 million, down $18.2 million from the third quarter. In approximate numbers, the cash was used primarily for the following purposes -- $11 million to purchase the antenna product line from Andrew and the related costs, $5 million to purchase a new building to house antenna operations, $1 million for the stock buy-back program and $1 million of working capital related to the antenna transition, with the remaining $1 million related to expanding working capital requirements on higher revenue.

The company repurchased approximately 135,000 shares of its common stock during the quarter. As of December 31, 2004, the company has repurchased 2 million out of the 2.5 million shares authorized by the board of directors under our continuing share buy-back program. The company continues to have no debt.

Before I turn the call back to Marty, I would like to give a brief update on our Sarbanes-Oxley Section 404 compliance. We and our independent registered accountant are still in the process of completing the required testing and evaluation of our internal controls for 2004. Our acquisition of the Andrew product lines in October of last year has severely impacted our timeline for completion of these activities and we still have much work to do before we are in a position to file our 2004 Form 10-K.

As of our call today, the company has concluded that an error in its tax accounting as of December 31st, 2004, constitutes a material weakness within the meaning of the relevant accounting standard. This material weakness relates to the company's accounting for income taxes in the fourth quarter as part of the year-end reporting process. Our conclusion resulted from our qualitative assessment of our internal tax capabilities coupled with the year-end audit adjustment relating to the fourth quarter to rectify the accounting error.

The financial statements presented in the press release have been appropriately adjusted and reflect the correct income tax expense and income tax accrual. Because the error relates to our tax accounting, it has no effect on our business or customers and has no impact on our revenues, our cash flows or our financial condition.

We have expended significant resources in our Section 404 compliance activities and management is committed to addressing any issues that arise in connection with our internal controls. To address the accounting weakness, we have engaged an outside tax advisor and we will be implementing training procedures for our finance personnel. And we will, of course, make all appropriate public disclosure in our Form 10-K when and our independent registered accountants have completed the required evaluation activities under Section 404.

That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thank you, John. As most of you already know, we adjusted our fourth quarter guidance upwards when I presented at the Needham Technology Conference in January. We exceeded that guidance slightly, breaking through the $15 million mark for a single quarter. Although we generated more than $15 million in the fourth quarter of 2003, that reflected a one-time event, the intellectual property settlement with Intel.

We generated $15.3 million this past quarter from our wireless revenue and recurring royalties. This is the first time that our operations generated more than $15 million in a single quarter since the end of the bubble economy. We are now shipping as much wireless product as we did as a commodity modem company.

John has already provided sufficient financial detail and discussed the specific products that drove our fourth quarter revenue. I thought that it might be best to spend my time on reviewing how we recast our business over the past year, the industry factors that will drive our growth in 2005, and our focus on improving profitability in 2005.

First, let me discuss some of our major 2004 accomplishments. During the past year we invested $37 million in acquiring assets in the antenna business. This investment included the purchase of MAXRAD, several product lines from Andrew, the related transaction expenses, and the purchase of a new building that will accommodate this operation. We believe that these investments represent an exceptional use of the shareholders' money and will allow PCTEL to participate more fully in the growth of an important trend in telecommunications, the emergence of pervasive wireless broadband.

When we set out to effect a transition from modems to wireless, we concluded that a dominant force in the industry would be the availability of pervasive wireless broadband networks to consumers. We believed then and believe now that pervasive wireless broadband will be a patchwork quilt of disparate wireless networks and that people will receive voice and data services without regard to a specific standard or network type but instead will be served by multiple systems that make wireless broadband available to them.

We've committed to providing products that simplify mobility and that enable the delivery of wireless broadband. Antennas are an integral part of this effort. If you doubt this, ask yourself how many Wi-Fi antennas were sold seven or eight years ago? How many Wi-MAX antennas? How many antennas for WISPs? Add that to the antennas required for satellite radio, GPS antennas for network timing, RFID, and so on.

