PCTEL Inc (PCTI) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to today's PCTEL, Inc., First Quarter 2006 Earnings Conference Call. [Operator Instructions]

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

Thank you, Keith. On behalf of PCTEL, I'd like to welcome you to our earnings release conference call for the first quarter. I want to thank all of you for attending and for your 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.

As we have done in the past, John 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 will then open the call to your questions. The Company will provide a transcript of our prepared comments on our website fifteen 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, realize product and manufacturing efficiencies and reductions in cost as a result of the discontinuance of manufacturing in Ireland, 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 that the Company now presents non-GAAP financial information in its earnings releases. The Company believes that presentation of results, excluding non-cash based expense, including stock option expense and other stock-based compensation, as well as amortization of intangible assets related to the Company's acquisitions, provide meaningful supplemental information to both management and investors.

The non-GAAP financial analysis reflects 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 turn to revenue. First quarter 2006 total revenue was $18.6 million compared to $15.0 million in the first quarter of 2005. This represents a 24 % increase from the first quarter last year. Approximately 12% of the growth is organic and 12% came from the recently acquired iVET and PMR antenna product lines. The 2006 first quarter revenue includes wireless product revenue of $18.2 million, up from $14.5 million last year, and licensing revenue of $0.4 million compared to $0.5 a year ago. Now, I will speak to the trends by segment.

Our Antenna Products Group revenue for the first quarter was $12.4 million, up 20% from a year ago. Approximately 17% of the increase reflects iVET and PMR revenue acquired in 2005. We had growth of 3%t in our established antenna product lines. The organic growth comparison was adversely impacted by a continued softness in some of our mobile antenna product lines.

RF Solutions Group revenue was $3.7 million in the quarter, up 20 % from the first quarter last year. The segment continues to benefit from the rollout of UMTS networks and the related need for 3G scanners.

We believe that this group also benefits when carriers slow down capital investments and must achieve greater capacity with their existing infrastructure. Our scanning products enable cellular network engineers to optimize the performance of their current networks.

The Mobility Solutions Group revenue in the first quarter was $2.1 million, up 89% from the first quarter last year. The Company saw an increase in revenue in both its established wireless data products as well as its IMS revenue.

Licensing segment revenue was $0.4 million compared to $0.5 million in the first quarter last year. This segment continues to be affected this year by completion of older licensing agreements and the global decline in analog modem sales and modem prices.

Now, I would like to speak to revenue guidance for the second quarter of 2006 and update our guidance for the year. Second quarter revenue is expected to be between $19 to $20 million. We expect licensing to be approximately $400,000 [of that].

With respect to annual guidance we are refining our anticipated range. We are lowering the range to $86 to $92 million from $93 to $98 million. This takes into account the softness that we have seen in both our mobile antennas and the forecasting challenges that we have had with the iVET product line. We anticipate revenues by segment as follows: APG - $59 to $64 million; MSG and RFS combined to $26 million; and licensing at $1 to $2 million. Again, our greatest revenue risk is associated with antennas. However, from a net income perspective, this revenue risk is offset somewhat by our revised gross margin forecast that we will discuss next.

Now, let's turn to gross margin. Aggregate pro-forma gross margin for the first quarter was 47.4% compared to 49.5% for the first quarter last year. I will speak to each of the segments individually.

Antenna products gross margin was 30% in the first quarter, down 4.4 points from 34.4% in the first quarter last year, or about a $0.5 million on a $12.4 million revenue base. As we reported in our recently filed 8-K, we will be discontinuing our manufacturing operations in the Dublin factory by midyear. Marty will comment further on this. We anticipate that when implemented, our outsourced iVET manufacturing approach will yield gross profit margins that are comparable with our other antenna product lines.

Our guidance for Antenna Products Group gross margin percentage in the second quarter is in the low thirties. This reflects the continuation of the variances in the first quarter related to our Dublin factory, as well as continued improvement in our other antenna product lines. 2006 annual guidance for APG is in the low to mid-thirties.

RF Solutions gross margin was 70% in the first quarter compared to 75% a year ago. There was a heavier mix of software last year. We expect margins going forward to be about the same as they were in the first quarter.

Mobility Solutions gross margin was 99% in the first quarter this year compared to 96% in the first quarter last year. We expect gross margins to remain in the upper 90% range going forward.

