PCTEL Inc (PCTI) 2005 Q3 法說會逐字稿

Good day every and welcome to today’s PCTEL Inc. Third Quarter 2005 Earnings Conference Call. Today's call is being recorded.

At this time I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Marty Singer. Please go ahead sir.

Thank you very much. On behalf of PCTEL welcome to our earnings release conference call for the third quarter. I want to thank you all for attending and for your interest in our Company's progress.

My name is Marty Singer, I am PCTEL's Chairman and CEO. With me today are John Schoen, our Chief Financial Officer, and Steve Deppe who heads up our Antenna Products Group, and Jack Miller, Director of Marketing.

As we have in the past John will first review our financial performance in some detail and then will review our balance sheet and other issues. After he’s done, I’ll cover the general state of the business, discuss highlights of the past quarter and then I’ll discuss some areas of focus for the remainder of the year. We will then open the call for your questions.

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 are forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies and obtain protection for the related IP, and the ability to integrate acquired businesses and products. 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. Third quarter 2005 total revenue was $21.6 million compared to $10.7 million in the third quarter of 2004. This represents a 102% increase from the third quarter last year. The 2005 third quarter numbers includes wireless product revenue of $21 million, up from $9.4 million last year, and licensing revenue of $0.6 million compared to $1.4 million a year ago.

Now I will speak to the trends by segment. Our Antenna Products Group revenue for third quarter was $15.3 million compared with $5.7 million a year ago. Of the $9.6 million increase, $5.1 million came from the products acquired from Andrew in the fourth quarter 2004; $1.5 million came form the recent acquisition of Sigma Wireless Technologies, and the remaining $3 million of the growth was organic. The organic growth represents a 53% increase over the third quarter last year. The revenue related to the Sigma acquisition is lower than we guided in our last earnings call due to a slower rollout of IVET [ph] antennas than anticipated.

RF Solutions Group revenue was $3.7 million in the quarter, up 45% from the third quarter last year. The results include a $0.3 million order from our OEM channel destined for Cingular. The segment continues to benefit from the rollout of UMTS networks and the related need for 3-G scanners.

The Mobility Solutions Group revenue in the third quarter was $2.1 million, up 84% from the third quarter last 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 patters from several carriers and ratable revenue recognition of several contracts under new 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 $0.6 million compared to $1.4 million in the third quarter last 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 be around $0.3 million in the fourth quarter.

Now I would like to speak to revenue guidance for the fourth quarter of 2005. Total revenue is expected to be between $21.5 and $22 million. As previously stated, we expect licensing revenue to be approximately $0.3 million of that number. This takes our annual 2005 guidance to between $76.5 million and $77 million. At this time, we are offering revenue guidance for 2006 of between $95 million and $105 million. The ranges by segment are $70 million to $80 million for APG; $13 million to $14 million for RFS; $9 million to $10 million for MSG; and $1 million for licensing. The wide range in APG guidance is primarily related to uncertainty surrounding the pace of IVET antenna rollouts during 2006.

Now I’d like to turn to gross margin. Aggregate gross margin for the third quarter was 46.4% compared to 58.5% for the third quarter last 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 31.9% in the third quarter compared to 41.7% in the third quarter last year and 36.2% in the second quarter this year. During the quarter, the Company discontinued certain antenna products acquired from Andrew that were identified as slow moving or where PCTEL had an overlap in product. The gross margin results for the quarter include a $0.3 million charge or 2.2% of revenue to dispose of the related inventory.

To give a sense of scale to our margin improvement progress, the gross margin without the inventory disposal charge and the addition of Sigma was 37.3%, which is comparable to the 41.7% margin in the third quarter and the 36.2% that we did in the second quarter. As we have said previously, the Andrew products have an inherently lower margin than the Max Rad products, which make up all the revenue in the third quarter last year. Management continues to target a long-term margin between 38% and 39% for the blended Max Rad and Andrew acquired products.

Total gross margin for the segment with Sigma is expected to be in the 34.5% to 35% range in the fourth quarter, which is an improvement over the third quarter. RF Solutions gross margin was 69.3% in third quarter compared to 66% a year ago. We expect margins going forward to be in the 67% to 72% range. Mobility Solutions gross margin was 99% in the third quarter this year compared to 95% in the third quarter last year. We expect gross margins remain in the 96% to 99% range going forward.

After taking into account potential revenue mix for the fourth quarter, total gross margin for the fourth quarter is expected to be between 47% and 48%. Our preliminary review of 2006 gross margin based on the revenue mix previously discussed is between 47.5% and 48.5%.

