PCTEL Inc (PCTI) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to today's PCTEL, Inc. third quarter 2007 earnings conference call. Today's call is being recorded.

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

Thank you, Sheila. On behalf of PCTEL welcome to our earnings release conference call for the third quarter. I want to thank you all for attending and for your continued 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 VP and General Manager of Global Sales, and Jack Seller, Director of Marketing.

As we have done in the past, John Schoen 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 highlights of the past quarter, and then I will discuss some areas of focus for 2008. We'll then open the call to your questions. The Company will provide a transcript of our prepared comments on our website 15 minutes after the call.

With that as background, John will read the Safe Harbor Statement and then provide a financial overview. John?

Hello, everyone. Before I begin my financial review of the Company, I will read the Safe Harbor Statement.

Today's call will contain forward-looking statements within the meaning of the Federal Securities Laws. Comments concerning our future financial performance and expectations regarding the future growth of our wireless and licensing businesses are forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies, and obtain protection for the related IP. 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, and 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 the presentation of net income excluding restructuring charges and noncash based expense, including stock and stock option based compensation, amortization and impairment of intangible assets and goodwill related to the Company's acquisitions and noncash based goodwill related 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 Form 8-K with the SEC. The release can also be found on our website at pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financials.

Let's turn to revenue. Third quarter 2007 total revenue was $20.3 million compared to $20.5 million in the third quarter of '06. 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 $17.4 million compared to $17.8 million in the same quarter last year, and $16.2 million in the second quarter this year. Third quarter last year included approximately a half a million dollars of revenue from UMTS antenna operations which the Company exited earlier this year. Both scanning and receiver and antenna products experienced sequential quarter growth.

The Mobility Solutions Group revenue in the third quarter was $2.7 million compared to $2.4 million in the same quarter last year and $2.5 million in the second quarter this year. 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's revenue as IMS technology is currently in its pre-commercial deployment trial stage throughout the world.

Licensing segment revenue was $0.2 million compared to $0.4 million in the third quarter last year. 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 in 2007.

Now, I would like to speak to revenue guidance for the fourth quarter of 2007 and the full year 2008. Fourth quarter revenue is expected to be between $21.0 and $21.5 million. Licensing is expected to be under $50,000 in that quarter.

Now, let me speak to the full year 2008. As a group, the five Wall Street analysts who cover the Company, have a revenue range for 2008 of between $88 million and $97 million, along with a range of earnings that accompany those revenue levels. The Company believes this range for revenue and associated earnings to be reasonable.

With that, I'd like to turn to gross margin. Aggregate gross margin for the third quarter was 53% compared to 49% last year. I'll speak to the margin performance by segment. Broadband Technology Group's gross margin was 45% in the third quarter compared to 41% in the same quarter last year. The Company saw improvement in both its scanning receiver and antenna product line. We expect gross margin in this segment to run in the 44% to 45% range going forward.

Mobility Solutions' gross margin was 99% in the third quarter compared to 99% in 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 the 98% to 99% range going forward.

Licensing gross margin was 99% for the quarter, and we expect margin in this segment to remain in the 98% to 99% range going forward.

With the product mix forecasted for the fourth quarter revenue guidance we expect total PCTEL gross profit for the quarter to be in the range of 53% to 54%.

Now, let's turn to operating expenses. Third quarter R&D and SG&A were $9.4 million, up $0.2 million from the same quarter last year. R&D expenses were approximately the same, reflecting a decrease in UMTS antenna products, offset by increased investments in our other product lines.

Sales and marketing was $0.4 million higher for the quarter, reflecting additional investments in distribution. G&A was down $0.1 million, reflecting the exiting of UMTS antenna operations. The Conexant royalty was unchanged from last year.

The Company announced in June of this year that it was exiting its UMTS antenna product operations with immediate affect, including its design centers in Dublin and the UK, as well as the related contract manufacturing operations. The details of the exit were disclosed in our 8-K filing of June 14th and updated in our 8-K filing of today. While not included in our non-GAAP earnings, the Company recorded a net restructuring charge, $2.1 million in the second quarter, and a favorable adjustment to that reserve in Q3 of $0.2 million, bringing the YTD net charge to $1.9 million.

With regards to the fourth quarter 2007 as compared to the third quarter, total R&D and SG&A and the Conexant royalty is expected to be about the same.

Income from operations improved to $1.6 million in the quarter from $1.1 million a year ago. The results are reflective of better gross profit performance combined with limited growth in total operating expenses.

