PCTEL Inc (PCTI) 2006 Q2 法說會逐字稿

Good day everyone, and welcome to today's PCTEL, Inc. Second Quarter 2006 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. On behalf of PCTEL, welcome to our earnings release conference call for the second quarter. I want to thank you all 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 then we'll 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, 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, 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 the subsequent events.

This concludes the Safe Harbor Statement. Now I will continue with the financial review.

Our investors will note that the company presents non-GAAP financial information in its earnings releases. The company believes that presentation and 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.

For more information on our non-GAAP financial results, please refer to our earnings release that has been filed under form 8-K with the SEC. The release can also be found on our website under "Investor Relations" shortly after the call. My discussion of results will be based on our non-GAAP financial results.

Second quarter 2006 total revenue was 26.8 million compared to 18.3 million in the second quarter of 2005. Second quarter revenue includes perpetual licensing revenue of 7.0 million from our recent resolution of the IP dispute with Agere. Without this resolution, revenue is up 8% over the second quarter 2005. Now, I will speak to the trends by segment.

Our antenna products group revenue for the second quarter was 12.8 million, down 5% from the second quarter last year. Results were unfavorably impacted by the termination of the satellite radio antennas for retail outlets product line last year due to low long-term margin projections. Approximately 2.4 million of last year's second quarter revenue was related to those products. Revenue was favorably impacted by our acquisition of the iVET and LMR product lines during the third quarter of 2005. Those products added approximately 1.7 million in revenue to the quarter compared to last year.

RF solutions group revenue was 4 million in the quarter, up 21% from the second quarter last year. The segment continues to benefit from the rollout of UMTS networks and the related need for 3G scanners. The mobility solutions group revenue in the second quarter was 2.7 million, up 104% from the second 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 7.4 million compared to 0.3 million in the second quarter last year. 7 million of the increase relates to a perpetual license granted to Agere in conjunction with the IP dispute resolution.

Now I will speak to the revenue guidance for the third quarter of '06. Third quarter revenue is expected to be between 20.0 and 20.5 million. We expect licensing to be approximately 0.4 million of that revenue.

Now, let's move on to gross margin. I will speak to the gross margin in each of the segments individually. Antenna products gross margin was 33.2% in the second quarter, up 3.1 points from the first quarter this year. We indicated earlier in the year that we are incurring significant manufacturing cost variances in our Dublin factory and that we would be discontinuing operations there sometime in the third quarter. The initiative continues on schedule, and we expect it to be completed in August.

Our guidance for antenna products group gross margin percent in the third quarter is an improvement of about 1 percentage over the second quarter. RF solutions group gross margin was 72% in the second quarter compared to 69% a year ago. There was a heavier mix of software this year. We expect margins going forward to be about the same.

Mobility solutions gross margin was 99% in the second quarter this year compared to 97% in the second quarter last year. We expect gross margin to remain in the upper 90% range going forward. After taking into account the potential revenue mix for the third quarter, total gross margin for the third quarter is expected to be between 49 and 51%.

Now lets turn to operating expenses. Total non-GAAP R&D and SG&A was 9.3 million in the second quarter compared to 8.6 million a year ago. This increase year-over-year is primarily attributed to the Sigma acquisition. The gain in sales of assets and related royalties of 250,000 compares to the 500,000 year-over-year. That's because the company restructured its royalty agreement with Conexant last year, which yields lower quarterly payment caps for them in return for a larger long-term revenue stream for PCTEL.

The company recorded a restructuring benefit of 1.3 million related to the Dublin factory closing in the quarter, and a gain of $0.7 million to date. The second quarter 2006 restructuring activity had three components. The company incurred 0.9 million in severance costs and 0.4 million of inventory impairment costs. The company also wound down its defined benefit pension plan in Dublin, yielding a benefit of $2.6 million. The non-cash benefit of 2.6 was net of a 0.6 million that the company agreed to fund under its severance agreement with the union there.

It is anticipated that there will be between 0.5 and 0.8 million additional restructuring expense recorded in the second half of the year related to the disposal of fixed assets, the lease termination in Dublin, and additional employee severance. For more information on the restructuring, please refer to our earnings release that has been filed under form 8-K with the SEC, and also on our 8-K that we just recently filed today, which is also available on our website.

With respect to the third quarter, non-GAAP total R&D and SG&A are expected to be approximately the same as the second quarter with an expected sequential decline of approximately 0.4 million in litigation costs offset by increased R&D investment of the same amount. The R&D investment is related to our scanning products and IMS software, and the Conexant royalty is expected to be unchanged from the second quarter at 250,000.