Now let’s talk about operating expenses. Our investors will have noticed that we have added to our earnings release a reconciliation of GAAP to non-GAAP earnings to highlight the effect of accounting for non-cash expenses related to stock-based compensation and amortization of intangible assets from the Company’s acquisitions. Total OpEx was $10.9 million in the third quarter compared to $8.8 million a year ago. This represents an increase of $0.8 million in cash-based R&D and SG&A and $0.8 million of amortization of non-cash based stock compensation and $0.5 million of amortization of intangibles and a $0.1 million increase on gain of sales and related royalties.

The increase from R&D and SG&A reflects increased spending related to the antenna products acquired from Andrew and the recent acquisition of Sigma Wireless Technologies. The $0.5 million increase in amortization of intangibles relates to the Q4 2004 acquisition of antenna product lines from Andrew and the Q3 2005 acquisition of Sigma. A gain on sale of assets and related royalties was up $0.1 million as it includes a gain on disposal of intangible assets related to the government decode produce which was sold to one of our secure government distributors in the quarter.

The Company expects fourth quarter OpEx to be at the same levels as the third quarter, with the exception that the gain on sale of assets and related royalties will drop back down to $0.5 million.

Other income was $0.1 million in the third quarter compared to $0.3 million a year ago. Typically, other income is comprised primarily form interest generated from cash-term cash investments along with some miscellaneous expenses. This quarter also contained a $0.4 million non-cash expense for currency exchange loss related to the Euros held awaiting the close of the Sigma acquisition on July 4. The exchange loss reduces the Sigma purchase price. The Company expects other income to be approximately $0.3 million to $0.4 million in the fourth quarter.

While we do not give annual guidance for OpEx there is one definitive cash-based item that will change from its current run rate that we would like to point out. Starting in the first quarter 2006, the royalty received from Conexant is contractually capped at $250,000 per quarter. That cap is currently $0.5 million a quarter.

Now I would like to speak to the Company’s tax provision. PCTEL provides a full valuation reserve on its deferred taxes. This is expected to yield an income tax expense for the year of approximately $300,000 based on the current guidance.

Now let’s speak to net earnings; net loss for the third quarter 2005 was $0.9 million or $0.05 a diluted share compared to a net loss of $2.6 million or $0.13 per diluted share in the third quarter 2004. To summarize the differences previously discussed, gross margin is up on higher volume; cash-based R&D and SG&A are up primarily due to the Andrew acquisition last year and the Sigma acquisition this year; non-cash compensation expense is up primarily from an increased use of restricted stock grants relative to the use of stock options; amortization of intangibles is higher from the Andrew and Sigma antenna products acquisitions; other income is lower from a rise year-over-year in interest rates offset by a non-cash currency exchange loss related to the Sigma acquisition; and taxes are higher from a change in the effective tax rate. The net effect of all of these factors is an increase in net income.

Now let’s turn to the balance sheet. Cash in short-term investments ended the quarter at $58.6 million compared to $82.1 million at the end of the second quarter 2005. In approximately numbers for the third quarter, cash generated from operations was $2.6 million; cash used in investing activities was $26.4 million primarily related to the Sigma acquisition; cash generated from financing activities was $0.1 million representing a wash between the stock buyback program and cash received from the exercised stock options; and a $0.2 million positive currency translation adjustment related to Sigma.

The Company anticipated cash will end the fourth quarter in the range of $56 million to $58 million. The Company repurchased 85,000 shares of its common stock in the quarter at an average price of $8.73. As of September 30, 2005 the Company has repurchased 2.1 million out of the 2.5 million shares authorized by the Board of Directors under our continuing share buyback program.

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

Thanks John. It is really a pleasure to report the progress that John just summarized. From management’s perspective there were several key highlights during the quarter. Setting aside the write-off of inventory related to the cancellation of slow-moving products acquired from Andrew, we made great progress on our core Max Rad and Andrew-acquired APG gross margins. We have gone from 34% in the first quarter to 36% in the second quarter and we now stand at just over 37%. We expect to better in the fourth quarter.

RF Solutions Group continues to benefit from the growth in UMTS networks and we are experiencing strong sales of our UMTS scanners. We continue to get improved visibility of demand. The sales force under the management of Jeff Miller is performing at or above forecast.

Our Mobility Solutions Group now delivers roaming clients and voice-enabled clients to 12 customers worldwide. We now have a presence on 6 handsets and more of our revenue is coming from subscriptions. Our Antenna Products Group, excluding the favorable impact of Sigma revenue established a new quarterly revenue high point of $13.7 million. Sales of our GPS-based products, which include vehicle tracking and the aviation markets are unlicensed band products such as Wi-Fi and Wi-Max antennas and strong public safety sales drove our growth. We have been participating actively in the deployment of urban broadband Wi-Fi networks.

We are beginning to see the positive results from our focus on cost synergies. Again, excluding Sigma our sequential quarter OpEx remained flat. Over the next few quarters, we expect to deliver results that will reflect continued progress on our cost structure. We are centralizing more of our financial and other G&A functions, leveraging the space in our new APG facility, and using vacated space in our headquarters to build up our development group with an MSG.