After taking into account the potential revenue mix for the second quarter, total gross margin for the second quarter is expected to be between 47 and 49%. Our view of 2006 annual gross margin based on the revenue mix range previously discussed is between 48 and 50%.

Now, let's turn to our operating expenses. Total non-GAAP operating expense was $9.4 million in the first quarter compared to $8.6 million a year ago. R&D and SG&A were flat year over year at $9.1 million. Sigma added approximately $1 million in OpEx in the quarter year over year, which was offset by lower patent litigation expense and other operating efficiencies. The gain in sales of assets and related royalties was $250,000 compared to $0.5 million the same quarter year over year. The Company restructured its royalty agreement with Conexant last year, which yields lower quarterly caps in return for a larger long-term revenue stream.

There was a $0.5 million dollar restructuring charge that relates to the statutory severance owed employees in Dublin whose positions are being made redundant. This expense is included in both our GAAP and non-GAAP income as reported.

With respect to the second quarter, non-GAAP, R&D and SG&A are expected to be between $9.4 and $9.6 million. This represents a sequential increase from $9.1 million related to investments in R&D and IP litigation. The Conexant royalty is expected to be unchanged from the first quarter at $250,000. As stated in our 8K filing related to the closing of manufacturing operations in Dublin, the Company expects additional restructuring charges of between $1.2 and $1.4 million later in the year related to additional severance and the impairment of fixed assets.

Now, let's turn to other income. Other income was $0.6 million in the first quarter compared to $0.5 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 Sigma acquisition. The Company expects other income to be approximately $0.6 million in the second quarter of 2006.

Now, let's turn to taxes. Income tax for the expense was close to zero versus a $200,000 expense in the first quarter last year, but difference is attributed to changes in effective tax rates and the timing of income in the year by legal entity. The Company anticipates that it will incur income tax expense ranging between $1 million and $1.4 million for 2006, most of which is non cash based. The annual expense is primarily driven by the Company's $3 million NOL carry forward being comprised of deductions for disqualifying incentive stock option transactions. The tax benefit for such deductions are charged to additional paid in capital rather than a benefit to the tax provision, even though the Company receives a cash tax benefit to its taxes payable.

With respect to earnings, non-GAAP net income for the first quarter 2006 was breakeven, compared to a net loss of $800,000, or $0.04 a share in the first quarter of 2005.

To summarize the differences previously discussed, gross margin is up on higher volume and a heavier mix of MSG and RFS products in total revenue; R&D and SG&A are flat, primarily due to costs acquired with iVET product lines were largely offset by efficiencies in the existing cost structure that were made since Q1 last year; the Conexant royalty is lower due to a royalty agreement restructuring; other income is higher from a rise in year over year interest rates; and taxes are lower due to a change in the effective tax rate. The net effect of all of those factors is an increase in non-GAAP net income.

With regards to the balance sheet, cash and short-term investments ended the quarter at $58.8 million compared to $59.2 million at the end of the fourth quarter 2005. The Company anticipates cash will end the second quarter in the range of $57 to $59 million.

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

Thanks, John. Over the past few months, we have discussed the operational issues in front of us. Our 2004 to 2005 expansion from $48 to $78 million in revenue and our growth in wireless revenue from less than $1 million per quarter to $22 million per quarter, stretched our operational resources.

We commented throughout the past two quarters that PCTEL would focus internally and improve the effectiveness of the organization. The results from this past quarter suggest that we are making progress in that regard.

Without restating John's excellent summary of our financial performance, let me make a few points on our results and offer a bit more detail in a few selected areas. We fell a bit short on our revenue target for the quarter, however, if we exclude the restructuring charge from our non-GAAP earnings, we generated $500,000 of non-GAAP earnings for the quarter.

We anticipated slower antenna sales in our core APG operation and our newly acquired iVET business. Because of that we took preempted action, contained costs, improved gross margins, and aggressively grew our higher margin businesses in MSG and RFSG.

The results reflect not only a sharper focus on operational effectiveness but also the advantages of diversification as we attempt to benefit from the growth in wireless broadband solutions. Our stockholders might pause to consider our performance in the context of the recent announcements from other industry players on the decline in antenna infrastructure sales.

