PCTEL Inc (PCTI) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to today’s PCTEL fourth 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, Patty. On behalf of PCTEL, welcome to our earnings release conference call for the fourth quarter. I want to thank you all for attending and for your continued interest in our Company’s progress.

My name is Marty Singer, and I am PCTEL’s Chairman and CEO. With me today are John Schoen, our Chief Financial Officer, and Jack Seller, Director of Marketing. We also have with us today Steve Deppe, who heads up APG, our Antenna Products Group, and Biju Nair, who heads up our Mobility Solutions Group.

As we have done in the past, John Schoen will review our financial performance in some detail and 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 2006. We’ll then open the call to your questions. The Company will provide a transcript of our prepared comments on our website 15 minutes after the call.

With that as background, John will read the 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. Now, I will continue with the financial review.

Our investors will note the Company presents non-GAAP financial information in its earnings releases. The Company believes that presentation of results excluding such non-cash-based expense as stock-based compensation primarily related to restricted share grants and amortization of intangible assets related to the Company’s acquisitions provide meaningful supplemental information to both management and investors that is indicative of the Company’s core operating results and facilitates comparisons across reporting periods. My discussion of results will be based on our non-GAAP financial results.

Let’s start with revenue. Fourth quarter 2005 total revenue was $22.8 million compared to $15.3 million in the fourth quarter of 2004. This represents a 49% increase from the fourth quarter last year. The 2005 fourth quarter number includes wireless product revenue of $21.9 million, up from $14.3 million last year, and licensing revenue of $900,000 compared to $1 million a year ago.

Now I will speak to the trends by segment. Our Antenna Products Group revenue for the fourth quarter was $15.3 million, up $5.5 million from a year ago. The increase year over year is largely attributed to the iVET and PMR products acquired with Sigma in Q3 2005 and having the Andrew acquired product lines for only two months in 2004. The organic year-over-year growth rate for the segment without those acquisitions was 26% for the quarter and 28% for the year. Revenue from the iVET and PMR product lines contributed $2.5 million in the quarter and $4 million in the year. Our sales of iVET and PMR products increased from $1.5 to $2.5 million sequentially.

RF Solutions Group revenue was $4.2 million in the quarter, up 29% from the fourth quarter last year and up 33% for the total year. The segment continues to benefit from the rollout of UMTS networks and the related need for 3G scanners. Marty will provide some additional discussion on this growth.

The Mobility Solutions Group revenue in the fourth quarter was $2.4 million, up 119% from the fourth quarter last year and up 35% on the total year. MSG revenue by quarter was uneven in 2004 due to the timing of initial customization fees and initial block purchases or 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 $900,000 compared to $1 million in the fourth quarter last year. This segment continues to be affected this year by the completion of older licensing agreements.

Now I would like to speak to revenue guidance for the first quarter of 2006 and update our guidance for the year. First quarter revenue is expected to be between $19 and $19.5 million. We expect licensing to be approximately $400,000 of that number. For our wireless product segments taken as a whole, the midpoint of the guidance range represents approximately 30% year-over-year growth, of which approximately 13% is organic and 17% related to the addition of the iVET and PMR product lines during the third quarter 2005.

We would like to update our annual 2006 revenue guidance from the $95 to $105 million range to a range of $93 to $98 million, primarily related to the tightening of guidance for the Antenna Products Group. We are seeing iVET antenna rollouts moving slower than anticipated and a deceleration in growth rate for three of our other APG product lines. Marty will provide additional details on these trends. The updated ranges by segment are $67 to $71 million for APG and $26 million for RFSG and MSG combined, and $1 million for licensing.

Now let’s speak to gross margin. Aggregate gross margin for the fourth quarter was 47.2% compared to 73% for the fourth quarter last year. The fourth quarter last year was favorably impacted by a one-time, non-cash reserve reversal in cost of revenue related to the modem product lines we sold to Conexant in 2003. Without that favorable item, gross margin in the fourth quarter last year would have been 52.1%. 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 28.5% in the fourth quarter, down 10 points from 38.5% in the fourth quarter last year, or about $1.5 million on a $15.3 million revenue base. Approximately 2%, or $300,000, relates to one of the Andrew product lines that was, for a limited period of time, manufactured by Andrew on our behalf. We have not been able to manufacture at the same cost level as yet. Approximately 8%, or $1.2 million, relates to our Dublin factory. Our recently acquired iVET product line is experiencing significant operational variances, as well as labor and overhead absorption variances related to the level of the current activity.

Our guidance for the first quarter is between-- for gross margin-- is between 28% and 28.5%. This reflects the continuation of the variances in the fourth quarter as well as a lower overhead absorption that comes with the seasonality of APG revenue. While we have cost reduction programs in place to address the issues discussed, we are revising our 2006 annual guidance for APG to between 33% and 35% gross margin.

RF Solutions gross margin was 73.7% in the fourth quarter compared to 65% a year ago. There was a heavier mix of software this year. We expect margins going forward to be in the 67% to 72 % range.

Mobility Solutions gross margin was 99% in the fourth quarter this year compared to 95% in the fourth quarter last year. We expect gross margin to remain in the 96% to 99% range going forward.

After taking into account the potential revenue mix for the first quarter, total gross margin for the first quarter is expected to be between 43.5% and 44%. Our view of 2006 gross margin based on the revenue mix previously discussed is between 47% and 48%.

Now let’s turn to operating expenses. Total non-GAAP operating expense was $9 million in the fourth quarter compared to $9.1 million a year ago. R&D and SG&A were flat year over year at $9.5 million. Sigma added approximately $1 million in cash-based OpEx in the quarter year over year, which were offset by lower patent litigation expense and other operational efficiencies. The gain in sales of assets and related royalties was the same year over year. There was a small restructuring charge in the fourth quarter last year related to the closure of an office in California.

We expect non-GAAP OpEx to be in the range of $9.4 to $9.9 million in the first quarter, net of the Conexant royalty. R&D will be up from increased investment in software and RF engineering, and SG&A will be up sequentially as the first quarter contains the bulk of the annual trade show expenses. Additionally, the Company renegotiated its agreement with Conexant in the third quarter last year, which extended the period that royalties would be owed in return for a smaller quarterly cap of $250,000, down from the $500,000 a quarter cap in 2005.