Other income was 0.7 million in the second 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 attributed to the general rise in short-term interest rates over the year, partially offset by the lower cash balance after the Sigma acquisition in mid 2005. The company expects other income to be approximately 0.7 million again in the third quarter of 2006.

Income tax expense for this quarter was 1.7 million versus a $100,000 benefit in the second quarter last year. The difference is attributable to a change in effective tax rate. The company will utilize all of its net operating losses this year. We expect total expense in the second half to be in the range of 0.4 to 0.6 million. Non-GAAP net income for the second quarter 2006 was 8.4 million compared to non-GAAP net income of 1.5 million in the second quarter of 2005.

To summarize the differences previously discussed, gross margin is up on the Agere IP dispute resolution, as well as higher volume and a heavier mix of MSG and RFS products in the total revenue, R&D and SG&A are up 1 million primarily from the iVET product acquisition, restructuring related to the Dublin facility yielded a net gain primarily due to the termination of the pension plan there, and the Conexant royalty is lower due to a royalty agreement restructuring, and other income is higher from a rise year-over-year in interest rates. Taxes are higher due to a change in the effective tax rate and the Agere resolution. Effect of all these factors is an increase in net non-GAAP income.

Now, let's turn to the balance sheet. Cash and short-term investments ended the quarter at $63.8 million, up 5 million from the first quarter. The cash receipt from the patent dispute resolution is expected in the third quarter 2006. The company anticipates cash will end the third quarter in the range of $66 to 68 million after netting out estimated tax payments on the IP cash receipt and the funding of accrued liabilities that are due in the third quarter.

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

Thank you, John.

My comments this evening will be brief. We've received some feedback that I often restate some of the financial information that John reviews, and so we will avoid that redundancy during this call.

While I will begin with a few comments on management's perspective on the quarter, my detailed remarks will be focused on five areas -- our progress in organically growing our product portfolio and our distribution capabilities, a few of the market highlights over the past few months, our ongoing transition in Ireland and its integration into our antenna products group, the patent dispute resolution with Agere and, finally, a few of the industry trends that we believe are in our favor despite a generally tough time for technology companies.

Let me begin with some of my overview comments. As far as the second quarter is concerned, we were pretty satisfied with our progress on most fronts. As you might recall, we committed at the beginning of the year to improve the gross margins in APG. Our efforts delivered a 5 percentage point margin improvement in the quarter as compared to where we were in the fourth quarter last year. We are becoming more effective in global supply chain management and in our core processes.

We committed to growth in our high margin businesses, the mobility solutions group and RF solutions group. Those two areas combined for over $6.6 million in the quarter, growing over 45 percent over the second quarter last year. We also committed to our stockholders that we would effect a transition out of our Dublin manufacturing facility by the end of August. That transition is on schedule or perhaps a little bit ahead of schedule. While we are concerned with the sluggish growth in APG, we were encouraged that revenue was up quarter over quarter and that all of the iVET shipments reflected new orders.

Finally, we were pleased that we were able to resolve the three-year old intellectual property lawsuit with Agere. We have improved the company's financial performance on a non-GAAP basis both in the quarter and year-to-date. We expect the manufacturing transition out of Ireland to yield continued improvement in our margins, and the IP dispute resolution will also benefit our operating expense performance, as John has already mentioned. All of this will contribute to our ability to fund organic growth.

Let me now comment on the five areas outlined earlier. First, the organic growth. We delivered four significant products or prototypes during the second quarter, all developed through organic investment in our existing operations. Our antenna products group made tremendous progress in expanding both our WiMax and our iVET portfolio. We have committed to expanding our WiMax product portfolio, specifically focusing on base station opportunities in Point-To-Multipoint and Point-To-Point applications. We designed and delivered new Sector Panel, Omni, and Dish antennas for this market. These new products will strengthen our ability to participate in what is forecasted to be a strong backhaul market in the 2.5 spectrum.

We also introduced our new broadband iVET antenna. Our initial product met the needs of certain carriers who wanted to optimize performance for a specific band. Our new antenna will provide greater flexibility. Carriers with requirements in both 2G and 3G markets will be able to leverage a single antenna investment.

The RF solutions group delivered a J-CDMA version of its flagship SeeGull scanner to a major wireless infrastructure provider in Japan. CDMA operators in that country are going through a re-banding process for which new scanners are needed and ours is the first to address this need. Further improvements to include Japan EVDO will be made in future months. The Group also managed successfully the transition of the European versions of its products to RoHS compliance well ahead of some of its competitors.