While these trends impact one aspect of our business, infrastructure antennas, our diversified approach to wireless broadband still permits us to benefit from other areas of growth. For example, the same customer that might slow down their purchases of antennas, might still use our scanning receivers to optimize their network performance without incremental capital investments. The same customer slowing their infrastructure build-out might buy additional software licenses to increase the ARPUs on their high-speed data networks. We believe that this happened in the past quarter.

Let me make one other operational comment that will impact our earnings as we move forward. We continue to lose over $1 million per quarter related to our Dublin operation. As we announced just two weeks ago, we have reached agreement with the union on our plan to shut down the manufacturing facility there, and we have signed an agreement to move production of certain antennas to Elcoteq.

We are confident that we will eliminate these quarterly losses by the end of the third quarter. As we move into 2007, we anticipate two favorable changes to our baseline earnings. One, we will eliminate Dublin-related losses and, two, with the second Markman Ruling behind us, we are in a position to substantially reduce our patent litigation costs sometime next year. These improvements will bring us closer to our goal of becoming an earnings growth Company. This will complement our history of strong revenue growth.

Before I turn to specific product and market accomplishments over the past quarter, though, I want to make a few remarks regarding investment in the future. Over the past four years, PCTEL has made five acquisitions. We also funded organic growth in all of our product areas and in our sales capabilities. While we have paused to catch our breath this year and to work through operational issues, we want to make it clear to our stockholders that we intend to move forward aggressively with investments that will sustain long-term growth.

There are three areas that we are currently exploring, continued investments in IMS and other device-related software applications, two, additional investments in WiMax, and, three, expansion of our regional sales and support capabilities.

Now, let me provide you with a few highlights over the past quarter. We had several exciting marketing and sales events in the first quarter. Our presence at the 3GSM Conference in Barcelona was well received and resulted in a showcase opportunity for PCTEL on MSNBC.

We discussed our software solutions for fixed mobile convergence including seamless roaming from cellular to wireless LAN networks. Our iVET demonstration at 3GSM, and recently at CTIA, also generated a lot of interest.

In parallel we re-launched the Antenna Products Group with our key distributors and manufacturing representatives. Many of our important distributors had not been to our new facility and were unfamiliar with our expanded capabilities and product line.

With respect to sales, we had seven noteworthy events. In the Antenna Products Group, we won the T-Mobile Hungary Tetra project. We were awarded the M/A COM mobile antenna competition. This was an auction style bid process, and we achieved an important design win with Motorola for GPS antennas used for vehicular tracking.

In our Mobility Solutions Group, we signed a contract with AT&T for our wireless WAN SDK and with TDC, that's Telecom Denmark, for multi-mode Roaming Client applications.

We also signed three IMS licensing and trial contracts, including one that we announced with Lucent, and also in MSG we renewed our NTT DoCoMo contract for 3G connectivity software, and handset software for FOMA and Wi-Fi.

And, finally, in our RF Solutions Group, as significantly, we sold our first CLARIFY system to Cingular.

We also had several important product developments during the quarter. These included, in APG, the release of three new products, the dual band, dual input WiMax and Wi-Fi antenna that will be deployed in the rapidly growing metropolitan wireless networks.

Secondly, a new GPS transit antenna for tracking public transportation vehicles and route optimization, and third, in APG, a versatile low profile mobile antenna that requires no ground plane and can be mounted on any surface. This is being used for data relay applications from construction and other vehicles.

In MSG, we had three major software releases. These included a VoIP CDMA handoff capabilities for our IMS release, an improved Motorola M1000 handset release for DoCoMo, and third, support for Cingular HSDPA technology in our core Roaming Client product.

And, in RFSG, we also had three major product releases. To fully benefit from network transition opportunities, by that I mean from 2.5G to 3G, we released regional versions of our SeeGull scanning product. We introduced enhanced WCDMA versions of the product for Europe and for Japan, and we introduced a U.S. version of our GSM/WCMA combined scanner, and finally, we just introduced a much stronger version of our WCDMA CLARIFY product.

These nine development programs reflect our commitment to organic growth and will result in platforms that will generate both near and long-term revenue opportunities.

I would like to cover two additional issues: our plan for our Dublin operations and our progress on the litigation. As we already mentioned, we advised stockholders that we needed to change the economics of our iVET operation. Over the past 60 days we made a great deal of progress. We signed two agreements with Elcoteq. Elcoteq is a top tier contract manufacturer with operations throughout Eastern Europe.

