PCTEL Inc (PCTI) 2007 Q2 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to today's PCTEL Incorporated second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the conference 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. 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; Bob Suastegui, our new Vice President of Global Sales and Marketing; and Jack Seller, Director of Marketing.

As we have done in the past, John will review our financial performance in some detail and will review our balance sheet and other financial 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 2007. We'll then open the call to your questions. The company will provide a transcript of our prepared comments on our website fifteen minutes after the call.

With that as background, John will read the safe harbor statement and then provide a financial overview. John?

Hello, everyone. Before I begin my financial review of the company, I will read the safe harbor statement.

Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance and expectations regarding the future growth of our wireless and licensing businesses are forward-looking statements within the meaning of the safe harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless product business, implement new technologies and obtain protection for the related IP and the ability to integrate, acquire 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 net income excluding restructuring charges and non-cash based expense, including stock and stock option based compensation, amortization and impairment of intangible assets and good will related to the company's acquisitions, and non-cash based income tax expense, provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the company's core 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 a 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.

Let's turn to revenue. Second quarter 2007 total revenue was $19 million, compared to $26.8 million in the second quarter of '06. The second quarter last year included a $7 million IP licensing settlement from Agere.

I will speak to the trends by segment.

Our Broadband Technology Group, which contains wireless antenna and wireless scanning products, reported revenue in the quarter of $16.2 million, compared to $16.7 million in the same quarter of last year. Strong growth in the scanning receiver sales was offset by a decrease in antenna revenue, resulting from the elimination of lower margin antenna products and the exiting of UMTF antenna operations.

The Mobility Solutions Group revenue in the second quarter was $2.5 million, compared to $2.7 million in the same quarter last year. The second quarter last year included a heavy concentration of software customization fees related to a large carrier win. The principal products in this segment are the company's data roaming client software and associated central configuration server, as well as its IMS client software.

Data client sales dominate MSG revenue, as IMF technology is currently in its pre-commercial deployment trial stage throughout the world.

Licensing segment revenue was $0.3 million, compared to $7.4 million in the second quarter last year. As previously stated, the second quarter last year included a $7 million IP licensing settlement from Agere. With the completion of the modem patent litigation last year, the company has remaining only several relatively small licensing agreements that will run to completion this year.

Now, I would like to speak to revenue guidance for the third quarter of 2007. Third quarter revenue is expected to be between $19.5 and $20.5 million. Licensing is expected to be approximately $100,000 in that amount.

Gross margin. Aggregate gross margin for the second quarter was 52%, compared to 51% last year, excluding the one-time $7 million licensing settlement. I'll speak to the margin performance by segment.

Broadband Technology Group's gross margin was 44% in the second quarter, compared to 43% in the same quarter last year. The improvement reflects growth in our higher margin scanning receivers and clarify products and the elimination of certain low cost, low margin antenna products.

This is the second year in a row of margin improvement in this segment. It is running year-to-date at 44%, as compared to 42% in all of '06 and 38% in all of '05. We expect gross margin in this segment to run in the 44 to 45% range going forward.

Mobility Solutions, gross margin was 98% in the quarter, compared to 99% for the same period last year. As a reminder, the only cost of sales in this segment is third-party software licenses. We expect gross margin to remain in that 98 to 99% range going forward.

Licensing gross margin was 99% for the quarter and of course we would expect that margin to remain in that 98 to 99% range going forward also.

With the product mix forecasted for the third quarter revenue guidance, we expect total PCTEL gross profit for the quarter to be approximately the same as the 52% achieved in the second quarter.

Now let's turn to operating expenses.

Second quarter R&D and SG&A were $9.8 million, up $0.5 million from the same quarter last year.

R&D expenses were up $700,000 on incremental investment in head count and expenses across all products.

Sales and marketing was $200,000 higher for the quarter, reflecting additional investment in distribution.

G&A was down $200,000, reflecting the completion of patent litigation in 2006 and the reductions of costs associated with the Dublin facility.

The connection royalty was unchanged from last year.