Sigma generated just under $1.3 million Euros, or approximately $1.54 million in the quarter. We believe that these revenue levels reflect a slower than expected roll-out of key IVET design wins. We have been fully certified though at several European operators over the last quarter.

In addition to the progress that we have made on the top and bottom lines, we have been extremely active in releasing new products. During the third quarter, RFSG released an EBDO-450 scanner. This scanner meets the unique needs of Eastern European operators that are upgrading their NMT-450 networks to CDMA or BVDO networks. It is another example of how PCTEL continues to benefit from the growth in wireless broadband networks. RFSG also released a WCDMA HSDPA scanner. As you may know HSDPA or High-Speed Downlink Packet Access is an enabler for video and other services. Our combined WCDMA HSDPA scanner permits simultaneous cove rage of both technologies and facilitates broadband wireless network optimization.

Finally, RFSG released a prototype of a WCDMA 1800 scanner that should accelerate our penetration of the broadband wireless market in Japan. The Antenna Products Group was extremely active in developing new products during the quarter. In our mobile radio product line, we developed a new series of elevated feed antennas for 5 gigahertz and above. Additionally, APG developed wide-band Omni directional antennas for merging mobile radio applications in the 700 and 800 megahertz bands.

In the Wi-Fi arena, APG developed a specialized line of 2.4 gigahertz antennas for mesh network infrastructure deployment and an upbanded version of Wi-Fi for public safety applications. APG also developed a new line of light infrastructure pentaband directional panel antennas for US and European cellular networks.

Finally APG made great progress in rationalizing the overlapping of obsolete products acquired from Andrew. In the past 6 months, we have retired 50% of the Andrew SKUs converted 10% to our Max Rad product lines and maintained only 40% of Andrew SKUs while driving record revenue. There have been several positive product-related events with Sigma including an agreement to try Sigma’s variable-tilt antenna, the IVET antenna at a major US carrier. Separately, Ireland 02 ordered our new Street Works version of the iVET, an order that we will begin to fulfill in the fourth quarter. Sigma also achieved inter-operability with Siemen’s antenna management system, a major milestone for penetrating networks in Italy and Spain. Similarly Sigma achieved inter-operability with Nortel a key requirement for delivering into certain Vodafone networks.

The Mobility Solutions Group continues to demonstrate its product leadership with the introduction of new Win32-based features and products and Intel-based products. During the third quarter, T-Mobile began shipping our dual-mode software to support GPRS as well as Wi-Fi access to the Internet. We also delivered PC-based software to tier-1 handset manufacturers who will include this software with every phone they ship to customers. The software will enable subscribers to access 3-G networks by using their phones as a wireless modem. Within the PC software framework, we also added Enterprise functionality to our central configuration server that enables wireless carriers to sell their 3-G services to Enterprise.

In parallel, MSG realized its first significant shipment to cell phone-based roaming clients into NCT Doco-Mo [ph]. Our software is preinstalled on Motorola’s new Simbian-based M1000 convert handset, a cellular phone with Wi-Fi capability. We also shipped IMS-ready voice software for Windows-based mobile devices to a major infrastructure vendor for carrier tryouts.

Finally, in conjunction with one of our partners, we demonstrated voice call handoff between CDMA and Wi-Fi networks and between GSM and Wi-Fi networks. We continue to successfully complete inter-operability testing IOT of our mobile white [ph] roaming client in several environments. The ability to handle pedestrian-level speeds for basic handoffs is crucial to the success of white calling from multiple wireless phones with infrastructure from competing providers.

In addition to growth-related key broadband markets APG responded to the urgent need to rebuild public safety networks that were damaged or destroyed by the recent hurricane. Public safety shipments were over $1.3 million to just 2 of our customers in the third quarter. We continue to believe that public safety will represent a stable and growing revenue source for several years. The new tetra-based products from Sigma will add significantly to this portfolio.

APG realized other operational achievements during the quarter, notably APG received ISO-9000 2000 registration for their Tianjin China facility and recertification for our new facility in Bloomingdale, Illinois.

We continued to sharpen our organization focus during the quarter. As John mentioned we had 2 small transactions during the quarter; we sold off a set of patents to Conaxent. These patents had limited use to PC Tower and were not central to any current litigation or future plans to certain intellectual property. Aside from the money that we received for these patents we will avoid the G&A related costs for maintaining unnecessary patents in the future. Similarly, we sold off some software that we developed for the government applications of our scanning technology, John already mentioned that. The software and 2 people were transferred to a current cleared distributor for government sales. The distributor will continue to buy our scanners for these applications, which is our core business, while we were able to decrease operating expenses and realize a small gain on the sale of the software.