In parallel, we reached agreement with the union on severance and pension terms. As a result of these agreements, Elcoteq will begin to manufacture the iVET antennas next month, that's May, and we will move all manufacturing out of the Dublin facility by the end of July. At this point in time, the transition is going smoothly. We will experience the full benefit of these changes in the fourth quarter.

Let me quickly comment on the litigation. We announced that we received the Markman Ruling on the fourth and final patent in our litigation with Agere and Lucent. You may recall that the first three patents that pertained to country-code dialing and power-saving, were covered by an earlier Markman Ruling. With this important milestone behind us, the parties are moving forward to the next stage in the litigation process. This stage includes mediation.

We will update you on our progress as events unfold. We are very excited about the progress that we are making at PCTEL, the growth of our high margin businesses, the plan for reducing manufacturing and other operational costs in Ireland, and our broad ability to benefit from the growth in wireless broadband.

With that, that's a conclusion of our prepared comments and we'll be glad to answer any questions that you may have for us. We've set aside 45 minutes. Keith.

[Operator Instructions] Sid Parakh with The Robins Group.

Good evening, everybody. Can you talk a little bit more about the Mobility Solutions because it sounds like revenue has declined sequentially and I was trying to understand if that was just the lumpy nature of buying behavior or was it something else?

Yes, what that has to do with, Sid, is in the second half of last year there were significant VoIP and the handset trials going on in some of the major carriers that had a very positive impact on the second half revenue. Yes, and the business is lumpy, so I think we're finally getting to a stage, though, where year over year comparisons are going to start to be meaningful.

Okay. Now, also, you revised your guidance downward, and it sounds like Antenna Products Group has a lot to do with that. Are you still seeing the trend, say, that you find Q1 exists so far into Q2 or are you seeing anything change there?

Well, the biggest part of that softness is related to Sigma. When we started the year we thought that iVET was going to contribute roughly $20 million in revenue, and now we're focusing on results that are in the $10 to $11 million range, and there is some softness in our core antenna group, but we believe that that will begin to rebound.

You've seen announcements from other people about antenna sales and I think there could've been. Because of our delivery issues last year, when we started delivering on schedule some bulk purchases by some of our major distributors, and that has softened purchases in the first quarter. We think we'll be reasonably strong, though, in antennas for the rest of the year, though like I say, the majority of the issue has to do with Dublin.

Okay. Also, now, recently you've moved some of the antenna manufacturing to company, I mean, you're basically outsourcing some of the antenna manufacturing. Can you give us a sense of how much of your total antenna production is outsourced and how much is in house, and what, say, the target range is?

Well, what we're announcing here is not the outsourcing of our core manufacturing for antennas but the manufacturing related to Dublin. So, if we look at this year, all of the iVET product line is going to go to Elcoteq, and then we're going to make a decision on the PMR that comes out of Dublin being in either Elcoteq or out of Bloomingdale.

We have always outsourced subassemblies for our core antenna product line. In fact, it's a goal of the Company to reduce the number of subassemblies every single quarter, but in the case of Antenna Specialist, which is a product line that we picked up from Andrew, we are working to see if we can outsource a substantial portion of that product line

Okay --

But that's a product line that we acquired from somebody else that was, actually, already outsourced in Mexico.

Okay. John, can you give us a sense of the timeline for the recognition of restructuring charges related to Sigma?

Well, at the end of the day, I would say of the $1.2 to $1.4 million that's going to come, assume that it's going to be ratably taken over, say, April through July and then, maybe, there's $200,000 left for the fourth quarter, this is just a ballpark. Because all the severance has to follow the future service period of the employees. Now and then in the fourth quarter what you'll end up with is any fixed asset write-offs once we send them over to Elcoteq [inaudible] and we take them then.

Okay. And then just for my understanding, most of the benefits of this restructuring with be evident on the cost of goods line or will you see some of the OpEx line, too?

It will be mostly in the costs of goods sold you'll see by the time we get to the fourth quarter they'll be some relief in G&A.

Okay. And finally, how much did you spend on litigation this quarter?

About $200,000.

And, for the next quarter?

In the forecast that I gave, it's in roughly the $300,000 to $400,000 range.

Okay. Alright, that's about it. Thanks, John.

Doug Whitman with Whitman Capital.