The mobility solutions group added both new products and new product features in the second quarter. We introduced an enhancement to the roaming client that support an end-user's activation of new cellular data cards. This will add convenience and additional flexibility to end customers and development partners. We also enhanced the capabilities of the software to synchronize phone books between off-the-shelf applications such as Microsoft Outlook and Lotus Notes and the device connected to the Roaming Client. The product also offers complete support for embedded 3G devices for UMTS, HSDPA and EVDO. PCTEL also released an early version of the software that is compatible with the new Microsoft Operating System, the new operating system, Vista, and we are working closely with Microsoft to enable 3G solutions on this new platform.

The voice-enabled version of the Roaming Client has added SMS over EVDO and several new active voice call handoff methods. The voice client has now moved beyond the PDA form factor into smart phones and feature phones with 1 new infrastructure partner, 3 new handset partners and 3 new handset software-operating platforms.

Finally, we expanded our distribution and sales capabilities during the quarter. Jeff Miller, who most of you know as our VP of Global Markets, established a Sales Director for Europe, Middle East and Africa. We also hired a senior sales leader for handling the OEM sales of our antenna products which, by the way, has been a primary area of sales shortfall in APG. By the end of the year, we will complete our transition to a single, global sales force, with strong regional management for both direct and indirect distribution.

Let me provide you with some of the market and sales highlights. Our continued growth depends on securing additional customers while maintaining and expanding our relationships with existing customers. We accomplished both of these goals during the past quarter. In APG, we successfully delivered new products to an existing customer, Motorola, who utilizes Wi-Fi at a protected, public safety frequency. This product has the potential of becoming a global standard within the public safety market.

We also secured a design win for a 2.4-2.5 GHz dual band antenna at a major OEM and a high performance panel antenna for an RFID application. As previously mentioned, we made excellent progress on our WiMax portfolio. We also received our first orders for iVET products from a U.S. based carrier and also have an adjustable azimuth "Streetworks" product on trial from a second U.S. carrier. We are encouraged by these early opportunities in the United States.

APG marketing has been busy in the second quarter expanding our distribution channel in Europe. Master Distributor has been appointed to serve Western Europe for all APG products. Our North American distributor business continues to be very solid.

In RFSG we secured one major new OEM reseller of our scanners. This new partner is based in Western Europe, has customers across the globe, and had been previously using scanners supplied by one of our competitors in this space. Currently, over 10 OEMs resell PCTEL scanners including the two largest ones in the world, Tonnes (ph) and Nemo. Our goal is to add one more OEM reseller by the end of the year.

RFSG, in cooperation with one of its OEM partners, has become one of the only two suppliers of scanners to Vodafone on a global basis. We anticipate starting to benefit from this development in Q4 of '06 and through 2007. The group continues to benefit from the deployment of WCDMA around the world.

Mobility solutions group announced Vodafone as a new customer for the Roaming Client, the data product. Three additional customers were acquired both in the U.S. and Europe as our footprint continues to expand globally. Four global customer trials were conducted and many product evaluations took place from Europe to Latin America to Asia. Currently, the solution from PCTEL is the only one in the market that supports all major cards, phones as well as embedded devices on Windows platforms.

Let me now talk about the Dublin transition. When we acquired Sigma Wireless Technologies, now PCTEL Ltd, the organization had approximately 110 employees, including contractors. It became clear that many of these employees were under-utilized or building product for a forecast that was overstated. The supply chain depended upon components from other Irish suppliers, and the manufacturing costs were incompatible with getting the new iVET product into an OEM distributor channel. Four months after the acquisition, we quickly determined that we needed to make radical changes. By February of this year, we signed an agreement with Elcoteq, a contract manufacturer. Soon after that, APG worked out a plan to manufacture some of the non-iVET products. As you'll recall, there were some public mobile radio antennas within Sigma that we use in the public safety applications.

Under APG's leadership, we are nearing completion of our transition plan. In just a few weeks, Dublin will be a design center with a strong development organization. We will maintain approximately 20 people in the region. Today we have an additional 15 people working to ensure that we meet customer commitments during the transition. But, as you can tell from these numbers, we're already down around 70 people. By the end of August we will release all of the remaining manufacturing employees.

Now, the Agere IP dispute resolution. We have a binding agreement resolving our IP dispute with Agere, and let me go off-script just for a moment. I signed the final settlement agreement and licensing agreements just a few hours ago.