The company announced in June of this quarter that it was exiting its UMTS antenna product operations with immediate effect, including its design centers in Dublin and the U.K., as well as the related contract manufacturing operations. The details of the exit were disclosed in our 8-K filing of June 14, 2007, and updated as of today.

While not included in our non-GAAP earnings, the company recorded a net restructuring charge of $2.1 million. The company expects a negligible loss gross margin and net OpEx savings as I will now describe in my third quarter guidance.

With regards to the third quarter 2007, as compared to the second quarter, total R&D is expected to decrease by approximately $400,000 due to the exit from UMTS operations, partially offset by additional investments in other product lines.

Sales and marketing expenses are expected to be about the same.

G&A is expected to be between the same, maybe up to $100,000 higher.

The connection royalty is expected to remain approximately the same.

Now, let's turn to other income.

Other income was $0.9 million the second quarter, compared to $0.7 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, as well as the increase in cash from last year, primarily due to the $7 million patent litigation settlement, which we actually received the cash in the third quarter of last year.

The company expects other income in the third quarter to be approximately the same as it was in the second quarter.

Now let's turn to income taxes. It is anticipated that the exiting of the UMTS operations will place the company in a net operating loss position of between $3 and $4 million at the end of 2007. We expect to pay no federal income tax in '07 and U.S., state and foreign income taxes should net to almost zero.

The second quarter non-GAAP tax provision of $200,000 reflects the amount necessary to get the company to a year-to-date expense of close to zero.

We expect a non-GAAP tax rate for the remainder of the year to be close to zero.

So, just as a summary of earnings, non-GAAP net income for the second quarter of 2007 was $1 million, or $0.05 a diluted share, compared to non-GAAP net income of $7.2 million, or $0.33 per diluted share, in the second quarter last year.

To summarize the differences previously discussed, gross margin is down due to the $7 million IP settlement in last year's results. Total OpEx cost was higher on investments in R&D and sales and marketing, offset by G&A reductions.

Other income is higher from a rise year-over-year in interest rates and our cash balance and taxes are lower from a change in the effective tax rate.

The net effect of all of these factors is a decrease in non-GAAP net income.

Now, let's turn to the balance sheet.

Cash and short term investments ended the quarter at $68.6 million, up $0.9 million from the end of the first quarter this year.

The company repurchased 146,000 shares of its common stock in the quarter under its stock repurchase plan for $1.5 million. The shares were purchased at an average price of $9.91.

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

Thanks, John. We had a difficult quarter with many challenges. As John has already discussed, we took decisive action and closed down an unsuccessful operation in Dublin. While this chapter in PCTEL's story is now behind us, the lessons of this acquisition will remain with us for some time. PCTEL management took a risk that slowed the company's growth.

Prior to the acquisition of Sigma, PCTEL had invested $11 million in the acquisition of our scanning receiver business and the network tools business, $31 million in the acquisition of our two antenna businesses and $1 million in our mobility software businesses.

At the time of their acquisitions these businesses that we acquired for a total of $43 million were generating $36 million in annual commercial sales. This year, stripping out the contribution of licensing revenue, those businesses will average about $20 million a quarter, or around $80 million. The Sigma acquisition was an aberration.

Our focus is now on the growth and the profitability of existing operations. Specifically, our three priorities are growing MSG revenue, growing BTG's antenna revenue sequentially and maintaining our improved Broadband Technology Group gross margin percentages as we grow the antenna revenue content of that segment.

This past quarter our software business remained at $2.5 million, despite our acquisition of additional customers, release of new software products and the participation in new IMS trials. We are confident that our efforts will result in meeting our growth expectations, although it would appear that we are stuck at approximately $2.5 million, we are pleased that subscriptions comprised a greater percentage of our MSG revenues. As our newer customers grow, such as Vodafone, Telmex and Sprint, our subscriber- base revenues will also grow.

We are not depending only on subscriber revenues for MSG's growth. We have become much more aggressive in packaging our most valuable modules into software development kits, or SDKs. Currently, we have six such modules, including a WAN connection manager, a LAN connection manager, a conflict resolution manager and automatic authentication and registration module, a devise wizard that simplifies installation of wireless modems and our OTA module.