John, if you could talk a little about your receivables, historically, have been very low and you had a little bit of a rise this last quarter, as a housekeeping question, and kind of what the expectation is going forward.

Yes. What happened to us, Doug, is in the first quarter where I would have, normally expected a lower seasonable volume to see lower AR, and plus, also, lower inventory numbers. In other words, a shrinking of working capital that specifically generates cash, what happened with AR was we had substantially more of our revenue in the quarter was in the third month as a percentage than what it was in the fourth quarter. That had to do with we just had a really slow start to the Antenna Group which then picked up by March. So, I'm still sitting here on lower revenue sequentially, but the same receivable balances, but everything's current. So, that's just a phenomenon of how it rolled out.

On the inventory, I would of typically, historically, we would've expected it to have contracted but, unfortunately, the bookings rates dropped faster than we could turn off the supply chain purchasing in our antennas, and then we expect to get to more to more normalized numbers for both of those asset basis in the second quarter.

Okay. And, Marty, could you comment a little -- you talked about focus on profitability. In the past, you talked about focus on cleaning up this tough thing that you've been dealing with over in Ireland, and you've also thrown out today additional possibility of acquisition. Should we assume, then, that an acquisition in the make will likely be accretive and come [aside], and so on?

I think what I threw out was the possibility of additional investments. They may not be acquisitions, Doug, but I do want to be aggressive, particularly, in growing our software business. We have a fair number of opportunities and in order to do that we have to make sure that Biju Nair has adequate staff.

Also, every time we've made an investment in expanding our sales capabilities, whether it's been in Europe, Asia, or Kala, and the Caribbean, and Latin America, we've gotten a benefit from that within about 12 months, and I want to continue being aggressive in those areas.

We are looking to add to our WiMax product line. I think you cannot assume that that would be accretive. In other words, we want to expand our portfolio of what we can offer and there's some particular areas of interest to us. It is important to us, Doug, as you mentioned, to maintain our focus on improving efficiency. We're doing that now and of enhancing profitability, and you can assume that we're not going to do anything in the acquisition front that would derail that.

Okay. And, John, you may have given a number, I may have missed it, what was the litigation expense?

It's about $200,000, Doug.

Doug, it was really low this past quarter. You may remember that we had very high expenses in December, I think there were seven or eight, $100,000 because we anticipated doing the Markman Hearing in December and because of scheduling issues with the judge, that got pushed off to the first quarter.

All of our preparation was already completed. Essentially, we only had a week of heavy work right in front of that rescheduled hearing, and then after that hearing, we were waiting for the ruling and, so not much happened in the way of litigation expenses in the first quarter.

Okay. And then a final question, going back to the earlier question about the antenna business and Powerwave. Andrew of Custer had given a lower outlook and so on. Is there any reason to expect that your business would turn up at a different time than they would, seeing now you're on the same characteristics of the market problems, right now, affecting you?

Yes. I think Powerwave and Andrew announcements, that you just mentioned, have to do with cellular infrastructure antennas, large base station antennas and to some extent, it might explain some of the slowness that we've had in iVET, our Dublin acquisition, but that's a relatively small component of our overall portfolio.

In our traditional areas like Land Mobile Radio antennas, Wi-Fi antennas, and WiMax antennas, I believe that we will turn up more rapidly than those who are waiting for infrastructure purchases, because other factors drive them and other factors slow them down. I think that WiMax antennas have run into a temporary slow-down because people are waiting for 80216E, the standard to be released and, so some people are on the sidelines, and that's likely to get resolved pretty quickly.

In the case of Land Mobile Radio, I think that it's totally seasonal and there was a lot of [diversity] purchase activity at the end of last year because of all of the natural catastrophes, and some of the rebuilding of those networks, and I believe that after some of that inventory is consumed, we'll see our shipments returned to normal levels, and there's nothing structural in that business that's changed. So, I think we'll be in good shape there.

The other issue that I think we mentioned at the last earnings release, there has been a barrier for the types of antennas that we're selling at the Enterprise markets and distributors is RoHS compliance, these standards of getting rid of all lead based solder, and some of the distributors have said flat out that they've got to empty out their inventory before restocking, and I think all of that's going to be over by the end of May because June is the date that they've got to turnover.

So, there are different issues for us than the kind of structural issues in cellular infrastructure.

Okay. Thank you.

Thank you.

Anton Wahlman from ThinkEquity.