Other income was $0.5 million in the fourth quarter compared to $0.4 million a year ago. Other income is comprised primarily of interest income on our cash. The increase year over year is attributable to the general rise in short term interest rates over the year, partially offset by the lower cash balance after the Andrew and Sigma acquisitions. The Company expects other income to be approximately $0.4 to $0.5 million in the first quarter of 2006.

Non-GAAP net income for the fourth quarter 2005 was $2.2 million, or $0.11 a diluted share, compared to net income of $2.3 million, or $0.11 per diluted share in the fourth quarter of 2004. Fourth quarter results last year include $3.2 million, or $0.16 per share, of non-cash income from a one-time reversal of a reserve related to the modem product line that were sold to Conexant in 2003.

To summarize the differences previously discussed, gross margin, without the modem reserve bring back, is up on higher volume; R&D and SG&A are flat, primarily due to costs acquired with iVET product lines and were largely offset by efficiencies in the existing cost structure that were made during the year; other income is higher from a rise year over year in interest rates; and taxes are slightly lower from a change in the effective tax rate. The net effect of all of these factors is an increase in non-GAAP net income.

GAAP net loss for the fourth quarter this year was $200,000, or $0.01 per share, compared to net income of $1.1 million, or $0.05 per share in the same period last year. While non-GAAP earnings rose in the quarter compared to last year, GAAP earnings declined. The difference between the trends is attributable to an increase in stock-based compensation, primarily related to restricted share grants and amortization of intangible assets related to the Company’s acquisitions of the GPS and mobile antenna products from Andrew in October of last year and the acquisition of the iVET product line in the third quarter this year.

Now let’s turn to the balance sheet. Cash and short-term investments ended the quarter at $59.2 million compared to $58.6 million at the end of the third quarter 2005. The Company anticipates cash will end the quarter in a range of $57 to $59 million.

The Company repurchased 2,000 shares of its common stock in the quarter. As of December 31, 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 would like to turn the call over to Marty for his summary comments.

Thanks, John. As John has already described, we had an outstanding quarter, which punctuated a year of strong revenue growth for PCTEL. For the year, PCTEL increased revenue from $48 to $77 million, a 61% increase. For the quarter, our $22.8 million compares to $15.3 million for the same quarter last year. Our established businesses in antennas, scanning, and connectivity solutions, all performed well. As John has already suggested, our challenges are in two areas - the gross margins and growth rates associated with our established antenna businesses and, secondly, various issues associated with our investment in UMTS antennas and in expanding our European footprint. In my remarks today, I want to address those challenges and ensure that our investors understand our program for harvesting the benefits of our investment in the UMTS antenna market and in making broad progress on the gross margin front. First, however, I’d like to review our market and product progress during the fourth quarter and some of our activities going forward. Finally, I will provide an update on our IP litigation with Agere and Lucent.

So let me talk for a second about market and product progess by product area. In RFSG, we continue to benefit from the growth in wireless broadband applications. Our recently released UMTS and EVDO scanners continue to drive revenue growth in this business area. As an example, our sale of UMTS and EVDO scanners increased 122% from [2005 to 2004]. The Group’s $14.3 million in 2005 revenue represents an increase of 33% over the previous year. The strong sales reflect the demand for products that will help cellular engineers with the transition from second generation to UMTS networks and the co-existence of GSM networks with UMTS networks. Our dual and tri-mode solutions meet the needs of these engineers. As we will discuss later on, the strong performance of the scanner business requires us to revise our 2006 guidance, as 2005 sales exceeded our previous expectations for 2006.

During the fourth quarter, our RF Solutions Group continued to introduce new products that will drive revenue growth and, consistent with our market philosophy, help wireless operators successfully deploy and optimize their broadband networks. For example, our most recent CLARIFY release combines our GSM data collection with simultaneous data collection on UMTS networks. To meet the needs of GSM operators in the U.S. that are rolling out WCDMA networks, we released the SeeGull LX combo GSM/WCDMA Quad Scanner. This scanner supports GSM and WCDMA technologies in both the 850 and 1900 bands. Each of these new products will help operators more quickly identify and resolve RF problems in these multi-technology environments.

In the Mobility Solutions Group, we really began to reap the benefits of their extensive footprint with multiple carriers, infrastructure providers and handset suppliers. We had an unusually strong quarter with respect to product development and product releases in support of our organic growth in this area. Of special note were the IMS and Fixed Mobile Convergence Client software for seamless handoff between Wi-Fi and Cellular networks. We demonstrated this at the 3GSM conference. I know that a few of you attended that conference and saw this new product. Working with other infrastructure vendors, we were able to demonstrate that with a converged Wi-Fi and Cellular phone, using our Voice-enabled, Roaming Client software, a caller could maintain a call while actively moving from one network to another. Our IMS product releases are important to our growth beyond 2006.

We have also included several new voice features for enterprise applications of our client. This new client is interoperable with Lucent, BridgePort, and Nortel infrastructure systems. Our IMS release also works with infrastructure provided by two additional key infrastructure vendors and will be deployed in a trial with a major U.S. cellular operator. We also delivered an upgraded version of our Central Configuration Server that supports the new enterprise features that were released on our IMS and FMC Roaming Client. As mentioned previously, all of these capabilities were demonstrated at the 3GSM show last week. I can report confidently to our investors that our products were well received and that we are on the forefront of fixed mobile convergence and the growing demand for handsets and networks that combine VoIP and cellular.

Hopefully, you saw our recent announcement with Lucent that we made just prior to the 3GSM exhibit. In the past, we were unable to disclose this relationship. It’s an important one. Lucent, like a few-- or similar to a few other infrastructure providers, has developed a server that will mediate the roaming between cellular and unlicensed band networks. Carriers who are promoting converged services must implement these specialized mobility managers in the network. This infrastructure must be complemented by client software for handsets, and this is precisely what we provide. In our commercial relationship with Lucent, we are providing the compatible client software that complements their system. You can anticipate additional announcements as the year progresses as we unveil our relationship with other infrastructure vendors.

The next six months will be equivalent in development productivity and new product releases. Our forthcoming IMS release will include support for intelligent detection of handoff conditions for roaming between Wi-Fi and cellular networks. Just as importantly, we will be releasing a version of the client that supports Cingular’s HSDPA networks. All of these new products are based on our strong foundation in the connectivity and authentication capabilities inherent in our core Roaming Client product. We are seeing greater success with that product line as well. We are now well established at Cingular. If you go into a Cingular store and purchase the data service, the kit you will get includes a wireless data PCMCIA card, typically from Novatel or Sierra, and a CD with software. That software is based on PCTEL’s Roaming Client. We encourage you to use the service. It’s exceptional and was recently reviewed quite favorably in the Wall Street Journal. We have high expectations for the successful rollout of Cingular’s high speed data service throughout the year. We also support the Quad-Mode Option card that Cingular subscribers can use to roam worldwide.

Let me discuss some of our progress in APG. The Antenna Products Group turned in another strong quarter, as John already described, at $15.3 million. We had very strong sales of our public safety products as well as continued strength in our various wireless broadband antenna products. Our analysis suggests that revenue from these products increased approximately 28% year over year. For the second straight quarter, however, we did see a sales decline in two of the product lines that we acquired from Andrew, both the On-Glass antennas - part of our Antenna Specialists product family - and our GPS timing antennas declined sequentially. We have a very good understanding of the decline, and we believe it’s temporary. In the case of the GPS timing antennas, and this was part of the MicroPulse product line, we were contractually obligated to sell exclusively through Andrew. We have now just begun the process of opening up the distribution of these products to our network of distributors and manufacturers representatives. It will take a quarter or so to mobilize this new channel. In the case of the Antenna Specialists On-Glass antennas, it is clear that dealers must consume all of their inventory of existing antennas before they make additional orders as they prepare for a transition to RoHaus compliant antennas. These are the new standards in Europe regarding the elimination of solder and other materials, lead in particular.

We also had little contribution from our previously strong SDARS business. If you will recall, SDARS is the retail satellite demonstration antenna system that contributed heavily to our strong second quarter. For the year, we sold about $3.5 million worth of these products. This was one of the product lines that was included in the Andrew transaction, and we will not pursue this product line in 2006. We made this decision recently. The margins are poor, and the business is unpredictable.

We did experience growth in the sales of our iVET antennas. The increase in iVET sales reflected stronger sales at Vodafone. iVET and PMR shipments increased, as John mentioned, from $1.5 to $2.5 million sequentially. As we move forward, we plan on first and second quarter shipments of the iVET product line that will reflect the benefit of our design wins at O2, Vodafone, and 3.

As I just mentioned, the public safety arena has been surprisingly strong. Katrina, national security, and other issues have motivated a variety of public safety communication projects around the nation. These projects call for emergency response vehicles to be equipped with wireless communication radios, cameras, and other equipment. There is strong momentum to put in place a common system to communicate during larger emergency incidents. These projects will require the type of special purpose antennas that we provide.

As John discussed earlier, we had significant gross margin challenges the second half of 2005. A near doubling in sales, the integration of production from Andrew facilities in Mexico, overlapping manufacturing costs, and a move to a new facility all stressed our system. We have been devoting a great deal of management attention to core process improvements. These include a complete overhaul of our factory floor layout and workflow, the introduction of barcode scanning, and investment in design efforts that will reduce costs. Importantly, we also recently signed a broad frame agreement with a tier one global contract manufacturer, who will evaluate the potential of outsourcing some of our Bloomingdale-produced antennas. We will initiate outsourcing of a margin-challenged product during March, and we anticipate tangible benefits by the third quarter.

Our other integration challenge has been related to our new iVET product line. I’ve mentioned this at previous conferences and at other presentations. Specifically we have been disappointed in the first six months of revenue and gross margin associated with the new product line. When we acquired the iVET product line earlier this year, we characterized the acquisition, very unlike our previous acquisitions, as a technology investment that would permit us to participate in a very large and high growth market. We continue to believe that it was the correct decision to invest in the variable tilt antenna technology and to expose PCTEL fully to the growth in UMTS. As is the case with technology investments, however, we were interested in the key design wins at several key European carriers. We expect those design wins to translate into shipments and to prepare us for strong growth in 2007 and beyond.

As our fourth quarter results indicate, shipments, although up from the third quarter in this product area, have not been as strong as we anticipated. There are several reasons for this shortfall. One of our key customers underwent a change in ownership, and responsibilities and budgets shifted during the transition. Another customer shifted its demand away from single-band to dual-band antennas in a key project. Our dual-band product will not be available until mid-year. Finally, it is clear that we need to establish the cellular infrastructure manufacturers as a key distribution channel into the carriers.

John already outlined the economic impact of the revenue shortfall. Our cash-based pro forma loss investment in this new product line was $1.3 million in the fourth quarter and $2.1 million for the second half of 2005. Our strong operating performance in our other businesses offset those investments, but at the current order flow, we anticipate continued investments of approximately $1 million per quarter as we integrate the iVET product line and the legacy PMR product line completely into APG. While we can tolerate the revenue shortfall, we cannot tolerate this earnings impact.

Over the past two months, we have outlined a plan that should eliminate the need for this level of investment by the end of the third quarter. The major element of this plan is the potential outsourcing of the high running antenna products. To that end, the same tier one global contract manufacturer who is working with our Bloomingdale facility is evaluating the manufacture of our highest volume UMTS antennas. Additionally, we are investigating a few alternatives for the production and distribution of the Digital PMR and Tetra products that we also acquired as part of the acquisition.

