PCTEL Inc (PCTI) 2005 Q1 法說會逐字稿

Good day, everyone. Welcome to today's PCTEL, Inc., first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Marty Singer. Please go ahead.

Thank you. Good morning, everyone I apologize for the early start to those of you on the west coast. I'm Marty Singer, Chairman and Chief Executive Officer of PCTEL. On behalf of PCTEL we thank you for joining us on our earnings call for the first quarter. In this call we will address the financial results of the first quarter and the outlook for PCTEL in the second quarter of 2005.

Joining me today is John Schoen, our Chief Financial Officer. John will take you through our financial performance for the first quarter, as well as limited financial guidance for the second quarter of 2005. 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 comments concerning our future financial performance and expectations regarding the future growth of our wireless and licensing business 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, acquire 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 in our control. Additional discussion of these and other factors affecting the Company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today and we disclaim any obligation to update information to reflect subsequent events. This concludes the Safe Harbor statement.

Now I will continue with the financial review. First quarter 2005 revenue was 15 million, compared to 10.7 million in the first quarter of 2004. The 2005 numbers includes wireless product revenue of 14.5 million, up from 8.6 million last year, and licensing revenue of 0.5 million compared to 2.1 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 fifth 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 first quarter 2005, including the Andrew acquisition was 10.3 million. Organic revenue growth for the non-Andrew acquired products was 14% over last year. The organic growth was largely driven by wireless broadband applications.

RF solutions group revenue was 3.1 million in the quarter, up 30% from the first quarter last year. The Company benefited from a large order through one of its OEM customers that is destined for the U.S. Navy. The mobility solutions group revenue in the first quarter was 1.1 million, about the same as the first quarter last year. The revenue levels are indicative of the early stage subscriber traction of the carrier customer base.

Licensing segment revenue was 0.5 million compared to 2.1 million in the first quarter last year. This segment continues to be affected this year by completion of older licensing agreements. It will continue to decline in 2005 absent any intellectual property litigation settlements.

Now I would like to speak to revenue guidance for the second quarter of 2005. Total revenue is expected to be between 15.5 and 16 million, comprised of wireless revenue in the range of 15.2 to 15.7 million and licensing revenue of approximately 300,000. We are raising our total annual 2005 revenue guidance from 60 to 64 million to a range of 63 to 65 million.

Now let's turn to gross margin. Gross margin for the first quarter was 49.6% compared to 65% for the first quarter last year. Gross margin at the total level is not comparable year-over-year due to the decline in licensing revenue and the increased antenna revenue. I will speak to each of the segments individually.

Antenna products gross margin was 34.4% in the first quarter, compared to 41.8% in the first quarter last year. There was a 4.5 percentage points of margin consumed by duplicative manufacturing costs in the first quarter related to the transition of the Andrew product lines out of Andrew's factory. The transition is now complete. The remaining variation from last year's results from slightly lower margins on the Andrew products in the mix. We expect margins to settle in the 38 to 39% range going forward based on that mix.

RF solutions gross margin was 76% in the first quarter compared to 68% in the first quarter of 2004. The first quarter benefited from a heavy concentration of OEM receiver and software products, which have higher margins than our system sales. We expect margins going forward to be in the 67 to 72% range.

Mobility solutions gross margin was 97% in both the first quarter this year and last year. We expect gross margin to remain in the 96 to 98% range going forward. After taking into account the potential ranges of revenue mix for the second quarter, total gross margin for the second quarter is expected to be between 49.5 and 50.5%.

Now I would like to address our operating cost structure. Our investors will have noticed that we have changed the income statement presentation of stock-based compensation expense. Rather than presenting it on a single line of the income statement, it is now spread to the various income statement categories as required by recent SEC guidance. Total OpEx was 10.1 million in the first quarter. This represents an increase of 1 million in cash based R&D and SG&A, 300,000 of -- increase of amortization of noncash based stock compensation and 200,000 of amortization of intangibles. The increase from R&D and SG&A includes 0.6 million of transition costs related to the Andrew acquisition with the remaining 0.4 million comprised of increased investments in antenna products partially offset by reductions in corporate costs and reductions related to our soft AP product in MSG taken in the fourth quarter last year.

Costs related to patent litigation were flat year-over-year at 0.5 million. The 0.3 million increase in stock based compensation is driven by the Company's decision to issue restricted shares in 2005 in lieu of cash compensation and stock options. Restricted shares are expensed to the income statement under both the current accounting rule, as well as FAS 123R which goes into affect in 2006. The 0.2 million increase in amortization of intangibles related to the Q4 2004 acquisition of antenna product lines from Andrew. The Conexant royalty was unchanged from the first quarter last year at 0.5 million. Guidance for the second quarter 2005 OpEx is 9.7 to 9.9 million. This includes 8.5 to 8.7 million of cash based R&D and SG&A, 0.8 million of noncash amortization of stock-based compensation, 0.9 million of intangibles amortization, offset by 0.5 million of royalty income from Conexant.