Question on the MSG Group, could you discuss a little bit -- you had some announcements last year about the VoIP capabilities and then, of course, the following on with that, surrounding this year's 3GSM Conference, you had a Lucent announcement on IMS because they are closely related to the VoIP capabilities and building upon them. Can you just go in it a little bit deeper as to the timing? When do you think somebody is, actually, going to be using that type of functionality-- built on top of your Connection Management?

Right. Well, you are seeing it, actually, being used by NTT DoCoMo, but that's somewhat old news. Right now, we are primarily a period of trials, and all the major infrastructure players are working with carriers to have their specialized servers, that enable the seamless mobility between cellular and Wi-Fi work with clients like ours.

I feel pretty good about our business here because of the feedback we're getting is that infrastructure providers are being told by carriers that if they want to participate in trials they need to be compatible with our VoIP enabled client.

I don't think you're going to see any meaningful commercial service in the VoIP enabled Roaming Client to 2007. I think you'll see continued trials and beta tests throughout this year. Some of the beta tests might have some reasonable subscription level, but I think 2007 is going to be the year for meaningful deployment of FMC service with VoIP.

And, looking at the competitive landscape where you're a part of the IMS food chain as it were. You look at a food chain map on this and it looks like you're designing a chip or something. It's a bazillion little pieces, of course, and where do you see that in your corner of this market that you're facing the most direct competition for this particular feature in the software?

Who are the other software providers here?

Yes, for the CP. Yes, for the handsets.

Well, in this space you have application vendors like ourselves providing a complete application. You have other companies who are participating at even more of a molecular level, TapRoot, Ecrio, CLARITY, all those are private companies.

Our traditional carriers such as Smith Micro, have not been as active on the IMS front. As you know, we've seen them more active in areas like entertainment, compression software, other applications there. I think we're out in front of this one and that we have a reasonable opportunity. We have a dominate positioning, Anton.

Yes. And, now, just in terms of -- no specific carrier in the world, by any means, but what are some of the areas in terms of building on your connection manager that you see as priorities that your customers are saying, 'Look, we really have got to have this.'

Obviously, just connecting in the very different type of networks, but you're, pretty much, already there and everybody knows that you're going to be working with every type of network that's out there being as WiMax, obviously, Wi-Fi, [inaudible], 3G, what have you, but just different stuff that's going to be sitting, whether in a [inaudible] or some other handheld that people want you to handle, that the carrier wants the brand and doesn't want the Nokias or the Lucents or the whatnots of this world. They really want you to focus on these things.

Yes. Well, I can tell you that we're on a multiple handsets now, and the carriers are directing handset manufacturers to work with our IMS client, and I'm very confident of our position in that marketplace.

The way it turns out with our application, we end up working with every major infrastructure provider that wants to have a server embedded into a wireless or fixed network that does this handoff. We've announced a couple of those relationships, but we have many more. Likewise, with the handsets and you can assume that wherever we're active with our Connection Manager, we're also very active with IMS.

Yes, it seems to me that from the handsets to the various feature servers and other switches in the network that will govern the IMS relationships, you look at the number of combinations there and you have to be a pretty hefty mathematician to count that long, but do you have the resources to manage all of these integration combinations that -- double digit number of carriers around the world?

Well, we're up to about 37 permanent employees in Biju's area right now. Plus, we have opened up facilities in Belgrade and in India. We mentioned that, I believe, at the last earnings call and we're growing Belgrade at about three employees a month because we have to train them and get them up to speed, and we have about 10 people in Bangalore. So, we plan on establishing a much greater software production capability to manage all these opportunities.

It seems like you could employ 100 people there, no problem--

Well, that's one of the things I mentioned, and Doug asked a good question. I know that some of our investors now get nervous when we talk about investment, particularly, if it means acquisition and, perhaps, getting involved with another unknown quantity. But, first, we've done a good job on four out of five of those, but what I do mean to indicate by that is we think it's very important right now to invest in our IMS business and invest in our software business. We have a lot more opportunity that we can handle and we need to make sure that Biju has adequate resources.

And, here's final iteration of that and are you comfortable with -- maybe, you haven't even discussed pricing yet with your various partners, but where would you think in your mind that pricing is going to be?

It's one thing to see that there's going to be a ton of handsets, a ton of systems worldwide, but at some point it's got to payoff and I have no idea what you're going to be paying for this at your molecular level. Do you have a good comfort level with the pricing payoff?