The point is that as unlicensed spectrum has become part of the patchwork quilt that underlies the delivery of pervasive wireless broadband, the demand for new antennas has exploded. At the same time, licensed spectrum carriers are working hard to extend their networks into the home and into the enterprise.

We are excited about having assembled assets that we expect will deliver more than $40 million in antenna sales this year. In addition to our legacy products in public safety and our newer products in Wi-Fi, in-building cellular and wireless broadband, APG, the Antenna Products Group, offers complete retail distribution systems for satellite radio, WAS (ph) antennas for efficient navigation, GPS antennas for network timing and on-glass antennas for automotive applications.

We invested in a new Illinois-based facility that will allow us to consolidate our antenna operations stated earlier. We have already completed transfer of product production from one of the Mexico plants that supplied product to Andrew. We will transfer production from the remaining factory within the next 45 days.

We balance this in-sourcing with customer-driven manufacturing operations outside of the U.S. and component-based outsourcing. We continue to maintain our operation in Tianjin to support Motorola's market requirements in China. As we have stated earlier, we will pursue opportunities to consolidate and grow our position in this industry.

We will also benefit from our investments in sophisticated RF tools that simplify network performance. You might recall that we acquired BTI -- now our RF Solutions Group -- in March of 2003. We launched a new product last year, CLARIFY, that helps operators optimize the performance of their networks by identifying sources of interference.

We sold 50 CLARIFY systems in 2004 and hope to double that number in 2005. CLARIFY and our OEM scanner product line has put PCTEL in a great position to benefit from the industry's transition from 2.5G cellular networks to 3G UMTS networks. We also believe that our scanners, which are based on our software-defined radio platforms, have applications to other challenges issues in wireless network performance. These applications related to antenna and base station performance are also noteworthy. RFS has launched its EvDO scanning receiver, which supports the CDMA carriers that are moving along the EvDO 3G migration path.

Finally, with respect to our RF Solutions Group, we established a small organization to pursue SDR-based opportunities in the adjacent security space. We now have three new standard products available for security and military applications.

Convergence and the emergence of voice over IP will also impact our business favorably. For those of you who attended 3GSM last week in Cannes, you probably were struck, as I was I, by the sheer number of subscriber devices with Wi-Fi and cellular capability.

Let me go off script and say I was also struck by the conversion rate to the euro and how expensive Cannes was for all exhibitors.

You may have also seen or actually used the voice over IP service that we provided at 3GSM as part of the mobile IGNITE alliance. Using our roaming client with infrastructure from BridgePort Networks, we demonstrated the initiation and maintenance of voice calls over Wi-Fi and cellular networks using a single subscriber device and a single number. We believe that voice over IP use will grow and that carriers and consumers will demand products that enable seamless roaming across different wireless networks. This application, voice over IP, will build upon the momentum that we have established for the roaming client.

As you might recall, we made a small -- about $2 million with transaction expenses -- investment in acquiring a Wi-Fi software company back in June 2002. We now have 8 active carrier customers, private and public, using our roaming client. Our customers include T-Mobile, Cingular, SBC, NTT DoCoMo, NTT Communications, GoRemote, BridgePort and another private carrier and their customers.

Through these private carriers, we are also getting traction in other cellular carriers. In addition to voice over IP, the requirement for mobile workers to have secure and flexible Internet access to corporate servers has created demand for our product. The growth in the mobile work force will continue to drive the need for flexible roaming clients. Our central configuration server is being updated to enable private and public carriers to provide secure mobile Internet access to enterprises using 3G services.

I've recently spoken with many of our shareholders and potential investors at the AEA Small Cap Conference and the Needham Growth Conference and at FBR's recent event, just this past month. My sense from these meetings is that PCTEL gets reasonably high marks for aggressively building a wireless revenue base and for navigating the transition from a troubled modem business to one with strong growth opportunities.

