PCTEL Inc (PCTI) 2006 Q4 法說會逐字稿

Good day, and welcome, everyone, to today's PC-Tel fourth quarter 2006 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the program over to the Chairman and Chief Executive officer of PC-Tel, Mr. Marty Singer, please go ahead, sir.

Thank you. On behalf of PC-Tel, welcome to our earnings release conference call for the fourth quarter. Thank you all for attending, and for your continued 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 will review our financial performance in some detail and we'll review our balance sheet and other issues. I will cover the general state of the business, discuss the highlights of the past quarter, and then I'll discuss some areas of focus for 2007. We'll open the call to your questions after that. 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 securities -- federal securities laws. Comments concerning our future financial performance and expectations regarding the future growth of our wireless and licensing businesses are forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies, and obtain protection for the related IP and the ability to integrate acquired businesses and products.

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 basic expense, including stock and stock option base compensation, amortization, and impairment of intangible assets and good will related to the Company's acquisitions, and a significant non-cash change in accrued income tax 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 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.

Let's turn to revenue. Fourth quarter 2006 total revenue was $20.7 million, compared to $22.8 million in the fourth quarter of 2005. I will speak to the trends by segment. Our broadband technologies group, which contains wireless antenna and wireless scanning products reported revenue in the quarter of $17.6 million compared to $19.5 million in the same quarter of last year. For the year, revenue in this group was $68.2 million, compared to 68.6 in the prior year. Antenna revenue declined for the quarter and the year, while scanner revenue experienced continued strong growth. Marty will comment on these results in a few minutes.

The mobility solutions group revenue in the fourth quarter was $2.6 million, up 7% from the $2.4 million reported in the fourth quarter of last year. Revenue for the year was $9.8 million, up 41% compared to the $6.9 million reported in 2005. The principal products in this segment are the company's data roaming client software, as well as its IMF client software. Data client sales dominate MSG revenue, as IMS technology is currently in its precommercial deployment trial stage throughout the world.

Licensing segment revenue was $0.5 million compared to $0.9 million in the fourth quarter last year. The difference is attributed to a licensing settlement from U.S. Robotics in the fourth quarter of last year. With the completion of the modem patent litigation earlier this year, the Company has remaining only several relatively small licensing agreements that will run to completion in 2007.

Now I would like to speak to revenue guidance for the first quarter of 2007. First quarter revenue is expected to be between 19.3 and $19.7 million, up approximately 5% from the first quarter last year. Licensing is expected to be approximately $0.3 million of that number. As a reminder to our shareholders, the budgeting cycles of our customers, particularly our broadband technology customers are cyclical. The first quarter is traditionally the lowest quarter of the year, and the fourth quarter is typically the strongest. Our annual 2007 revenue guidance remains unchanged from what was provided at the last quarterly conference call at between 94 and $100 million. That is approximately 80 to $84 million for broad band technology, 13 to $15 million for mobility solution software, and approximately $1 million for licensing.

Now let's turn to gross margin. Aggregate gross margin for the fourth quarter was 53%, compared to 47% for the fourth quarter of last year. Gross margin for the year was 54% compared to 48% in '05. Approximately 4 points of the improvement reflected the one-time $7 million licensing settlement in 2006. 2% of the difference reflects product margin improvements and favorable product mix.

Let's talk about the segments. Broadband technology group's gross margin was 45% in the fourth quarter, a substantial improvement of 6 points as a percent of revenue from the same period last year. Gross margin for the year improved one point on revenue. The improvement reflects growth in our higher margin scanner products as well as the improvements achieved in our ident antenna products that were outsourced to lower cost manufacturing sources in 2006. We expect gross margin in this segment to run in the 44-45% range going forward.

Mobility solutions gross margin was 99% in the fourth quarter and the year, unchanged from the same periods last year. The only cost of sale in this segment is third party software licenses. We expect gross margin to remain in the 97 to 99% range going forward. Licensing gross margin was 99% for the quarter and the year. We expect margin this segment to remain in the 97 to 99% range going forward. With product mix forecasted for the first quarter revenue guidance, we expect total PC-Tel margin for the quarter to be between 49 and 51%.