Since we initiated our licensing campaign in March 2003, we have achieved significant results. We received $52 million in outright settlements, purchasing obligations, indemnification payments and ongoing royalties. We are now cross-licensed under 5,000 patents and we were able to deflect multi-million dollar infringement claims asserted against PCTEL. We estimate that we spent a total of 7 million in litigation expenses during this period.

Having accomplished our primary financial and strategic goals, we are eager to move on with the development of our product operations. We are not contemplating additional IP enforcement activities. As we mentioned earlier, the relief from this OpEx burden will give us greater freedom in funding our organic growth.

Finally, I'll discuss a few of the favorable industry trends. PCTEL has maintained throughout its metamorphosis from an analog modem to a wireless company that we will benefit from growth in broadband wireless networks and applications. Our business thesis is that, even in a difficult telecom market, wireless broadband remains an exciting growth story. We participate in that growth in several ways. Our antennas ride the growth of broadband cellular, the consumer's desire to easily connect to broadband wireless facilities, the explosive growth in the unlicensed band, the public and government requirement to utilize broadband in public safety applications, and the need to continually optimize the performance of these networks.

Even when spending on cellular infrastructure declines, we have the opportunity to demonstrate growth. For example, if a carrier decides to curtail infrastructure spending, they will be under greater pressure to deliver more capacity with their existing network. Our scanners help them accomplish that goal.

Current events in telecom support our business thesis. We believe that the use of the 2.5 to 2.7 spectrum globally presents new opportunities for PCTEL. We are eager to learn more about Sprint/Nextel plans for deployment of their MMDS spectrum. Similarly, we believe that Clearwire and the recent investments by Intel and Motorola will create a strong market for new antennas, scanners, and connectivity software tools.

Even without WiMax or OFDM deployment in the new spectrum, we are witnessing strong growth in broadband wireless. While we cannot report directly on our customers' businesses, we have seen a sharp uptick in the number of subscribers who are connecting to broadband cellular data services. We believe that this will continue over the next few years, particularly with the buildout of HSDPA and the deployment of TD-SCDMA in China.

We will also benefit from the continued interest in Fixed Mobile Convergence and other IMS applications. Our software is now embedded in the IMS infrastructure offerings of seven different OEM's that are actively trialing IMS at carriers around the world.

So, in summary, the past quarter marked progress on several fronts. We improved our gross margins in our Bloomingdale, Illinois antenna facility, grew our RFSG and MSG revenues, nearly completed our transition from our Dublin iVET manufacturing facility to Elcoteq, resolved our IP dispute with Agere, secured several new customers, strengthened our sales force, and continued to develop and introduce new products. This is our fourth consecutive quarter with positive financial results, and we anticipate continued earnings growth for the remainder of the year and into 2007.

With that, we've set aside 30 minutes for your questions. Operator?

[OPERATOR INSTRUCTIONS.]

Matt Robison from Ferris, Baker Watts.

Good afternoon. I guess my first question is how and when do you get paid by Agere?

We’ll get paid in the third quarter by wire.

OK, so that’s a one-time deal, all at once?

Yes.

Marty, you mentioned a whole bunch of MSG partners. All that stuff happened in the June quarter?

Yes, quite a bit, several new OEM partners and several new handset partners. Biju has been busy flying around the world. He’s in Korea right now, has been in Japan, been in Europe, and we’re getting a lot of traction with our IMS platform.

How do you envision those handset deals impacting the income statement?

I think it’s too early to say. For 2006 we’re not envisioning a huge impact. We view IMS as a mid-2007 event. Right now we’re taking in some revenue associated with the early trials but, in terms of licenses, we view that as mid 2007.

And the revenue guidance, should we assume that APG is flat, and your higher margin business continue to do what they’ve been doing?

Well, we’re very confident on the growth of our higher margin businesses. That’s for sure. We think we really need to see what happens in the third quarter. I would just hasten to remind you of comments that John made that, in the year-over-year comparison, we’re taking out 2.4 million for F-Stars (ph), and we got clipped a little bit in some of the antenna specialist areas where we had a bubble last year with some mobile antennas that we sold.

I’m encouraged in that second quarter over first quarter was a little bit stronger. We’re seeing some very nice growth in our GPS antennas. Our distributor business seems strong. The area that is sort of a wait-and-see in terms of whether we’re going to be a little bit positive or much stronger growth is our sales into the OEM. So, we’re not adjusting the guidance at this time but, as we’ve said earlier that, if you look at our results, the only soft spot has been the relative flatness of APG.

OK. Now, if we want to try to back out the settlement, do we just assume there was no cost of goods sold with it at all?

Yes. There’s no cost of good sold, so back out 7 out of revenue and 7 out of gross profit.