On the other hand, there is impatience with respect to bottom line performance. Current investors want to see stronger earnings and year-over-year growth. We also heard skepticism regarding the synergies between our different operations. Finally, there were many questions regarding our intellectual property lawsuit with Agere, Lucent and U.S. Robotics. I'd like to address all of these.

First, let me discuss some of our cost actions. Over the last three years we have generated profit in two of those years, the last year being the exception. In 2004 we were disappointed in the revenue traction in government sales and the lukewarm acceptance of our SoftAP. We were on target in all other product areas -- antennas, wireless test equipment and scanners into commercial markets and our roaming client. We also encountered a $1 million burden in Sarbanes-Oxley compliance costs.

Despite reductions in all other areas of our public company costs, these costs grew to approximately $3 million. Additionally, our investment in the IP litigation cost us $3 million in 2004.

We have offered revenue and gross margin guidance for the first quarter and the full year. The guidance reflects our growing confidence in year-over-year revenue growth and gross profit stability for our product segments. We believe that we can reduce our public company costs during 2005. We took cost actions in the fourth quarter related to SoftAP. We closed offices and made other selective reductions. The effects are reflected in our sequentially lower first quarter guidance for R&D, sales and marketing and G&A expenses.

With respect to synergies between our different operations, I would point out that we have consolidated much of our international sales force under Jeff Miller. We have combined our IT departments and made significant progress on consolidating our financial operations. We have a single website with a unified brand under PCTEL.

We should benefit from these synergies in 2005. We should see lower marketing costs and improved brand recognition among carriers, manufacturers and distributors. We have also established a structure for absorbing additional products.

With respect to products and technology, we have made it clear that we will apply our scanning and antenna efforts to new adjacent spaces such as RFID. Indeed, PCTEL is unusually positioned to take-- to participate in this exciting new area. RFID requires antennas, scanners and pulse-processing software. We have current products and development resources that can be applied to this application.

Synergy will also be on our minds as we move forward with potential acquisitions. We want to build upon our current businesses and acquire operations that permit us to utilize our existing management team, distribution channels and industry position.

For example, in our last acquisition we brought over several new product lines with only 15 professionals. To that end, we are exploring opportunities to acquire companies or assets that will help us establish a stronger position in antennas or software-defined radio without a linear increase in head count.

Let me discuss our IP litigation. As you may recall, we filed suit against 3Com in March 2003 and then consolidated that lawsuit with the one that we filed against Broadcom, Agere, Lucent and U.S. Robotics. At the same time, we asserted our patents against Intel.

Since that time, we settled with Intel, Broadcom and 3Com. We have spent approximately $5.6 million for IP litigation in '03 and '04. During that same timeframe, we recorded $24 million in licensing revenue and another $3 million from Conexant in royalties recorded as additional gain on sales of the HSP modem product line. We feel that most of these licensing deals were made possible by our firm stand on the strength of these patents and our willingness to go to court, if necessary.

We plan to continue our strong defense of our patent portfolio and aggressively pursue our claims. The Markman hearing is on April 6, 2005, and we will have a better sense of where we stand with respect to the defendants after the judge's ruling on the definition of claims and other matters pertaining to the litigation. Suffice it to say that we believe we should stay the course.

In summary, over the past year we invested heavily in antenna businesses that we believe position us to benefit from the emergence of pervasive wireless broadband. We grew our roaming client business, building upon the growth in the mobile work force. Our scanning business matured and PCTEL now owns about 35 percent of the OEM scanner market and we are unchallenged in the interference management area, our CLARIFY product.

We are excited about our market focus and the promise of simplifying mobility in a world dominated by pervasive wireless broadband. We continue to look closely at companies or assets to acquire that allow us or will allow us to build upon our current business platforms and we are committed to positive earnings as we move into 2005.

Thank you. With that, we are ready to take your questions. We have set aside 45 minutes for the Q&A session.

[OPERATOR INSTRUCTIONS] Doug Whitman, Whitman Capital.

Congratulations on a good quarter, guys.

Thanks, Doug.