Now let's turn to operating expenses. Fourth quarter R&D and SG&A were $9.4 million, down $100,000 from the same quarter last year. R&D expenses for the quarter and the year were up compared to last year on incremental investment in head count and expenses across all products. Sales and marketing was virtually unchanged for the quarter and the year reflective of the revenue pattern. G&A was down for the quarter and the year compared to 2005, reflecting the completion of the patent litigation in the first quarter of 2006, and the reduction of costs associated with the Dublin facility. The Conexant royalty was down in the quarter and the year due to scheduled changes in royalty caps.

With regards to the first quarter 2007, as compared to the fourth quarter 2006 just ended, management anticipates that R&D will increase by between 0.1 and $0.2 million on additional investments. Sales and marketing expense should increase about 0.2 to $0.3 million as the first quarter contains the bulk of the annual trade show expenses. G&A and the Conexant royalty are expected to remain approximately the same. Now let's speak to other income. Other income was $0.9 million in the fourth 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 attributed to the general rise in short-term interest rates. The Company expects other income in the first quarter to be approximately the same as it was in the fourth quarter of 2006.

The Company's non-GAAP income tax provision for the quarter and the year excludes a $5.2 million one-time favorable non-cash adjustment to its income tax accrual. The accrual adjustment is related to our modem operations that were sold in 2003. The accruals were determined to no longer be required based on the criteria set forth in financial accounting standard number 5. As a general review of earnings, non-GAAP net income for the fourth quarter 2006 was $3.3 million or $0.15 a diluted share compared to non-GAAP net income of $2.2 million or $0.11 per diluted share in the fourth quarter of '05.

To summarize the differences previously discussed, gross margin is up due to greater software and scanner sales, coupled with cost improvements in antennas. Total OpEx cost was up slightly in investments in R&D, offset by G&A reductions. Other income is higher from a rise year-over-year in interest rates and taxes are lower from a change in the effective tax rate. The net effect of all of these factors is an increase in non-GAAP net income.

Now let's turn to the balance sheet. Cash and short-term investments net of the company's short-term credit line ended the quarter at $69.9 million, up $0.5million from the third quarter. During the quarter, the company repurchased 227,000 shares of its common stock for $2.1 million at an average price of $9.40. The Company has repurchased 2.3 out of the 2.5 million shares authorized by the Board of Directors under its current share repurchase program. Management anticipates cash will end the first quarter in a range of 69 to $70 million.

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

Thanks, John. My comments this evening will focus on one aspect of the Company's progress and plans: Revenue growth. The past quarters' results and indeed the results for the entire year demonstrate that PC-Tel can now generate profits and is operating effectively. On modest sequential revenue growth, we generated $0.15 per share in non-GAAP earnings.

We've pared back G&A expenses and our recent organizational changes have streamlined management of our core products and our distribution channels. We have not, however, aggressively increased revenue despite strong growth in our software and scanning receiver products, declining antenna sales resulted in weak revenue growth for the year. There were specific reasons for this decline, including our inability to repeat about $8.5 million in specific sales events that occurred in 2005. This included the elimination of certain antenna product lines. This will change in 2007. After reviewing our progress in the mobility solutions group, and our success in growing the scanning receiver products, I'll discuss our plans to grow 3 of our antenna product families by 30% for a year over the next several years.

We are very pleased with our progress in the mobility solutions group. In 2006, we secured additional business with Vodafone, landed a major enterprise customer, fielded our roaming client at 8 carriers, and participated in 23 IMS trials. On an annual basis, our revenue grew 41% in this segment. In 2007, we anticipate revenue from two additional major carriers and expanded revenue from our existing customers. Last week, we had an outstanding presence at 3GSM in Barcelona. We have now demonstrated our software products for the past 4 years at 3GSM. Other competitors that started out in the connectivity space have disappeared and it is clear that we have an excellent reputation for delivering high quality, carrier grade products to the industry.

Our footprint now spans 8 carriers, 2 enterprise focused carriers, and 7 infrastructure providers. The marketplace greatly values what we provide. Much more than a simple client, we deliver a system for managing millions of connected devices that goes well beyond basic connectivity. We provide a server that implements management tools, enables applications, and administrative tools for automatically provisioning and authenticating users. Our IMS framework now provides a new platform for generating other sources of revenue.