Now let's turn to other income. Other income generated primarily from short term cash investments was 0.5 million in the first quarter compared to 0.2 million a year ago. Second quarter 2005 other income is expected to be approximately 0.4 million.

I would like to speak to the company's tax provision now. PCTEL provides a full valuation reserve on its deferred tax assets. This, coupled with a limited remaining tax loss carry back available will yield an income tax expense for the year even though the Company will generate a book loss. The effective tax rate used in the first quarter was 7% of the net loss. We are guiding the same tax rate on GAAP pre-tax earnings for the remainder of the year.

Net loss for the first quarter 2005 was 2.3 million or $0.12 of diluted share compared to a net loss of 0.5 million or $0.02 per diluted share in the first quarter of 2004. The $1.8 million difference between the quarters can be attributed to three factors. 1.1 million of the unfavorable change relates to the income tax provision and the related change in effective tax rate between the years. The Company had a substantial tax loss carry back available to it in 2004, which has now been largely exhausted. In addition, 1.1 million of the favorable change relates to one-time costs associated with the transition of Andrew products into our operations. Approximately 0.5 million of the transition costs were recorded in cost of revenues, and 0.6 million in operating expenses. Finally, these additional costs were partially offset by 0.4 million in increased profit from operations.

Now let's turn to the balance sheet. Cash and short term investments ended the quarter at 84 million compared to 84.1 million at the end of the fourth quarter 2004. The Company anticipates it will use approximately 2 to 2.5 million of cash in the second quarter, exclusive of any cash used for the stock buy back program. In approximate numbers, the cash will be used primarily for the following purposes. 1.5 million reduction in payables primarily related to the Andrew transition, 2 million of capital expenditures primarily related to the new antenna products building that was purchased in Q4 2004, 0.6 million of final earn-out accrued for related to the DDI acquisition and this offset by $2 million in net proceeds from the sale of the antenna products current building, which is anticipated in June. The company did not repurchase shares of its common stock during the quarter. As of March 31, 2005, 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. That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thanks, John. Good job. I only have a few comments to make, and then we will open up the call for questions. Generally, we are extremely pleased with the performance of all three of our product groups. They all performed at or over expectations for the quarter In APG, the antenna products group, we shipped new WAAS antennas to Raytheon, we were qualified by Qualcomm to supply antennas into their Omni Direct Systems and we shipped our new wideband and multiband antennas to a variety of customers. These versatile products eliminate the need for multiple single frequency antennas and display significant capital expenditures.

We have also been selected by Motorola to provide upbanded Wi-Fi antennas for an important public safety application. We have momentum in this group and I should point out that all of this was accomplished during the period in which we had significant disruption associated with the transition from factories in Mexico to our new facility here in Illinois. Our RF solutions group enjoyed strong sales of its core scanner products. As we shared with you last year, we believe that RFSG will benefit from the transition from 2.5G to 3G networks. We continue to see strong sales of our new EVDO and UMTS scanners as well as our GSM clarify systems. We are beginning to see additional sales of our software with our scanners. The sale of Insight software with our newest scanners contributed to the strong RSFG gross margins.

Last quarter also saw a return of our government business. Finally, some of of you have quizzed us about synergies between the various groups. We have achieved cost and operational synergies with the integration of our sales force. For example, last quarter the same account executive representing our roaming client to a carrier sold RFSG scanners. In Israel, Latin America and Asia our account teams are now selling all three product lines effectively.

Turning to our mobility solutions group, we have had an outstanding presence at both the 3GSM and CTIA conventions which I mentioned briefly on the last call. Our demonstration of a VoIP client stole the shows. We generated a lot of new interest in our client solutions and as we recently announced, we signed a contract with NTT DoCoMo that will put our client on a leading converged handset. We believe that our expansion from laptops to cell phones, particularly converged phones will enable PCTEL to establish a new revenue stream. Additionally, we anticipate signing another contract with an infrastructure vendor and we are in negotiations with several other companies regarding cell phone-based versions of our Roaming Client. Indeed, we signed a contract just yesterday with another handset manufacturer, the identity of whom we will not announce for several months.

These new opportunities and our $1.1 million in first quarter revenue increase our confidence in the scalability of MSG. Let me add that we have established a development team in India to accelerate our work on Symbian based client platforms. We have been running a very lean development team at MSG and we need to expand our capacity. This, incidentally is a further example of synergies. Biju Nair, the GM for our mobility solution group manages this development operation for the benefit of both RFSG and MSG.