John, if you could, just clarify for me because I'm trying to understand exactly what-- when we're talking about “deficiency” what we're talking about. What adjustment is there being made to what quarter? Did you overpay or underpay your taxes?

Yes, here's what it-- In actually booking the tax provision, we sit down with the auditors at the end of every quarter and finalize the tax provision, just like we do for every other account we have.

In the fourth quarter, they disagreed with the entry we booked that was specific to the fourth quarter. So this has no impact on any past financial statements. But under the Sarbanes-Oxley rules for a company our size, an audit adjustment that passes a certain dollar threshold is considered a material weakness, even if it's-- the books are exactly stated correctly as you see them now. As a matter of fact, our threshold is actually less than a penny a share for a company our size.

OK. So if I understand correctly, this is an estimated tax that you never--

Yes, the tax provision.

--actually paid to the federal government?

You're absolutely right, the tax provision as it applies to book, which is right on the face of the impact statement.

The point is, Doug, that the earnings and the financial summary you see in our release is 100 percent accurate. The auditors looked at the tax provision. They said, “We disagree with that.” We changed it--

And now they agree with it.

And now they agree with it. But you get two opinions. One is everything clean in the financial analysis? The answer to that is yes. But you get another opinion, which is, what is the status of your internal controls and your internal processes? And because we had this error, they'll say we have an adverse opinion regarding your internal controls. And it goes on to the checklist of the things that we have to improve going into this year.

OK. Well, I'm happy as long you continue to report the right number. Moving-- John, if we had-- you had three different numbers here that-- that are non-operating on a normalized basis. So if we pulled out the change you made regarding litigation, basically the change-- the expenses of the ongoing litigation and amortization, so if we looked at the operating business as a true operating business and-- what would have been the operating profit or loss this quarter?

Well, what you would do is the-- you see the $3.2 million up in the modem inventory and royalty expense recovery and effectively you would add that back. So $1 million-- if you view it on run rate, a $1.1 million net income, you would subtract $3.2 million from that.

And what were the legal expenses this quarter?

The litigation expenses were approximately $900,000.

And amortization was--?

Actually, about-- if you add the two amortization lines together, it's about $1.2 million.

OK, so you would have-- doing the math, you would have had a mild profit on an operating basis this quarter?

If measured that way.

OK. And then, you guys just-- you talked about the cost of the GSM show. Maybe, Marty, you could comment on kind of the reaction and kind of what you learned from what you saw from the movement, 2.5G to 3G and kind of what opportunities is that giving PCTEL?

Yes, it was a great show for us in three dimensions. One, we have a voice-over-IP demo that was very well received that we did in conjunction with BridgePort Networks and basically showing how these new converged devices Wi-Fi and UMTS could be utilized to carry a phone conversation from one network to another on the Wi-Fi side, using voice-over-IP. And I think that's a great opportunity for our roaming client. I noted that one of our competitors, after we did this demo, has announced something similar.

The second thing was that our CLARIFY system now handles both UMTS and GSM. As a result, the cellular engineers who are planning the transition will be able to utilize our tool in detecting interference and using those parameters in optimizing the networks.

And finally, we also released our dual-mode scanner that's used by test and measurement companies such as Nemo and TEMS and I think there's a great opportunity for that.

Another thing that, of course, I saw at GSM and I think you can talk to others is that equipment, in general, was not the big story. The big story was content and there was all types of interesting content that people were making available now over phones as the bandwidth has increased.

Matt Robison, Ferris Baker Watts.

Can you talk a little bit about-- I mean, you didn't break out wireless, of course, versus licensing for the current quarter. Can you give us a little more direction on how you see the mix of the other product lines and the effect of seasonality?

Also, on the-- I guess it's sort of a housekeeping item, this tax and the 404 stuff, it sounds to me the difference between materiality and zero defects and the internal audit process, just to finish that discussion, can you give us a sense for the magnitude of what you had to change in order to correct the internal process?

Well, I-- let's start with the first question about seasonality. Typically, and we actually talk about this in our -K, the RF Solutions Group has a tendency to-- their largest quarter is always the fourth quarter. So-- and I don't give guidance by item, but essentially if you go back and look at the history, that business historically drops $0.5 million or more between fourth quarter and the first quarter and then just ramps its way back up again.

There is a slight seasonality to the-- to the antenna business, but, frankly, it's not a business we've been in long enough to establish a definite pattern other than it-- there is a seasonality. It's slight. It's not as dramatic as RF.

But you have a full quarter of revenue from that one, this time, too?

Pardon me?

You've got a full quarter of Andrew--?

And I've got a full quarter of Andrew revenue, so it's tough to call that. But-- and that-- but effectively, the-- where we're seeing a definite effect of seasonality and we expect to see it in RF Solutions, because that traditionally happens come rain or shine every-- every year, based on the budget cycle at the carriers.

And then we would expect, then, with a guidance of $60 to $64 million for the year you're going to see a stairstep up.

So MSG we could assume would be flattish?

Yes, I think for the next quarter or two, plus or minus a couple hundred thousand dollars, I think is where we're going to be at.

You had it-- with the balance sheet effect of the acquisition you had unusual shifts in current accounts and DSO and inventory and so forth.

Yes, absolutely.

Should we be expecting a change versus what we've seen in the past from you guys or is this going to normalize?

Yes, the balance sheet should be normalized. We basically picked up about $5 million in inventory from the Andrew deal and we picked up-- obviously, we invested in a $5 million building. And at the end of the day, there was some minor prepays and stuff, but that's the biggest change in the hard assets. And, obviously, receivables are higher because I've got higher revenue now.

Now what did you say the full year margin range was going to be?

We had-- Actually, I don't remember if I gave guidance on full-year margin.

47 to 49.

That was for the first quarter, I thought.

For the first quarter and with, I would say, we're maybe up within a range of a point higher than that for the year.

Was this--?

And that ties out to what we-- the guidance we had given at the Needham conference. That remains unchanged.

The tax issue--?

Yes, I'm not going to get into the specifics of our internal accounting, but suffice it to say that at the end of the day it was specific to the-- to the fourth quarter and for us, 5 percent of the annual bottom line, which is about $160K, is the threshold for a material weakness and I can tell you-- I will say that it hit that threshold.

OK.

But, once again, it was all resolved as part of the close process in the fourth quarter and was specific to the fourth quarter.

And you'll have measures in place that will resolve the internal audit--?

Yes, the issue here is I've got to go get some outside tax expertise and then up the training level of the folks that I've got.

And didn't they give you an extension on when you had to have that all together?

Yes, the-- an extension is available for-- not when we have to have it all together, but an extension for when we have to report. I think that's what you're referring to.

Yes.

Yes. So it doesn't have to be reported concurrent with the filing of the -K, it's-- you get an extension to file that piece of your attestation for your internal controls.

Because you remember in the Sarbanes-Oxley world you now get two audit opinions and you make two attestations. The first is that your financial statements are correct in all material respects and you get an audit opinion on that. We expect that to be clean and reflect the numbers that you see here.

Then separately, even though it might be combined in the same opinion paragraphs, you attest-- or the company attests that its internal controls were either operating effectively or they weren't and you get an outside audit opinion on that, separately. That piece has been allowed to be decoupled and reported at a later date, after the -K filing.

Wes Cummins, B. Riley & Company.

A couple of questions. Marty, first on the mobile-- the software piece of the business, the roaming client, any indication-- or can you give us an indication, first, of what the subscriber numbers have been, quarter-to-quarter from your customers? And then also what you're expecting throughout 2005, any indications that your larger carrier customers have given as far as demand for the products that they're offering?

On the first, we can't give you subscriber numbers because those are closely held secrets of the carriers and our customers would be unhappy if we discussed that. Also, in many of our commercial relationships now we have either prepaid or some type of fixed monthly revenue relationship with these carriers that doesn't require us to have insight into the specific number of subscribers.

Our indications are that this business is beginning to grow. We're seeing a stronger interest. Certainly on the cellular side, there's a very strong interest and the multi-mode capabilities of our product to be able to go from Wi-Fi to cellular is something that we think is going to be attractive in '05 and is going to generate more revenue.

OK. And then the voice part of the client that you recently added, who will you really be marketing that to?

Well, we're marketing it to all of our customers and it is marketed in conjunction with their willingness to acquire some additional infrastructure. But we think this is a great addition to the product and a great capability for consumers. But carriers-- certainly the private carriers are highly interested in this capability.

OK. On to the RF Solutions side of the business, what is the demand for the newer products, the UMTS and EvDO products? And can you walk through just really quickly what the product cycle is like for those versus the schedule of network roll outs for carriers?

We-- it's interesting. We do something called the vintage charge and I believe I displayed at the Needham conference. It's available on our website and I use it now in all of our investor conferences, but our RF Solutions group is particularly strong on this dimension. About 50 percent of all their revenue comes from products that they have introduced in the last 24 months, 50 percent. Our cycle for new products ranges from 6 to 9 months, depending on complexity, and we try to have products available when the problems mature in the cellular engineering.

It really doesn't help much to have an EvDO scanner available before there's a lot of EvDO traffic. So we'll have-- we're delivering EvDO capability this year and then, similarly, with GSM and UMTS we've made that available this year, as well, to participate in the engineering associated with the transition from 2.5G to 3G.

I don't know if I'm answering your question.

Yes, that's part of it. I mean, the percentage of revenue coming from new products. And then, just, I guess what do you expect as far as just EvDO and UMTS, in particular, as we're going forward?

I think these are going to be great winners for us. And, again, not just in and of themselves, having scanners in those technologies, but, in particular, the dual-mode capability that we have of giving cellular engineers access to both technologies simultaneously in a single tool.

OK. The last question I have, John, on the cash flow, what do you expect as far as cash flow for the next quarter and the balance at the end of the next quarter?

I-- just because we are continuing-- we do have some more capital that we need to put in to facilitate the building, I would expect that we would be somewhere between $82 and $84 million.

Sid Parakh, the Robins Group.

John, I have a question for you. Can you break down the amount of Andrew revenues in the quarter?

Actually, if you were to do the math backwards of the 14 percent sequential organic growth, you would back into a number of between $3 and $3.5 million.

And this is for two months, right?

Yes.

Should we expect this number to increase sequentially or should it be about the same?

Well, from a modeling perspective I think what you do is-- at the Needham conference we had given a number of $40 million for antennas for the full year and that includes what we believe to be a full year of Andrew.

OK.

So, yes, rather than going about it that way, I would just model the $40 million we've guided as that component of the $60 to $64.

All right. Also, can you comment a bit more on the government sales? I know last time, a few months ago, actually, you had mentioned that government sales were slow and have you seen any improvement on that front?

Yes, we have. We had sales in the fourth quarter. We have a good backlog for the first quarter for our government products and part of the challenge, of course, was getting three of these products to be in a full productized status where they can be ordered directly without special assembly. And we think we'll have a stronger year this year in government than we did last year.

It's tough to talk about government products in a single quarter because they tend to be lumpy.

OK. And finally, also, can you quantify how much revenue in your Mobility Solutions Group came that was non-recurring in engineering?

Actually, Sid, we don't go into that, because that's kind of like trade secret kind of stuff.

OK, that's fine. And maybe one last question. Can you talk a little bit more about the satellite radio stuff that you mentioned that you're seeing some traction there?

Sure. One of the new product lines that we acquired is a retail distribution system for satellite radio. So if you were to go into a Circuit City or a Best Buy or some other indoor facility where you wanted to test and try out a satellite radio, you need coverage within the building. So we actually sell a fairly expensive solution that retail distributors buy, they install and they use for the demonstration of their products. And we think that that product may have some application in other environment that I don't want to get into here, but that will be a reasonably strong product line for us this year.

[OPERATOR INSTRUCTIONS] Tony Langham, Langham Research.

If I wrote it down correctly, the final sentence in your formal presentation was, “We're committed to positive earnings as we enter 2005.” I wonder if you might expand on what exactly you mean by that?

Well, as you well know, Tony, the-- most of the analysts that follow us follow us on a pro forma basis. And at the end of the day, Marty's referring to on the pro forma basis we're committed to continuing and improving the profitability there. I mean, obviously, with a purchasing-- with purchase accounting in place and an acquisition strategy, it's going to be very difficult on a GAAP basis in order to generate GAAP earnings, especially in 2005 if we do another acquisition.

Matthew Campbell (ph), Knott Partners.

I was wondering if you could comment on your buy-back. You've bought back 2 million of 2.5 million shares at this point. It seems like you're restricted to how much you can buy back or the timeframe you can buy back the stock. Any change in that from your company? Are you able to open the window at all?

Well, I can speak to this quarter. I mean, unfortunately, the lateness of our call effectively the window for us is only open during the second quarter-- second month of each quarter and so, effectively, the window will be closed for the whole quarter for us, just because it's almost the 28th of February. By the time-- a couple days after the call transpires where we can open it anyway.

And with the stock where it is, is there any talk with the board about increasing the size of your buy-back at this point?

Well, as we talked about before, I've got a half a million shares to go. Typically, with the limits in place and the number of trading days I have to open the window, that's probably, a couple of quarters worth, just if you just do the math backwards by the number of days that the trading window can be open.

So typically-- so far the board has taken a position that says, hey, let's get through or get close to the edge of our-- of finishing the 2.5 and then they're certainly open to reauthorize and discuss the opening of another one.

OK. I was just curious from a business standpoint, if you're seeing any benefit from the build-out of RFID in your business?

Oh, we are. We've actually seen some early RFID sales from our Antenna Products Group. We think those sales will accelerate this year. It's an area that we want to focus on and then, going forward, this is-- this will most likely become a focus as we attempt to generate new products that take advantage of both our scanning capability and our antenna capability.

OK. Lastly, and I missed this. Sorry, I got on the call a little late. OpEx for '05, did you guys give a number?

We did.

Well, we gave it for the first quarter but we don't give guidance below gross margin on the year.

Eric Tiner (ph), Needham & Company.

Nice quarter, guys.

Hi, Eric. Thank you.

Just a question about 10 percent customers.

Yes, you'll see a company called Testco (ph) in the -K as a 10 percent customer and that's-- that's a public company, Testco (ph), on the NASDAQ, and it is a large distributor of wireless products. And they are a customer, a large customer of our Antenna Products Group. And below that there are no other 10 percent customers.

OK. I wonder if you could just talk a little bit more about about synergies with specific examples, obviously without customer names, about where you were able to get some, especially revenue synergies, between the different product lines.

Sure. We've made several sales calls to major carriers where we've represented all three of our product lines in a single sales call and sold all three of our products to that customer. We've gone in and made sales of our Wi-Fi and in-building antennas to cellular carriers, sold our CLARIFY system and our scanners to that same carrier and then also sold our roaming client to that carrier.

And, as we mentioned on the call, one of the actions that we took last year was to integrate the sales force under-- consolidate and integrate the sales force under Jeff Miller and that's really paying dividends. And then outside the United States, for example, I was just in Israel and visited all the carriers in Israel, several distributors, and in every single case represented all of our product lines to each of those customers. So we're seeing a pretty good advantage at this point.

[OPERATOR INSTRUCTIONS] And there appears to be no further questions at this time. I would like to turn the conference back over to Mr. Singer for any additional or closing remarks.

We have no additional remarks, other than to thank all of you for your participation. Thanks.

[OPERATOR INSTRUCTIONS]