We are launching an aggressive campaign to represent these modules into the PC and the smart phone OEMs, as well as to systems integrators who would be interested in incorporating these modules into their systems.

With respect to our Broadband Technology Group, we are generally pleased with the progress of our scanning receiver product line. Our challenge with this product line is to expand addressable market, as we believe that we have earned a dominant share of the current OEM market for scanning receivers.

With respect to antennas, our three largest distributors posted double digit growth over the previous quarter. Our land mobile or public mobile antenna products are being represented by VARs and distributors in nearly all of the Homeland security projects around the country.

Finally, within the land mobile radio sector, our new wideband antenna is getting a great deal of traction, replacing the forest of antennas currently ensconced on every police car with a single SKU. We must note , however, that we will not see the revenue benefit from these new ELMAR antennas until later this year.

Also, our improvement and distributor sales was offset by a decline in certain OEM accounts.

WiMAX and GPS continue to represent strong growth opportunities. We now have meaningful WiMAX shipments to Motorola and Alvarion. We expect to see continued strength in the current quarter.

Last quarter we released two WiMAX product families and this quarter we will extend those families to address the 3.5 GHz and various requirements for the European market.

With respect to GPS, we anticipate strong network timing opportunities that will offset some of the slowdown in defense and vehicle tracking sales.

We are refreshing the GPS product line with organically developed product, as well as continuing to drive sourcing to lower cost manufacturing regions.

Our investors should anticipate that we will grow our design and development resources in our factory in Tianjin, to work with local customers, as well as local ODMs and contract manufacturers who can help us cost effectively expand and refresh our product line.

In addition to revenue growth, we must make greater progress in improving gross margins. Product sourcing in low cost regions is one aspect of our action plan. We are also simplifying the product line, cutting in half the number of antenna SKUs by the year end and focusing on further streamlining our supply chains.

During this call, I wanted to introduce Bob Suastegui, our new Vice President of Global Sales and Marketing. Bob has already had a great impact on the organization, centralizing all sales operations, initiating cross training, so that we have more sales executives and support personnel representing all of our products. Bob, why don't you introduce yourself and describe some of the actions that you've taken to aggressively grown revenue?

Thank you, Marty. Hopefully, I'll get a chance to meet many of you at various investor conferences or when you visit PCTEL. For now, let me just say that I'm excited about the opportunities at PCTEL to grow the business, penetrate new markets and develop a world class sales team. We have great assets, both in the sales organization and the product line that we can leverage.

With respect to revenue growth, I'd like to make just a few comments. My primary focus at this point is coverage. I have now visited each of our regions, with two trips to Europe alone, in the past five weeks since joining PCTEL. My emphasis will be on improving distribution in Europe and in Asia. I am addressing that within this quarter and anticipate results by the fourth quarter of 2007, or at the latest, the first quarter of 2008.

Specific actions that we have and will be taking include hiring a Regional Sales Manager for India. This has now been accomplished and this executive will hit the ground running next week. We will establish distributors in India for our products, find ODMs to service certain needs and focus on products where we have a distinct advantage.

We are close to hiring a regional sales manager for China. Presently we service our accounts either remotely or through our Tianjin manufacturing facility. We need to establish professional sales management that can handle both our antenna and scanning receiver opportunities, specifically supporting our OEM distributors of the scanners and doing more to expand our relationship with [Gwaway] in China.

We are actively establishing increased distribution in Europe. We have already established two distributors in EMEA and we expect to triple that by the fourth quarter of 2007.

We are also evaluating the performance of our manufacturers' representatives in North America.

Finally, we are exploring how to more effectively penetrate the enterprise market with our mobility software solutions.

Again, I am really excited about the opportunity to grow PCTEL, build a world class sales organization and to become cost effective in establishing coverage. I have received great support since joining the organization and anticipate a long and productive relationship with the PCTEL management team and our customers.

Marty?

Thanks, Bob. And thanks for all the energy that you're bringing to the company.