We have a good comfort level with our pricing is that something that I wouldn't discuss on the conference call, though. I think I can look at my list right now and three of my competitors are on this call.

I understand that. I just wanted to make sure I knew you were -- this is like more of a -- business cases right up front as opposed to build it and they will come.

No, no, no. We have a well established business case for this.

Okay. Thank you.

Thanks, Anton.

Ken Muth with Robert W. Baird.

Hi. If I back out with the implied stuff for where Sigma was and you look at the antenna products year over year, I think your guidance, basically, implies exactly flat or within a million dollars on the Antenna Products Group. Is that, a) the right calculation and, b) if that is right, what's going on there that that is a flat performer because antennas seems to be a pretty good growth area you have for the segments you're in.

Well, you're right. We outline that pretty clearly. We said, I think, that in antennas we had a -- so far organic, 3% growth rate.

Year over year for the Q1?

Yes, for organic antennas.

Okay. And, then when you look at the end mark, I would've thought that that was a much better growth potential marketplace for you and it's, obviously, the biggest piece of your revenue pie. So, if you back out antennas and then you combine that with RFS Solutions, which is the model seems to be about implying a 5% year-over-year growth rate, you've got 90% or 85% of your business that's flat year over year.

I don't know how you're doing your math there, Ken, but RF Solutions was up.

I'm saying for fiscal '06, your new guidance that you gave -- for your '06 guidance that you gave for the year.

Right. We have RFS in at roughly $16 million dollars and MSG in at roughly $10 million which adds up to $26. $16 million dollars is a--divided by 14.--

Yes, 14% then.

It's a 12 -- 13% GAAP [vote] and we did 20 points in the first quarter.

When you go back to the antenna products is where I wanted to focus on. Do you see what the guidance -- has that RAM come in the last two quarters, the last quarter? When does that start to dramatically pick up? I, probably, understand that each quarter is going to be a linear higher, but to get to your numbers for the year, the 59 to 64, is Q4 the real pop in that area?

Well, Q4 will definitely be a pop, but there'll be a pretty good pop in the third quarter as well.

Okay. And, then the MSG area, what is the total number -- how you look at the total number of customers for that, right now?

Well, part of the problem is the consolitation among our customers, but we have T-Mobile on the carriers' side, we have AT&T/Cingular, we have NTT DoCoMo, we have Vodafone.

We just recently announced this deal with Denmark and then we have, in that area as well, several contracts that we've announced with infrastructure vendors and others with a few handset vendors, and then there's several that we have not announced. I would say, in total, we have about 18 customers.

Okay. And, is there--what is the potential for the -- your $11 million guidance in the MSG to be significantly better than that? What would have to happen, would it be one or two customers takeoff or your Sigma, Cingular, and Dell relationship start to accelerate? What would make that a very conservative guidance number?

I think, really, three things. Growth in Cingular, HSDPA subscribers, a very successful launch of our embedded products with Vodafone, and an earlier than anticipated takeoff with IMS licenses. Those would be the three largest factors.

Okay. And, the APG, where do you see the revenue from a geography prospective ramping? Is it universal or is there one area? Is it U.S.? Is it Omiya? Is it Asia? Or where would you see the biggest country -- ?

Well, clearly, the Latinas and our core APG has been simply in United States. We're about 80% of that businesses and I don't know that it's so much a regional question, Ken, as it is a product or market type question. For example, I think that the growth has to come in three areas.

We have to see a return to our normal levels of growth for Land Mobile Radio antennas, the public safety sector, and as I explained, I don't really think there's been a downturn in that sector. I think that in the crush after the various catastrophes that we had last year, there was, probably, some overstocking in third and fourth quarter, and that'll get burned off and then people will start buying again at decent rates.

I think across the board, there's been an issue with RoHS compliance, and I think that area-- that issue gets resolved sometime around the end of May and then, finally, as I mentioned before, WiMax has been slowed a little as people are waiting for the standards to get sorted out, and I think that's going to occur in the third quarter as well.

So, in the fourth area, I think I mentioned at the last earnings release, Ken, that Andrew had really slowed in their sale of our GPS antennas to a couple of our major customers, and we are beginning to take over the distribution of that product directly, and we expect to see some immediate benefit from that.