We are also making progress in transforming the organization. Jeff Miller has done an outstanding job in centralizing the Company’s sales organization. We have a single sales force for all direct carrier sales into which we are integrating the 5 account executives from Sigma. The companies that we acquired separately are product groups now with responsibility for development, product management, and manufacturing operations. Finance, legal and HR are all part of the corporate structure.

PCTEL management is very excited about the financial performance over the past 2 quarters and optimistic about growth in the fourth quarter and beyond. At the same time, we want to set reasonable expectations. As John has already mentioned, we are providing revenue guidance with a mid-point of $100 million for 2006. That represents potential growth of 30% over the guidance that we provided for 2005. We expect that APG with Sigma will generate between $70 million and $80 million and that our software and our scanning business will generate between $22 million and $24 million. None of these estimates include the potentially favorable impact of settlements or judgments related to our IP litigation.

Speaking of the litigation, let close with a brief comment on the status of the case. We received the Markman ruling in early September. We were pleased with the ruling. From our perspective, the defendants in the case have stronger reasons to seek a settlement. We have a second Markman hearing on November 7 in San Francisco just prior to the AEA Meeting. This hearing pertains to a single patent that was reexamined by the Patent and Trademark Office and that we believe is utilized in a gear modems. We will update you on the litigation and settlement activity as events unfold.

In summary, let me make these comments. At the beginning of the year we committed to our shareholders that we would drive towards greater organizational efficiency, forcing synergies, and leveraging our existing cost structure. We can report some success in achieving those goals. The product groups that we have had as part of our organization for over a year are performing quite well, and we have global sales force representing all PCTEL products. We are confident that over the next 6 months we’ll make significant progress weaving Sigma into the PCTEL fabric and we will realize the objectives that we established for the acquisition.

We hope it has become clear to our investors that we are committed to both growth and bottom-line performance and that with our 3 operating engines, PCTEL is uniquely positioned to benefit from the explosive growth in wireless broadband networks, and all of our challenges are amenable to hard work and focus.

We have set aside 30 minutes to respond to any questions you might have at this time. Operator you can open the call to those questions.

[OPERATOR INSTRUCTIONS]. Sid Parakh, The Robins Group.

Good evening gentlemen; I think you talked about improved visibility in the RFS business segment. Could you just elaborate on that as what clearly gives you more visibility?

Sure, we have more visibility for I thin 3 reason; one we have some meaningful relationships with OEM distributors of our scanners that now are a little bit longer term than they have been in the past.

Secondly, unlike last year where we were forecasting a very unpredictable business, the government business, we’ve based our forecast this year almost entirely upon commercial applications of the scanners rather than government applications of the scanners and the result is that we’ve eliminated the type of volatility that we experienced in the third quarter last year when we disappointed all you guys.

The third reason is that there’s been a sustained boom in the scanning business, a mini-boom I should say for scanners that are associated with the newer technologies, UMTS and EVDO and we’re getting reasonable visibility of the continued need for those scanners. That’s really all we meant by that.

I should make a fourth comment. When Jeff Miller stepped into this job of organizing the sales force, what he did is he brought a discipline to the forecasting including the application of certain schools like salesforce.com and so on. And he’s really developed a pretty good discipline around understanding the funnel, the probabilities and focusing on how to close our opportunities and that quite frankly has made a big difference in execution of the sales force team.

Okay, and also I think you mentioned during the call that the VOIP roaming plan is now standard on the Motorola M-1000. Now if I recall you were still testing that software. Is it fair to assume that it’s commercially deployed at this point now.

Yes that’s what we said during the call just a few minutes ago, that is has been deployed by NTT Doco-Mo and it’s a successful product.

Okay and you said it’s on 6 other handsets now; is that -- ?

Our software is on 6 other handsets -- on 5 other handsets. And we can’t discuss those in great detail other than the ones that we’ve announced.

Okay that’s fair. Just one last question; can you give me the number how much you spent on litigation expenses?

It was about $600,000 this quarter.

Matt Robison, Ferris, Baker Watts.

Okay first a little housekeeping; a couple of things you mentioned. Could you repeat the APG and RFS gross margin?

Yes the APG gross margin in total -- let me just go back -- it was 31.9% in the third quarter, and that includes Sigma. And RFS was 69.3% in the quarter.

Okay, and what was the tax guidance?

It was 300K for the year. So just take the year-to-date and minus 300 and plug the difference.

You understand the gross margin though on APG?

Oh yeah I got all the other.

And Matt just FYI we have now attached to the earnings release the actual revenue and gross margin by segment; it’s actually in the table there.

Oh good; now did I Hear you say that expenses were going to be just as high in the current quarter?

What I said was expenses should, OpEx expense in the fourth quarter should be in line plus or minus 100K of what they were in the third quarter.

So nearly $2 million higher than they were in the second quarter before the non-cash stuff?

Well, if you -- $2 million higher than the second quarter? I guess I don’t follow.

Well that was all just Sigma Wireless.

Yeah basically we added to the second quarter about $900,000 and change of Sigma OpEx, cash OpEx.

Okay, so the other was…

The rest was all a wash; the rest was flat. I’m not $2 million up over the second quarter.

Okay and then -- all right and that’s what we should look -- ?

Yeah, cash-based operating expenses the way you count them, if in your model we’re about $8.3 million in the second quarter and they’re $9.1 million this quarter. So we’re up about 800K or 900K.

Okay thanks.

And Sigma is the difference.

[OPERATOR INSTRUCTIONS]. Ted Monroe, The Cardinal Group.

Hi Marty, nice quarter.

Thank you Ted.

I have kind of a general scenario question. Looking at some of the carrier results that are coming in; wireless overall spending maybe flat to down as we go out to ’06 and even in Q4, which may or may not have some impact depending on the spending but there certainly would be a shift to UMTS I would think and how much of a boost would that be to your business?

Well, it’s hard to quantify but it certainly is part of our projection for 2 important areas of the business; one Sigma Wireless. We are, as I said in the release we are initiating the trial of those products in the US and in particular we have a product called Street Works, or and some people refer to this as Street Furniture where we have 3 antennas packaged in a ray-dome which is an environmentally sound protective covering that allows you to put this variable-tilt antenna capability at street level or in places where you want the antenna to be inconspicuous and we think that there’s a very broad market for that in the US and as UMTS rolls out, that’s part of our estimate of why this market grows to a total of about a $550 million CAM [ph] by 2008.

We also believe that you’re going to see the rollout of the variable-tilt antennas begin in earnest in the UK and Ireland as they are starting to go from early deployment to increased congestion and they begin to run into this problem of having to do manual tilts. I don’t know if I’ve answered your question completely on that score.

On the other part of our business where this is relevant is in our scanning business. We have seen a tripling of the sales of our UMTS scanner out of our FSG. And this scanner is packaged with People’s Test equipment and as operators deploy the UMTS network demand for the UMTS scanner continues to increase. This is a great high margin product for us. There is a place where we can do other things, such as combine UMTS with other technologies that are the target of the transition. So the UMTS rollout has a lot of potential for us.

So based on the scanning results you’re seeing, would you say that transition is happening already, because Cingular was the big question here and I think they’re done.

There’s absolutely no question that the transition is happening. We’re seeing that impact in the sale of our scanners.

Right, and now is there any distinction between domestic and international?

Well, for us some of that stuff is a little less visible because I would say about 60% of our sales of scanners go through the OEM distributors of test equipment, NEMO, ASCOM, and Andrew through Alan Telecom which had Grayson. So exactly where the test equipment, where our scanners are going is not visible to us.

Yeah, but my initial question was really what’s happening in the United States, and it seems as though you are seeing that.

Absolutely, particularly when you look at folks like Andrew purchasing our equipment, they are selling their test suites dominantly in the United States.

Great thank Marty.

Thank you very much Ted.

Anton Wahlman, Needham & Co.

Hey there. While we’re on the subject since you brought it up my suggestion is that John you give a lot of numbers detail on your presentation. It’s just impossible to take notes that fast. I think it’s probably at some point to read the transcript of this whole thing or read the prepared remarks so that we don’t make any errors in trying to interpret what you said.

Having said that I think that most of it was clear, but one thing I wanted to ask you was you said taxes for this year $300,000 for the full year. As we look into ’06 things like basically that type of revenue obviously would show some profitability and could you talk a little bit about the status of any NOLs if any and talk a little bit about what any statutory versus cash rates that you might be paying as we go into ’06?

Yeah, well as you go forward we end up in pretty much a loss position for taxes going forward, even though on a cash basis we’ll be positive, and we are already positive. And the reason is because I do get a 15-year amortization deduction for all the goodwill on the books as well as all of the intangible assets. And I do get a tax deduction for the vesting of restricted shares, even though it’s a non-cash expense to me.

So net/net from a tax perspective I end up in a loss position; however, because of me having to reserve all of my deferred tax assets I’ll always end up with pretty much a net tax expense between $300,000 and $500,000. And a lot of that typically relates to the tax timing difference that I have to flush through the provision; it’s a non-cash item related to the deduction that I get for goodwill, net/net having to run the reserve charge through the P&L.

So really from a book perspective I would expect taxes next year to be in the $300,000 to $500,00 range on full GAAP basis for the provision, but maybe $150,00 of that is cash-based because it’s local state income taxes and some jurisdictions and in foreign places and the rest is nothing but a book entry.

Makes sense, and when it comes to your amortization of stock-based compensation I guess for the quarter here, if I’m reading this thing right it’s a little over $1 million.

It’s about $1.2 million and change.

That’s right.

And you’ll see it right there on the proforma.

Exactly I’m looking at it, so a little over $1.2 million or so. How do you see that going forward on a quarterly basis? I mean is this a general level that we should anticipate or -- ?

Well remember you’ve got FAS-123R for all of our stock options kicking in next year. So this year I’m expecting that number to -- you just repeat the third quarter in the fourth quarter for stock-based. I guess you’re in at about $4.1 million for the year for the total number. And I would expect that number to go up about $1 million next year. And most of that ends up being I’ve now got to take the expense for stock options out of my footnotes and have to put it in the face of the P&L. That primarily the difference; I mean if people are modeling what that is, it would probably go up $1 million next year.

Okay, now Marty on the handset situation, clearly today, the day of the Motorola handset Doco-Mo and so forth, it’s if I understand it correctly it’s used for roaming between Wi-Fi and cellular. You talked a little bit about some other applications for handset-based software. I mean, what role will this software have in say a device that doesn’t have the particular Wi-Fi chip in it but rather only sort of a cellular be it 3-G or otherwise, but a cellular only type handset in terms of running for example voiceover IP on a 3-G connection for example, BDVDO, EMTS or any of the other expansions of the GSM link?

Well again, the focus of our client has always been bridging different types of technologies and while we’ll have something that allows -- excuse me for a second. Well we’ll have something that always allows date or voice over a single technology, our focus is really on the converged phone, and what we’re looking at is a world where the types of convergence are going to be varied; for example in addition to Wi-Fi we’re going to have Wi-Max and you’re going to see phones with dual personalities, perhaps triple personalities and the ability to move from a cellular to a void call is what we’re interested in .

Okay, now the other thing is of great interest of course is what you’ve done in the laptop world, of course Sony has I think it’s 2 models now on the market, whatever something 350 and something whatever 600, I forget where your software is on there when you buy these things and they’ve got built-in hedge for that Sony Ericsson part. How do you view the laptop-based market? Is that going to be a significant also growth market for you?

It is; as a matter of fact we refer to that as the dashboard where our software will reside on the laptop and it will be a dashboard for using your coupled phone or your PCMCIA card or some other modem device off of your laptop. And you’re going to need this type of software, and your problems are going to become more complex. You’re going to want to be able to do cellular and Wi-Fi. But we haven’t been able to announce some of the relationships that you’re talking about right now. If you’ve seen the product on these other devices, we’re very pleased about that. But of course we have not made any announcement regarding Sony Ericsson.

Okay, no I just -- that was one of the cards that was in there. But anyway all right well that makes sense. Could you just discuss a little bit about I mean you’ve done a lot of acquisitions over the last 3 or so years. Your appetite or lack thereof going forward; also the reverse, would there be any at some point -- you’ve got different business lines here I mean you being a very dynamic Company I mean at some point would you consider any form of divestiture or -- ?

Well let me get to that, but let me go back because I did a bad job of answering one of your questions Anton. I may have misunderstood it; when you were talking about the role of our client, let’s say a 3-G only phone, not one with dual personality, although we’re focused on this converged phone, it’s very important you will recall that we made an announcement regarding Kyocera for the use of our software in their 3-G phones on the broad topic of IMS applications. And if that’s what you’re after in your question, we do firmly believe that IMS applications, peer-to-peer video, other peer-to-peer messaging service, message presence all of that is going to be an important element to our client. So I just wanted to clear that up.

Now to your question of divestiture we’re clearly not focused on that issue at this time. It is possible, but I’ll tell you one of the barriers is just getting all of our businesses to the appropriate size. And our focus now is to see how we can make our Mobility Solutions Group a $30 million to $50 million revenue company; how we can get our scanner company over $20 million; and how we can have an antenna business, again keeping our focus on broadband wireless because that’s the area we’ll focus on to be well in excess of $100 million. That’s what I’m thinking about right now/

You say growing the Mobility Solutions business is a $30 million to $50 million business?

Well that’s obviously a goal to make it a big business, and one of the things that we’re very interested in is how we find new areas of growth that go beyond the roaming client and then take advantage of the growth that we see in IMS applications.

Okay that sounds good, thank you very much.

David Carson, Whitman Capital.

Marty nice quarter.

Thanks David.

Couple of questions; you were just talking about IMS. I’m kind of curious what your, could you just comment on maybe kind of your roadmap and how you’re going to phase in some of you on your IMS roaming client on your converge device some of these new applications?

Well probably the most important one our roadmap which we’ve discussed at various investor and analyst meeting is going beyond where we are today which is voice voice-centric voice over IT and moving on to peer-to-peer video, which we think is going to be extremely important.

Within the voice arena, there is still quite a bit for us to do. In the voice arena, you have push-to-talk, you have present services and so on. And that’s part of our roadmap. But you can expect us to move from Voit [ph], to move to a broad base of peer-to-peer voice services and then a peer-to-peer video as an area of focus.

Okay and I notice it seems like you had nice improvement on your DSLs but can you talk in general about how you got your cash to grow this quarter?

Yeah, I would say now you’re into John’s territory.

Yeah, at the end of the day what we’ve done is we dropped our DSOs by about 10 days from the 65 day average range into the 55 day average range, and we’ve got a much more focused effort on it. You’ll see inventory it’s been basically -- inventory is flat net of Sigma so we were able to get increased growth there because we’re seeing an increase in turns efficiency in both RFS and APG. Remember with APG with the acquisition even of Andrew we just got to the point now where we can catch our breath and get that stuff integrated into what we consider a standard MRP process. So that’s the inventory story.

And then net/net, I mean if you look and one of the things that helps with the proforma analysis is that it really points out that cash from the P&L when you add that to non-cash expenses is a couple of million bucks a quarter, which gives us the freedom to go and do the investments that we want to get.

I think it’s a pretty nice approach and once again I guided next quarter in the 56 to 58 range. We are talking about putting some more than our typical run rate of fixed asset addition in next quarter the largest one being, I think we’re going to be in the $500,000 plus range, putting a little more money into the Bloomingdale facility to get the air conditioning upgraded. But typically we spend about $400,000 or $500,000 a quarter in regular CapEx and so we’re able to support that.

Thank you, and then on gross margins -- and I was writing just as fast as I could but in your core and [inaudible] group it seemed like there was a nice trend there going up and fourth quarter guidance too. Can you repeat that but also talk how you’re accruing the gross margins and if you strip out the Sigma?

Sure, so let’s go back to without Sigma and I’ll talk a little slower here. Net/net you had gross margins without Sigma was in the inventory disposal was 37.3%. And I have to do a quick math calculation for if you’re looking for the sequential -- just bear with me. In the second quarter, it was 36.1% so you’re sitting on a little over one point, 2 points of improvement. And in March it was a little over 34% -- it was like 34.2% or 34.3%. So basically you’re seeing a 2-point improvement from Q1 to Q2; another 1.5 points without the write-off of the Andrew stuff which we discontinued, and we think -- so that 37.3% our goal is for that in the short run to get that mature in the next couple of quarter into the 38% or 39% range. And we think you’ll see -- I can’t predict exactly; I certainly wouldn’t want to commit -- Steve was sitting here -- to a number but we thing=k we’re going to continue to see sequential improvement like you’ve seen until we get that suites done.

Is that volume or what’s that?

Leveraging overhead.

Steve, do you have any comments about how you’re improving the gross margin?

Yeah just a couple of things; one leveraging the new facility we have, the rationalization of the antenna Andrew product line that was referred to by John as a big piece of that. We’re working very hard on the material cost side and reducing the reduction of SKUs helps us do that. So operationally we’re just getting tighter and tighter, and we’re quit4e confident about getting to the 38, 39 area that John talked about.

Nice job Steve; one last question on the public safety you mentioned that it did well for you this quarter and I think you said you thought it was sort of sustainable. Is that, besides the hurricanes, you always hear about how they have to spend money in this area because the Police Department can’t talk to the Fire Department during these national disasters and how much of that sort of is driving the increase in public safety when you look out into 2006, the need for inter-operability between the first responders?

I think there are several things going on. The general, because of starting with 9/11 and the issue you referred to, inter-operability issues, there’s a lot of work going on in that area. I don’t think we’ve seen the expenditures there yet. They have not hit us that potentially could. However, there’s an awful lot of other public safety upgrades going on as it relates to the need for additional security. So we’re banking on 2006 to be very strong for us in the public safety area. The higher frequencies, the 4.9 gigahertz frequencies are starting to also that’s an area that’s been allocated to public safety. So a tremendous amount of additional business here in the public safety sector.

We should mention here that one of the areas of activity that Steve is involved in in public safety is sort of a combination of public safety and wireless broadband. So for example, we have a project where we’re up-banding Wi-Fi so it can be on a secure frequency for certain public safety applications. Those are extremely high margin, very profitable areas for us to go into.

A lot of light infrastructure being done for the public safety; doing a big project here in Chicago relating to the Police Department so it’s just a lot of activity in this area.

Well thanks and nice quarter again.

Thank you.

Thank you.

Jeffrey Bondalid [ph], Vaughn Investments.

I have a couple of questions, I think they’re both for John. The first one is -- maybe I missed it -- did you say what your projected operating expenses for 2006?

NO we typically don’t’ give guidance at the OpEx level.

Okay, do you have any guidance on projected OpEx savings in 2006?

Well just on general trends I can say that in the first quarter, typically I can talk a little bit about seasonality, that typically you do see a spike from the current level because all of the heavy trade shows are in the first quarter, so there’s probably a $400,000 increase in the run rate of Q3 and Q4 in that quarter. And then also there will be a one-time expense that we will have in the first quarter above the run rate that you saw in Q3 and obviously for Q4 in that we are consolidating our operations in Germantown and moving them all to a new facility and there will be a $300,000 one-time expense to get that move done.

But beyond that, I would say that we are going to continue investing in R&D and sales and marketing and our goal is to leverage our G&A costs at roughly the level or with a slight increase as to where it is today.

And I’m really not going to go into a lot more detail.

Okay and then the second question I had, I noticed that even with the stock buyback that the share count remained roughly the same year-to-year, and I just wondered if you could explain that, and also I think you already answered the stock option expense for 2006.

Well remember we do have people exercising stock options and so net/net that’s pretty much a wash. And investing in restricted shares and that’s probably how the numbers stayed the same.

And then option expense for 2006 you said about --

Probably in the 5 to 5.2 range depending on what the stock price is the day of the grant, but most of that increase over this year is I have to now include stock options and expense.

Right, I’m all set, thanks.

Zade Hammond, Mentor Partners.

Hi guys; I just wanted to kind of get a sense, I mean we were kind of predicting 25% growth, organic growth as I see it in the antenna business, and that’s phenomenal and I’m very excited about that. But are you seeing any increased competition out there from anyone, or are you still feeling that you’re pretty strong compared to anyone?

Steve Deppe talking, I feel from a strength standpoint I feel we’re rating somewhat of a juggernaut here in the antenna business with the critical we have in the new facility, the access we have to some international markets, Sigma acquisition getting us into Europe, etc., so we’re feeling very, very good about the breadth of our product line and the markets we’re serving.

Having said that, yes there is competition. We have a bit of work to do, particularly in the international areas where we’re running into new competition there. But Marty alluded to the fact that our goal is to get to be a $100 million business. By the time we are a $100 million business in the not too distant future we’ll be one of the larger antenna manufacturers and designers in the world, which we’re quite excited about.

Excellent, I mean so you are seeing new players or not really?

Well it really depends what the market is but for example you have well-established players like Andrew Power Wave, Arthess [ph], in the Wi-Fi area; and in public safety you have private companies like PushCraft [ph]; then you have Radio Larson also in that area. And you have players like Laird who bought Centurion, and there are many, many small companies. It’s a highly fragmented market and quite frankly we’re going after a little bit of a consolidation here focusing only on what we believe are high margin, high growth opportunities in primarily the broadband wireless space. And we’re trying to use our very responsive engineering, our engineering environment as an important competitive advantage.

Excellent, good luck next quarter.

Thanks.

Rob Aman, RK Capital Management.

Hi, nice quarter.

Thank you Rob.

Can you talk a little bit about are there any other additional kind of qualifications or inter-operability testing SWT [ph] that still needs to take place among their customers to see that ramp take place on the [inaudible] side?

Are you talking about Sigma?

Yep.

There are a couple of types of testing but we really have made progress in one of the most significant, which is AISG, which is Antenna Inter-operability Standards Group set of requirements for compatibility of our management system with other infrastructure providers. We’ve done inter-operability testing now with 3 of the major vendors. We feel that we’re ahead of our competition in that area, and then there’s the type of field testing that we have to do with each of the infrastructure vendors as we move forward. But we’ve really gone quite a long ways now in the last 90 days in finishing what Sigma had already made a great deal of progress on. And we’re reasonably confident we’re going to see the benefit for that in 2006.

Great, and it sounds like you expect a pretty nice ramp there even in the fourth quarter as the UK and the Irish business ramps up.

We’ll see stronger business in the fourth quarter over the third quarter, there’s no doubt.

Okay, and long-term outlook for gross margins on that business, how does that look?

Well, we have a lot of work going on there. One of the things that we’re looking very hard at is how we do a much better job of increasing the material content with respect to labor content in what we produce out of Ireland. And so we’re looking at ways to bring in more highly integrated modules from lower cost manufacturers so that we can rely on Ireland for their core competency, which is development, final test and assembly and perhaps on others with lower cost manufacturing for the material component.

Okay and last question; can you characterize the difference between booked revenues in the MSG versus what you were able to recognize? I know in the past revenues that you’ve recognized probably understated the actual revenues you’ve booked.

Well we don’t actually practice the metric bookings.

Deferred revenue grew a few hundred thousand sequentially?

right it grew a few hundred thousand sequentially, but at the end of the day the deferred revenue balances aren’t huge.

Yeah okay thank you.

That concludes out question-and-answer session. At this time I’d like to turn the call back over to Marty Singer for any additional or closing remarks.

I have no further remarks. Thank you for all your questions and we’ll look forward to talking to you about our progress at our next quarterly release.

That does conclude today’s conference call. Thank you for your participation. You may now disconnect.