I haven't yet covered our scanning receiver business. Luis Rugeles and his group continue to do an outstanding job in growing our business. We have established a new set point for quarterly sales. Our challenge in this business continues to be, as I mentioned earlier, the expansion of the market beyond drive test and the inclusion of additional tools, particularly software analysis tools, for post-processing interference management such as our CLARIFY product.

We have successfully refreshed the product with the delivery of the new EX platform and I'm pleased to inform you that we will have a WiMAX scanning receiver by first quarter 2008. During the past quarter we released the EX 1.0 scanning receiver for WCDMA and GSM European bands, as well as our Insight software for EX and certain WCDMA applications.

We do have several exciting growth opportunities in the scanning receiver space. In addition to the WiMAX opportunity in North America, there are strong opportunities in the AWS band and, although well established in many areas, there are still strong GSM opportunities in emerging markets in Cala, India, China, Africa and Russia.

We also anticipate the build out of networks associated with new 3G licenses in India, China and Russia, to favorably impact our scanning receiver business.

While we are satisfied that our investment in organic development of scanning receivers, new antennas and new software products have resulted in a strong product portfolio, we are not satisfied with the current revenue growth rate for the corporation. While we continue to be interested in opportunities to expand our business through acquisition, our first order of business is to realize our growth and profitability objectives with our existing operations.

With that, I welcome your questions. John, Bob and I are all available for about thirty minutes. Operator?

(OPERATOR INSTRUCTIONS) We'll have our first question from Matt Robison, Ferris, Baker, Watts.

Hi, gentlemen. I was wondering if you could give us a little bit more flavor of how the mix on the antenna business is looking these days. You know, WiMAX seems to be moving along, initial stages of deployment various places and I understand you're working with Motorola and Alvarion and maybe talk a little about the carriers and how that's going. So, at one point a couple of quarters ago you talked about the private, the emergency responder opportunity versus a GPS and the WiMAX and you characterized the growth rate.

Yes.

So, maybe you could just give us an update on that.

Sure. You know, the four top areas for us are land mobile radio, GPS, WiMAX and WiFi. And the reason that our distributor sales are up is because we've seen stronger sales of land mobile radio type products through those distributors. And so we are being represented in the homeland security and we really did have double digit improvement, quarter-over-quarter, in our three major distributors in the U.S.

Also, the only part of the business that we did salvage from the Sigma operation was some compatible products with land mobile radio, some specialty products used in their public safety operation.

One of the product lines that's really emerging, that's interesting, Matt, is GPS. Now, in the second quarter, GPS sales actually offset some of our advances with distributors, because we had a couple of direct OEM customers that had been buying in very high volume for fleet management that sort of took a rest. Now, we think that we'll recover there, but that part of the GPS business, while still good, was not as strong as it had been.

Where GPS is really growing for us, though, is in the network timing arena. As you know, in CDMA networks you need GPS timing to accommodate the spread spectrum transmission of voice. But, what's really emerging is pretty interesting opportunity is that in UMTS you're starting to see the requirement for expanded GPS timing, because the traffic is no longer going to be exclusively backhauled by T1 and DS3 facilities that have their own inherent timing. They're going to be backhauled through Ethernet to some type of packet network. And we think that we'll start to see that near the end of this year and that in 2008 that will be a very strong trend.

So, I've covered land mobile radio and GPS.

WiMAX, we had a nice quarter and the margins on those products are reasonably good. I think I mentioned, specifically, Alvarion. We went through a very long design cycle and we're seeing the first fruits of our efforts there. We think that the Sprint Clearwire joint venture could be positive for us, because we think that they'll be enhanced capitalization of the build out of this 4G network. We think it's a great combination, Spectrum from Sprint and some of the IPO money and other investments that went into Clearwire, as well as additional investments. So, WiMAX continues to go well and WiFi gets in a steady state.

And you can see by my comments, although we have made progress in gross margin, it could have been better but for the product mix. While we're always happy to see the distributors up, when the distributors are up, their types of products are going to have lower margins associated with them, you know, our legacy land mobile radio products.

Does that help you?

Yes, I was hoping to hear, get a little sense of the magnitude of WiMAX, whether it's really big enough to make a difference.

Well, it is big enough to make a difference, but I think last quarter I gave you a sense that I'm looking at percentage growth of maybe 300% for a couple of years in a row, but I've been advised by John and outside auditors that I don't get into below segment revenue reporting for specific products, because we'll end up doing that until the cows come home.

On the MSG side, it looks like it's stalled a little bit in terms of new customers or finding new networks where the consumers really seem to be interested in laptops, the use of their cellular spectrum. Am I being too cynical on that?

I don't know if cynical is the right word. I think that there is one thing that you're saying is very true and that we're addressing is that, after the carriers get passed the type A personalities like you and me, they're not able to sell all these $60 and $70 subscriptions to a broader audience. And so, we think that one of the things that's going to be important in the cellular market is the ability to offer session-based pricing. And that's something that we're working on.

So, just as T-Mobile and others offer session-based pricing, you know, Waveport, T-Mobile, anybody in WiFi, offer session-based pricing, and that enhances their revenue stream, the same thing is going to be crucial for EBDO and UMTS, particularly as these modems are embedded at marginal cost into the laptops or perhaps even into the handheld device. And people don't want a big subscription, but they're willing to pay for ten minutes, an hour, a day, and so on. So, I do think that there's an issue there.

But really, our growth in this area is stronger than reflected in the numbers. Perhaps at my next investor conference I'll show a chart that shows how we've grown our customers. But last year, we had a one-time NRE customization that accounted for us getting to 2.7. And indeed licensing of our individual clients only accounted for 57% of revenue back in '06. In '07, 70% of our revenue is now represented by an expansion in licensing. And although I can't, I don't want to talk about customers by name, but in one customer's case, we've gone from $1 to $2 to $4 million in licensing revenues, all subscription now and two years ago it was all NRE.

It's disappointing for us in this area, Matt, and you know it's really clear to state. And again, I don't want to mention customers by name. We won two really large operators, one of them we anticipated that we do $2 to $2.5 million with this year. It looks like we're only going to do about one. And there was another customer that we thought we'd do about $3.7, $3.8, and we think we're going to end up doing $2.2.

And it's not that these are bad customers or not that we're disappointed with the business. Either the rollouts have been slower, the network is not where it needs to be so that they're comfortable with aggressively marketing the offer or, in one case, they just simply launched the service five months later than they anticipated. So some of the results there are just reflecting the pace of growth.

But with what we're doing in this area, I'm pretty excited. You know as I said, we're doing things on the administrative side that are vitally important. This ability to offer session-based pricing, we actually have sort of a ability to throttle bandwidth that's going to be important both in the carrier and the enterprise side and that we're already delivering to one of our customers in the enterprise side.

And then, we have some important IMS trials and opportunities coming up. And this issue with packaging up our STKs for sale into the PC market and into other market opens up some new opportunities for us.

So, I hope to be able to report some stronger progress to you next quarter, Matt.

Okay, well thanks for the overview and I'll get back in the queue.

Okay.

Our next question, Anton Wahlman, ThinkEquity.

Hey, Marty and John. Just I think most things might have been discussed, but maybe you can elaborate just a little bit on the software clients to two matters. First of all, with respect to pricing, it would just seem to me that the ramp, even among your publicly announced customers over the last year with respect to their underlying HSPA-type subscriptions, from a unit standpoint seems to have been pretty strong, yet your revenue has remained fairly flattish. And I understand that, yes, there was some NRE in the past, but probably be some NRE these days, as well. I mean, it seems to me to indicate that maybe just maybe your pricing sort of per unit must have been going south. Is that a correct interpretation?

No, it's incorrect. Happily, it's incorrect, Anton. Next time, I'm going to let Matt ask another question so you can't ask a difficult question like that. But, no, there has been no impairment to our pricing at all. I'll give you -- you know I can't talk about dollar values for our pricing, but I will tell you this. Some of our customers, let's say a customer who is launching, will buy a block of licenses from us, let's say 200,000 licenses at a time. And what happens is that if they're slow to deploy those licenses, well, we don't recognize the revenue. And that is the single biggest reason for the ramp looking a little bit slower than you might want it to look.

And the other issue, as I mentioned, is that this quarter was not really helped by any extraordinary NRE or customization. And ultimately that's a good thing, because we want to be in the repeatable product business, not in the job shop customization business.

And I'm actually pretty upbeat about 70% of our revenue being in repeatable product sales.

What that does for us, Anton, is if you plot the math based on our internal projections, that will be about a 35 to 40% increase in licensing revenue year-over-year, which does reflect the pattern that you're seeing in [UFI].

Okay. Well, that's good. Now, insofar as you talked about the session-based pricing, am I interpreting you correcting if I say that you basically hope that that is a new feature that you have that you believe is going to enable you to essentially break into new accounts and win new accounts, more so than necessarily make a big difference in the volume or --?

I think it's both. I mean, here is what I think about session-based. Number one, it's something that's going to help us in accounts we're not at. The way that we're developing this capability is that our central configuration server, which is where this would reside, would be compatible with other people's clients, as well as our clients. So, it would be helpful as a tool to penetrate new accounts.

But the second aspect of this is that we think that it's vitally important to expand the pace of uptake of the wireless data services. And what's required is a greater flexibility and pricing. So, we think that there's two potential advantages, but I want to caution you, Anton, in terms of your modeling, I would not anticipate any benefit from this whatsoever until 2008.

Okay. Final question then, relating to obviously you've had some good additional large carrier wins in this frontier and there have been recent announcements of some mergers of networks with the guys that are deploying WiMAX at 2.5 to 2.69 GHz, with guys that also have [EBDO] deployments. Would it be correct to assume that that holds a very good opportunity for you to expand your footprint of your sort of connection manager into not only kind of one, but even two, what was supposed to have been two separate substantial nationwide WiMAX networks and that if they accelerate that rollout and they want to have multi-mode cards operating both at EBDO, as well as WiMAX, would you, I mean, would it be correct to say that that is a darn good opportunity for you?

I really feel badly about answering a long question like that, and such a good question like that with a simple yes. But I think that that's right. The one thing I will tell you is that consolidation is a blessing and a curse. While it does accelerate the capitalization of new networks and I think that's going to help us and I do think that there's an opportunity to expand the footprint of our connection manager to go from cellular, WiFi and now to WiMAX. That's all good.

I will make one comment, Anton, about our software results. In 2004, 2005 and 2006, we separately won, competed and successfully won, Bell South, SBC, AT&T Wireless and Cingular. All of those had a separate revenue string. That's not one customer. And so, the consolidation is, can have some powerful and positive impacts, but consolidation has been somewhat of a threat in our business as well. So, I'll just leave you with that.

I understand. Better stay less than more there. Well, I think that's all I had for now. Thank you.

Thanks, Anton.

We'll go next to Douglas Whitman, Whitman Capital.

So, I get to follow the two smartest guys. So the questions now will be simpler. One quick question on financials, John, if you could go back. Receivable days declined. Was due to linearity, great financial work, et cetera. And can you talk a little about, can you, should we expect further declines, or is that about the right range?

Yes, if you recall from -- folks on the call recall last quarter, we had a rise in receivables of about $3.5, $3.8 million, around that range, growth in receivables. It was related to the timing of software revenue recognition versus our invoicing cycles and an increase in European-based receivables. And at that time, I had said I was going to get half of that back in the second quarter and half of it back in the third quarter and we're on plan. I did get half of it back, which is what generated the cash on flat sequential revenue. And I think, I know the specific accounts I'm going after and we should be able to get the rest of it back in the third quarter.

And the tax rate change, is that due to Ireland or is that an ongoing thing?

Yes, it does. The way we account for Ireland on our tax return is it something called check the box, so it's just as if it's part of our U.S. operation. And so, the write-off of the assets, as well as the restructuring costs and the costs to get out of the contract manufacturer are all tax deductible in the current year. And so, that's what's going to drive us into, for tax purposes, into an NOL that will keep us from paying taxes this year and give us a lower tax rate for next year.

So, that all points to greater cash, so it's following a tradition. Can we talk a little bit about, given how low your stock price is, about the outlook for buy back and greater cash?

Well, as you know, Doug, and you know partly as a response to your well-founded emphasis on this point, we did get an authorization from the board to buy back additional shares and we began that process in May. Unfortunately, our trading volume was so low that under the rules, we can only buy back a certain percentage of the average trading volume and we can only buy back in the middle month.

It continues to be a discussion and I continue and we will continue to put it on the agenda of our internal board discussions.

Okay. Well, thank you and I don't have -- Matt just stole my questions with Anton. So, thank you.

Okay. Thanks a lot, Doug.

We'll go next to Michael Coady, B. Riley.

Thanks. Hi, Marty. Hi, John.

Hey Mike.

Could you talk a little bit about the pricing environment in the antenna section among the four major groups? And you mentioned one of your challenges being to maintain the gross margin in BTG. As antennas improve as a percentage of the revenue, I guess, that you could talk about again the pricing environment and how you intend to do that.

Yes, well, it turns out that our gross margins have some components to it that we have some decent control over. An example is rate. We were getting chewed up the last three quarters because of a very low volume coming out of El Cotac and St. Petersburg and how those antennas were shipped to customers and had to be stored first at a warehouse and freight was costing us a full point. And we can do a better job on freight across the board.

The second area that is really under our control, it turns out that we, after the Andrew acquisition, had ballooned up to about 15,000 SKUs. And it turns out that about 2,500 of those SKUs account for about 95% of our revenue. So, we undertook a program about six months ago and we've been communicating with our distributors and manufacturer's reps to reduce those SKUs and do it in a way that we don't end up with obsolete inventory. And that's really going to simplify operation in our factory, simplify what we do in sourcing and I think that by dabbling pretty hard on that front, we'll be able to offset some downward price pressure.

But the third, and by far the most important component of our margin, is mix. And not just product mix, but distribution mix. So, for example, WiMAX and GPS are higher margin products. But more important than that is that when we're able to sell one of those products directly to an OEM customer, that's when we realize our very highest margin in our antenna environment.

So, we want to continue to grow very aggressively our business with our distributors. Our distributors are a bedrock for an awful lot of our antenna sales. But at the same time, we need to focus our efforts on increasing the number of OEMs to whom we sell and expanding the product line that is appropriate for that customer base.

Does that help you?

Absolutely. Thanks. And, John, just a couple housekeeping. Could you go over CapEx and D&A, please?

Yes, CapEx in the quarter was about $780, call it $800,000. It was $1 million in the first quarter, so we typically run about $3.5 to $4 million a year in CapEx. Most of that is spent in the antenna area.

And what was the other question?

Depreciation, I guess, amortization's on the P&L.

Yes, it's on the P&L. And also, if you're going, anybody's doing an EBITDA type number, we run about, I want to say, it's about $0.5 million a quarter in pure depreciation.

Okay.

Which on top of the numbers you see us pulling out for the for the 90F amortization stuff.

Great. Thanks. And good luck in the back half of the year.

Okay.

Thanks a lot.

(OPERATOR INSTRUCTIONS) We'll go next to Ken Muth, Robert Baird.

Hi, in the MSG vertical there, do you anticipate any new customers in the second half '07 or in '08?

Yes. Bob, do you want to respond to that?

Well, we're looking at a couple of customers that we're attacking, both in North America, as well as a customer that have reach globally. So, we're actually working on several projects in the funnel that are to increase our share of business from the new customer base, as opposed to the existing. So, we, we're doing a lot of those things and we're attacking those in a major way.

And specifically on the SBK side, we're focusing a lot of our energies on our customers in Europe and Asia with SBK application. So, the short answer is, yes. We'll get into more specifics next quarter. But as of right now, we're very bullish and optimistic about some of those opportunities internationally.

And maybe you could talk about the difference in the, where the growth could come from more so in the '07 or second half of '07 to '08. Is that more IMS related software or is it more the connection manager stuff?

I think, Ken, that we're going to continue to see stronger growth in the connection manager, but within that, I think we're going to see some strong growth in the enterprise-based sales of our connection manager.

IMS I continue to tell most people is really a 2008 revenue item when it comes to licensing sales. And in 2007, it's still dominated by trials.

And anything you have going on in the cable vertical, cable MSO vertical?

Not really.

Okay. That's all I have. Thanks.

When you said, Ken just on that. When you said that, I assume you're talking about software, you're not talking about antennas.

Correct.

Okay.

(OPERATOR INSTRUCTIONS) We'll go next to Gene Weber, Weber Capital Management.

Hi, Marty and John.

Hi, Gene. How are you?

Fine, thanks. I'm going to ask a product question and it's really not too specific, but maybe you can help me. It relates to MSG. And in prior calls, as you know, I've been a long term shareholder, you've talked about technical capability you have in multi-band, being able to switch from cellular to WiFi networks.

Correct.

You read a lot about that now with all these new mobile devices coming out. Are you participating in that at all? And if you are, maybe you can describe it and how you get paid for it.

Yes, and we absolutely are participating in that. That's where most of, well, let me say a couple of things. Yes, we are participating in that. But that's where our participation is really in the carrier-driven trials for two specific capabilities. One is voice call continuity and is a subset, which is what you're talking about.

Okay.

And within that voice call continuity, there's just VoIP to cellular static calling. And let me just describe that to you. So, from a application point of view, you get one of these new smart phones or any kind of phone that has both a cellular and WiFi chip set. You go and you use your cellular phone outdoors or the office as a cellular device, driving, whenever. And then, when you go into your house, you're WiFi chip in the phone locks onto your WiFi router in your house and, provided that you've already gone through the registration process, you now make VoIP calls over your WiFi system and you don't incur long distance charges.

So, there's a variety of people interested in that. Not surprisingly, long distance carriers are not interested in that, because it takes away a revenue source. And the way that we would get revenue from that is that we would sell our client that allows you to do that to a handset manufacturer who puts our software on their phone. And we have a couple deals like that in place already.

So, it's kind of like, it's a NIP, intellectual property sale, if you will, of software?

It really is our roaming client.

Okay.

We call it our roaming client VE, voice enabled. And then another version of that is where you are actually cooperating with a carrier and the carrier has put a piece of equipment into their network that allows voice call continuity. Now, that's a more complex version of what I just described. So, you'll be making a cellular call. You'll go into a WiFi environment and you're cellular call will persist and turn into a VoIP call over WiFi. And those VCC trials are the very active trials now going on at the cellular carriers. They refer to that as a transparent handoff, or seamless mobility.

And the carriers are not as opposed to that as you might think. First of all, they get a big payoff. What's the payoff? They get to shed traffic onto the unlicensed band. Secondly, if they can really offer this seamless service, they can charge for it. How do we get paid? Same way we get paid for the roaming client today. Carrier buys our roaming client, roaming client is imposed on the handset manufacturers. We get some small measure of that RE upfront. We get a fixed price per subscriber and then in the second year and subsequent years we get 15% maintenance on the sales that we made in that prior year.

Okay. Okay. I understand. So, it is a kind of a per client software sale and what you're saying is that this market is still, in some cases, in the test phases. It's really --

It's still in its infancy.

Yes, okay. So, hopefully if it does take off, this is a significant, more significant revenue source for you going forward.

We believe it will take off and we believe that we are going to be among the most active participants in this market.

So, when is -- is that a 2008 event also, or is it beyond that?

We believe that that is not, you won't see any significant rollout of VCC until third quarter of '08.

Okay. Great. Okay. That's very helpful. Thanks a lot.

Okay.

And that concludes our question and answer session. I'll turn the conference back over to Mr. Marty Singer for any additional or closing remarks.

Thank you all for attending. We look forward to updating you at the next quarterly earnings release call. Thank you.

Thank you.

A replay of today's conference will be made available beginning at 8:15 p.m. Central Standard Time, running through August the 8th, 2007, at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112, and entering the pass code 2112449. This does conclude today's conference. Thank you for your participation. You may disconnect at this time.