I personally visited our three primary customers for our iVET antennas in Europe last month. There is no substitute for direct experience in assessing business challenges. I can confidently report that there is an extremely strong demand for remotely controlled, variable-tilt UMTS antennas. This was made clear as well at the 3GSM show where several vendors were displaying these new products. It is also clear that there is very strong demand for our Streetworks version of this product. Streetworks is a packaged solution that meets the requirements of environments with a very tight zoning or planning restriction. We should also point out that it appears that our solution, which combines both variable tilt and variable azimuth, was unique at the 3GSM show. No other vendor was displaying variable azimuth. We also can report that we have secured two U.S.-based trials for our product. Finally, we have fully staffed our development programs that will result in a stronger portfolio, one that includes dual- and wideband versions of the product.

Jim Giacobazzi, a former Andrew and Motorola executive that we hired a couple quarters ago, is focused on integrating iVET into the Antenna Products Group. He is tasked with improving the financial performance by third quarter 2006. Jeff Miller, who has done an outstanding job as our VP of Global Sales, is now directly involved in the iVET sales efforts. He and Jim have brought on two additional experienced resources to address top line goals and we have shed three resources from the original sales team. The actions that we have outlined in manufacturing, development, and distribution will allow us to achieve our target earnings model by the end of the third quarter.

Let me provide some additional perspective on our guidance change. As mentioned earlier, the elimination of the SDARS product line effectively resets our starting point for 2006. While we did an aggregated $54 million in APG, without the SDARS business, we would have ended the year at just over $50 million. We made the decision to exit this business just recently. In addition, as we mentioned earlier, we have to re-launch our GPS business with our established distribution channel. We are confident that we will grow the $50 million base to $67 to $71 million in 2006. First quarter growth over the previous year has typically been about half our growth rate that we experience in subsequent quarters. Our January data is consistent with this. During the first four weeks, shipments were up approximately 11% year over year without the iVET and PMR product lines. I am sure that you will have more questions about the guidance in our Q&A session.

Let me give you a brief update on our litigation before we go to the Q&A. As most of you know, we are still in litigation with Agere and Lucent. We settled with USRobotics during the fourth quarter, and we are now totally focused on the litigants with the largest soft modem business.

After several delays, we had the second Markman Hearing in January. As we have discussed on earlier calls, the Markman Hearing is the phase of IP litigation where the judge listens to arguments about the definition or meaning of key terms used in the claim construction. This hearing dealt with one of our key soft modem patents, the one that was reaffirmed by the U.S. Patent and Trademark Office. We must now await the judge’s ruling. You might recall that after the last Markman hearing, it took approximately four months to receive the ruling. Once we receive the Markman ruling, the litigation will move into another phase. We will update you as events transpire. We expect that the litigation will continue to cost approximately $2.5 million per year.

In summary, let me make a few observations. We had an extremely strong quarter with respect to revenue growth. We have now met or exceeded guidance 16 out of the 17 quarters since we took over PCTEL. We still have a great deal of work in front of us on gross margin. For the year, revenue and non-GAAP earnings exceeded expectations. We managed costs effectively, as you can see by the non-GAAP OpEx, and we did this while aggressively growing revenue. The results from our investment in the UMTS product line and European distribution, however, were disappointing. We need to strengthen revenue flow and get manufacturing costs under control. You can be assured that we are moving quickly to address these issues, and we are confident of achieving a positive business profile by the third quarter. We have a decent track record of integrating acquisitions into PCTEL, although it sometimes has taken time to work through various issues.

With that, John and I will be glad to take your questions. We also, as I said, have Biju Nair and Steve Deppe with us to help with any detailed questions that you might have.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question today will be from Matt Robison from Ferris, Baker Watts.

John, what was the reason again-- I might have missed it-- for the $700,000 increase in G&A for the fourth quarter?

Approximately $200,000 of it-- Are you talking sequentially?

Yes.

Yes. What we’ve got is our litigation expense was up about $150,000 sequentially. It was up to about $700,000. Then, what we typically this time of year-- what we have is higher costs associated with public company costs tend to hit higher in the fourth quarter. That’s pretty much what the biggest issue was - was our public company costs. Specifically our audit costs were up sequentially. But, anyway, as we said, on a year-over-year basis, they were comparable.

Can you remind us what your net operating loss carry forwards that might be available to you in the future?

Our NOL is approximately down to about $1 million.

Okay. On the MSG for NRE versus license, can you give us a flavor for how that came out for the year and what direction it went for the quarter?

Yes. General guidance is that in any given quarter for the year, it tends to track between 40% and 60%, depending on the quarter. It fell within that range again.

Which is 40%, and which is 60%?

Well, the reason why it’s hard to tell, Matt, is because several of our large contracts-- you’ve got licensing and huge NRE that are combined. At the end of the day, while the stated contract might split it out for accounting purposes, you kind of have to commingle it as we do it. But, it was probably closer to 60% licensing as opposed to NRE this quarter. Ultimately, our goal as this expands is to get it to 80%/20% or greater.

The other point, Matt, that I would make on the year is that in 2004 when you look at the $5-plus million that we had in MSG, $3 million of that was either in soft AP or obligation payments from Conexant or Broadcom. We really only had $2 million in the Roaming Client arena. This year coming in at approximately $7 million in total for Mobility Solutions Group, this year being 2005, we really had substantial improvement in our traction for the Roaming Client itself.

Okay. Yes; that’s been pretty clear. Marty, a question for you. You’re going up against some real big companies relative to your own size in this iVET product line. What gives you conviction that you can compete with companies that have-- are so much larger than you are in the space and scale that to make it work?

Well, there’s a few things. One is we do have some technical advantages, particularly in how we do the variable beam adjustment. I don’t know if you’ve had an opportunity to look at the technology, but we have this internal phase shifter that is actually part of the enclosure as opposed to a motor that fits below the variable-tilt antenna. That is really appealing to operators. It’s something we patented. I think we’re going to be able to take that very far. The second thing is that we’ve perfected the variable azimuth. I know that you weren’t at 3GSM, but we are unique in providing both capabilities. Finally, our Streetworks version of the product, where we package a trisector version of this product within a ray dome - in an environmentally sound package - is very attractive. Lastly, Matt, we have three really strong design wins, and we’re starting to see the rollout now of the product.

Are you--? How far down the road are you in outsourcing this? When will these--? When will you potentially have your partner proving that they can manufacture this product at competitive markets?

In this area, I’m a little hamstrung in answering you directly, and I don’t mean to be evasive. But, let me give you a little context for why I have to be a little bit cautious here, Matt. We are dealing with union employees in Dublin. Under Irish law, those employees have to have an opportunity to present an alternative plan. We have already notified them of this potential, and there’s a certain period of time and a certain process that we have to go through to give them a fair opportunity to come back with a cost effective plan. Until that period is over, which is approximately 35 days or so, I really can’t comment on the specifics of the outsourcing.

Well, we’ll mark our calendars.

Okay. I can tell you that we will make it clear when we’re able to talk in a complete way about this plan.

Okay.

We will go next to Anton Wahlman from Needham & Company.

Hey, a couple of clarifications first. John, what do you say about expenses in Q1? There’s a fixed overhead R&D S&M, G&A-- I could quite hear you correctly there.

Okay. In Q1, net of the Conexant royalty, I expect a range of 9.4 to 9.9. The way you track it you would need to-- You’re going to end up needing to add back the amortization of stock-based compensation.

Okay.

So, what you do is you take--

But, basically, the way you report pro forma, it would be 9.4 [inaudible] 9.9.

Yes. That would exclude the amortization of tangibles. It would exclude the amortization of restricted shares, and it would include the $250,000 benefit that we get from the Conexant royalty.

Got it. On the revenue guidance for antenna products, I heard you say-- For the year, of course, it’s 61 to 71. Did you give any number for Q1 - specifically for that, or no?

No, I did not.

Now, Marty, maybe for you. In terms of the satellite impact, you talked about that a bit on an annualized basis and so forth. As we got to the fourth quarter here, has it just been that--? Did you say what the impact was of the satellite demo type products as we exited the year here in ’05, or did you just give the full-year number? You said the full year was 3.5 or 4.5?

Yes. For the full year, it was 3.433 million, and there was a bubble in the second quarter of about 2.3 million. As we exited the fourth quarter, that business had declined to under 400,000. So, on the basis of what we saw as a trend, and this was really a decision that we just made after seeing the January results, we’re just making a clean break from that product line.

Got it. But, in terms of then the impact on the antenna business for Q1, it doesn’t sound like on a sequential basis that would be much of an impact.

That is absolutely correct. First quarter to first quarter, the impact was in the neighborhood of about 250,000. We had small business last year in ’05 of about 230,000, and this year we’ll have zero. There is that much of an impact; it’s not totally immaterial. It’s not the most important element of our revenue profile. It’s really more a factor when we talk about the entire year, Anton.

Got it. What I’m trying to sniff out here is basically wherein was the sequential decline in revenue reside from in terms of where would most of it come from?

It would come from the second quarter. If you were to take what you’ve got modeled for our segment reporting for 2005, Anton, what you’d do is you would subtract 200,000 from the first quarter of ’05, you would subtract 2.3 million from the second quarter of ’05, you’d subtract 500,000 from the third quarter, and you’d subtract 400,000 from the fourth. That should add up to about 3.4 million.

I got that, but I’m looking into Q1 of ’06 here. You’ve guided to $19 to $19.5 million in revenue.

SR business in that would be very small.

I know, but for whichever reason, SDAR or otherwise, I’m trying to figure out which businesses are clearly-- You had a very strong quarter in RF Solutions, so that might be down. It’s just a matter of how much of an impact is it to the antenna business for whatever reason?

I’m getting a little confused, Anton. Maybe I’m just getting lost in your question. On a year-over-year basis from ’05 to ’06, in aggregate we’re not forecasting a decline. We’re forecasting a decline fourth quarter to first quarter, and that’s largely seasonality.

Okay. That’s what I was getting to. What I was getting to is where does seasonality impact? I could imagine that the software business would not be as impacted by seasonality. For example, Cingular [inaudible] and CPA network has just been unveiled.

Anton, let me make some general comments about seasonality. To the extent that there is a customization fee, as an example, in MSG, that budget money, as opposed to [supplying] licenses to a carrier, so as an example it tends to be lighter in the first quarter of every year because the carriers, frankly, haven’t figured out their budgets until March or April. There is-- That’s what’s driving seasonality of a low first quarter in MSG versus second, third and fourth.

I mean, although, Anton, some of this is impacted by bubbles in certain products and so on, we did go in 2005 from 15 to 18.3 to 21.6 to 22.8 million, sequentially. So, there is an inherent seasonality in our business, and we expect that to be repeated in 2006.

All right. Good enough. Just one more question for you, Marty. If you could just talk very broadly in terms of the opportunity for your software business on the following two dimensions. First of all, data only usage of the product versus voice usage of the product. Obviously the products are a little bit different, but data versus voice, and then sort of laptop versus various classes of handhelds and where you see you making the best progress in ’06? Data versus voice and laptops versus handhelds.

Okay. Well, let me start with data only versus voice. There’s no question that we’re beginning to see a real benefit of our relationship with a major carrier on high speed cellular data. As I said, if you go into a Cingular store and you get a kit, that’s our software. We hope that Cingular will be for us what Verizon is for one of our competitors. We have also disclosed to you that Vodafone is a customer of ours, and they have yet to launch their high speed data service. We expect to see real benefits from that after they launch in the second quarter.

With respect to the laptops, there’s still a very strong business there. One of our big wins was in embedded, embedding the software as an icon on a laptop that is designed to be compatible with a particular carrier. We’ll continue to see strong business in the laptop arena. Now, what we are excited about, as I described at the conference that you sponsored, Anton, is our opportunity on handsets. We’re compatible now-- Biju’s here; how many handsets?

Six or seven different handsets.

And, we’re particularly excited about our opportunity with these converged phones with the Wi-Fi and cellular chipset. I think we have a greater footprint than anybody out there with a VoIP-enabled client. But, I will say generally that IMS type applications are going to be more of a 2007 story than they are in 2006. Just as we saw the strong growth from ’04 to ’05 to ’06 in our base Roaming Client product, we are anticipating the strong growth to be from ’06 to ’07 to ’08 in our IMS product line, based on our Roaming Client.