And, the last question, on the litigation, what is the total expense, you think, in calendar '06, the costs associated?

It's tough to say if it really matters how effective this mediation is. If we go through mediation and we don't have to return to litigation, we could stay at relatively low rates and come in between $1 to $1.4 million. If we're back into litigation and into discovery third and fourth quarter, it will be where we previously forecasted at $2 to $2.5 million.

Okay, great. Thank you.

Okay, Ken.

[Operator Instructions] Matt Robison with Ferris, Baker Watts.

Hi. Maybe you could talk a little bit about MSG revenue in terms of license versus usage. Has there been any change there? And, then you look at that number that you gave for MSG combined with RFS, or is that primarily usage and we're waiting for some IMS stuff to come through before we start to see another wave of licenses?

Yes, it looks like licenses versus NRE is about 60/40 right now, Matt, and we're pleased with that split. The reason that we have a fair chunk of Bonaire is that we're still doing working on trials with IMS and we still do customization for our Roaming Client, and then go ahead and ask the second part of your question again.

You kind of answered it because you said the NREs related to IMS, so that would be the leading indicator of your licenses.

Yes, and it's really interesting. We're pleased with that because if you look at last year, we had 50 to 60% in Aridian, that turned out to be a very good investment in our Roaming Client future and we believe that this will convert over to licenses as we move into 2007.

You mentioned the core APG business is 80% U.S., and followed that up by RoHS compliance as an issue. Are you talking about U.S. distributors that are selling into Europe, is that how the RoHS comes in or are you just talking about the 20%?

Well, there's 20%, but there's also some U.S. distributors that are taking action in advance and trying to get rid of lead based solder. So, this has become a universal issue.

Okay. So, you're talking about sensitivity to that kind of European environmental regulation over here.

Yes, but if I were to order the issues for the U.S. distributors, Matt, it definitely would be, first, overstocking of Land Mobile Radio after the natural catastrophes that we had as the single biggest issue relating to the flatness in Land Mobile Radio stuff.

And, you do figure that that's behind you after the current quarter?

Yes. Mid to second quarter, we think that'll be cleared up and then the second issue is that there has definitely been a [squabishness] in WiMax, and what we're hearing is that there's a little bit of a slow-down as people wait to sort out the standards.

Well, it's hard to imagine that WiMax has even been meaningful at any time yet or are you just talking about fixed wireless in general?

We were selling some decent antennas to a couple of the infrastructure vendors in WiMax and, as I'm sure you know, some of their business has been cared by people waiting on the sidelines, and then the third issue for us, in the APG, is the GPS issue that we've already discussed with you.

That's, really, your only exposure to public networks on the core business, right?

That's exactly correct. Other than some in-building cellular that we sell into Enterprises to the distributors.

Okay. Thanks.

Rob [Ammon] with RK Capital.

Yes, but by my math, did iVET do about $1.7 million in the quarter?

Pretty close. Yes, I don't think we broke it out that, but that might be a little low, but that's about right.

Okay. And, then should that take another tick down next quarter just with the manufacturing transition or does it hold steady at that level?

I'm looking for iVET to be bumped in the second quarter.

Okay. And, then can you remind me that the dollar amount of revenues you had in the product that went into retail sites, into the demonstration antennas that are discontinued?

About $3.4 million in [EPSTRS].

Yes. Last year there was about $300,000 of that in the first quarter and this year there was zero.

And, how much in Q2 last year?

Off the top of my head, I don't have it, I think it was a million something, but it was like $3.4 million for the year.

The biggest two quarters were second and third quarter and, like John said, it was $300,000. That's a good question to ask. It may help explain, in part, Ken's issue with the growth.

Yes, that's where I was going. Yes.

Yes, because you do have to take $300,000 out for EPSTRS.

Yes, I was getting flat organic growth, but you get substantially more than that if you back that $3.5 million bucks out.

That's right.

And, then the gross margin in the traditional APG group, iVET, any idea where that was for the quarter?

Yes, it was in the mid-thirties.

Okay. It looks like it approved sequentially.

It absolutely did.

Yes, we had a lot of progress on a gross margin.

Okay, excellent. Thank you.

At this time, we have no further questions in the queue. I'd like to turn the conference back to your speakers for any additional or closing remarks.

I just want to thank everybody for their interest in our story and your questions, and we'll update you next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation.