PCTEL Inc (PCTI) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to today's PC-Tel Incorporated third 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.

Thanks. On behalf of PC-Tel, welcome to our earnings release conference call for the third quarter. I want to thank you all for attending and for your interest in our company's progress. My name is Marty Singer, and I am PC-Tel'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 Schoen will review our financial performance in some detail and will review our balance sheet and other issues. I will cover the general state of the business, discuss some highlights of the past quarter, and then I'll discuss some areas of focus for the remainder of 2006. We will then open your call for questions. The Company will provide a transcript of our prepared comments on our website about 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.

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 presents non-GAAP financial information in its earnings releases. The Company believes that presentation of results excluding restructuring charges and non-cash-based expense, including stock option expense and other stock-based compensation, as well as amortization and impairment of intangible assets and goodwill 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 operation -- or 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 at www.pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results.

The Company recently announced a reorganization that combines its RF Solutions and Antenna Products segments into a single reporting segment called the Broadband Technology Group. For today's call I will be discussing the financial results in the old line up, with the two segments separately reported. Starting in the fourth quarter, the results will be combined.

Let's turn to revenue. Third quarter 2006 total revenue was $20.5 million compared to $21.6 million in the third quarter of 2005, a decrease of approximately 5%. I will speak to the trends by segment.

The Mobility Solutions Group revenue in the second quarter was $2.4 million, up 17% from the third quarter last year. The revenue continues to be a mixture of license and maintenance fees and customization fees relating to its Roaming Client product. IMS revenue is related to trials, and continues to be about 10% of the segment's revenue.

Our Antenna Products Group revenue for the third quarter was $12.6 million, down 17% from the third quarter last year. Last year, this segment benefited from several large orders in the public utility and military defense markets that did not repeat themselves. Additionally, the Company discontinued its Satellite Radio Demonstration product line at the end of last year. iVET product revenue was unchanged from last year.

RF Solutions Group revenue was $5.1 million in the quarter, up 37% from the third quarter last year. The segment continues to benefit from the roll out of UMTS networks and the related need for 3G scanners.

Licensing segment revenue was $400,000 compared to $600,000 in the third quarter last year. This segment continues to be affected by the expiration of legacy modem licensing agreements.

And now, I would like to speak to revenue guidance for the fourth quarter as well as a preliminary view of 2007. Fourth quarter revenue is expected to be between $20.5 to $21.5 million. We expect licensing to be approximately $400,000 of that revenue. Our preliminary view of 2007 revenue is between $94 and $100 million. That breaks down into $61 to $65 million for Antennas, $19 to $20 million for RFS, $13 to $14 million for MSG and $1 million for licensing.

Now, let's turn to gross margins. I will speak to gross margins in each of the segments individually. Mobility Solutions gross margin was 99% in the third quarter this year compared to 99% in the third quarter last year. We expect gross margin to remain in the upper-90% range going forward.

Antenna products gross margin was 29% in the third quarter, down 4% from the second quarter this year. The reason for the decrease is a decision in the quarter to prune the product portfolio of some slower moving antennas within the On-Glass and GPS product lines and record reserves for the excess inventory. We believe that this decision positions those product lines for consistent margins going forward.

Also, the Company completed shut down of the Dublin factory in the quarter. The Company feels that these two actions put the segment back on track to attaining consistent gross profit results going forward in the 34% to 36% range.

RF Solutions gross margin was 70% in the third quarter compared to 69% a year ago. We expect margins going forward to be about the same.

After taking into account the potential revenue mix for the fourth quarter, total gross margin for the fourth quarter is expected to be between 50% and 51%. Based on the revenue guidance that I just gave for 2007, we also expect gross margin for '07 to be in the 50% to 51%.

Now, let's turn to operating costs. Total non-GAAP R&D and SG&A was $9.2 million in the third quarter compared to $9.1 million a year ago.

The gain in sales of assets and related royalties was $250,000 compared to $600,000 in the third quarter last year. As you will recall, late last year, the Company restructured its royalty agreement with Conexant, which results in lower quarterly payment caps for them in return for a larger long-term revenue stream for PC-Tel. With respect to the fourth quarter, non-GAAP total R&D and SG&A are expected to be approximately $9.3 million, about $100,000 higher than the third quarter. The Conexant royalty is expected to be unchanged from the third quarter at $250,000.

The Company recorded a restructuring expense of $1.1 million related to the Dublin factory closing in the quarter, and an expense of $400,000 on a year-to-date basis. The Company does not anticipate recording further expenses related to this restructuring.

In conjunction with the restructuring of the Dublin operations, the Company performed a reassessment of the intangible assets and goodwill associated with the related product lines acquired from Sigma Wireless Technologies in 2005. While the products have been put on a solid gross profit profile going forward, our long-term revenue outlook is lower today than it was a year ago when we acquired them.

Based on our long-term economic outlook, the Company has recorded an impairment charge of $20.3 million. For more information on the restructuring and impairment expenses, please refer to our disclosure that has been filed under Form 8-K with the SEC as of today, and the release can also be found on our website under Investor Relations.

Other income was $1 million in the third quarter compared to $100,000 a year ago. Other income is comprised primarily of interest income, with smaller amounts of foreign exchange gains & losses and miscellaneous incomes comprising the rest. The increase year-over-year is attributable to the general rise in short-term interest rates, and last year's results included an exchange loss related to the acquisition of Sigma Wireless Technologies. The Company expects other income to be approximately $900,000 in the fourth quarter of 2006, as the third quarter had about $100,000 of exchange gains that we do not foresee repeating in the fourth quarter.

Income tax expense for the quarter was a credit of $500,000 benefit versus a $100,000 expense in the third quarter last year. The difference is attributed to a change in effective tax rates. The Company will utilize all of its net operating losses this year. We expect the tax provision in the fourth quarter to be an expense of approximately $100,000, based on the fourth quarter guidance given. The tax rate has been uneven by quarter this year due to forecast changes related to the Dublin operations.

So to recap earnings, non-GAAP net income for the third quarter was $2.6 million, compared to non-GAAP net income of $1.6 million in the third quarter of 2005. To summarize the differences previously discussed -- gross margin is down slightly on lower revenue; R&D and SG&A expense are up slightly; the Conexant royalty is lower due to last year's royalty agreement restructuring; other income is higher from a rise year-over-year of interest rates and last year's results including a foreign exchange loss; and taxes are lower due to a change in effective tax rates. The net effect of all of those factors is an increase in non-GAAP net income.

Now, let us turn to the balance sheet. Cash and short-term investments ended the quarter at $70.6 million, up $6.8 million from the second quarter. The increase is primarily related to the receipt of the IP litigation settlement with Agere in the quarter. The Company anticipates cash will end the fourth quarter in the range of $69 to $71 million.

I would like to now turn the call over to Marty for his summary comments.

Thanks, John. Before I comment on the quarter and describe what we anticipate over the next several months, I want to take a moment to congratulate our RF Solutions Group on an absolutely outstanding quarter. This is the first $5-million quarter in the organization's history. For those of you who don't remember our acquisition of DTI, we paid approximately $11 million after an earn out for an operation that was generating about $8.3 million in annual revenue. The past two quarters we've generated $9.5 million of high-margin sales.

The revenue increase reflects three factors -- our acquisition of new customers, our focus on our core business and emerging technologies and an increase in the bundle rate of our scanning receivers with traditional test and measurement businesses. The increase in these sales suggests that our investment in a global sales capability and a focus on organic growth is paying off. We anticipate continued strong performance for our scanning receiver product line.

Recently, Sprint-Nextel adopted PC-Tel scanning receivers to upgrade their test and measurement platform, and our products will be used in the national WCDMA deployment in Australia. This recent win, as well as the growth associated with the recently completed auction of new AWS spectrum in the U.S. and the deployment of WiMax and TD-SCDMA, should continue to propel growth in this business.

This is also the fifth consecutive quarter in which the Mobility Solutions Group has generated over $2 million in revenue. We continue to benefit from the growth in high-speed wireless data subscribers in the U.S. and a global interest in IMS trials. We anticipate stronger contributions from our existing customers like Cingular and from our acquisition of Vodafone as a Roaming Client customer. We are also seeing greater traction in the Enterprise space, and our product is evolving to meet the needs of this segment.

We can announce that we recently closed a deal with 2Wire for an SBC/DSL gateway application. This could represent a substantial volume opportunity.

We have continued to enhance our software products by adding support for embedded 3G devices that now ship with most major PC manufacturers. We now support all major PC cards, embedded cards as well as tethered cell phones for UMTS/HSDPA as well as EvDO. MSG has also enhanced the Roaming Client capabilities to include automatic service provisioning of embedded 3G devices, as well as contact list synchronization with popular applications such as Microsoft Outlook and Lotus Notes.

On the IMS front, our Roaming Client IMS has been licensed by and is compatible with all major IMS infrastructure systems. Our list of compatible infrastructure platforms continues to grow and now includes BridgePort, Lucent, UTStarcom, Tekelec, Nortel, and Siemens.

Turning to the quarter, let me make a few observations about revenue. Despite the strong performance of RFSG and the in-line performance of our software group, MSG, our revenue is up only marginally over the second quarter. Again, I'm addressing the growth in our operational revenue and excluding the benefit of the one-time settlement with Agere that we realized in the second quarter of this year. Moreover, we are down on a year-over-year basis. While we are pleased that APG sales have been stable this year, averaging about $12.5 million per quarter during a choppy period for many other wireless equipment suppliers, we had expected stronger growth for APG that included the new iVET antennas and the various products that we acquired from Andrew.

A few things are clear with respect to revenue. Discontinuing the SDARs product line caused an unfavorable comparison of around $500,000 in the third quarter compared to last year. Also, last year, the third quarter was unusually strong because of one very large project related to vehicle tracking for a large utility customer and several government projects related to national defense. These projects contributed approximately $1.8 million in the quarter. More importantly, we anticipated that iVET sales would grow year-over-year, but were unchanged at $1.5 million for the quarter.

Indeed, the shortfall in iVET explains most of the shortfall in our APG projections. To some extent, this is a start-up business and a certain amount of volatility should be expected. We believe, however, that the iVET issues are industry-wide and that the market has sputtered for an important reason.

You may or may not know that the GSM licenses in much of Europe are expiring. With those expirations, operators have decisions to make about how to deploy the spectrum associated with GSM service. One of their options is to deploy that spectrum to deliver UMTS networks. While that will ultimately benefit iVET product sales -- because there will be a greater need for cell planning and antenna management -- in the short term, it creates demand for iVET antennas at a frequency, 900 MGhz, that is different from our initially targeted frequency of 2.2 GHz and above. We have addressed this issue with the release of a new, multi-band product, and longer-term, we still believe that this represents a growth market for us, but it has been a factor in the [empiric] revenue.

Our antenna group is making headway in other markets. For example, APG made excellent progress with a series of design wins at key OEM customers. The design wins will position us well to take advantage of future projects related to public safety and homeland security initiatives and include the re-banding of WiFi for public safety applications. Throughout the year, our sales through our major distributors have held up and that also bodes well for the future.

We also anticipate a return on organic investments in our GPS and WiMax portfolios. Indeed, we received our first orders from Tadiran for our new WiMax products. We continue to invest in WiMax, as well as expanded distribution capability and the new applications for our WiFi product line and our legacy products in public safety. It is critical to our success that we secure additional design wins with major OEM infrastructure providers.

For those of you who have had a chance to read our press release from last week, you know that we are combining APG with RFSG. Jeff Miller, who has done an excellent job of building our Global Sales organization, will manage the two groups in our newly formed Broadband Technology Group. The organization will focus, among other things, on emerging opportunities in WiMax. There were several reasons for this organization change.

One reason pertains to product. As we organize some of our resources around the WiMax market, there may be opportunities to move from passive to active devices. We have resources within RFSG that could facilitate in that regard, and it's time to get the advantage of engineering synergies.

A second reason is that Jeff has been successful in building a highly aggressive sales team that has been handling our scanning receivers and our software sales globally. While the regional managers have been responsible for antenna sales outside of the U.S., we have used a different organization for U.S. antenna sales. With this organization, we will be completely unifying the sales force.

Finally, Jeff has been successful in the past in creating market-driven priorities through a strong product management organization. I think that we have the potential to benefit from that approach in the Broadband Technology Group.

This is the first quarter in which I no longer have updates regarding our litigation. It is a great relief to have that chapter in PC-Tel's history behind us, and it is a pleasure to report that we received payment on the last settlement -- $7 million -- on August 12. It is because of this last settlement that our balance sheet now carries $70 million in cash or short-term instruments.

In all, the IP strategy was quite successful. As part of this strategy, we divested the modem business to Conexant, asserted our patents against Intel, required Silicon Labs to license or buy patents, and we settled with Broadcom, U.S. Robotics, 3COM, and Agere. In total, we generated over $50 million in cash payments, received licenses to thousands of patents, and we deflected infringement claims from others that were initially valued at over $25 million. We invested less than $7 million to achieve these results. Our litigation expenses in the third quarter were zero.

The restructuring of our Dublin operations is also complete. We filed an 8k update today, which has all of the pertinent details. While we have put the iVET product lines on a sound economic footing, we have reassessed the long-term economic outlook for the products versus the original purchase price. While the outcome of the Sigma acquisition has not met our original expectations, we have built a meaningful RF business through four acquisitions that cost us approximately one times the current revenue from those operations.

To be more specific, we spent approximately $69 million for a current annual revenue stream of approximately $70 million. We anticipate reasonable growth next year for the Broadband Technology Group and, in the aggregate, we have grown successfully through acquisition and subsequent organic investment in those operations.

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

[OPERATOR INSTRUCTIONS] We'll have our first question from Michael Cody with B. Riley & Company.

Thank you. Good afternoon.

Hi, Michael.

Could you quantify the impact of the reserves taken in the Antennae Product Group in the quarter?

Yes, it was about 4 points, and so the non-normal swing there would be about $500,000.

Okay. And was there any impact from Dublin still? Or was that really when it hit the quarter in APG?

That would have -- so I still would have had fixed costs in Dublin. They would have been a little better than the second quarter, but that's why we expected to see an improvement in the fourth quarter.

Okay. And then, let's see, that 34% to 46% range -- did you say that's in fourth quarter? Or that's kind of going forward once everything --?

I would say that that's going forward, not only in the fourth quarter. And then it fits into the guidance I gave for '07 also.

Got you. Great. How about the tax rate expectation in '07 on a fully-taxed basis?

What we're going to be doing in '07 is we think we have a good shot at passing the regulatory hurdles that we have for not having to reserve our deferred tax assets next year. So at the end of the day, I think we're going to be a number that's in the -- probably in the 25% range of pro forma earnings. And unfortunately the rate on GAAP earnings will be -- it'll be ridiculous. It'll be in the mid-50s. But if you were to use a 25% tax rate on pro forma earnings, you'd been in good shape.

Okay, thanks. And then just the last thing, and I'll jump off, regarding the iVET antenna and the new product targeted at the 900 MHz, is that ready now? Will that be shipping in the fourth quarter?

That is ready now. It will be shipping insofar as we have orders, but we do have some strong orders from some existing customers right now for the fourth quarter.

Okay, and the 2.2 GHz --?

That's ready, and that's been in the wings, and that will be shipping in the fourth quarter as well to existing UMTS licensees.

Okay, got you. Thank you very much.

Thanks, Michael.

We'll have our next question from [Jason Nolan], Robert Baird.

Thanks for the questions. John, just to clarify, the APG gross margin guidance is good for Q4 also?

Yes, it is.

Moving on to the product side, you've kind of guided RFSGs to flat year-over-year into '07. Is --?

No, no --

No, I think we said $19 to $20 million.

That's $19 to $20, and if you just do the math forward for '06, you're in the, like, the upper 16, lower 17 range this year.

Okay, okay. On the MSG side, would you -- the $13 to $14 million in guidance -- would you characterize that as conservative or a stretch goal? I guess I'm kind of asking how much visibility you have in that guidance.

There is a portion of our revenue that comes from non-recurring engineering associated with IMS trials and, to some extent, that is not totally visible for us. But we do have a strong base now of licensing revenue from some of the wireless carriers as well as our private carriers such at FiberLink. I would say I am very confident about $13 to $14 million.

And is the 2Wire deal including in 2007, Marty?

It is.

And then, if there were upside to MSG, would that be growth from existing customers or new customers -- and just more color there.

There's really three types of growth that we could get in MSG. One, clearly, we have been disappointed to date with the subscriber growth with at least one of our carriers, and we hope that that situation will resolve itself, and we'll see some strength there. Second, we could have some unanticipated NRE associated with some of our larger customers and the IMS. And the third is we anticipate some new products as derivatives off of MSG.

For example, we announced some time ago at an investor conference that we had this auto-activation feature now associated with the Roaming Client. And what that does is it permits a carrier to avoid about $20 in their usual activation costs. We think this auto-activation capability and other sort of administrative tools that are now buried within our central configuration server could be valuable, not only to other public carriers but also to private carriers as well, and there are elaborations on those backroom features that we anticipate releasing into the market.

Okay, and then last question -- on MSG also. With the management restructuring, would we expect any change in MSG investment going forward just from, as you referenced there, new product development, specifically?

Well, I'm clearly spending more of my time on accelerating the growth in the software of business. I have a lot of horsepower and managerial bandwidth now in [VPG]. As you know, I have a lot of confidence in Jeff, a great deal of confidence in Luis Rugeles, who's grown the RFSG. We have a terrific guy heading up product management there in Jim [Jacobosy] and very strong VP-level development talent in [Martin Manion] and [Neil O'Carroll].

Biju has done an unbelievable job growing the software business from zero to -- I think, what you guys have in anywhere from $9 to $11 million for the year in software -- clearly has been doing all of the jobs in this area without, in my opinion, adequate support. So as part of this reorganization, a few things are happening. One is that he is getting a dedicated sales force of four people to push his products as well as the continued support of the regional managers.

The second thing that's happening, as I already mentioned, is I'm putting more of my time into this area. I think it's important that we grow this area, both organically and possibly through acquisitions. And the third area is looking at targets. But we'll proceed cautiously in that area and make sure that we have a good fit.

Okay, that's it. Thanks, guys.

Thank you.

We'll have our next question from Douglas Whitman, Whitman Capital.

Thanks for the great quarter, guys. Going back, there was a question earlier about -- Marty and John -- about Dublin. Can you talk about where you are in Dublin, if there's some -- what's left to be done there?

We're really in good shape in Dublin. All of the manufacturing is outside of that factory, either at [Alcatech] or our facilities right here in Bloomingdale for some of the public safety products. We have a few people who are already covered in the restructuring charge that are cleaning up inventory and a couple of clean-up items that had to be done there.

But I think steady state, by the end of the year, you're talking about a design center that will be no larger than 14 people. And all of the financial and product management support is here under Jim Jacobosy's control. So we're really done with the expense there, and we're reasonably pleased with where Alcatech is now on delivering our product. Their yield tests go up a little bit so that we're totally pleased, but we're really achieving this goal of getting our cost of goods to about a third of what it was under the old Dublin manufacturing regime.

So hopefully this is the last quarter you'll hear about any restructuring charges, and that's why we're so confident in the higher gross margin going forward.

And another prior question, which was on -- and you made a brief comment on 2Wire. Could you describe the relationship a little more in AT&T?

Yes, what this is -- the initiative there is to use the penetration of a cable modem to deliver VoIP and cellular service where cellular service is provided by buying minutes in bulk, and then you have a phone that has a dual personality, WiFi and cellular. And so as you going into your house with a WiFi-enabled cable modem, you can make VoIP calls, and you go outside and make cellular calls by virtue of wholesale minutes that have been purchased on our available tier account.

So this is one of the examples, Doug, when you hear people talk about triple-pick play opportunities for the cable providers, where we really have a nice opportunity here to benefit from that.

Excuse me for being so dense. So you're working with 2Wire, and they'll be working with you with cable modem providers, not DSL providers?

Well -- I'm sorry. I'm using DSL generically as a DSL/cable.

So you'll be working with AT&T and guys like that -- [inaudible] the world.

Right, exactly.

Well, congratulations on that. You talked about gross margin and maybe a little bit more on AT&T, the gross margin there, which went down. How much of the effect of that was for obsolete inventory.

Four --

Four --

Four points.

Four points.

So it declined sequentially four points. Virtually all of it had to do with the excess inventory.

Okay. So I'm probably looking at that a little bit differently than you guys do, but if I looked at that as a normal earnings -- normalized earnings, basically, for the quarter, if we moved the inventory charge, I'm coming up with something like $0.14. Or am I getting the right number?

Yes, you would --

Yes, it took $0.02 to $0.03 out of their earnings.

That's correct.

Okay, so it would have been $0.14 or $0.15 on a normalized basis. And then, can you talk a little bit more about -- you know, obviously, the antenna markets been very week overall for just about everybody. When -- what's your vision of what could be happening, industry conditions and assuming conditions -- I assume if business picks up in the industry, your business will pick up, but what could -- and assuming that takes awhile, what are some of the other initiatives you can do to get some growth out of the antenna business?

Yes, I would like to be able to say, Doug, that all of the slowness in our APG revenue is due to market conditions. But I think that some of our problems have been self-inflicted in the following way. Correct me if I'm wrong on this, John, but I think it as October or November of 2004 that we completed our acquisition of the four product lines from Andrew.

And a couple things happened there. We really had to divert a lot of management talent to moving that production out of Mexico, putting it into a new facility and rationalizing and cost-reducing that product line. And there were certainly benefits to that, and the company enjoyed the benefits of very nice revenue growth last year.

But in that process, quite frankly, I believe we took our eye off the ball in making sure that we were getting important design wins at some of our OEM customers. And if you look at our results in APG, our distributor sales are actually up 7% to 8%. Where we took it on the chin, with the exception of Motorola, has been in -- has been with our OEM customers.

Over the last six months, we have applied adequate focus to these design wins, but I think realistically that we're in a penalty box for a year, and I expect a return to a more robust run rate in our traditional antenna business starting at the end of the first quarter, second quarter next year.

And we have taken actions that are going to benefit us, and I'm quite confident of that.

Okay, and it wouldn't be a PC-Tel conference call if I didn't point out that you have a huge amount of cash with positive cash flow, and it would be great to see you become more manly men and buy a little stock back.

I'll pass that information on to our Board of Directors, Doug.

Maybe you need to spend more time in California.

Thank you for consistency. You're a universal constant, like pi.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Matt Robison, Ferris, Baker Watts.

Hi. What --

Hi, Matt.

Can you give us a flavor of what the customer concentration's like for RFS these days?

Yes. And let me, by background, Matt, just elaborate on the accomplishments that Jeff Miller and Luis and the RFSG organization have had in this area of customer concentration. You know that when we took over DTI, I think we didn't totally understand the business model. And what we discovered was that the guys who are selling test equipment, which are comprised of a laptop, a GPS receiver, a phone and a scanner, sometimes were just doing it -- most often times were doing it just for the laptop, the GPS receiver and the phone.

One of the things that Jeff and Luis focused on with the sales force is educating carriers on the added benefit that you get be combining a scanner in that test equipment configuration. So I think one of the things that's happening is that we're benefiting from an increased bundle rate of scanners with test equipment. And what that has done is it's created a greater demand among our core customers.

And approximately 60% of our business -- and this is the direct answer to your question -- comes from sales of the scanner really without anything else -- the bare scanning receiver into test equipment providers such as Tems, Nemo, Ascom, SwiftCall and Andrew through -- it's Grayson Wireless Group.

And then, in addition, we sell a certain number of those scanners directly into the carriers and some to other parties such as [Wahwe]. So I think that answers your question, Matt.

Yes, yes, it does, at least partly. Is there -- if you look at where those, I guess you'd call them OEM customers, are selling through to, are there any particular carriers that are driving the end market?

Well, there's no question that our market right now is being driven by UMTS and EvDO. And whenever you have a technology change, a disruption, you get an increased demand for scanning receivers because you're deploying the new networks; you're doing a lot of testing; there's transitional issues and so on. So what's really interesting about this business is that over 60% of it outside of the United States.

I think sometimes investors could misunderstand our business by looking at the Antenna Group and seeing so much of it in the United States. But if you look at the scanning receiver group, and you look at our software, we have a lot of business outside of the United States.

So a more complete answer to your question is, number one, we're concentrated in the OEM providers, the test equipment. Number two, new technologies -- EvDO, UMTS, FOMA in Japan -- are all where we're seeing momentum for the scanners. And the third answer to concentration is that a significant amount of our business, 60%, is outside the United States.

Well, it seems like there's -- the business is counter-cyclical to the infrastructure suppliers.

You know what, it has two big drivers. One is technology disruption, which could be cyclical or counter-cyclical. But the second, which is counter-cyclical, is that when a carrier decides to slow capital investment in their network -- so, for example, we're going to make a transition, and therefore, we're not going to invest in additional GSM infrastructure.

Well, then their network engineers have the task of getting greater performance out of the existing investment. They need to leverage it. And the way they do that is by getting more refined data on the performance of the network, tuning the network as a result of the data they collect with our scanners. So that part is counter-cyclical.

All right, thanks.

Okay. Thank you.

We'll have a follow-up question from Jason Nolan, Robert Baird.

Thanks. Just a follow-up on --

Are you double-dipping today, Jason?

I am, Marty. I am, if that's okay.

Yes.

Just one follow-up on RFSG. You just referenced that 60% of that business is outside of the U.S., and I know there's a couple of resellers in Europe. Do you have a feel for the total number of customers that make up RFSG? And then, secondly, what do you see Cingular doing into '07 versus '06 in RFSG?

Well, I think Cingular will be strong, not only for the purchase of our scanners through the OEM resellers but also potentially for our [Clarified] product because Clarified still is very strong for GSM, and there's some demand for that, and we do have capabilities in other technologies as well.

But we have 50 or 60 customers that we're selling to through the OEMs, and that's one of the great aspects of RFSG. We're sort of expensive on the R&D side of RFSG, but very cost effective on the sales side of RFSG because we can drive so many of our sales by influencing the OEMs. Our direct sales guys spend a lot of their time educating the end user in order to bring demand into those OEM resellers.

Okay, great. Thanks a lot.

Thanks.

We'll go next to [Brian Rorey, Orillion Management].

Hi. I was just wondering if you could comment a little bit on the trend in R&D spending, and it's been trending up fairly strongly on a year-to-year basis, and this quarter, I guess, is kind of an apples-to-apples comparison with respect to acquisitions and so forth.

Yes, it's about $1 million up from last year, Brian. And there's three elements to that growth -- I think all of them really worthwhile. But let me just make a comment here. We have not made an acquisition now for 15 months, and I'm sort of enjoying the benefits of making organic investments in our own product, and there's three areas where we think we're going to get a lot of benefit and better return than we would through acquisition, and I'll tell you what those three areas are.

If you look at our website now, you'll see that we are able to showcase a pretty substantial WiMax antenna product line. That's all new. Secondly, we invested additional resources into the development of this broadband or dual-band iVET antenna so that we can play in the GSM spectrum that's being -- in the spectrum that's being vacated by GSM technology. The third area of expanded investment has been in our scanning area, and we think we're going to really benefit from that.

Two big areas for us are HSDPA and TD-SCDMA. We believe we have a strong opportunity in China, particularly with our association with Wahwe, and we want to be out early with a new scanning receiver to meet that market.

And the fourth area, and one that we've talked about for the entire year, is our investment in IMS. There's no question that if all we were doing were enhancements to Roaming Client, the profit that we would be generating from our MSG division would be a lot greater. But we're trying to prepare for the IMS market, and we're delivering -- I would say -- three important applications over the next two quarters. We're going beyond the Voice over IP, and we'll be delivering Push to Talk over cellular, peer-to-peer video sharing and also messaging capability.

And to give you even more color on that, we've built up our Belgrade group, which is the lower cost development center, to seven people, and I'm not sure how many people we have in Bangalore now, John.

It's in the vicinity of nine.

So we are looking for lower cost development engines, but it's important that we keep pumping resources into that area.

So is that a dollar amount that -- how do you think the dollar amount trends going forward? And what kind of percent of revenue range is the right [inaudible]?

I think you can see us going up another $1 million in development next year.

For the year as a whole?

Yes.

Okay. While you're mentioning IMS, are you all doing anything with UMA? I think --

No, we are not. But we really made the bet on IMS.

Okay. Okay, thanks.

Okay, thank you for the question.

We'll go next to Gene Weber, Weber Capital Management.

Hi, Marty and John.

Hi, Gene. How are you?

Fine, thank you. Just want to clarify a couple things. These may be more for John, and it relates to Sigma and Dublin. So you're done there -- you longer have any reserve for expenses there, but did I hear you say that you still have a 14-person design team there?

Yeah, we --

So they're on the R&D line of the income statement.

Okay.

So that is something that we're -- that's really a question for me, Gene, about the development resources, and it was always our intention to maintain a European design team since our markets are going to be dominantly in Europe, we hope a little bit in Russia, quite frankly, where we manufacture product, and we may have a cost advantage there. And for example, this change to the dual-band antenna, it was crucial that we had local resources there to design, develop and test this new solution.

Okay, good. No, I understand it. I just wanted to clarify, wanted clarification on it.

Sure.

And there was -- what was the one other thing that I was thinking about? I'm having a senior moment here. Well, I'll pass. If I think about it again, I'll get back in the queue. Thanks for -- all my other questions have been answered. Thanks.

Well, with that, Gene, I think we're -- it looks like the queue is empty right now. We appreciate your questions and your participation in this phone, and we look forward to sharing results with you at our next earnings release. Thanks a lot.

A replay of today's conference will be made available beginning at 8:15 p.m. CST, running through h November 9, 2006 at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the passcode 7846916. This does conclude today's conference call. Thank you for your participation.