At 3GSM, we demonstrated our new Microsoft-phone compatible client at Nortel, IBM and UTStarcom's booths. We also demonstrated our SIP-based IM client that eliminates the barriers between different IM services. This is an important application that promotes device and service independence. Our focus in 2007 will be expanding our application portfolio, enhancing the existing client to meet the administrative and management needs of our carriers, enterprise customers, and OEM and handset partners, and increased IMS activity including FMC voice, push to talk over cellular, location-based services, and next generation instant messaging.

Our presence engine will be a key component in all of the pre-IMS and IMS offerings that we bring to the market. Our roaming client base will grow because of our new customers and the demand for additional functionality and licenses from existing customers. One such example would be providing our carrier customers with a client and a corresponding server component that enables their subscribers to have individualized control over their account. This service and corresponding client would give subscribers the ability to subscribe on an hourly, monthly, or temporary session basis. We will continue to leverage the power of 3G networks and devices to offer additional functionality. And offer additional revenue opportunities for carriers and ourselves.

Our annual 2007 revenue guidance for the mobility solutions group is 35 to 45% increase over 2006, but our number of opportunities continues to grow and with additional customer wins, we have a potential for a stronger year. The midpoint of our 2007 revenue guidance for our broadband technology group represents approximately a 20% annual growth. We anticipate modest growth of our scanning receivers and our legacy land mobile radio antennas will be steady. Our scanning receivers and systems, in particular, our new EX platform that we unveiled at 3GSM and our clarify system were well-received in Barcelona. In addition to delivering a state of the art platform that sets an industry standard for form factor, scanning speed, and dynamic range, we are virtually unchallenged in the area of combination scanning products. These are scanning receivers that handle UMTS and GSM, EBDO and CDMA and so on.

We also expect more revenue from our clarify interference management system, as well. With the addition to UMTS and GSM internetwork analysis capabilities, Clarify will solidify its industry leadership position in interference management for overlaid networks. It will also become a critical solution in managing the necessary clearance of European GSM900 mHz spectrum in preparation for the new WCDMA deployments. For those of you who are unfamiliar with this trend, what's happening is that the GSM licenses are being reharvested for UMTS deployment. We believe that we will dominate the supply of these leading edge products into the wireless test and measurement market. Interestingly, we anticipate strong sales from the operators who have constrained CapEx growth budgets. They must squeeze more capacity from their existing networks. To do so, they need tools to understand their network issues. Finally, we anticipate growth from a unique product that we built to handle CDMA - IDA networks.

In addition to our traction with the mobility solutions group and BTGs, our AP solutions products, there's a great deal to be excited about in our 3 primary areas of antenna investment. Indeed, as I mentioned before, we believe that revenue growth over the next several years could approach 30% in the areas of WiMAX, GPS, and wideband mobile antennas. We have had design win success over the last 6 months in WiMAX for which we expect to see traction in the second half of this year. The GPS market continues to grow as new applications for our products are introduced. Wide band and multiband mobile antenna products will similarly show robust growth. This family of products responds to the public safety markets demand for increased interoperability of network equipment that can operate over a wide range of frequencies or over multiple sets of frequency ranges. The European market has begun to employ UMTS in the traditional GSM frequencies, that will allow us to enter that market segment with products without facing incumbent suppliers.

Additionally, we now have a broad band iVET product that can support wireless deployment simultaneously at 1800 mHz and 2.1 gHz, with a single product. We'll see greater than 30% growth in that product family, as well. While some of our investors have questioned our entry into the IVET UMTS market, we are now deriving an an unanticipated benefit from our investment. By the end of 2007, we should be releasing an IVET, that is a variable tilt enabled version of our WiMAX antenna. This will simplify subplaning for the new WiMAX operators. There will be a global market for these antennas, and we believe will ensure that we will triple sales in 2007 and then again in 2008 for our new WiMAX products. We encourage you all to visit our booth at CTIA to see these new products.

As we've discussed our inability to grow the antenna business impaired our overall growth in 2006; however, our multiple and diverse investments in wireless broadband products resulted in strong revenue growth in two areas to date: mobility solutions group, and MBTG's RF products. In 2007 and beyond, we believe that we will experience comparable growth in our portfolio of broadband antennas and WiMAX, IVET, UMTS, GPS and wideband mobile antennas. We are extremely confident about our long-term growth prospects because of our confidence in the prevalence of wireless broadband, and the demand for ubiquitous voice, data, and video services. The demand for broadband wireless services creates strong demand for our connectivity software, the mobile solutions that we offer, our tools for optimizing the performance of these networks, and antennas that make the networks accessible to users.

Here is some useful data to keep in mind. Today there are 2.1 million HSDPA hand sets. The industry forecasts growth to 90 million 2009. Today there are 120 million 3G subscribers. They are forecasted to grow to 1 billion by 2011. WiMAX infrastructure sales were $140 million last year. They are forecasted to grow to $3.3 billion by 2011. The demand for mobile video and high speed wireless data continues to grow unabated. PC-Tel will benefit from all of these broadband wireless growth drivers.

Finally, as John mentioned, we bought back just over 227,000 shares at an average price of $9.40 in the fourth quarter. As you may recall, our share repurchase activities are confined to periods where our public disclosures are current and there are no insiders engaged in stock sales. Over the past 4 years, we have bought back a total of 2.314 million shares of the 2.5 million shares authorized by the Board of Directors. These shares were repurchased at an average price of $8.10. We will continue to consider opportunities to buy back additional shares at favorable conditions. With that, we've set aside 30 minutes for your questions. Operator?

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

Hey, guys. Nice results. I know, Marty, you've combined the RF solutions and the antenna products group for the broadband group. But it's still -- these products still have quite varied margins and growth characteristics. Can you help us understand the -- how the components came out in the quarter? And then give us a flavor for the magnitude of these growth antenna business? I have a couple follow-ups too.

John, do you want to comment on what we can do here without violating our segment reporting?

Well, I think at the end of the day, we've actually been through this with our auditors and our attorneys about talking about trends below BTG pretty much have to be limited to basic trends. What we can say at least for this quarter given that it's the first quarter is that both -- all three of the product areas, the antennas, the Sigma antennas and RFS did show growth over the same period last year. And at the end of the day, you can kind of tell by the way that the margins went that there was more growth in a little more growth in scanners than there was in antennas. Just quarter-over-quarter, year over year Beyond that we really can't speak anymore to anything but trends.

What about the magnitude of the growth antenna businesses, where they are now?

Well, I know -- when you say the magnitude of the growth --

The magnitude of those businesses, are they couple million dollar businesses? $500,000 businesses? You're talking about some big --

Yes, Well -- basically you've got -- similar to last quarter, which was the last quarter that we actually reported them. If you add up the components from last quarter, they were about $17.7 million, you can get that out of the last quarter's segment reporting that we did. And as you can see the relationship of that is about $5 million out of the 17.5, $18 million runs around scanners from an order of magnitude perspective. And that's --

I wasn't trying to ask the same question a different way.

I think, Matt was trying to ask a different question. When we were saying, for example, 30% growth year-over-year and we were applying it to something like GPS antennas, we're applying it to wide band mobile radio antennas and we're applying it to WI-MAX antennas. He wanted to have information that was deeper than percent growth. He wanted to have absolute dollar amounts.

And that's difficult for us to do without getting into sort of microscopic reporting. I think I can tell you this much: I think before we began to combine the products, we talked about our antenna products as having maybe 4 components, that we have land mobile radio, which was a legacy business. We had emerging products in WiFi and WiMAX, we had our GPS line and then a few miscellaneous. We think, if you look at the data, we're going to have 30% growth over some areas that have been meaningful for us in the past and we'll have 30% -- we'll have much greater than 30% growth in areas that have been smaller.

For example, WiMAX and its precursors like Canopy have been relatively small. And this year you'll see substantial growth in those areas. And we're actually looking at 2 to 300% growth in that area and perhaps another tripling next year.

What's driving the GPS growth?

GPS growth is in a few interesting areas. For one, there's combination of products now for public mobile radio that both have navigation information and then basic communication with the various systems they have to access. We're also getting direct business now in our timing applications for CDMA EVDO networks. And before, what we were doing, is we were taking what was initially an Andrew product, distributing it through Andrew to Lucent. Now we're delivering those products directly. And we think that's going to be a pretty strong business for us over the next few years. So there's -- and then the final, of course, is fleet management. We have a pretty strong business in that area. And then we have a small component of that business that goes into the government.

John, what was the CapEx and operating cash flow this quarter for the fourth quarter?

CapEx in the -- well CapEx in the quarter was about -- I don't have the number off the top of my head, but it was in probably the $1.2 million to $1.5 million range?

I saw where was property, plant, and equipment was up.

What we did was we outfitted some more advanced equipment in the APG antenna factory. And we're making a significant investment -- investments in ERP and Hyperion and some info systems.

And operating cash flow?

The operating cash flow, off the top of my head, I would say it's pretty close -- I would actually pull it right off the press release.

Oh, sorry if I missed that. Marty, do you see any demand for GPS for timing that might reflect the interest in carriers to go the ethernet backhaul where they may not necessarily be able to get the sync signal like they could with the TDM backhaul?

Yes.

You think you'll start to see that in UMTS and GSM networks going forward?

Yes, I think there is a potential market now that goes beyond CDMA and EBDO.

Yes, the income loss from operations pro forma Matt, is pretty close to our operating cash flow.

All right. Guys. Let somebody else ask a question.

Okay, thanks, Matt.

Our next question comes from Anton Wahlman, ThinkEquity.

Hey, Marty and John, can you hear me?

We can, how you doing?

Outstanding and improving. My question is concerning some of the frequency support in terms of what's coming up with some of the new networks that are being built and will be built in the next couple of years. First of all, with respect to T-Mobile's 1.7 and 2.1 gHz deployments that are going to be underway here this year in terms of about your scanners and any applicable antenna products that you would potentially be seeking to sell to them if -- what you're planning on introducing there. The other one is, looking into 2008 and looking at the 700 mHz spectrum, that's coming up. What are you thoughts on that? Is that something you believe will be significant driver for you and where you will be launching products from scanners to antennas and so forth?

Well, a few things. The scanners, although not a layup, this is what we do as a regular diet. In fact one of the reasons we launched our new EX platforms is its flexibility in terms of dynamic range and its flexibility in terms of handling combinations of frequencies and combination of technologies. So whenever there is a disruption, either in terms of a cellular or wireless standard or frequency change, that is always great news for scanners. And when you talk about 1.7 and 2.1 gHz, these are easily covered within antenna technology, antenna specs. And for example, while we had that little bit of difficulty when we have a massive change, for example, we had a single band IVET UMTS handset, up at 2.2, where the initial licenses were. And we've released now a wideband antenna that will handle the existing GSM spectrum. We'll continue to do those types of things.

One that you didn't mention that is really interesting, unfortunately, when I prepared these scripts, some of the information is just so laden with technical terms and some of it gets lost. But I mentioned, for example, something that I referred to as wideband mobile antennas. And so for the avoidance of doubt, let me tell you what I'm talking about there is exactly your issue. If you look at the problem of interoperability, let's say the cop in his police car or the paramedic in their emergency vehicle, or whatever. You probably have noticed that they'll have 6 to 12 antennas outfitted on those vehicles. And it's because they're communicating with different frequencies or different systems. The calamities that we had in this country indicated that core problem with interoperability. Well, we've come out with an entire portfolio of these wideband mobile antennas that is going to really revolutionize how public mobile radio applications are implemented.

You're going to see one antenna instead of six. These antennas are going to have higher margin, they're going to be in great demand, and we're really focussed on this area. So spectrum range, frequency range, application changes are all good news for the antenna business for us.

All right. Well, that was the main question I had. So thank you.

Okay.

And we'll go now to Ken Muth, Robert W Baird.

Thanks. This is Jason on for Ken. First a couple housekeeping, John. What's your tax rate expectation and share count for '07?

I would say the share count around 22 million, $22.5 million is pretty appropriate. Tax rate wise, I said about 25% of non-GAAP earnings, but just remember guys that you need to, the flow that has to follow GAAP, the way it's going to hit by quarter. So as example the first quarter, because you'll have -- even with the guidance I gave for non-GAAP, when you add back in the GAAP expenses, it'll actually drive a, GAAP slight loss in the first quarter. So net-net you've got to flip that when you do it by quarter. So 25% on the year, but just make sure you watch how the GAAP goes from quarter to quarter because that's how it's got to flow by quarter.

And then the broad band technology gross margin guidance, the 44 to 45, that's for the year of '07?

Yes, that'll cover the year too.

So it looks like your gross margin guidance for Q1 suggests that you may be lower than that in EPG for Q1.

No the 40s -- at the end of the day, we did 45 in the fourth quarter what I'm reaffirming is that we can do that again.

Okay. And we can't talk about gross margin by RF or antenna, correct?

No.

Okay. In the R&D line item, is that investments weighted towards any one of the three major areas more so than the other? Or is it weighted roughly by revenue?

Let me answer that. There's no question that we've made more investments in the software area recently. We've expanded our software groups in Belgrade and India and we've also put a little bit more muscle behind our IMS activities that we support here in our U.S. office. We've also expanded some of our investment in our new antenna portfolio. So we have expanded investment in WiMAX, we have an expanded investment in these wideband mobile antennas, and of course, we continue to have this bubble that doesn't go away in some of the IVET applications. And we've been pretty constant in supporting the scanners. We bumped up that investment over a year ago when we were getting on the track to launch this new EX scanner. And that's been relatively constant.

Most of the scanner investment is targeted towards Clarify, Marty?

No, I would say that Clarify is actually relatively modest investment. The bubble in that investment was designing our new platform. Ken, actually I think was quite impressed when he came into our booth, at 3GSM. I hope he was impressed, he wrote an upgrade. He saw the scanner. And we have this form factor that sets the standard now for the industry. And it sets a standard also for dynamic range and speed in terms of sampling. Now this new scanner does go into our clarify system. The clarify system is doing post processing on data that we collect. But the really expensive investment that we've made in scanners is the redesign of that product.

Okay. Couple questions on MSG and I'll give up the floor. First you mentioned the potential for a stronger year in MSG than guidance, is that based on share, or just end user take rate?

It's really a couple things. One is how rapidly licenses will be deployed out to these subscribers. And how soon we're able to consummate a couple of these contracts that we've secured, but the business has secured, but we haven't yet consummated the contract. And so you have a little bit of anxiety there. The sooner we get them, the greater potential we have for going through these numbers.

Okay. And then, IMS has historically been approximately 10% of MSG. It sounds like there's potential --

I would say that we ended the year being about 20%.

Okay.

Because we're involved in so many of these trials. Now it's not the kind of revenue that we covet because a lot of its NRE.

Right.

So our task in '07 is to convert that from NRE into subscription. And we're working on a couple opportunities. I think the most exciting thing that happened at 3GSM is that people got excited about this IM client that we have that is more directly related to the carriers' revenue stream than something like FMC Voice where they have not yet discovered how to make a profit from that. But sip-based IM, where you become agnostic to what phone you're using, what IM message services you're using, what other devices are involved, whether they're laptops or other handhelds, That's really related to ARPU and how much text messaging and IM they're selling. And we had a pretty good response to that and I'm hopeful that we'll see some deployments in '07.

Okay. Thanks, Marty, thanks, John.

Doug Whitman with Whitman Capital, your line is open. Please go ahead.

Thanks for the good quarter.

Thanks.

If you could talk a little bit about the antenna business obviously has been a slow business kind of last year for a lot of people, where you kind of maintain market share basically. Talk a little about the scanner side of it. You had a strong year in it and do you think you gained market share? And if so, what were the features? Is that repeatable as we look at it this current year?

There's no question that's repeatable and we'll have reasonable growth again this year in the scanner business. What drove the scanner growth were really two variables. And both of these were exploited in a really effective way by Jeff Miller in sales and Luis Rigelis leading that area for us. And the two variables were this: We increased the bundle rate of our scanners with test and measurement equipment from the prevailing -- well the dominant OEMs in the market such as TEMS and NEMO and others. Meaning that, there's -- and that's why there's such great opportunity for growth here. I think before this year, only 10% of those systems had a scanner. Some of them tried to get away with having a test mobile. I think that's been bumped up to 14 or 15%. Our goal in life is to bump up the scanner bundling to 30 or 40%. And then you'd really get strong growth in this business.

The other characteristic or variable that we pushed in this area was to increase the number of OEMs that we had. So we went really from 2 OEMs to 6OEMs who are using our scanners. All of that was favorable. The thing that I think or the variable I think that could promote the scanning business at a rate even greater than we had this year is the extent to which TEMS and Nemo and other test and measurement and India and China. And bundle our scanners in the test and measurement equipment that they deploy there. So all of those things are really favorable.

Could you update us also on your views of the timing of when WiMAX, the rollout and when it becomes meaningful to PC-Tel?

Yes. I think you'll see meaningful revenue from WiMAX in the second half of this year. And I'm going to wait till the next earnings call and get greater guidance from my outside auditors on how to define meaningful and if I can give absolute dollar amounts. But it will be meaningful. And I think what you're going to see are some specific applications being deployed earlier rather than later, for example, backhaul. You're also going to see WI-MAX cable boxes for lack of a better term, with opportunities for some consumer WI-MAX antennas that we feel we have a shot at getting.

All of our time over the last 6 months and during this quarter is being spent on securing design wins. And we have 3 very important design wins that we have right now. And we'll start to get the benefit of that in the second half of this year. And quite frankly, Doug, it's one of the reasons that I'm so optimistic about the business. I really want to see our antenna growth in our investment areas catch up with the growth that we've had in the scanning product line and in the software product line.

Okay. Well, it's nice to see your positive cash flow and you're using some of it to buy back stock.

I know that you appreciate that use of cash.

Thanks. Bye.

and we'll go next to Michael Coady, B. Riley & Company.

Thanks, hi Marty, hi John.

Hey.

Just a couple things. John, with OpEx you looking for a bump up and mentioned there'd be some trade show activity, et cetera in the quarter. It's also going to be up year to year and obviously if there's some R&D investments. Can we see that come down a little bit as the trade show activity --

Yes, it should come back down, you know 150 to $200K from the first quarter's end.

Okay. Thanks. And Marty you mentioned the seasonality DBTG of or maybe John you did, stronger in the fourth quarter weakest in the first quarter. We didn't really see that trend obtained in the fourth quarter '06 for the reasons that you mentioned. But you would expect that -- you would expect to see that in the fourth quarter of '07 such that you should see a nice pop in the fourth quarter? You'll see more of the seasonal trend?

What's you're seeing is that that trend did actually happen, but it's masked by the $8.5 million worth of antenna business that was one-time and or antenna lines that we discontinued.

Okay.

Yes. But you actually look deep down inside you would see that trend again.

And we certainly had it in 2005 when we had a huge pop in antenna revenues. This year we had a smaller pop.

An example of two of the largest areas of nonrepeatable business was the F-stars, which is not OEM based, OEM manufacturing based and the Katrina related item in 2005 turned out OEM manufacturer cyclical base.

There's one other thing I should mention, and I think we should mention this historically. The third quarter was the last quarter that we broke out scanning revenues from antenna revenues. And you may recall, we just had a record quarter for scanners in the third quarter. I think it was $5.1 million. And we said at that time that we would be un-- it would be unlikely that we could repeat that level in the fourth quarter. And that statement is true. So we actually did have a nice little ramp --

with a minor flip-flop between Q3 and Q4.

Yes.

Okay that clarity really helps. I appreciate that. Thank you very much and good luck in your growth opportunities in '07.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] And now we'll take a follow-up question from Matt Robison.

Yes, on -- regarding the share count your reported share count much higher in the fourth quarter presumably, that's because of GAAP profitability. How should we look at the first quarter if there's going to be a GAAP loss adjusted profit. What's the delta?

Yes, what we do, Matt is we use what would be fully diluted for our non-GAAP when it's profit.

Right.

and so that's why when you -- right now you guys -- as a group I'm seeing number share counts out there in the 22 million range for a lot of folks. And our view is we don't disagree with that range.

and then --

I'm going to end up doing -- in the first quarter if you follow the -- if I deliver the guidance that I gave, I'll end up with a GAAP loss. So for GAAP I'll have primary shares, but I'll have a non-GAAP income, which means I'll use diluted shares, which will be in the 21.7 to 22 range just like they were in the fourth quarter.

Yes. And then the tax for GAAP tax, should we be looking at some sort of --

What you do is you just take your model for the year in the low to mid 20s on non-GAAP, but you've got to just apply that as a rate to the way GAAP is going to flow by quarter.

That's all I need, thanks.

And our next question comes from Gene Weber, Weber Capital Management.

Hey, how you doing?

Fine, thanks. A more general question on the operational side of the antenna business. Last year, if I recall, you made some operational changes domestically and then, of course, you moved the Irish operation over to Russia. Could you give us an update as to just how all of that's worked out so far and are you expecting further improvements beyond what you've seen so far?

I think so. We will have further improvements, but just to recap that, aside from 11 developers, a product manager, administrative personnel in Dublin, what was the Dublin operation has been completely vacated. The entire product line, not just the IVET UMTS, some of the PMR, public mobile radio products have been shifted to Elcoteq. And we're actually outsourcing some other products from Bloomingdale into Elcoteq that will be delivered into large distributors that we have there, such as Telecom Spain.

We have a -- an expense that you could say is related to Dublin, but it really is not. It's related to our commitment to invest in Europe. So if you look at Viju's area and the mobility solutions group, we now have two full-time people dedicated to supporting Vodafone, TDC, and Denmark, and supporting a large enterprise customer that I can't name, and securing additional opportunities in Europe. We still have the one person in Israel, but we've expanded our sales force for BPG to include a regional VP and three other people. So that expense will remain, and our business will have to catch up with that. We feel that it's really important to have some speculative investment in sales. Every time we've done that, whether it's Japan or other places, it's always paid off for us.

And so when we look at our expenses internally and you don't see all that, you could associate a number as high as 17 or 18 people with Dublin. Basically we've gone from about 115 to 13 people, if you look at the core operations. As far as the changes we made here in the U.S., the biggest change was we took Jeff Miller out of sales and both components of our RF business, scanners and antennas now report to him. We're starting to see some benefits to that. The streamlining of global supply chain management, the regional sales managers actually report to me now. I'm getting a much more intimate understanding of what's going on in our sales activities, and I think we're going to see some greater efficiency out of having salespeople who only sold antennas before sell scanners and antennas and salespeople who only sold scanners before sell antennas, as well. And we actually already had successes in that area in the first quarter. And then it's a great advantage now that Viju and the mobility solutions group has a dedicated sales force of really 4 people worldwide. But that's really what we need for this size business.

So I'm happy with how that's going. We're going to continue to press on our operating expenses. If you look at some of the detail for the quarter, 2005 over 2006, what I'm really pleased with is that we've expanded our investment and development, we've stayed totally flat in sales and marketing despite expanding our presence in Europe. So we've had some streamlining. And we've had a sharp reduction in the last 3 months in G&A. Now that's after the litigation has ended. This is not just litigation. This is closing down Dublin facility, John doing a much more effective job on implementation Sarbanes-Oxley and who we're using as our outside auditors. All those things are benefiting G&A.

Okay. So are we kind of steady state now?

I think in sales and marketing, we're going to see a little bit of increase, it's not entirely leverageable because we want to get a person on the ground in India, and we want to get some additional help in China. So I'm anticipating in our budget an increase somewhere between $200-5 00,000 on a yearly basis.

Yes.

But in development, I think we'll have continued modest increase, but we're not going to have a big bolt on expense in this year barring a decision, perhaps, to invest in a major software initiative internally versus acquiring one. And we're looking at some options right now. But in terms of the products that we have on our road map today, and what we're planning to do, we're looking at modest increases in development. And then G&A should continue to be moderated. John, would you have any comments on G&A?

Well, I think, at the end of the day, we've got the lawsuits behind us. We've -- on an annual basis, we've, even though we changed auditors, we did have to absorb a partial year. As I look out to '07, I've looked at the guidance ranges that people have loaded for cash OpEx, they run in the 38 to $40 million range and I don't disagree with that range.

One other comment. If you look at OpEx as a whole for those three quarters, we went from 11.3 to 10.9. And remember that the way we took the Conexant royalties was negative number against that OpEx. We got -- we obtained $250,000 less than we did in the quarter last year. So we actually had an improvement more like $600,000 in OpEx. So I think we're doing a pretty good job there.

Okay. Well, good. We'd love to see you keep it up. Thanks a lot.

Okay. Thanks.

This will conclude our question and answer session.

Yes.

At this time I'd like to turn the program back to Mr. Singer for any closing remarks.

Again, thank you for attending this quarter's conference call and we look forward to updating you in our progress in the next quarter. Thanks.

Thank you, everyone for your participation. As a closing remark, I'd like to remind everyone that today's conference will be available beginning at 8:15 p.m. central standard time running through March 7th, 2006 at midnight. You may access the replay by dialing 719-457-0820, or 888-203-1112 and enter the pass code 2126423. This does conclude today's conference. Thank you for your participation. You may disconnect at this time.