Our patent litigation continues to move forward. We completed the tutorial phase of the Markman hearing in March. Unfortunately, the Markman hearing itself had to be postponed from April 6, to May 16, because of the judge's responsibilities in an unrelated jury trial. We are eager to have our day in court, and we hope to have more to report to you after the Markman hearing and the courts mandated mediation that will take place sometime after the hearing. We remain extremely confident in our position, which is simply this. We deserve to be compensated for the use of our valuable intellectual property, and we believe that others have realized substantial economic benefit from the use of that technology.

Let me conclude with a few comments about our direction. PCTEL has been organized to exploit well-defined opportunities associated with the growth and pervasive wireless broadbands. We restructured PCTEL around this strategic purpose during a sharp economic downturn and in the midst of very uncertain times for technology companies. When the current management team took over PCTEL, it was important to us, and, we believe, to our investors to create a stable, predictable and well-managed company that could thrive while pursuing higher risk but very rewarding growth markets. We also realize that we needed to be much larger if we were to attract the interest of a broader investment community and accommodate the costs of being public.

Since that time, PCTEL has met or exceeded its guidance 13 out of 14 quarters. We have maintained a very strong balance sheet while transforming assets, cash and patents into high growth operational engines. We have grown our wireless businesses from less than $1 million in 2002 to 10 million in 2003 to 42 million in 2004. We are now projecting 62 to 64 million of wireless revenue that, excludes the licensing revenue, in 2005 We must now focus on profit attainment. The first quarter results suggest that without the temporary Andrew transition cost of 1.1 million and the noncash amortization of intangible assets and stock-based compensation, we are close to achieving that objective. If you consider further the 500,000, the 600,000 per quarter in the litigation burden and the expense bubble for Sarbanes-Oxley, it indicates we are well-founded in our expectation of profitable quarters ahead. Our cash based OpEx is under control and as John indicated, we are raising our 2005 annual revenue guidance from 60 to $64 million to 63 to $65 million, including the licensing revenue.

With that, John and I, along with some members of PCTEL's Executive team will be happy to answer your questions. We have set aside 30 minutes for this part of the call. Thank you very much. Phillip?

Thank you, sir. [OPERATOR INSTRUCTIONS] We go first to Matt Robison with Ferris, Baker and Watts.

Congratulations on the strong revenue you've demonstrated here. Housekeeping first, I suppose. On the OpEx, the 600K of OpEx that was related to the Andrew transaction, can you comment how that -- was that all in G&A or how would we spread that around?

It's 200,000 in R&D, 50,000 in sales and marketing, and 350,000 in G&A.

Okay. On the mobile solutions group, it was flat year-over-year, but was there a change in the conformance of that versus -- in terms of new licenses versus maybe some subscriber-related revenue.

What you would have seen would have been a shift out of some licensing revenue that we had to OEMs for our SoftAP roaming client, which that initiative wound down and then you would have seen replacement of revenue from the carriers with their rollouts of their wireless.

Matt, just to clarify that, you may recall that as part of our negotiated settlements with Broadcom and Conexant, we had some revenue coming in for particularly the SoftAP from those two parties. So that revenue has dried up, and what you're seeing now is essentially all Roaming Client revenue. And the Roaming Client revenue has grown substantially.

Okay. Also, Marty, you mentioned broadband wireless as a driver for antenna products group. Is that just unlicensed spectrum or licensed spectrum, both, or can you give us some flavor of where this money's coming from that's buying your products?

It's licensed and unlicensed. The unlicensed of course is dominated by Wi-Fi, products like Canopy Motorola or precursors to Wi-MAX such as Alvarion type antennas. But in addition to that, we sell indoor cellular antennas that are associated with the growth of wireless broadband. So we're seeing growth in both of those areas.

Okay. Thank you.

Thank you.

We go next to and Anton Wahlman with Needham.

Hey there. John, a couple of clarifications. On the expected $800,000 amortization for second quarter, is that all related to the noncash stock comp or was there some other component thereof?

Well, there's two components. There's about, as we said 900,000 of just straight intangibles then that other 800,000 is just strictly the amortization of restricted shares.

Okay. So that is -- that's completely. Okay. And that was done in lieu of your paying people.

Yes.

Okay. All right.

And a portion of that is for the general population and then a piece of that is also for the retention bonuses that come with the employees that came with the acquired companies.

Okay. You mentioned a large OEM contract the U.S. Navy. Maybe you can't speak to it but I figured I'd ask regardless, here. What's the allocation.

Let me clarify that. Our customer is not the U.S. Navy.

No. The OEM.

That's correct.

And what -- can you or can you not speak to the -- like the type of application that is -- or the type of technology that that was from your RF solutions group.

Yes. It's related to our software defined radio, it's related to the scanning. And you can imagine that there are a variety of applications for that, including jamming and related identification processes. But we can't say anything other than that.

Okay. Could you also discuss a little bit -- I mean at some point, you were selected by both Cingular and T. mobile for the roaming client. Could you give more granularity as to the nature and status as to what -- how those two customers are using that product, whether it's sort of Wi-Fi only or if it's gone into Edge and UMTS or just simple GPRS and how those two customers now are using the product.

Cingular is definitely using that. Well, it's now Cingular of course -- ATT wireless. That's being used very effectively on the cellular side and as well as Wi-Fi. And T-Mobile at this time, though, is exclusively Wi-Fi. That's clearly a focus of ours, to extend that into the cellular side and to extend the reach of this product internationally, as well. Both relationships are going extremely well. We continue to do additional product development in both areas. But more importantly, we've got a more predictable relationship with both of these customers with respect to subscriber-based revenues.

Okay. And I assume that you are and have been for some time completely ready to just have them supplied and then fully activated with a version the of software that can handle sort of seamless between the Wi-Fi and the various GPRS, Edge, UMTS, et cetera cellular technologies.

Well, seamless is a tricky word there, but -- because it depends on the infrastructure that's available. But in terms of our software, A, it's multimode and, B, we now have a VoIP capability to it. In the case of going between cellular and Wi-Fi, though, in both cases, data or voice, without the proper infrastructure, it is still a make and break type of connection. And it will not be until later this year that you'll see a seamless capability at a couple of the operators where they implement the appropriate infrastructure, the servers, required to bridge the transition from the two different network types.

Yes. Okay. So finally, then, you mentioned briefly the VoIP capability of the product.

Yes.

Could you give us a little update on -- I mean you announced the product, if I recall probably no more than about two months ago. And, what is its state of readiness and are there -- I mean when do you think that you will see the first major customer implementations of your VoIP roaming client?

We think this summer. But we're shipping it now in trial status to two different carriers.

Okay. Now, finally, then, I mean in terms of the nature of the customer that will actually be paying you for software revenue, I mean the first deployments that you had were essentially you're doing with this with the carriers, the T-Mobiles, the Cingulars, the NTTs, and so forth, and you also had some -- there's some virtual carriers, the Boingo's of this world, and Fiber Links, and so forth, and then you could imagine that this at some point also will go into cellular phone hand sets, small PDSs et cetera, converge devices and it's unclear to me as to who's -- who would be paying -- if that were to happen if you think that's going to be a material part of the contribution, will it be paid by the Motorola, Sony Ericssons, whatever of this world, or are you going to be paid by the carriers that deploy those products, the T-Mobiles and Cingulars of this world.

Well, it's clear we're going to have three different customers. We are definitely going to receive payment directly from device manufacturers, whether they are the phone guys or the wireless modem guys. Secondly, as in the case of NTT DoCoMo, independent of the phone vendor, the cell phone manufacturer, our deal is fundamentally with the carrier. And then the third customer is going to continue to be private carriers, such as Fiber Link. And we think that they're enormously important in reaching the enterprise market.

All right. That's very helpful. Thank you.

Thank you, Anton.

We go next to Sid Parakh with Robins Group.

Hey, good morning, gentlemen.

Good morning, Sid.

Hey, can you just talk a little bit about the underlying trends in your mobility solutions group, like specifically what is happening with all the cell phone carriers and their use of the roaming client.

Say that again, Sid.

What I'm trying to say is, I'm just trying to figure out how the underlying trends are for -- I mean adoption of data services and how a roaming client sell through have been down to the subscriber level.

You're asking for actual subscriber take rates?

No, no, no. I'm just trying to figure out what the trends are.

The trends are very positive. I mean there's no question that the number of roaming client implementations on laptops has grown significantly year-over-year. The exact trend and the exact growth, though, is a very closely guarded statistic by our customers. I was at a carrier meeting just this week spending an entire day with the call center to review ways that we can improve the product from a user perspective. And at that meeting, we were given the actual statistics of the subscriber growth for Wi-Fi and cellular. But under the absolute understanding that we cannot disclose those numbers to anyone.

So I can tell you that the trends that all of our major carrier customers and our private carriers are decidedly up, and as I said, last year, our MSG revenue had a huge component from settlements with parties that we had the modem lawsuits with where they agreed to use our software for some time. That no longer is part of our revenue stream. What you're seeing now is 100% roaming client customer-generated revenue. So we've had significant growth in that area.

Okay. And, now, I know there has been some talk about you trying to shift the revenue model that you originally had in this business segment. Has that changed? Are these revenues still reflecting your original --?

Yes. It definitely has changed for the better. In three cases, we've been able to move customers -- four cases now, to a subscription-based model where we are guaranteed a certain floor of revenue, and it shifts our revenue to subscription based rather than NRE or one off type of revenue events, associated with the delivery of software. It makes the relationship better on both sides, and we think we have two more relationships to modify in that direction, but we've made a lot of progress there.

Okay. What I'm trying to get at is let's say an increase of subscriber uptake of roaming clients. How well is PCTEL linked into that uptake? Is there any relation between adoption rates --?

Yes, there is.

Okay. Great. Also, now, the NTT DoCoMo deal that you announced yesterday .

Yes.

Are there any NRE revenues associated with that, and if at all, what -- I mean can you kind of hint us to what extent they would be to?

Yes. Unfortunately -- this is John. We're under strict nondisclosure on that deal for the dollar amount associated with it. But from an accounting perspective, it's a combination -- I can't tell you -- it's a combination of NRE and licensing revenue. We do our accounting for it, though, as a -- as a subscription model as it has not only NRE, it has licensing and it has maintenance in it. So you'll see it as a -- once we deliver the first software load, which is this quarter, you'll see that being accounted for as a subscription over the life of the deal.

Okay. And one more question. Why haven't you bought any stock back during the quarter. I mean I'm just curious that --?

That's easy. At the end of the day, we filed our Q very late. We had filed for an extension due to all the Sarbanes-Oxley work that we were doing. And by the time we got everything filed, our -- it was so late in the quarter that our normal window was closed. Just a reminder, we buy stock during our open trading window, which is typically the middle month of each quarter.

Okay. And just talking about Sarbanes-Oxley, can you quantify how much of an impact it has had on your operating expenses?

Well, we estimate that the total Sarbanes-Oxley bill for us in '04 was approximately 1.1 to 1.3 million, depending on exactly which account the bulk of that in outside services. John, do you want to give them a number for the first quarter.

In the first quarter we ran a little high, we ran in the 7, $800,000 range for public company cost. But we expect those costs to be in about the -- this is just pure outside expense costs, not any of our internal payroll costs. In the 2.5 to 2.6, 2.7 range for the year.

Okay. Thank you, gentlemen.

[OPERATOR INSTRUCTIONS] We go next to Anton Wahlman.

Hey a couple of quick follow-ups here. First of all, did I hear you correct when you said that in Q1 there was really no NRE revenue in the software?

No. What I said is that there was all roaming client revenue. There was no SoftAP and there was no revenue that we had in the first quarter of '04 that came from guaranteed purchases from parties that we had settled our patent disputes with.

And the reason why we describe it that way, Anton, is it's all for delivering software features. The issue is typically though is, is in the early stages of adoption, does the customer internally want to treat it as nonrecurring engineering or a license fee. And it's strictly driven by their internal budget process.

Okay.

What don't you get on that, Anton.

No, I'm just a little bit slow. Don't worry. The other thing is in terms of the way that you recognize revenue on your subscription model for the software, would it be fair to say that you basically -- you don't recognize any revenue on that any faster than your actual customers, in turn, are successful with their product, and it's basically -- when your customers have a -- have a paying customer, after they have paid their monthly bills, basically it filters down to you guys. You don't get any revenue accelerated ahead of such an event plan.

From a correlation perspective, we are correlated with the growth of our customers. It's a little off because of SOP 97-2 requires me to do a refinement of -- and make sure that I have comparables. So there are some deals. As an example, the take rate for DoCoMo will be much faster than I will recognize the revenue over the next year simply because of the way the accounting rules work.

So basically, you've got to figure out what actually happened and once you've figure out what has happened, then you can recognize the revenue?

Actually, no. It has to do with having accounting comparables and it really kind of separates itself from the economics. And so that's why when I say it's not a pure one-to-one correlation, but it is a close positive correlation between our customers, traction, subscriber traction, and our growth. We absolutely do not recognize revenue attaching to units that are going into inventory anywhere.

It seems to me like you're being very appropriately conservative there, that there's no -- that couldn't really -- you couldn't really conceive of any backlash coming from such a problem, then.

That's correct.

Well, we're not shipping a bunch of stuff into somebody's inventory and taking credit for it and then waiting for it to be disseminated to customers.

Exactly. That's very good to have that clarified. Thank you.

Thank you, Anton.

We go next to Wes Cummins with B. Riley.

Hi, John.

Yes.

A couple of questions here. First, on the antenna product line, can you give me an idea just roughly how much of their revenue there is associated with wireless broadband?

What we do is we talk about emerging products and legacy products Wes, this is Marty, and basically 50% of our revenue, maybe a little lower now, is in the legacy area of LAN mobile radio and so so on and 50% was in emerging. That was preAndrew acquisition. Now I would describe it more as maybe a third, a third, and a third. A third coming from the new Andrew areas, a third coming from the emerging wireless broadband areas, and a third coming from legacy. We'll split that out in my next investor presentation more clearly. That's a good question.

Okay. And I'm assuming that the emerging areas are probably the highest growth area. Would you lump any of the Andrew product into the same growth category as the emerging?

Well, they are -- they're some very high growth areas, they're not necessarily wireless broadband. So, for example, in a completely unrelated, we have these WAAS antennas that are used for navigation system, very expensive high margin antennas that have had nice growth. We have -- it's interesting. We participate in satellite radio without being a satellite radio company. You wouldn't call that broadband, but that's been very high growth. And then we have some growth in areas like RFID. We have not put those into the emerging market area or the wireless broadband area. We've been looking at the Andrew -- the products we got from Andrew in a different bucket.

Okay. Okay. And then on the mobility solutions, Marty, can you just comment? You did this a little bit already, but the overall pipeline as far as the amount of potential new customers in that business and then can you give us just kind of a relative comparison of what the pipeline looks like now versus, say, last quarter or a year ago?

It's really tremendous versus a year ago. We have about -- I was just going over our opportunity list with Biju Nair yesterday in the MSG area. We have about 15 to 20 real opportunities associated with our new VoIP client and Roaming Client versions going on hand sets and other devices. A year ago, our pipeline was simply the carriers that we were going after. So that's changed dramatically for us. It's one of the reasons that we've invested in this development center in India, so that we can move quickly on getting our Roaming Client adapted to different operating systems, which has not been a huge requirement for our business in the past.

Okay. Do you think you have enough resources in place to address the opportunities you're seeing or --?

I think probably -- I think one of the things you should anticipate is a little bit of growth in our development resources. I think we are going to focus on some lower cost venues to build those resources up. Some of that budget growth is already in our plan. But we do anticipate some additional investments.

Okay. And last question, acquisitions. Are you guys still looking for more acquisitions and have you identified anything recently?

We are, indeed, looking at acquisitions, and we're -- I would say probably about 60% of my time is focused in that area. It's one of the things we can't really comment on publicly. But I will keep you all updated as those events mature.

Okay. Thanks.

We go next to Ted Moreau Cardinal Group.

Hi. Good morning.

Good morning.

Marty, I might direct this at you. It kind of gets back to the overall macro secular trend question that was asked earlier. And that is coming out of CTIA, there were a couple technology developments that seemed to be positive for you and would drive the overall environment. And I'm just curious what it might mean for some particular products, and that would be the EVDO revision A, which allows voice to work on an EVDO network and also the IP multimedia system, sort of overall movement to converged wireline and wireless networks and add some different revenue streams to carrier revenue. Are those some items that would be of significant benefit to you in the macro environment as we go forward?

Absolutely. I think, Ted, what you're focused on in this IMS is what we're focused on in our Voice over IP client. If you look at VoIP, it really is the first salvo in our IMS direction. And we are investing resources and expanding the roaming client from its traditional base to provide IMS type of services and there are a whole suite of those services. So that is an important area for us. And made more important by the presence of IMS on cell phones which we are now targeting.

With respect to EVDO, let me just make a general comment. Changes in cellular standards are great news for a scanning and receiving business and also very good news for an antenna business. Technology change drives change in these basic kernel technology products. One of the characteristics of RFS is they are very responsive. And if you look at the design of the product, because it is software-defined in nature, it can quickly be adapted. So EVDO, the more rapid transition to UMTS than anticipated, and ultimately I believe there is going to be a role for us in TD SDCMA as it rolls out in China. So both of those trends are positive for us. Thanks.

And Marty, might I just follow up on sometimes these technology changes are a little more long term in nature. But my impression is that this is going to move some things forward, especially on EVDO. It seems like a couple carrier are moving, just with EV alone and now I have to convert now that this technology initiative is --?

Yes. There will be a lot more planning work, as well.

Okay. Great.

Thanks a lot, Ted.

We go next to Gene Weber with Weber Capital Management.

Hi, Marty and John.

Good morning, Gene.

I'm awake. My questions may not be all that sharp, but let me go ahead anyway.

I doubt that.

Just, John, on a little housekeeping thing, on the SOX cost I think earlier you gave a number of 2.5 to 2.7 million. Is that your kind of cumulative cost when all is said and done in terms of one-time cost?

No. That's my total public company run rate. Public company cost. Cost that being a -- registered on the stock exchange, D&O insurance cost of audit fees, all of that rolled into one.

Okay. Do you have any sense as to how much SOX is going to cost you on an ongoing basis?

I would suspect that we're somewhere in the 0.5 million to a $1 million range. I mean the big issue is for a year or two, now that everybody's gone through their bubble, how can we get this thing back down to some kind of a reasonable run rate.

I'm sorry what did you say the number was again

It's somewhere around 0.5 million to 1 million in compliance. Unfortunately I can't get it to any better granularity because --.

That's fine I'm just asking several companies that. The second question, a more substantive one, as it relates to the increase in your guidance, are you going forward with that because the strength across all three of your business segments, or is it more than one that's kind of causing you to up your guidance.

Yes. We are expecting growth in all three.

Okay. Okay. Good. That's it for now. Thank you.

We go next to Matt Robison with Ferris, Baker Watts.

Yes. Thanks for the follow-up. In the past we've seen a fair amount of lumpiness with RFS, it seems like it was particularly associated with their federal business. But are you -- with the deployment of these new protocols and new spectrum, are you thinking that we could have a trend here for a couple quarters and do you think the comparison is -- give us a flavor of what you think is going on with that.

Well, let me respond to that. The lumpiness in 2004 with RFS was largely due to an error that I made, and that was being unrealistically bullish about our opportunities in the third quarter for government sales, and secondly, we had lumpiness because after we introduced Clarify, we had an algorithm glitch in the first quarter of 2004 that led to some significant delays in rolling out that product in a -- in a strong way. And so there was a real hiccup in the Clarify rollout. But the big mistake was being too bullish about some near-term opportunities that we had in the government.

What we did this year is we really focused on getting a reasonable expectation for our government sales and folding that in more realistically to our RFS plan. In addition, and I think we mentioned this on the last call, I could be getting in hot water here with John. But for the first time in the history of RFS, we entered the year with a very, very strong backlog to our major OEM customers. And what we've been able to do and a lot of this has to do with bringing in professional sales management. As I told you before, I think, we established Jeff Miller as Head of Global VP -- or VP of Global Sales, and he's had a terrific effect on the discipline that we have in our sales function. Those factors combined are resulting in a smoothing out of the revenue for RFS. And that's a long-winded way, Matt, of saying that I think that while lumpiness will never be totally behind us in RFS, it does seem now that our sales are more predictable.

I appreciate the explanation.

Okay. Thank you.

We go next to Tony Langham with Langham Research.

Marty, your revenues in mobility solutions to date have been laptop connectivity. Now with the signing of the handset deal announced yesterday, I think you mentioned earlier in the call another handset deal you can't yet announce. Is there a point in time and when might that be where your mobility revenues from handset connectivity would exceed those from laptop connectivity?

Yes. I think that there is a point in time when that will occur, Tony. The handset will become the connectivity vehicle of choice to the Internet, and you have the basic map of 7 or 800 million handsets being sold a year with a prediction that in the near future, 200 million of those are going to be converged versus a total PC market of 140 million a year with roughly 50% or 60% of those being laptop. So you've got a pretty big denominator on the handset side versus the laptop side to work into. And there's another element.

A VoIP client on a laptop is marginal, at best, as a utility to a subscriber. A VoIP client on a handset, however, is extremely useful and what we anticipate is that providers such as NTT DoCoMo offering converged handsets are going to absolutely level their sight on land line telephony, where your cellular phone becomes your cordless phone in the home working off a Wi-Fi access point and giving you free voice service over VoIP. So I do believe that will occur, and it's actually the basis of our business plan for investing more into IMS-related capabilities.

Thank you.

Thanks, Tony.

We go next to Jeff Shiner with MS Capital Management.

Good morning, gentlemen. Just starting with you, John, real quick. Could you clarify, you talked about the three ways now that the Company can make money within MSG from the handset, from the carriers, and possibly from the private carriers, as well. Would the handset revenue recognize it from the Motorola, the Siemens of the world, and such, would that be a subscription based model as well, based on maybe a handset volume?

Here, let me clarify. You need to separate the economics of how someone pays for things from the very strict rules for recognizing revenue for software products that SOP 97-2 imposes on folks. And so the -- the only way that those things would sometimes separate, so when I talk about accounting for things on a subscription model, is that they will both trend in the same general direction and rise with volume.

Okay.

Okay.

Were there any discounts offered by the Company within the antenna group to any of its distributors? Within the quarter, we saw one of the large distributors Terawave offering discounts on some of PCTELs antenna products and also to that is there any issues out there with any of the customers in the antenna group?

Not that we know of. And we don't control our distributors discounting. But in our -- yes. The only reason for gross margin impairment in the antenna product group was the cost associated with the transition that went into COGS for those products. Just to add a little color we met with Steve Depy yesterday in preparation for this, and related to this transition, we've had 90 contractors. That was a hit on COGS, which impacted gross margin but we're not really suffering at the ASP level but thanks for the question. Hello?

Yes. I'm still here. Just one more question, gentlemen. I thank you for your time this morning. Could you talk about the effects across all product lines and the benefits you may receive from rollouts in the back half of fiscal year '05 of HSPDA?

No. We can't. I have not thought about that.

Thank you.

We go next to Rob Ammen with RK Capital Management.

Yes. Can you talk a little bit about the average subscription period that you're seeing with these three or four customers on the mobility solutions group side and then just in general how you feel you're tied to those customers with product road maps, et cetera, versus some of the alternative competitive models you see out there.

Well, first we don't only have three or four customers. We have a few more than that.

Three to four that are under a subscription agreement right now that you highlighted.

Yes. Well, I think we're tied in a variety of ways. One, carriers make a huge investment in a software application that touches their customers. They set up call centers to support the software, they distribute the software. There's a lot of training on the software. And then as you move forward, you have long-term relationships with these customers that tie them into a road map that essentially is a long-term agreement between you and the customer. So there's lots of places where the customer and the supplier touch each other on these subscription agreements.

And how long is the average term? Are we looking at multiyear terms for these subscriptions.

Yes. Multiyear terms in every case.

Can you talk a little bit more about Clarify? In the past you've highlighted some ASPs there and trends and kind of unit expectations. If you could outline that for us, that would be great.

We're trying to sell between 60 and 70 Clarify units this year. We're really heavily focused on GSM and the transition to next generation. But GSM markets, T-Mobile, Cingular, places in Latin America are where it's focused. And what Clarify does, of course, is with some DSP and post processing capability, it allows cellular engineers to detect sources of interference that would otherwise be invisible to them. Clarify is going reasonably well. We are in the midst of developing some additional post processing software for clarify, which will make the product sale more of a solution sale than a sale of a technology that provides simply data. We are going to continue to press Clarify. And right now we believe it's a unique product in the marketplace.

Then last question for John, just the gross margin expectation for full year '05. Should we be looking at the same type of range we were before, that 51 to 53?

Yes.

Great. Thank you.

Thank you.

We go next to Robert Katz with SendVest.

Good morning. Good morning Marty and John.

Hey, Bob.

I have a question on the VoIP, the Roaming Client. Will that be a seamless product or is it going to start off being if you're on a cell phone or one of these devices and you actually enter a Wi-Fi hot spot it won't make the switch it will only make the switch when you initiate your next call or is it going to be a messaging solution first and then VoIP could you give a little more color on --.

Yes. It's a make and break deal. So right now in its current implementation, it's a VoIP call on access an point, a cellular call on the network, and you get the benefit of being able to be reached using your cellular network, but it is not seamless as you move from one network to another. By the end of the year, it will be. But again, that's dependent upon infrastructure that the network provider puts into their network.

Right. So this is a pretty integral part of a lot of the strategies by the carrier.

Absolutely. And it's one of the reasons that we have so many opportunities now that we didn't have last year.

What other products in the market do you --?

Well, I don't want to really go over all of our competitors here. But there are a few.

There are a few.

The kind of guys that compete with us are not our traditional competitors like Smith Micro, BVRP, Phonic, L Systems -- the guys who are competing in this space, Robert, are more like the people who jumped into the IMS space. And this is viewed as one of the elements.

This seems like sort of a killer app for this technology.

Well, it's one of several. I think that voice is always the killer app. But there's also quite a few other applications, Push-to-Talk, Instant Messaging Service, Peer-to-Peer video, that are all in the IMS -- under the IMS umbrella. If I could go to the -- I think we have one last person waiting to ask a question. Do you have anything else, Robert?

That's it. Thank you.

Operator, this will be the last question.

We take our final question from Doug Whitman.

Thank you. John, if you could maybe talk a little bit about receivable days were very well managed this quarter. Is that because of the linearity or is there a change in the business going forward and what should we expect?

We've actually -- yes. We've actually invested in additional headcount in particularly in our antenna products group, and we've upgraded the resources that we have going after our MSG and licensing receivables, specifically to address this. And we think we're seeing the fruits there with the data.

And the closing question I have -- congratulations by the way on a job very well done there. But the closing question I have is on a longer term basis, so you're not forecasting near term revenues. But what do you see as the organic growth of your markets and then what do you think you can do versus that rough rate of growth when you look out over a three year, five year time frame?

Well, I , -- you mean -- I could speak to them by segment. I mean in antenna products typically the growth rates that we see -- remember, we had said that there were three areas in antennas. In your LAN, traditional LAN mobile to mature market, in a bad year, it's a couple of points growth and in a good year, it's 10% growth. But it's an excellent provider of cash. Our emerging markets which we said was about a third -- primarily driven by broadband, we have seen in the past growth rates in the 30s. And we believe that that's sustainable at least into the low 20s going forward. On a worst case basis. And we're actually in uncharted territory in the -- in the Andrew area from being able to measure against the regression analysis. But we are looking, once again, in the 15 to 20% growth as a minimum threshold there.

I think if you look at the RF solutions group, they have been able to sustain growth in the -- in the high teens to low 20s range, and we think that that is sustainable. And then in the area, obviously, of -- of most excitement is the MSG area. And we're at the beginning threshold of an opening market and I think that's what's got us so excited about it, that kind of we feel that between the PC devices and our ability to get onto handsets especially, that over the next three years, that business can grow substantially. But I have to admit I don't have a specific number for you.

Thank you.

Okay.

That concludes today's question and answer session. I'd like to turn the call back over to senior management for any additional closing comments.

Thank you very much for your attendance on our call this morning. We look forward to updating you in the future.

That concludes today's conference call. Thank you for your participation. You may now disconnect.