And your 400K before Agere was a little bit higher than I was looking for.

The 400K without Agere, you mean?

Yes.

Yes. That’s about right. It ran about 400. It’ll run about 400 next quarter, too.

Doug Whitman with Whitman Capital.

Just a quick question following on Matt’s question. The 7 million, is that taxed at a particular rate?

Yes. Anything people want to take out, if you look on our pro forma earnings, the tax rate there is about 17%. So, if you’d want to see what things were with and without things, you would tax them at 17%.

The gain on this particular 7 million?

That’s correct.

OK. And can you go a little more over, John, what’s kind of leading to the gross margin improvements in the company? I know Marty tried to be fast, as well, so things seem to be going in the right direction.

You’ve got a couple things going on. One, we continue to make sequential improvements in the antenna products group. If you go back to the fourth quarter last year, as Marty mentioned in his section, we’re up 5 points from where we were at in the fourth quarter, and that is a combination of a couple things. One, efficiencies that we’re gaining in our Bloomingdale factory from where we were at then, because you remember we were still -- that last year was the year we were absorbing a lot of the Andrew product. And then, the second thing that we’re seeing is we’re starting to see some efficiencies in what’s going on in Dublin, and waiting for that leverage point to really flip for us about halfway in the third quarter and substantially more than that in the fourth quarter.

Yes. But Doug, if you just look at Bloomingdale, we’re about three points up. I think we mentioned at our last call that we had a little bit of a reorganization where we separated manufacturing out of APG. It’s headed up by John Kosmus (ph) and Global Supply Chain Management. By the way, he’s soon going to take over manufacturing for RFSG as well, and he’s really doing a nice job of driving just routine manufacturing efficiencies. We’re putting out more volume than we did in the previous two quarters with about 80 fewer people.

The second thing that’s going on is that, when we integrated the Andrew product line last year, there was a fair amount of overlap between some of the Andrew products and the legacy MAXRAD products. And between the marketing and the development organization, they did a great job of rationalizing that product line, and that probably contributed a solid point to the gross margin. I think we’re going to see some continued improvement there, and we’re really set up nicely to get the benefit at the bottom line of increased volume in the Bloomingdale facility.

So, that’s the antenna piece and, of course, the other two pieces are our 99% gross margin MSG business is twice as big as it was last year year-to-date, and our 70%-plus RFS business is 20%-plus.

Yes, it’s up 20%

Higher than where it was year-to-date.

And on the Dublin part, when are you completely out of Dublin?

Mid-August.

Yes. We’re getting out in August, and then I’ve got to clean the factory out, and fourth quarter should look like a pure quarter.

We have about 15 to 20 people in Dublin right now that are part of the negotiated severance agreement who are still there because we have some delivery obligations that we need to make, and that really couldn’t be made if we transitioned out by the end of this month. So, we’ll have a little bit of a stub period, and we still have rent and so on.

Right. All those fixed costs for two months still have to show up in manufacturing costs as a post-restructuring.

Right, so the fourth quarter we’ll see the pure?

Fourth quarter will be pure.

OK. And then the last part of the margin question is you’ve talked about and, obviously it’s a huge opportunity, the WiMax part. Do you expect WiMax margins to be roughly similar, or do you expect them to be higher or lower?

I think WiMax should be slightly north of our average gross margin in that area, and consistent with what we get out of what we refer to as our emerging products. So, you know, Wi-Fi has been traditionally good, GPS has been traditionally good, and WiMax will be in that category as opposed to some of our lower margin products like Antenna Specialist and the LAN mobile radio products.

OK. And then following on Matt’s question, one thing he touched on but -- Vodafone, where are you? Have you started the ramp yet, or where is the ramp?

We actually saw a little bit of benefit from Vodafone in the second quarter. It’ll be a little bit chunky because of the nature of how they buy their subscriptions, but we are now seeing the beginning of the benefit of that relationship.

OK, and I’d be remiss if I got on a PCTEL conference call without urging you guys to do a buyback. So, thank you for the great quarter.

Thanks, Doug, for the questions.

[OPERATOR INSTRUCTIONS.]

Anton Wahlman with ThinkEquity.

Question on taxes. This Agere settlement aside, going forward, now that you will be soon having eaten up your NOLs, what should we look for in terms of a long-term, or even say first clean quarter, 4Q, going into ’07, what kind of tax rate are we talking about?

Yes. What I would use, and I actually sat down and modeled this because I expected the question, for those analysts that follow us on non-GAAP earnings, I would use a tax rate between 33 and 35% for ’07 and beyond. And then, hybrid, between where we’re at today and after the second half just because it’s still a transition year.

Sure, so the rate will be 17-ish for the rest of the year.

Yes, 17 to 20 for the rest of the year, and then what you can do is load -- and this goes out to everybody -- load 33 to 35% as a long-term rate.

OK. And this is actual cash taxes that will be paid. You’re not just accruing for something for which you won’t actually pay?

Well, actually, vary in our (ph) taxes is about 7, $800,000 a year always in the reduction of goodwill that you get, which is a non-cash thing that you take. But, that will be small in the total. So, you could pretty much call it cash for your cash flow model.

Now, on your software mobility revenue, 2.7 million in the quarter, that’s obviously the largest. But, in terms of how it breaks down between, can you discuss, maybe not quantifiably precise it, but little bit about -- I’m sure this consists of different parts. On the one hand you’ve got sort of monthly or quarterly accruals from X amount of subscribers and the dollars per subscriber, etc., and then you have development revenue, customization, new skins. And then, you throw in the IMS stuff on top of it, and could you discuss a little bit about where are we in terms of what’s recurring of this versus what are these one-time-ish type development revenue?

Well, it turns out that our one-time-ish is recurrent because we always have trials, we always have customization. I would break it down as 20, 20 and 60, 60 recurring subscriptions, 20 IMS and 20 NRE associated with the Roaming Client, and that’s basically what it looks like.

That’s great. But, in terms of longer term, IMS versus the rest of the functionality, will that be not broken out, per se, financially but in terms of how you think of it? Is this all blending in to really one tight product, or are you on stovepiping these things a little bit?

You made a great suggestion to us once, Anton, that we have a conference call where we go over our product line. And I think the best way to understand this is we really have a software stack now and, at the base of that software stack is a basic connectivity and authentication, which is the basis of the Roaming Client. And then, we have several layers of software on top of that that deal with customization, that deal with aspects of the network. And then, above that we have applications, and some of the applications are, for example, fixed mobile convergence, and now we have other applications that are coming out like peer-to-peer video sharing or push-to-talk over cellular. And I think the way for us to express this in the future, and I think probably when I’m out at your conference at ThinkEquity I’ll do this, is I’m going to move away from presenting our product as a Roaming Client and IMS and really show you the software stack and how we’ll drive revenue on each of those elements.

That’s good. Now, one completely separate question then finally, which is you mentioned a few minutes ago here your consolidation of manufacturing between RF and antennas. It sounds to me in the broader picture that you’re sort of merging overall these two divisions, as it were, organizationally. Is that going to be taken to its logical conclusion at some point, that we will only see one? You will report on one segment, or do you think that is not quite as far as you’re planning on going?

It’s certainly something that we’re discussing. I would say this. We’re clearly very far down the path of consolidating all of sales for both organizations, and we’re consolidating all of manufacturing. The development disciplines, though, are quite different in the two areas, and the product management issues are also different.

We’re looking at this. I would say we’re at least six months away from doing anything meaningful in this area. And it may be that the two groups have to exist somewhat in parallel and separate for quite some time. It is a fair question. It’s something under review. But, for the next few quarters, I think you can count us on reporting the results separately.

I was just kind of curious, maybe just semantics. Thank you very much. Good presentation.

Michael Coady with B. Riley.

Good afternoon. With the litigation expense dropping off in the third quarter, then would you anticipate a further drop-off in the fourth quarter, or will it be pretty much at a bottom in the third quarter?

I would expect that the litigation-related expense would cease, as I said in the earnings call.

We’ll have a little bit of a stub in the third quarter because we reached agreement in arbitration on June 12th, and then getting to the final documents we incurred some expense. And you’ll see that in the third quarter, but it will be relatively small, like I would imagine sub-50. And then, in the fourth quarter it should be zero.

OK. Yes, lingering. Those expenses tend to linger sometimes, so I just wanted to get clarification on that.

Looking at your annual targets versus where you are now, and you said you don’t want to update those, but just one question, and that would be in the APG, the gross margin. Low to mid 30s was the target for the year gross margin. What do you think you can do? You talked about it a little bit in terms of having a pure gross margin in the fourth quarter. What might that look like?

When you are quoting low to mid 30s, you’re talking about APG?

Right.

Yes. As we said, we felt we could increase by another point in the third quarter, and I think there’s another 1.5 to 2 points to get in the fourth quarter, and then we’ve got to see where we’re at going into ’07.

OK, and then just one last question, again kind of touching on the annual targets and the third quarter guidance. Are you expecting anything in the fourth quarter to be particularly strong if you hit your third quarter guidance kind of the mid-point, you’d need a really strong fourth quarter to come up that annual guidance?

Well, we expect the antenna groups to be both our Dublin operation and the Bloomingdale operation, to turn in their strongest performance by far in the fourth quarter, and we’re anticipating reasonable growth in MSG and RFSG.

Ken Muth with Robert Baird.

Any concerns you guys have over Cingular? On their conference call it seems like they are getting a little bit behind here in their UMTS-HSDPA overlays, where they’re only at 25, and so their yearly number is probably likely to miss their original targets. Any impact that you guys would see on that at some point on your MSG stuff?

I don’t want to give you exact numbers because it’s really improper for me to comment on what my customers are doing in their results. But, I will tell you, from our perspective, Cingular is turning into a stronger and stronger customer for us in terms of subscriber growth. So, in terms of MSG, we’re not seeing any impact at this time, and there’s an awful lot of growth to be accomplished over the next couple years in building out this network, and we think we’ll continue to benefit from it. And I’ll tell you, we’re having a very strong year with them on scanners because I do believe that cellular infrastructure spending is down but, as I mention in my comments, one of the appealing characteristics of PCTEL is that we have a way of benefiting from a down CapEx environment. When carriers spend less on deploying base stations and switches, they need to get more out of their existing infrastructure. And we’re seeing reasonable growth in RFSG as carriers require better test equipment to optimize the performance of their existing network.

OK. And then, if you looked at the gross margin, the steady improvement you’re making there, is it possible to kind of extrapolate in ’07 we could see another two to 300 basis points improvement in that year?

Well, I think that is possible, for a couple reasons. One, we really have two gross margin issues out of Dublin. The first gross margin issue is that antennas were being manufactured in Dublin and had cost issues, and we’re addressing that with Elcoteq.

But, the second issue is that we really haven’t started to sell the higher margin versions of that product. And as that occurs, we should be favorably impacted by a better mix. So, that’s going to be a contribution, I think, to improved margins. Whether I could put a two or 300 basis point on that at this time I’m not prepared before we do our October planning on this, September-October planning.

The second element of potential improvement is that we are really getting much better out of our Bloomingdale facility. We’ve instituted a program of cost reduction that the entire organization has embraced. Steve Deppe (ph), Product Management, Marketing, Development, Manufacturing, we’re driving down basic components of cost, such as weight. What is worth mentioning here, in the second quarter we were hit by incredible increases in copper prices and transportation costs, and our margins went up. One of the reasons they’re going up is we’re using less material in these products. And I think we’ll continue to do that, and I think we’re going to see some improved mix as well as our GPS product line grows.

So, I’m encouraged. I don’t know, Ken, that I can get into the details at this time of two or 300 basis points, however.

OK. And you guys obviously had upside to the MSG side. Anything being impacted there by Dell and Cingular and the embeddedness in that?

That’s positive for us. I mean, Vodafone’s approach, they’ve told us that their approach is to move away from PCM-CIA cards and tethered phones over Bluetooth. They really want to capture the market associated with embedded, and that’s where we’re situated.

But, did that happen in this quarter, Marty, in Q2, or is that yet to come?

No, it did not. It did not happen yet. As I said, we’re beginning to see the favorable impact of Vodafone, but we have not seen the major benefit of the focus on embedded.

And when may that happen?

I think we’ll start to see it this year yet.

Gene Weber with Weber Capital Management.

A couple things. Have you started any manufacturing in Russia yet?

We have indeed. Most of our iVET shipments in the last quarter started out of Elcoteq in Russia. We still had some iVET that had to be manufactured and some product that we refer to as “green tubes” and some PMR stuff that was still being manufactured out of Dublin. But, yes, we have, and the yields are better, the costs are better. It’s really a first-class facility.

OK, so you’re not worried about any transition, I guess.

I am absolutely not worried. I’m worried that we’re not completed by the end of this month because the results are so much better.

OK, good. And then, shifting gears, in the scanner business I know you’ve always talked about carriers using it for all the stuff that they’re doing with their frequency. And in the past I know you’d always had some component of government security business. Do you still have that?

We actually do. I think the way it’s going to break down is this, Gene. When we bought this business back in 2003, I think that that finished up the year at about 8.3 million with over 2 million in government stuff, some of it one-time licensing, unusual things. This year I think we’ll do about a million, maybe a little less, but right around 1 million, and it’s easier for us to do. We reached an agreement a couple quarters ago with the distributor that we work through that has clearances, and we moved a couple of our developers and our sales guy over to him, and we have a long-term licensing arrangement with them and supply arrangement with them. So, we’ll continue to sell through him at reasonable margins, and we’re not really trying to develop further, though, that business.

OK. And then the last question I had, and maybe this is kind of an off-the-wall question but I’ll ask it anyway, Andrew was acquired by somebody, or is about to be acquired by somebody. Will that have any impact on you?

We don’t think so. We may look to see -- well, there’s some things we’re thinking about. I really can’t comment on them in a teleconference call, but our main business with Andrew is selling scanners to their Grayson Wireless division. That’s our main business. A secondary issue is that we sell through them to Lucent for GPS climbing (ph) antennas. In both of those cases we think the relationship will continue. It may be that in the acquisition of Andrew by ADC that they become less interested in some of the business areas where we compete. We compete with them for some business out of Motorola and elsewhere, and we’re going to stay really tightly focused on those areas, and perhaps they’ll be less so.

Ted Monroe of The Cardinal Group.

You commented on Ken’s question on the Cingular spending, and also that broadband wireless continues to drive despite CapEx. But, will consolidation have any impact, do you think, on any of your product lines, or is it really subscriber growth and traffic growth and technology initiatives that are the drivers rather than these CapEx numbers?

So far I think the consolidation has been a net positive for us, but mainly because, in all the cases where there’s been consolidation, we’ve had both sides of the business. So, for example, when you had Cingular and ATT Wireless combined, we had both of those accounts already. And so, now with Cingular consolidating again with AT&T more broadly, we’re in that account as well, and I think it gives us a bigger, stronger customer. I do get concerned when we read things about Motorola turning over its infrastructure business to Wowway and UMTS and HSDPA and taking a service approach to it. That’s probably a great decision for them, but we have close ties to Motorola, and they’re always a target for our sales activities. And so, it’s helpful perhaps that we’ve already started to invest sales resources in Asia, and we should be able to keep on top of that.

Other than that, I don’t see any immediate danger.

And is any of the OEMs, for example, getting on a different product line, such as Nortel possibly getting out of UMTS, and just the consolidation among the OEMs?

Not really because, Ted, you may remember in the scanning area our primary sales are to a different type of OEM, the OEM system integrator for test equipment. So, for example, Tems (ph), division of Ericsson that does test equipment, buys our scanners, or Nemo, which was an offshoot of Nokia and became part of Electrobit. They buy our scanners to insert into their test equipment consolidation. And then, we sell to Andrew, into their Grayson division, SwissQual, Ascom and others. So, in fact, as the infrastructure guys consolidate, I think they’ll continue to go to these large test equipment OEM resellers and they’ll be using our scanners in those applications.

And then finally, Marty, you also commented on this as well, but any of the changes within the different product lines of OEMS? You mentioned Andrew, which I know you can’t comment on. But, just the whole fallout from the shrinkage in the industry I’m sure makes product lines and divisions available. Are you seeing a lot of opportunities?

Well, that’s the kind of thing that we pay attention to, but I will tell you quite openly, and it sort of dovetails with one of Doug Whitman’s earlier comments, that we’re seeing some real benefit right now in focusing on our operational efficiency, and we’re really looking at ways to develop our business organically as our first order of business, and we’ve not been looking aggressively at very many opportunities to acquire new businesses. And I think our results are starting to show this focus on internal operations.

Matt Robison with Ferris, Baker Watts.

Can you just tell me what the headcount was exiting the year (ph) of March and now June?

Our headcount in aggregate is about 400, and it was about 510 at the end of last year.

OK, I’ll follow up later with the March quarter number.

OK, yes. I just don’t have that off the top of my head.

Yes, I can go grab that. It’s in our SEC filing.

I’ll look it up. Don’t worry. Thanks.

But, we’re making a fair amount of progress on that. Matt, are you satisfied that you understand the accounting for the restructuring and the taxes and Agere?

Yes, sure.

OK, great.

OK. Are there any other questions?

No, there appears to be no other questions in the queue at this time. I’d like to turn the conference back over to you, Mr. Singer.

OK. Once again, I’d like to thank all of you for your attendance and for your questions, and we look forward to sharing our results with you at the end of the next quarter. Thank you.

And thank you. A replay of today’s conference will be made available beginning at 8:15 p.m. Central Standard Time running through August 10, 2006 at midnight. You may access the replay by dialing 719-457-0820 or 1-888-203-1112 and entering passcode 5652483. Again, that passcode is 5652483.

This does conclude today’s conference. We thank you for your participation, and you may disconnect at this time.