PCTEL Inc (PCTI) 2005 Q2 法說會逐字稿

Thanks for holding, everyone, and welcome to today's PC-Tel Inc. second quarter 2005 earnings conference call. Just a reminder today's call is being recorded and at this time I would like to turn the call over your host, the Chairman and Chief Executive Officer of PC-Tel -- Mr. Marty Singer.

Thank you very much. On behalf of PC-Tel welcome to our earnings release conference call for the second quarter. I want to thank all of you for attending and for your continued interest in our Company's progress. I also want to thank you for being flexible in accommodating our time change. That was done for the purpose of accommodating analysts who had multiple companies to cover at this time.

My name is Marty Singer, I am PC-Tel's Chairman and CEO. With me today are several other key executives including John Schoen, our CFO, Jeff Miller, our VP of Global Sales and Jack Seller, our Director of Marketing.

As we have in the past John will review our financial performance in some detail and we will review our balance sheet and other issues. I will cover the general state of the business, discuss highlights of the past quarter and then I will discuss some areas of focus for the remainder of the year. We will then open the call to your questions and we will set aside as much time as is needed to answer them.

Jack will help answer questions related to sales results across the three business units. With that as background, John will read Safe Harbor statement and then provide a financial overview. 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 protections 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 and now I will continue with the financial review.

Let's start with revenue. Second quarter 2005 total revenue was $18.3 million compared to 11.5 million in the second quarter of 2004. This represents a 59% increase. The 2005 number includes wireless product revenue of 18 million up from 10.1 million last year and licensing revenue of 300,000 compared to 1.4 million a year ago.

I will speak to the trends by segment. Our Antenna Products Group revenue for the second quarter was 13.4 million, compared with 5.8 million a year ago. The increase reflects a 20% organic growth over last year as well as a 6.3 million from the antenna product lines that we acquired from Andrew in the fourth quarter of last year. Revenue is up 30% sequentially from the first quarter with approximately 2 million of the growth from the product lines acquired at the end of 2004 and 1.1 million for our existing product lines.

RF Solutions Group revenue was 3.3 million in the quarter up 30% from the second quarter last year and up 7% sequentially from the first quarter this year. The Company is benefiting from the roll out of the UMTS networks and the related need for 3G scanners. The Mobility Solutions Group revenue in the second quarter was 1.3 million, down 27% from the second quarter last year and up 17% sequentially from the first quarter this year.

MSG revenue by quarter was uneven in 2004 due to the timing of initial customization fees and initial block purchases of Roaming Client licenses by carriers. The Company is seeing a more stable revenue trend in 2005 due to a combination of stable buying patterns from several carriers and ratable revenue recognition of several contracts under revenue recognition rules for software contracts. The revenue levels are indicative of the early stage subscriber traction of the carrier customer base.

Licensing segment revenue was 0.3 million compared to 1.4 million in the second quarter last year and 0.4 million in the first quarter this year. This segment continues to be affected this year by completion of older licensing agreements. Absent any intellectual property litigation settlements, it is expected to remain around $300,000 a quarter for the rest of 2005.

Now I would like to speak to revenue guidance for the third quarter of 2005. Total revenue is expected to be between 20 and 21 million, which includes approximately 3 million attributable to the recent acquisition of Sigma Wireless Technologies. As previously stated, we expect licensing revenue to be approximately $300,000 of that number. We are raising our total annual 2005 revenue guidance from 63 to 65 million to a range of 75 to 78 million. The Sigma acquisition represents approximately 8 to 9 million of the revenue guidance increase, with the remaining 4 to 5 million increase related to the Company's existing product lines before that acquisition.

Now let's turn to gross margin. Aggregate gross margin for the second quarter was 47.5% compared to 63% for the second quarter last year and 49.6 for the first quarter this year. The gross margin trend at the total level is indicative of the rapid growth of the Antenna Products Group relative to our other segments. I will speak to each of the segments individually.

Antenna Products' gross margin was 36.2% in the second quarter compared to 41.9% in the second quarter last year and 34.4% in the first quarter this year. The integration of the products acquired from Andrew into our own factory has been more challenging than anticipated. Additionally we are incurring unfavorable variances in absorbing the rapid sequential quarter revenue growth. We anticipate achieving close to 37% in the third quarter and 38 to 39% by the fourth quarter on our existing product lines before the inclusion of Sigma in the second half of this year.

As we shared on the conference call shortly after the Sigma acquisition, the gross profit for those products is currently in the low to mid-20s range with a goal of getting into the low to mid-30s range in 2006. With that said, we anticipate that the total APG gross profit with Sigma will run in the 33 to 34% range for the second half of 2005.

Now let's turn to RF Solutions. RF Solutions' gross margin was 69% in the second quarter compared to 68% a year ago and 76% in the first quarter this year. 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 the second quarter this year compared to 98% in the second quarter last year and 97% in the first quarter this year. We expect gross margins to remain in the 96 to 98% range going forward.

After taking into account the revenue mix for the upcoming quarter, total margin for the third quarter is expected to be between 45 and 46%.

Now let's turn to operating expenses. Let's talk about our operating expense 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; this expense that amounted to $900,000 for the second quarter is now spread to the various income statement categories as required by recent SEC guidance.

Total OpEx was 9.5 million in the second quarter compared to 8.4 million a year ago. This represents $400,000 in cash-based R&D and SG&A increase and a 0.6 million of amortization of non-cash-based stock compensation increase and 0.1 million of amortization of intangibles. The increase from R&D and SG&A reflects increased spending related to the Antenna Products acquired from Andrew netted with a reduction in our IP litigation costs from last year. Costs related to our patent litigation were $500,000 in the quarter compared to $700,000 a year ago.

The 0.6 million increase in stock-based compensation is driven by the Company's decision to emphasize the use of restricted shares as equity incentives in 2005.

Restricted shares are expensed to the income statement under both the current accounting rules as well as under FAS 123 R which goes into effect in 2006.

The 0.1 million increase in the amortization of intangibles relates to the Q4 2004 acquisition of Antenna product lines from Andrew. The Connexant (ph) royalty was unchanged from the first quarter last year at $500,000.

Guidance for the third quarter 2005 OpEx includes the recent acquisition of Sigma Wireless Technologies. We anticipate total OpEx for the third quarter to be between $10.8 and $11 million. The cash base R&D and SG&A is expected to be between 9.4 and 9.6 million. This includes sequential increases from the first quarter this year of approximately -- of the second quarter this year for approximately 1 million for Sigma's operations and a onetime $300,000 G&A expense for the consolidation of our RFS operations into a single building.

The remaining components of OpEx are anticipated to be 0.9 million of non-cash amortization of stock-based compensation, 1.1 million of intangible amortization which includes estimated amortization of intangibles for the Sigma acquisition, offset by $0.5 million of royalty income from Connexant. It is not anticipated that there will be a significant charge for in-process R&D related to the Sigma transaction.

Now let's turn to Other income. Other income generated primarily from short-term cash investments was 0.4 million in the second quarter compared to 0.3 million a year ago. This was comprised of approximately 0.5 million of interest income offset by 0.1 million exchange loss related to setting up the currency movement for the Sigma transaction. Third quarter 2005 Other income is expected to be 0.3 million of primarily interest income. The lower amount is attributed to the lower cash balance expected as a result of the Sigma acquisition.

I would like now to speak to the Company's tax provision. PC-Tel provides a full valuation reserve on its deferred tax assets. This is expected to yield an income tax expense for the entire year of approximately $200,000 based on current guidance.

So in summary, net loss for the second quarter of 2005 was a loss of 0.3 million or $0.02 a diluted share compared to a net loss of 0.7 million or $0.03 per diluted share in the second quarter of 2004. The differences as previously discussed are gross margin is up on higher volume, cash-based R&D and SG&A are up primarily due to the Andrew acquisition last year. Non-cash based compensation is up primarily from increase use of restricted stock branch (ph) relative to the use of stock options. Amortization of intangibles is higher from the Andrew Antenna Products acquisition and Other income is higher from a rise year-over-year in interest rates and taxes are higher from a change in the expected tax rate. The net effect of all these factors is an increase in net income.

Now let's turn to the balance sheet. Cash and short-term investments ended the quarter at 82.1 million compared to 84 million at the end of the first quarter 2005. In approximate numbers, the primary drivers of the 1.9 million sequential decrease are as follows -- a 2.1 million increase in cash for the sale of the old APG building in the quarter offset by 2 million in fixed asset additions, primarily related to the new APG building; payment of a final 0.6 million earnout related to the 2003 acquisition of DTI and a 1.4 million reduction accounts payable to Andrew Corp., related to the manufacturing transition service agreement. All other operational and investing activities were a net wash.

The Company anticipates cash will end in the third quarter in a range of between 54 and 56 million. Approximately 26 million of the change will be related to payment of the cash portion of the Sigma purchase price and related transaction costs with the remainder of the difference invested in operations.

The Company did have repurchase shares of its common stock during the quarter. As of June 30, 2005, the Company has repurchased 2 million out of the 2.5 million shares authorized by the Board of Directors under our share buyback program.

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

Thanks, John, and hello again to all of you. As our press release indicated and as John's review explained in more detail, we had reasonably strong revenue growth in the second quarter. It has been awhile since PC-Tel generated over $18 million in revenue for a single quarter. In addition to the strong revenue growth, the Company continues to make progress in controlling operating expenses.

As John previously mentioned, our overall cash-based R&D and SG&A expense growth year-over-year was from the acquisition of Antenna Products from Andrew in the fourth quarter last year while total organic OpEx has been effectively leveraged.

We made a commitment to our stockholders to improve our financial results; we are very pleased that our operating profit before non-cash-based amortization of intangibles and stock-based compensation, which amounted to $1.8 million in the second quarter this year and $1.1 million in the second quarter last year, is up $1.1 million from a year ago. Additionally, our financial results in the second quarter continue to contain an investment in our IP litigation of approximately $0.5 million a quarter.

We believe that these positive results support the basic thesis of the Company. Wireless Mobility represents one of the most interesting stories in telecom; and PC-Tel has deployed its assets, intellectual property and cash to position the Company so that we can participate in the growth of broadband wireless networks.

The transformation of PC-Tel has been gradual, beginning with the acquisition of cyberPIXIE back in June 2002 and the divestiture of the Wired analog modem business in May of 2003. Since then, we have established a strong presence in the Antennas and RF technology while gaining traction in our software business.

It is now incumbent upon us to build upon the momentum that we have established in our operations. We have a great deal of work before us. For example our Antenna Products Group ranked up to 13.4 million in the second quarter. Sales in several product lines have contributed to the growth -- satellite Radio demonstration systems, GPS timing antennas, GPS fleet (ph) tracking antennas, Wi-Fi, WiMAX and others. In ramping up to that level we have encountered variances that eroded our historically strong gross margins.

Let me point out that APG ramped their production while in the midst of a move from Mexico to Illinois and during the transition from our Anover Park facility to the new factory in Bloomingdale Illinois. It should also be noted that APG actually improved gross margins from the first to second quarter, picking up 1.8 points.

On the other hand we had 100 temporary factory workers in the quarter. It is our goal to improve gross margin an additional 2 points on our existing product lines by the end of the year and we are upgrading our materially and planning personnel to accomplish this goal. As John mentioned earlier, we also had an aggressive goal over the next year to improve margins on the recently acquired Sigma products.

Our RF Solutions Group, or RFSG, is up 30% year-over-year in revenue. Their core business, our high-performance receivers, is driving the growth in this business. Our strongest growth has been in UMTS-based scanners. As you may know already, we made a significant management change in RFS, and the new management team read led by Larry Sakayama and Dave Lawler (ph) has done an outstanding job in controlling costs, achieving organizational focus, and developing a healthy relationship with the sales force which had been led by Jeff Miller.

We are still working on the expansion of CLARIFY sales. During the past quarter, we released a new software tool that will help our customers visualize and process results with CLARIFY systems.

The most exciting new product development over the past quarter has been from our Mobility Solutions Group -- MSG. During our last call we discussed the positive customer reaction to our new VoIP Roaming Client software at the 3GSM and CTIA exhibits. We also discussed our intention to migrate our software from the laptop to the cell phone.

Since then we have made several important announcements; most recently, we announced our relationship with Kyocera.

Kyocera -- who we believe will become an important supplier for converged handsets -- those that combine cellular and unlicensed spectrum such as Wi-Fi -- plans to incorporate our VoIP on their handsets. Earlier we announced that NTT DoCoMo is integrating the same software onto the M1000 phone from Motorola. Motorola continues to gain market share and we are excited about integrating our software into their newest platform. That phone can access the Internet over FOMA (ph), which is Japan's version of 3G and PHS and Wi-Fi.

Meanwhile our industry-leading Roaming Client application continues to gain share through its association with T-Mobile, Cingular, SBC, NTT DoCoMo, NTT Communications, Fiberlink (ph) and Go Remote.

Let me take another moment to comment on our organic growth initiatives. We have been acquisitive over the past three years and it is easy to lose sight of the steady stream of new products that we have developed and delivered to the market. In addition to the Explorer -- the new software tool that I mentioned that is coming out of RFS, that same organization delivered three new scanner releases for EVDO and CDMA, an indoor kit for our CDMA scanners and a new CLARIFY release with algorithm upgrade. Our Antenna Products Group delivered new military antennas, the Pentaband (ph), four new mobile antennas and two new 2.4 GHz products.

Finally, MSG was extremely active delivering their new VoIP client, a symbian-based (ph) platform, a secure Roaming Client for the government and eight other releases for various customers. Over 50% of our engineering effort is directed towards new product development.

We have nothing new to report on the litigation front. The judge presiding over our pant (ph) litigation with Agere, Lucent and U.S. Robotics has been involved in the well-publicized criminal trials associated with McKesson. That trial recently ended and we are hopeful that we will soon receive his Markman (ph) ruling. We continue to be optimistic regarding our case and our prospects for a meaningful financial settlement.

The core management team has now been directing PC-Tel for 15 quarters. During that time, we have met or exceeded our revenue guidance for 14 of those quarters, the exception being the third quarter of last year when government sales fell well short of expectations. We want to continue with the positive momentum.

With regard to the use of our funds, we have had a very clear idea of how we've wanted to invest mainly and expand our interests in broadband and wireless solutions. We also wanted the defendants on our IT litigation to know that we have sufficient financial resources to support our licensing strategy. In our estimation, we are making decisions and taking actions that are in the long-term interest of our stockholders.

Having said that, we expect that we will be less acquisitive over the rest of the year as we integrate Sigma Wireless Technologies and strengthen our existing business units. John Schoen, Jeff Miller and I all plan on spending more time on process improvements and execution as we develop a more effective and profitable operations. Our intent is to institutionalize earnings growth.

Once again, we want to thank our long-term institutional investors for their continued support. Hopefully you'll conclude that our recent results and our progress over the first half of year vindicate your patience and your confidence in PC-Tel's direction.

That concludes our prepared remarks. We have set aside some time to answer your questions. Operator.

(OPERATOR INSTRUCTIONS) Matt Robison of Ferris, Baker Watts.

Congratulations on the positive adjusted income. Can you talk about -- you had really dramatic growth in Antenna Products Group. Is there any industry trends you can point to? We all know that there's Wi-Fi everywhere now and so forth. Is it -- what's the secular story here or is it just that you've consolidated the industry enough that you are taking market share?

We don't think quite honestly that we are taking market share in Wi-Fi. According to our data, we have had about a 14% year-over-year growth in what we would describe as our broadband antennas of which we would include canopy-like antennas, Wi-Fi and so on. So we think we are holding our own there.

In terms of specific growth areas, there's no question that we've had very strong growth from the product lines that we picked up from Andrew. I think as we may have mentioned but, perhaps, I didn't clearly -- we had unusually strong sales for the satellite radio antennas. Again, we are not selling the commodity antennas that go on vehicles, but rather the retail demonstration systems; and we had very strong performance there. We've had strong performance in the GPS arena. And then I think we have expanded somewhat our land mobile radio or (ph) public safety. There's continued interest in that as a result of Homeland Security initiatives and other public safety initiatives.

I think it's too early to say that we are experiencing high growth because of consolidation. What I'm hopeful for is that as we look forward to the end of the year and we focus on our process improvements, we will become more efficient in our selling and also will become more profitable on the sales that we have because of economies of scale.

When you talk GPS antennas are you talking about -- you are talking about more infrastructure type stuff like for the synchronization?

Yes I suppose that would be (MULTIPLE SPEAKERS) yes. Matt, you may be right there. I think that if you look at Andrew's results today which were not probably the kind of results they wanted but there was some positive elements in there for guarding their base station business. There is some positive momentum in infrastructure and these GPS antenna -- these tiny antennas are sold into that type environments. So I think we are catching something there.

Now one trend I think that is real is, despite some of the cautionary comments you hear about the roll out of UMTS, we are really seeing increase in the demand for our UMTS scanners which suggests to me that there is a growth in network deployment and, certainly, a lot of focus on optimizing those networks. We think we are well positioned to benefit from the growth in UMTS and we're hopeful that our Sigma acquisition will amplify that potential for us.

You think the sale of that test equipment is a leading indicator?

Absolutely. It's all -- historically and this is true when Jack and John and I were at Safeco (ph), you do best when there's a technology disruption. You know, there's a demand for test equipment early on as deployment occurs, and so my sense is that something real is happening there in terms of the transition.

Can you remind us how you're pricing software these days and how these new applications like Kyocera might be reflected on the income statement and what -- where we are in development of the industry in terms of consumer take rate versus your revenue levels in that area?

I'm going to let John answer how we price software.

If you've seen in our -- in the stabilization of our trends here, Matt, we've gone from up to 1.3 million this quarter and we are anticipating a continuous sequential growth there. A couple of things. In the areas of VoIP in handsets, we are -- these are heavily leveraged into trials that are cited to carriers and those have fixed terms. So from a pricing perspective as an example in our MSG area, I billed close to $800,000 more than I recognized in revenue this quarter; you'll see on the balance sheet in deferred revenue rise. And that's being spread pro rata over the life of those trials as some run as long as 3 to 6 months. And then we expect that net to be supplemented with additional licensing revenue, either on a per-unit basis or all you can eat for a fixed fee like a subscription.

The way we have done in general in our pricing is -- and in the way we have structured our contracts is that our revenue streams will tend to look more like annuity streams of rising levels sequentially.

How does that correlate with subscriber additions for the --?

I would say we have got a pretty even split here between people who are on all you can eat for a fixed dollar a month versus subscriber take rates. So I wouldn't -- I'm not so sure you can draw a one-to-one correlation anywhere near our revenue rise and what any of our individual customers are doing.

But John, what do you say that one of the good news elements of MSG is that we are seeing an increased percentage of subscription revenues to the total compared to NRE.

Sid Parakh of The Robins Group.

Congratulations everybody. Can you break down growth that you have seen between all the different segments you mentioned? What I am trying to get at is what has been the fastest growing component, what has been the slowest growing component? And which of these has the longest life and potential? If you could just talk to that effect.

I think that we did talk to it in the script, but just to summarize really quickly and not to be glib about it, it's antennas (technical difficulty) MSG, 1, 2, 3, if you were going to look at it on a year-over-year basis. Our antenna growth group has grown very rapidly as a result of organic growth of the legacy products and then very explosive growth for the products that we acquired from Andrew. It's difficult to give you an exact number there, Sid, because we didn't own those product groups from Andrew last year and so it would be misleading.

But there's no question that we had the greatest growth in Antennas and it also shows up in metrics such as our gross margin. Our aggregated gross margin or weighted gross margin has declined because of relative strength of antenna revenue as a percent of the total. RFS, as we pointed out largely as a result of the growth in UMTS scanners, is up approximately 30% over the last year during the same quarter.

And now that we have some history with RFS, when we bought them, they were an $8 million company, they went 9.5, went to 10.5, and this year, we are hoping they're going to be somewhere in the $13 million range. So that is growing at a reasonably steady state.

MSG on a quarter over quarter basis from last year actually declined, but again it's difficult to get much information from that since last year we had some long-time revenue from (indiscernible). I believe, however, that as we close out the year, you're going to see that the fastest-growing group could actually be MSG on a year-over-year basis, just on this quarter to the same quarter last year, it's a difficult comparison. I don't know if I've helped or confused you there, Sid.

No that's actually fine. Now when we talk about -- I'm talking specifically about the satellite radio demonstration system for instance. Within the antenna growth, how much -- how big of a piece has that been? And also if you could talk about what sort of penetration these systems have already made and how much is left to grow? I'm trying to get a sense of how many demonstration systems are out there, how many more are required?

The second question I can speak to. The first question I know you'll be disappointed, but we simply don't get down to a product by product description of our growth. Suffice it to say that the satellite radio demonstration system was a strong area of growth. We believe that this is still a very greenfield market. While we had substantial growth in the first half of the year, we think there is a lot left. We continue to believe that that would be a strong product line for us and our engineers also believe that that product is one that they can develop derivative from.

So these same systems that are used for retail demonstration systems can be used to distribute the satellite signal in homes or offices. Not that we would necessarily condone having an office that allows our workers to bring in their XM radios, but there is some market requirement for that.

That's fair. Also on the Mobility Solutions Group side, how much -- what kind of activity are you seeing in the enterprise market? I guess NTT recently launched some version for the enterprises. Can you just give us a brief on that?

I actually -- go ahead and complete your question -- but I'll just tell you, I think that is one of most exciting areas for the Roaming Client. But go ahead.

The other thing I wanted to ask was -- how would you compare revenue between consumer, subscription versus enterprise subscription?

We don't really look at consumers. We look at carriers versus our private aggregators or carriers. And I think as we've described before, we have a very strong relationship with two private carriers -- that would be Fiberlink (ph) and GoRemote (ph). And then NTT Communications is actually focused on enterprise as well. We think that those three carriers have a very exciting approach to the market and are actually delivering valuable systems solutions to that enterprise. I think you're going to see these private carriers delivering to the enterprise be the innovators in delivering VoIP to closed user groups in an enterprise or Special Securities Solutions.

We also believe that some of these private aggregators/carriers are helping us get into certain carrier accounts that we would otherwise not have access to. In terms of our revenue, I would really hesitate to give you a split, but it's not inconceivable that next year it could be about 60/40 carrier to enterprise.

One final question, John. When you have given operating and guidance for next quarter, what kind of litigation expenses are you assuming?

Approximately flat at $0.5 million.

$0.5 million? So the year end number like 2005 number will be in the range of $2.5 to $3 million?

It wouldn't be unreasonable. It really depends where the marketing results go as to whether things heat up. But it wouldn't be unreasonable to put 0.5 million in any projections for the next few quarters.

Great quarter.

Jeff Schreiner of MS Capital Management.

Marty, let's just stay looking at MSG and talking about what you were just speaking with. And maybe this would be better addressed by John, but I'll just put it out there. We've seen GoRemote as they've uptaken the MSG client and used it, becoming more and more and the growth rate has been pretty substantial sequentially. How would we look at maybe Fiberlink in terms of that revenue growth? And would it be somewhat similar to what we've seen from GoRemote?

The one thing, Jeff, this is pretty dangerous territory for us because we'd be commenting on the growth of our customers and particularly in Fiberlink's case, they are a privately held company. So I would respectfully ask that we not comment on Fiberlink other than to say that both Fiberlink and GoRemote both seem to be growing quite well; and it wouldn't be unreasonable to conclude that Fiberlink has at least the same level of growth as Go Remote. But this is a very awkward position. I wouldn't want to comment on anything I knew about the business results of our customers.

I understand; I can appreciate that. Just another comment here, Marty. In the past when you've done investor presentations you've lifted out basically market opportunity or market growth rates over a five-year period for your various product groups. Specifically now that we have done -- you've done several acquisitions within the Antenna Products Group and maybe changed the whole mix within what Antenna Products Group is delivering now.

I was wondering if you could uptake on your next investor presentation or possibly today if you might have it, what you think maybe a 5-year compounded annual growth rate for the Antenna Products Group's market could be now?

We are actually going to post our -- we were updating our investor presentation today. We will post that no later than Monday and in there, we are going to include some Ham projections for the Antenna Products Group.

John, did soft AP revenue go away in Q1 '05? And if it didn't go away or you don't want to give out that level of granularity, was there any nominal amount maybe (MULTIPLE SPEAKERS).

It is nominal and will continue to be nominal. Not worth talking about.

Okay. And in (indiscernible) Solutions, Marty, you had made a comment in the Sigma Wireless announcement that there are several benefits that you could recognize in the RF Solutions Group from that acquisition. Is that kind of what we saw or have we not even got to see those benefits yet in this most recent quarter's results?

No. You know, we acquired Sigma essentially, July 4th, and so -- or July 5th, whatever the effective date is. So there was no collaborative efforts between those two groups before that time. So you have not seen that benefit. What I was addressing during that call and in subsequent remarks is that we believe we have a unique opportunity to create a closed-loop system. In other words, the Sigma I-vet (ph) integrated variable electrical tilt antennas are adjusted in response to the key parameters in a UMTS network, such as power density and signal-to-noise ratio. Our scanners -- the UMTS scanners that we develop in RFS -- collect that type of information.

What we want to do is look at ways in which we can create a closed loop where we are acquiring data from our scanners and feeding them into the control units for the I-vet (ph) infusion antennas.

Just one follow-up question. Just discussing DoCoMo again. Wondering if you could comment just possibly if this might be the unit device that we could be testing your voiceover, the FOMA 1000 Smart Phone, and in regards to that as well, the NTT test that you're currently doing. Are there any additional partners working with PC-Tel and NTT on this voiceover Wi-Fi development?

Do you know, Jeff?

We're not actually doing voiceover Wi-Fi with (MULTIPLE SPEAKERS)

Jeff, let me just clarify that so we are really clear on what we're doing there. The M1000 phone is a hybrid or converged phone. What it does is it allows you to access the Internet over multiple types of networks unlicensed spectrums, such as Wi-Fi or PHS and Licensed Spectrum, which in their case is FOMA, their version of 3G or UMTS. So the phone has those capabilities and our software goes on that phone and enables rapid access to the Internet for data purposes.

The only thing I can tell you is that program is going quite well. We have launched that. Our licenses are being consumed more rapidly in that environment than they have in other environments early in the program. I can't comment on any other partners unless you can shed any light on that. (MULTIPLE SPEAKERS)

We don't have any of that right now -- I mean, it would not be inconceivable to extend that product into the voice arena. But currently right now, there's just the data arena that's in there.

Is that helpful, Jeff?

Yes, that was helpful, and thank you very much for your time.

J.D. Abouchar with Pacific Edge Investments.

Very nice results.

Thank you, J.D.

Looking at the antenna business, you've done several acquisitions, bought and sold some buildings, that sort of thing and have some sort of gross margin opportunities in the consolidation. Can you give us a conceptual idea of where we are in terms of how much capacity you have and how much leverage there is as you grow into these markets and then consolidate a lot of the manufacturing operations?

Yes we have a lot of capacity. By the way, I don't know if it's your phone or our phone, but I am getting a lot of echo with you, J.D. Maybe if you're on speaker phone, I think you should go on a handset.

Anyway, as we have described now a couple of times, we recently invested in a much larger facility here in Illinois. As a result of that, we more than doubled our space. We were able to absorb all of the lines from Mexico into that new space and we can increase capacity at least by 2X from where we are.

Then with respect to Sigma, that story is a bit uncertain, but we certainly can absorb the current growth that we have. I should also mention another element here. Historically when we acquired Max Rad (ph), what they did to increase their capacity was that they increased the percentage of material costs, the overall cost, by bringing in highly integrated modules that they could then assemble with a smaller workforce as a percent of total cost.

Our operation is highly leverageable in two ways. A, as I said, we can increase production at the facility we have, but most importantly, the more volume we have, the faster we are going to move in the direction we have already been moving, and that is to increase material cost as an overall percentage of COGS and outsource the highly integrated modules.

So we still have some headroom to go here over the next year?

Absolutely. We just moved into this facility and it was with this growth that we forecasted that we had in mind as we made that change.

And if we move back to the MSG, Cingular is supposed to launch their 3G UMTS data networks later this year. Does that give us additive revenues or is that going to somewhat substitute for the Edge revenues?

We as a supplier of Cingular/AT&T and we're hoping to benefit from that launch. Jeff, can you add any color that?

Yes. Actually, it probably looks like some of the edge revenue -- our biggest bang is probably on the RTFS side of things as Cingular starts their UMTS HSDPA (ph) deployments in North America. Most of the UMTS volume we have seen has been driven by Asia and Europe; and deployments have been lagging in the U.S. and North America. So I think if I was looking for a revenue add or it's probably on the RFS side of things from the Cingular, HSDPA, UMTS deployment and there's probably a small incremental benefit on the MSG side of things.

I know, Marty, over the years, I've had numerous discussions with you on the MSG side trying to understand the moving pieces as they keep moving. Is it fair just to sort of conceptualize it now, is that as we see data revenues grow at the various carriers that you've signed up, we should assume that MSG revenues should grow incrementally along with it?

Yes. I think that is fair. And then new business that we've developed essentially using the same resources, which is the VoIP Roaming Client, is also turning into something that appears to be attractive to carriers. So data I think is an important driver but since February, we have been encouraged by the interest in voiceover IP.

Could that into '06 also be a per-subscriber type of incremental activity?

Yes. Absolutely.

Excellent. Keep up the good work.

Doug Whitman, Whitman Capital.

Great quarter. John, can you talk a little about cash flow? It is kind of hard with all the moving parts here. What was operating cash flow for the quarter?

Yes. I think as I talked about in the script I was actually quite pleased with the cash flow. I think the two biggest items that I'm happy with is while billings, we'd include the change in deferred revenue, went up $3.9 million sequentially, we were able to hold receivable growth going $2.4 million increase. The other thing we were able to do is in -- you will notice that even though we've increased revenue in billings by 3.9 million and COGS up a couple million bucks, we were able to hold inventory flat. And that was largely -- kudos to the guys in the Antenna Products Group for being able to take the finished goods sold up we had done to the Andrew transition and working that down. But as we look forward, this is -- I'm starting to include in my cash flow models the fact that there will be some limited amount of use of working capital -- I mean of cash flow working capital, especially as it relates to the Sigma business.

One of the issues that we have for Sigma or one of the paths we have to increase that gross margin from the low 20s to the mid-30s is that there were so cash-starved that they tended to not do any molds or tools or anything and they have a lot of mechanically assembled parts so that they could do their cash flow on a pay-as-you-go. So I am expecting uses of working capital and fixed assets.

And it's reasonable to take -- if we were looking at the base businesses -- to take the non-cash items out? And if we are looking at the actual -- like a private company would -- the actual cash from operations?

I'm sorry, Doug, I can hardly hear you.

I was asking -- it's reasonable, then, if we also look to the cash flow from the operations would be the backing out of those two items you have there, plus the additional 500,000 you had for litigation expense?

That's correct. What I would say is that a non run rate, non long-term, which is about 300,000 in cash that will go out this quarter for -- or it may be in accruals, but for us to do our consolidation in Germantown and then there is the ongoing 0.5 million for the litigation which dropped out when the litigation is gone to completion. (MULTIPLE SPEAKERS) and that's about 800,000 of free cash flow right there.

Typically companies that have that kind of revenue ramp that you have a jump in receivable days because there's an escalation throughout the quarter. Can you talk a little bit about (MULTIPLE SPEAKERS)

Yes we were able -- on an average basis, we were able to keep our receivables in the low 60-day range. We really didn't have much of a jump. As I've talked about before, one of the issues that we do have in both MSG and RFS is currently the billing cycles there are heavily weighted to the third month of the quarter. That is one thing that I'm working on to try and smooth that out and smooth out the cash flow. But that is still a challenge for us in those two segments.

The APG revenue and billings flow tends to move more smoothly and I can get a much better bang for my collection dollar there.

But part of the other question of that was -- if linearity was fairly good this quarter.

Well -- only in days absolutely. I think we were in two or three days. I think we are actually reduced by two or three receivable days from where (MULTIPLE SPEAKERS)

No, I am asking about the linearity of revenues, or is this just amazing CFO work? I'm trying to figure (MULTIPLE SPEAKERS).

No, what we were able to do this quarter is we were able to make RFS linearity go much better. I just mentioned, we were able to get it 50% out in the last; it goes on the last month as the OEMs try and line up what they need for the quarter. That number used to be higher and we had a more linear billing ramp now since we had everything in our own building for APG for the quarter.

And our goal would be to continue to trend this way. I mean we want linearity.

Marty, you talked about the strategy going forward. Can you comment a little bit -- you still have quite a bit of cash left and you have an open purchase. And I know you've been kept out of the market in part for the acquisition strategy, but what's the Company's plans going forward?

Regarding --?

Stock buyback. We have a very low valuation given the results of the Company's delivery.

Yes. As you know, we still have 500,000 shares authorized by the Board. We will start to look at that next week if it makes sense to execute. But beyond that, the Board has not authorized any other buyback activity.

Anton Wahlman of Needham & Co.

First of all, thanks for not holding your conference call simultaneous to everyone and their brother. Much appreciated. Thank you very much. And also I think it's probably the best financial results in about 3 years at a minimum.

Could you give an update on -- you mentioned earlier in response to a previous question the fact that you are going to have a Markman hearing. Could you remind us all a little about the timeline and the various milestones that are in front of you in the litigation situation?

We already had the Markman hearing May 16. It was coincident with the AEA Microcap meeting back then. We felt that we had a very encouraging Markman hearing. The judge -- Judge Jenkins -- who is highly regarded as one of the hardest-working and most diligent judges, said at the hearing that he planned to have the ruling out quickly. But you know that as civil litigants, we are properly the second fiddle to criminal cases and he had a criminal case before him -- the McKesson case in which he was involved. That's now over. We are eagerly awaiting receiving written ruling from Judge Jenkins and we just have to be patient until we receive that.

Now, once we have that ruling, there is a course mandated mediation between the parties. The parties at that time will understand the way the judge has construed some of the critical terms in the litigations. And I think in the Northern District, the statistic is that 97% of all cases settle within about 90 days of the receipt of the Markman Ruling. Part of that is because of the court's mandated arbitration or mediation.

Let me add, though, that, no, I don't want to fan any expectations here. One thing that we have learned is that litigation has a pace that is inconsistent with the pace of other business activities. And while we remain very confident, what is most important for us is to be resolute in this strategy, to always have enough cash so that none of the defendants in this matter feel that we are getting exhausted financially, that we don't have sufficient resources; and to continue to enforce our patents elsewhere. Did that answer your question?

Fantastic. John, in terms of public company expenses, not only SarbOx but all the other junk around it I am sure or at least some of it, and then you have a lot of internal just staff and of course then time in general on top of it. What are some of the various parameters in terms of trying to tally up most of this stuff that you would say that you are paying on a quarterly basis starting with SarbOx and then adding whatever you want on top of it?

I know last year when I added up my Sarbanes-Oxley costs for last year, I would put it probably close to $1 million, of outside paid costs (ph).

Yes, we had $3.1 million in public company costs last year, which was, at the time, before the Sigma acquisition, roughly $1400 per employee. And we thought that roughly a third of that was in Sarbanes-Oxley. In addition to that, John has clearly operated his financial staff at cost. And, incidentally, we just built a new conference room here. And the purpose of that conference room is to house the almost continual presence during (indiscernible) periods of outside auditors.

Having said that, Anton, I am past complaining about this and we are just committed to living with it and limit the growth in these expenses and to try to derive something valuable. I have got plenty of complaints with Sarbanes-Oxley and how it has been implemented. But at the end of the day, there is something valuable here and that is, the intent to protect the relationship of the stockholders to the Company, just like ISO 9000 protected the relationship between the Company and customers, and John is committed to trying to do that in a cost-effective way. So that's where we are.

Finally, then more maybe a complicated question, which is about your recent acquisition of Sigma. There obviously are a lot of moving parts here, obviously your current being the organic business is moving ahead at a rapid clip and there are a lot of variables. Could you go over -- I mean because it wasn't just clear to me, if you in terms you thinking that this was obviously a good deal in terms of what you paid for Sigma versus your annualized benefits and once you are up and running and this hits kind of a steady state of when you have done all the integration and all the synergies have been achieved and whatever.

Could you go through, in your kind of case for -- we paid whatever it was, $30 or some-odd million here, and this is to annualized revenue. These are the kind of the synergies we achieved from it, this is why this was a good use of the cash. Could you just make your case there again?

Sure. Just for the record, we paid $19.5 million in actual cash and we had another -- 19.5 million euros and 2.5 million euros in a pension plan that needed to be funded. We characterized it as $27 million.

We thought it was a very wise use of the cash for four reasons. First, we wanted the technology that they had. This was the first of our several deals that we valued more on technology that we did as simply a multiple of EBITDA. We wanted the technology. Second, as a Company, we have been challenged in our ability to get a strong presence in Europe. We wanted a European base of operation.

Third, we believe that the Company as a whole -- PC-Tel -- is devoted to a single theme, and that is growth in broadband wireless solutions. We believe as a subset of that, UMTS is critical and we completed the Sigma Wireless Technology and an antenna play that was crucial to the deployment of UMTS networks.

And fourth, of the various acquisitions that we've examined, this was the only acquisition that had two things simultaneously -- none overlapping parts; for example, they're strong in Europe, we're strong in the U.S. They're strong in cellular infrastructure, we're strong in light infrastructure and unlicensed (indiscernible). And at the same time, you add that none overlapping complementary match; we felt that there was opportunity for significant technical and sales synergies between RFS, the combination of our scanning technology and their antenna technologies and the ability to get more effective use out of the current sales force that we have selling RFS scanners and MSG and their sales forces selling UMTS antennas exclusively. We are going to be able to load both sales forces with all products. So that's my case.

Brian Horey, Equity Growth Management.

You gave some guidance for the year as a whole from a revenue standpoint. Can you guys estimate what that represents on an organic growth rate over the prior year?

We hadn't thought about it that way, but let me just think for a second. We had roughly 48 million, and 45 of that was in Wireless revenue. If I just look at those existing groups, it's probably about 55 or 56 million, same to same, maybe a little higher. But that's back of the envelope. Let me give that a more considered analysis.

Okay, thanks. And then did you have any 10% customers in the quarter?

I think the only customer that rises to 10% of everything in the quarter is Tesco (ph). If you actually look to our Qs, we actually do break down by segment 10% customers within the segment.

But Tesco would remain the single largest 10% customer on a consistent basis that would be big enough to cover everybody.

And can you give some sense as to how much of your revenue stream goes to carriers, specifically, or if you can identify the biggest buckets of groups of customers?

I would put MSG's current revenue in that carrier arena. I would put the Sigma revenue in the carrier arena.

And RFS really all goes to carriers that may go through distributors on the way there. So I would add up Sigma, MSG and RFS as all being carrier revenue, and then a relatively small percentage of APG as carrier. No more than 20% of total revenue.

Okay, fair enough. Can you talk about in Q3, what do you think is the usual seasonality trend in Q3 for the group of businesses that you have?

Yes. I think that our history has been that Q3 is not the strongest quarter for a couple reasons. I think that the carriers, who are as you pointed out, related to RFS, MSG and Sigma -- for example in Europe, there's big vacations during that period and I think they do a lot of year-end planning. And typically, that money gets pushed out to the fourth quarter. So I think that Ericsson mentioned in its recent release that while their overall infrastructure business is growing, they view the third quarter to being flat or perhaps sequentially down. But overall, they saw modest growth in the year which suggests that fourth quarter will be stronger.

That has been our experience. Third quarter has not been the strongest quarter on a seasonal basis.

And to follow up on your last question, a little bit back of the envelope. We did 48 million last year which -- and we had said roughly 3 million in the fourth quarter was related to the Andrew acquisition. So pull that out, you have a $45 million base. And net-net, if I just take -- I had just mentioned that we had done about 6.3 million this quarter in Andrew-related, which was up from the first quarter. If I turn around and I just pull that out on run rate, it says you got about 55 million versus 45 last year and -- but you have a swing where licensing actually went down. So the wireless revenue is probably up in the high 20% range organically overall and then about, it's at about 22% -- 10 million on a 45 base when you include licensing. That's back of the envelope.

So just on Q3, if you had a steady -- if you didn't have any seasonality, it would be about 25% of revenue. What do you think typically -- in a typical year, how much of the annual revenue do you think (MULTIPLE SPEAKERS)

Typically what we see is -- last year is an indicator. Remember I've only owned a lot of these segments for a year. What you see is sequential -- you see a very slight to flat as a group going from second quarter to third quarter, and then another sequential rise in the fourth quarter for organically. You are just going back and looking at last year's pattern.

Last question, in terms of this patent litigation that you've got ongoing, can you maybe briefly summarize what products or functionality that litigation addresses?

Yes. For those of you who have followed us for a long time, this litigation is 100% related to our historical background in the soft modem business. At issues are patents that we believe describe how you save power when you incorporate a modem in a PC; how you maintain compatibility in different countries with different dialing patterns, and finally, how you represent certain hardware as a software element.

So does that cover -- just to try to scale the opportunity, so to speak, did that cover every modem shipped in a PC for the last x years or --?

It certainly covers the ones that we've described as infringing from these vendors. But we believe that most vendors have used this. And by the way, most vendors have licensed these patents from us.

Yes, just as a profile, basically all of the big licensing money is when -- it's periods when -- modems used to sell for $100 to $200 apiece. And then -- so typically what you do is when you're trying to bring a person to license, a huge piece of the value proposition to license is in the past shipment. And that as an example, I just looked here -- remember, we did the analysis that said, organically, 48 million is 45 million. Well, of that 45 million, $6 million was related to licensing last year which went to $1 million this year. So you can see what we're doing is we are just nurturing this asset to just convert it to cash; and we don't expect it in the long run, it's not a growth segment for us. It's going to linger in the million to 2 million range for a couple of years because the modems sell for $2.00 now. And many of the people we've settled with, we just settled on a paid up (ph) for license. So that's why it shrinks.

So that's why when we look, it's what -- it's doing the math on the back of an envelope, 45 million becomes 39 million on pure wireless, which says our year-over-year growth for just our wireless products organically is in the 40% range.

But back to your question, Brian, is litigation covers all this historical period. And so the defendants like Lucent, Agere and U.S. Robotics, they have obligations to us, liability, that extends back several years. Other licensees -- Connexant, Broadcom, Intel, SmartLink, EXS (ph) Technologies, Motorola -- all settled for cross-license with us a long time ago.

That's helpful.

Operator, how many other questions are there; callers are there?

We have 3 questions remaining.

If we could confine this to 10 minutes, I would appreciate it.

Sure, and we'll move on now to Stan Trilling of UBS.

You only have two questions. All of my questions have been answered. Great quarter.

Gene Weber of Weber Capital Management.

John, could you just repeat what the gross margin guidance you're giving is -- by product -- by group?

Yes. EPG 33 to 34%, and Mobility Solutions should continue in the upper 90s -- 96 to 98%. And then let me just doublecheck here -- and somewhere in the 67 to 72% range for RF Solutions.

Okay. And are those numbers for the third quarter or for the second half of the year?

They actually would cover both, because every quarter, you're going see in the essence of some extraordinary event of a cost problem in RFS, you will always see it between 67 and 72% gross margin. And then with the Sigma addition, the overall range comes down from the 36 that we did in the first.

Yes, I got that part in my notes -- thank you. The other question I have is -- could you just repeat, again, why in Antenna you said you had some gross margin pressure? I think it had to do with the transition to the facility.

No. Basically, and this goes back to my Motorola days -- I used to be the Controller in the paging and walkie-talkie business, and that was during the boom of paging when analog still was doing good. Every time you're in an electronics business, it has got a lot of material costs in it and a lot of assembly and you grow sequentially 30% a quarter and -- or over 20% year-over-year; you leave a lot of manufacturing variances on the floor. And because you are expediting material, so you are paying more for your material than you would normally be had you scheduled it in an orderly fashion. You are paying expediting costs for free so you're paying more for expedited freight than land freight. And Marty had mentioned the number of temporary workers and the overtime build just shoots through the roof because it's inefficient assembly and planning when you are shaping that kind of growth.

Okay, but presumably, that was a one-quarter phenomenon. If you continue to grow, you're going to know how to handle it?

Well you do, except it takes a couple -- by the time you have short-ordered all of this material -- remember, we are still learning how to manufacture a lot of the Andrew product that we have brought it -- that's why you are seeing -- organically, I expected that 36 and change in the second quarter for our organic products would go to 37 in the third quarter and get up into the 38, 39 range in the fourth quarter. It's going to take a couple quarters to work it out.

Yes but you're right. That does assume revenue growth. So that's good, so moving in the right direction. That's it for me. Congratulations on the quarter.

Rob Aman (ph) of RK Capital Management.

There has been a ton of skepticism just in the market about the three different pieces and how they fit together and whether or not there's real synergy there. It seems clear from the results today and how you are talking about it that there is pretty good synergy. Could you talk a little bit about the sales momentum of scanners on the front end of the networks, the antennas when you build out the networks and MSG once the networks are up and running? Is the sales force seeing that kind of synergy as well in terms of how they are selling?

Well the sales force sells (ph) energy as commission. What the sales force sees is they can make a single sales call in the case of RFS and Antennas and have both in their bag. From our perspective, we see synergy at a more abstract level as participating in what we think is an explosive growth in Wireless broadband. And we have solutions for the consumer for accessing the mobile Internet and broadband on networks, so we have solutions for both unlicensed and licensed spectrum and our antennas. And we have solutions that help carriers optimize Wireless broadband networks, the UMTS scanners.

So we see it pulling together at the market trend level, the growth in Wireless broadband solutions and at the sales level, the ability of our sales guys to carry multiple product lines into the same customer.

A quick follow-up. How should we think about sales and marketing as a percentage of sales in terms of an ultimate target and potential revenue level to get to that target?

It really depends on the relative blend. We don't break sales and marketing out. I think we're going to be kind of in uncharted territory there as to how good the synergies can get. What we do expect is as you've seen, on a year-over-year basis, the only truly variable component we do have is in the Antenna space, we do have extensive rep network and we do have a component that rises just purely linear with sales. But we do expect a long-term leveraging. But beyond that, I don't have an exact model yet because at the end of the day, the synergies we can get with Sigma are intuitive, but I just -- see how this whole thing plays out, especially spend some time (ph) to invest in Europe. We have been at it for 28 days.

Right, but just on an overall basis, you showed what -- over 600 basis points of leverage year-over-year in sales and marketing this quarter. As we look out into the next year, it seems reasonable that you could get well under 15% of sales in terms of sales and marketing (MULTIPLE SPEAKERS).

I wouldn't argue with that -- yes. We think that's a reasonable forecast.

Thank you.

Thank you very much for your question. Operator, is that it?

That is all the questions.

Okay, thank you very much for your help.

Again, that does conclude our conference call. We thank you all for joining us today.