The trials and the contract are what’s are happening now.

Right. So, this is the year for trials and design wins, which we are doing a pretty good job in accumulating; and then we’ll see the license traction as we move forward in ’07.

Got it. Thank you very much.

We will go next to Ken Moon from Robert Baird.

Good evening. This is Jason Noland on for Ken. John, did you break out Sigma in the fourth quarter?

When you say break it out--

Revenue.

The revenue was $2.5 million.

The answer is yes; $2.5.

And, did you give tax expense guidance for the year ’06?

I would say ’06-- I haven’t given guidance yet. I haven’t given guidance on this call. The previous call last quarter, we had said that somewhere in the $0.5 million to $700,000 range of positive tax expense.

Okay. And, just a clarification on a comment made earlier. The Streetworks line within APG, that doesn’t compete with the larger antenna makers.

Well, it of course competes, but what we believe we have is a niche that some of the larger manufacturers are not attending to.

Fair enough. And then a question on RFS. It seems you’ve got a lot of traction there and excellent margins in Q4. It seems that you have well over a third of a share of the market now, unless the market’s grown. Are there any competitive dynamics changing there with the large multinationals you compete with?

Well, our biggest competitors there are Agilent, [Rhodenschwartz], and [Ritzu] and so on. The advantage that we have is that when we take our scanner and we represent it to someone who’s doing test and measurement equipment - TEMS, NEMO, AsCom, Andrew and so on - we do not represent a competitive threat to them with our own end-user test equipment. Some of the other competitors do. So, we feel that we have an opportunity to be the preferred kernel technology supplier to all of these suppliers or providers of test equipment. That’s a very important dynamic. The other thing that we’ve really focused on, and I think it is the reason that you’ve seen our revenue go from roughly $10.8 to $14.2 in a year and the reason for our modest increase in guidance, is that we are really focusing on the bundle rate. By bundle rate, I mean this - in a lot of test equipment configurations, they will try to do without a scanner. They’ll try to get by with a test mobile. We’re being more effective at convincing some test equipment manufacturers that there are a lot of advantages to our scanner, and we’ve achieved a price point which makes it attractive for them to bundle our scanner with their test equipment suite. We’ll continue to drive that. I should also add that we’re seeing a little bit of an uptick in our CLARIFY sales because we did make an investment in ’04 which impaired EBITDA net year in the development of software that turns CLARIFY more into a complete solution. So, you’ve seen some increase in the software content of our sales out of that group.

Thanks, guys.

And, we have a question from Susan [Calla] from Karris.

Hi. Good afternoon. Boy, that’s a great call and a great quarter. Your strategy is working very well for acquisitions. It really looks like it’s boosting the revenue growth, and you look like you have some good strategic areas. I wonder-- you still have $68 or $69 million on the balance sheet. Could you give us an idea of where you plan to invest next?

One thing that is important to say, Susan, is we’ve got a fair amount of work in front of us for the next six months in ensuring operational effectiveness. So, we’re not being quite as active as we were in the past for looking for acquisitions. But, there are two types of acquisitions that we are interested in, and we’re continuing to examine. But, again, the issues in gross margin and integrating the iVET product line are on our front burner. The areas that we’re interested in are the acquisition of additional antenna products that fit in very neatly with the type of operations that Steve Deppe is managing down in Bloomingdale. We would like if we could to consummate another Andrew type of transaction, where we can bring three or four product lines in without a lot of personnel and use our existing manufacturing infrastructure or our outsourcing infrastructure.

The other area, of course, is that we think we need to bulk up a little bit in the software arena. I probably would place a higher priority on that. We think there’s some great opportunities in IMS to prepare for the growth in 2007 and 2008. We’re looking at some opportunities in that area.

Great. Thank you.

We will take a question from Sid Parakh from Robins Group.

Hey. Good evening, everybody. Just a quick question. Have you given out the revenue guidance for the iVET product line for 2006?

No. We give out the guidance at the segment level.

Okay, so you haven’t broken that out.

Yes. I mean, the ebbs and the flows of all the product lines are mix and match back and forth, and that’s-- we don’t attempt to do it below the segment piece.

Okay, and would you do it for the RFS segment then - RFS and MSG?

We had quoted $26 million, plus or minus $1 million or two either way. The split is roughly 11ish for MSG and 15ish for RFS, plus or minus $1 million.

Okay. Also, can you talk a little bit about the revenue model for the IMS applications? Is it going to be similar to the Roaming Client that you already have out there?

I’m going to let Biju Nair answer that. He’s the one who’s the most intimately involved in that business, Sid.

Sid, there are a couple of different ways the revenue stream for the IMS applications flow. One is as a part of an infrastructure sales solution. So, when a large infrastructure player sells their IMS-based infrastructure solution, our software could make them a part of that standard reference platform. As a result, the sale goes through the infrastructure, and then they may point directly us to the carrier and say you can structure a relationship straight from that. At the end of the day, the revenue flows [through] the carrier. The second opportunity is the various handset manufacturers who need to make sure that the handsets that they are providing for the IMS applications are interoperable with all the different infrastructure providers and works on the carriers’ networks. So, there’s an opportunity to define a direct relationship with the carriers for the core IMS platform and then the IMS applications that are built on top of that. Those are the two different models.

Okay. And, I think, as you point out, it begin after 2006. Right?

Right. 2006 is when the trials are happening, and the deployment is starting, I would say, 2007 time frame.

Okay. And, as far as infrastructure partners, I think you announced Lucent. Have you signed on any others?

We have announced Lucent and also Bridgeport. We have signed on others, but we can’t announce them at time. As I said in my prepared comments, you can anticipate additional announcements as we’re permitted to unveil those. Many of these infrastructure vendors do not want the relationships disclosed until their trials are well underway. You might also be interested, Sid-- You’ve asked about it in the past-- some of our organic activity in antennas. Steve was going to comment on some of the investments we’re making there.

Sid, one of the bigger opportunities we have with regard to taking our business to Europe, when we acquired Sigma we had very little product overlap and very little geographic overlap. We are now prepared to take a lot of our existing products to Europe and the 3GSM show was an example of us pursuing several distributors who will, I think, hit very nicely in taking these products to Europe. That’s an area that’s somewhat-- basically untouched from our traditional products. We’ve got some very interesting product launches coming. We just completed a product that will end up covering not only the PCS band in the U.S., but it will also cover all the European frequencies as well, and it’s a T-1 backup product. We’re trying to think, again, broadly about products that will be very broad banded to cover frequencies around the world. A lot of new stuff - Wi-Fi and omnidirectional antennas - so we’re quite bullish about our product development efforts.

Okay. And it’s fair to assume that all of this is going on as we speak?

Yes. Absolutely.

We haven’t reaped the benefits of the European activity yet, but we are now prepared to take these products to Europe with help from some of our Sigma salespeople and Jeff Miller’s salespeople, and that’s very exciting.

Okay. That’s great. Hey, John, a final question. What should we model for stock option expenses for next year?

I had previously given guidance that it will be approximately $5 million.

$5 million. Okay. All right. Thank you, gentlemen.

We will go next to Doug Whitman from Whitman Capital.

Thank you. A quick question. I just wanted to make sure I understood, John; the litigation expense in the fourth quarter was what?

The litigation expense-- let me grab my notes-- was $700,000 in the quarter.

So, basically, roughly the USRobitics.

Both.

They added also preparation for the-- Remember, Doug; I think we talked about this. We initially were going to have the Markman hearing in December, and the judge’s father passed away.

No; I’m just talking roughly it was almost a wash.

Oh, yes. That’s true.

Can you talk a little bit about--

Wait, Doug. Maybe the increase was a wash, but it was not a wash. The expenses were greater than what we registered for Q4 in the USRobotics settlement.

I think I know the question you’re asking. On the top line, the USRobotics settlement contributed about $450,000, roughly; but the legal expense associated with it was $100,000 to $150,000. So, net/net, it’s about a $300,000 or $350,000 impact. I think that was the question you were asking.

Okay. So, actually, if we look at you on an operating earnings basis or non-GAAP basis, the actual $0.11 is really an accurate number or greater. So, you guys should be pretty congratulated for the quarter. Kind of maybe looking back, you guys have done a lot of acquisitions in the past. What’s been the time frame? I realize this is probably the most difficult one you’ve done yet. But, what’s been the time frame typically to get things operating the way you want them to be?

It’s been about 18 months. If you look at CyberPixie, we really didn’t get traction until 2004, and we bought it in mid 2002. If you look at Andrew, we acquired in October. Although the revenue was good right away, it’s going to take us about 14 to 15 months to sort out the gross margin. If you look at DTI, it was 18 months exactly before we established a distribution channel and refocused the strategy of the Company. I think that-- It’s interesting. In integrating the iVET product line, I think it’s going to be about 15 months. I think we’ll make a lot of progress in 15 months. That is a good question. All these acquisitions have their own challenges. This one has been difficult for a few reasons. But, nonetheless, I think about 15 months or perhaps 18 months is when we’ll have this totally integrated - from the point at which we acquired it.

Well, one final comment which isn’t really a question. As a shareholder, I’d love to see you buy more stock, giving you a positive cash flow and positive earnings looking forward.

You’re consistent on that dimension, Doug, and it’s a sentiment that we have heard and, of course, it’s communicated to our board.

Thanks.

We will go next to Rob [Ahman] from RK Capital Management.

Hi. Just a quick question on Antenna Products Group revenue guidance for next year. If I take the midpoint there and then take that versus the ’05 number, backing out the $3.3 million, it looks like about 35% growth or so. Am I looking at that the right way?

I think that’s right. If you-- Yes; that’s about right.

Okay. Should I be thinking of that as roughly half or maybe a little more than half organic and the rest of that being the acquired revenue contribution?

The way I would look at it, it’s about 20% to 25% organic, and the rest of it is the bolt on from the iVET and PMR product lines.

Okay. Great. So, organic growth still looks like your outlook there is--

I’ll tell you--

Almost as good as what you had this past year, 26% or so.

Yes. The organic growth in the areas like Wi-Fi, Canopy, WiMAX, land mobile radio has been decent. By land mobile radio I mean public safety. If you want to comment, Steve, go right ahead. The challenge is that we’ve had this SDAR that is coming out, and, although these product lines from Andrew are absolutely fantastic, the On-Glass antennas and the GPS, we do have a three- to four-month interruption here as we move this stuff into our own distribution channels. But, we’re very optimistic about the organic growth.

Okay. Can you remind me again what the total revenue contribution from acquired revenues in APG was in ’05?

Yes; it’s a little bit complex to work out because you have to remember that we had about two and a half months of the Andrew product lines in ’04. The way I think of it is this - the MAXRAD legacy products in Wi-Fi, public safety and so on, in ’04 was about $23.5 million. The Andrew products were about $3 million, and they came in at about 26.5 in ’04. If you look at ’05, that MAXRAD was about 30, going from 23.5 to 30. If you run rate the $3 million that we had in Andrew, it was running at about $12 million; and we grew that from roughly that run rate of 12 to about 20. So, the 30 and 20 is about $50 million in that APG core area. So, we had strong growth rates in both. What we’re having to step back from a little, and what we want to fully disclose to you, is that some of that Andrew growth was temporary in nature because of SDARS. And, another aspect that we want you to know about is that we have a bit of an interruption as we shift into a different distribution channel. I want to make this point though. One of the reasons that we initially acquired MAXRAD back in January of ’04 is that Steve had done such an outstanding job of building a strong distribution network of distributors and manufacturers reps. I’m really confident that we’re going to be able to do something meaningful with the GPS antennas in that network that he’s established.

Okay. If I’m looking at this correctly, you’ve taken your guidance up for RFS and Mobility Solutions Group versus the last call somewhat, and that’s the high margin business.

Right. So, that’s gone up marginally, and then we’ve tightened and taken our guidance down to the very low end of [inaudible]. When I was out at the Needham conference, we were talking about 70 to 80, and now we’re talking about 67 to 71 for APG, inclusive of the iVET product line.

And, last question. If I look at core APG, backing out the SWT, did the gross margin there deteriorate significantly as well, or was almost all that delta and SWT?

If you look at the core MAXRAD product line, that’s remained pretty constant - about 39% to 40%. Steve and his team have done a really good job on that. What’s been disappointing is we have never-- We have not yet cracked the code on some of the Andrew products. An example would be in one particular produce line, the On-Glass antennas. We just have a outrageous labor content to the total cost of goods. We’re redesigning that. That’s one of the first products that’s going to be outsourced. We will make a lot of progress on that by the third quarter. And, that represents about a 2% to 3% hit on the overall margin.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. We will have a follow up from Matt Robison from Ferris, Baker Watts.

Yes. Just, can you give head counts and then maybe much head count is in Europe?

Head count in Europe-- by that you are referring to the acquisition, Matt?

Yes.

Yes. I think when we acquired the company we were at about 107 with contractors. We’re down into the low 80s at this point.

And the total for the whole Company?

The total for the whole Company is right about 400, with contractors.

And we have a follow up from Anton Wahlman from Needham & Company.

Hey, John, if you could clarify the tax situation-- Did I hear you correct in the answer to a previous question where you said that taxes would be about $600,000 a quarter?

For the year.

For the year.

Effectively what you do is on a GAAP basis, I’m losing money. However, I get real close when I convert to taxable income because, at the end of the day, I don’t take all the intangible amortization as an expense. So, net/net-- Remember; I reserve all of my deferred tax assets because of my loss position. So, at the end of the day, I’m kind of a cash-basis taxpayer of about, like I said, somewhere between $400,000 to $700,000 in taxes next year throughout the year.

Okay. Let’s call it $150,000 a quarter then. Looking hypothetically into ’07 or whatever, at some point this is going to be a real tax rate; right? That’s going to be a percentage of revenue and what have you.

Right.

Would you expect that if we go into an ’07 situation, we’re paying the full 40% or something like that?

Yes. I would say going into ’07 and beyond, the effective tax rate would be probably in the mid 30s. The issue that I still get back to is, even in ’07-- I have to go for two straight years before I can start utilizing my deferred tax assets. So, net/net, I would model it at maybe around 35%.

Okay, so 35% as we look into the longer term.

The longer term.

All right. Well, that’s all I needed to know. Thank you.

And, we have a question from Gene Weber from Weber Capital Management.

Hi, Marty. Hi, John. Just to clarify a couple things. It looks like, if my notes are right here, that your cash balance at the end of the third quarter was $58.6; at the end of the fourth quarter, $59.2. And you also bought back 200,000 shares during the quarter?

No. We only bought back 2,000 shares.

2,000.

It was an immaterial number in the quarter.

Okay. And what was the total amount that you said you bought back in the program? I missed that.

2.1 out of 2.5 authorized.

2.1 out of 2.5. Okay. And, then, the second question is unrelated. In the Antenna Products Group, I believe when you moved facilities you took on a lot of additional capacity. How full are you in that new plant? What percent, roughly, of the capacity are you utilizing?

I’d say 60% or 65% on a one-shift basis.

Okay.

We have quite a bit more capacity. The other thing that goes with that, Gene, would be the fact that we-- As Marty alluded to, we’re continuing to look for additional outsource opportunities bulked with our own Chinese contract manufacturing partners and the new contract that Marty alluded to. So, we will create additional capacity as we go forward as well.

Okay. My last question relates to the sales activity with Cingular. How far behind are they in the market versus Verizon? I guess they’re-- Verizon’s been out about a year or so.

Gene, it would be dangerous for me to comment on the market position of perhaps our most important customer in that way. I will say this.

Well, answer-- You know what I’m trying to get at. Answer as best you can.

I think the issue is this. Verizon with EVDO is very, very well established. Their markets have been fully developed. In the case of Cingular, I think what they’ve said publicly is there’s about 16 markets that they want to fully develop, and the last information I saw was that they fully developed about 15 to 20 of them with high speed HSDPA. So, our view, Gene, is that we have an opportunity. If our revenue is X with Cingular at what we think is about a quarter of their potential build-out, we think that by next year we have a potential of being 4X in that account.

Okay. That’s kind of what I was getting at.

Yes. I knew that was the general direction. I really think that Cingular is making great progress in this area.

Okay. Thanks, guys.

And, we have a question from [Mahu Kidali] from Fertilemind Capital.

Hi, guys. I was wondering if you could comment on how you [sell] and recognize revenue with [inaudible] like Cingular and Vodafone.

I’m going to let our CFO respond to that because revenue recognition is tricky. But, John, why don’t you take a stab at that?

Yes. There’s a couple of different models that we use under software accounting. Some of our customers are under straight subscription, where it’s a certain amount or unlimited usage for a fixed fee per month or quarter. Others I am able to recognize because I’ve got comparables between customers, and they order licenses. Then, others, even though they’re explicit, and that’s why when Matt has asked this question, I was a little hesitant to try and give you an explicit split between licensing and NRE, is that under software rules, if I, especially in our newer areas, where I kind of like VoIP and all of the things that we’re doing with NTT DoCoMo on their handsets-- because I don’t have comparables, I tend to have to treat those like they’re a subscription. That’s one of the reasons why you’re seeing-- There’s two things that are contributing on the revenue recognition to being more smooth in ’05 than ’04 is that combined with more stable buying patterns from our customers.

Okay. So, you don’t have a volume--

We have a large volume of deferred revenue for MSG, as an example.

All right. Okay. Thank you.

Thank you. I think that that is it.

Yes. That concludes our question and answer session. I’d like to turn the call back over to Marty Singer for closing remarks.

I just want to thank all of you for your continued interest in the Company and for your questions. We look forward to talking with you further as events progress. Thank you very much.

A replay of today’s conference will be made available beginning at 8:15 p.m. CST running through March 9, 2006 at midnight. You may access the replay by dialing 719.457.0820 or 888.203.1112 and entering the pass code 7570147. This does conclude today’s conference. Thank you for your participation. You may disconnect at this time.