Other income was $0.8 million in the third quarter compared to $1 million a year ago. Other income is comprised primarily of interest income on our cash and to a lesser extent exchange rate gains and losses. Other income was lower than last year as last year's results included an exchange gain that did not repeat itself in 2007. The Company expects other income in the fourth quarter to be approximately the same as it was in the third quarter.

With regards to income taxes, it is anticipated that the exiting of UMTS operations will place the Company in a net operating loss position of between $3 million and $4 million at the end of '07. We expect to pay no Federal income tax in '07, and U.S. State and foreign income taxes should net to almost zero.

The third quarter non-GAAP tax provision of $20,000 reflects this. The fourth quarter non-GAAP tax provision is expected to be about the same.

To recap earnings, non-GAAP net income for the third quarter was $2.4 million or $0.11 a diluted share compared to non-GAAP net income of $2.6 million or $0.12 per diluted share in the third quarter of '06. This summarizes the differences previously discussed, pretax income was higher as a result of gross margin improvements being larger and our additional investment in operating expenses and lower other income. Taxes were higher from a change in the non-GAAP effective tax rate. The net affect of all these -- those factors is a slight decrease in non-GAAP net income.

Now, let's turn to the balance sheet. Cash and short-term investments ended the quarter at $65.9 million, down $2.7 million from the end of the second quarter this year. The Company repurchased 517,000 shares of common stock in the quarter under its stock repurchase plan for $4.1 million. The shares were purchased at an average price of $7.84. The Company expects cash to end the year in the range of $64 million to $65 million as we will be paying off the majority of our UMTS cash based restructuring charges in the fourth quarter.

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

Thanks, John.

I appreciate all of your time this afternoon. I'm hopeful that many of you will watch us ring the bell for the opening of the market this coming Friday. We feel very good about our recent performance and the outlook and we wanted to take a higher profile.

This past quarter we began to see some of the results from our efforts over the last few quarters to improve gross margins in our antenna product family, expand our scanning receiver sales, and extend our connection management footprint. We have invested heavily in several new product lines in each of these product families, and in each case we saw positive results in the third quarter. We sold more GPS and WiMax antennas, broke through the $5 million market with scanning receivers this quarter, and we acquired two new connection management customers outside of the U.S.

As John reported, we also improved gross margins. Our gross margin improvement reflects a few different factors, among them the elimination of low margin base station antenna products, continued strong scanning receiver sales, growth in our software group, and the sale of higher margin antenna products, such as our GPS antenna product line.

We are also starting to see the positive results from our increased investment in sales. Bob Suastegui, our Global Sales VP, has now been with us for his first full quarter. We also had our first full quarter of sales representation in India and OEM focus for our scanning receiver business.

We hired a Director of Sales Operations in China and established Richardson Electronics as a strategic distributor in a number of countries outside the Americas. Richardson in Asia will cover 11 countries for PCTEL and we added 5 new country specific distributors in Asia for the Philippines, Australia, Malaysia, Thailand and Singapore. Richardson will also handle 11 countries for us in EMEA, eastern Europe, Europe, the Middle East and Africa, and three countries in CALA, the Caribbean, Latin American countries. We also added country specific distributors for several other regions.

Specific sales accomplishments included new customers in South America for our antenna products and our roaming client. Our success with selling WiMax antennas to major infrastructure suppliers continued last quarter, and we expanded our scanning receiver sales with key test equipment providers in the U.S. and China for multiple technologies. We are also pleased to report that after more than a year of business development we have sold our CLARIFY interference management system into Africa.

Our North American distributors performed well this past quarter, suggesting that we are continuing to improve our share of their business, particularly for GPS timing antennas. We had a particularly good quarter with one of our system integrators who bundles our GPS antennas for defense related solutions.

Our new SeeGull EX platform is getting strong traction with major customers, both in Europe and Asia, and most recently in the Americas with T-Mobile. As we expand the number of available configurations we anticipate stronger EX sales. Finally, our larger roaming client customers are deploying their high speed data service much more aggressively.

On the product front we released a new line of parabolic antennas that support 5 gigahertz backhaul for point-to-point wireless data backhaul applications. This has become an important product for our distributors, especially given our price point which is significantly lower than our competition. Distributors have also responded favorably to our significant reduction of lead-times for delivery of high demand products. We now ship these products well within ten days.

Our Mobility Solutions Group was active, as well. We released our WiMax roaming client and demonstrated this product at the WiMax World Forum here in Chicago and tested it on multiple devices and networks. We delivered major releases to AT&T, adding significant functionality and new device support, and we completed interoperability tests with Nortel for our IMS suite and delivered our latest versions to Alcatel-Lucent. We anticipate IMS contracts within the next two quarters.

As some of you already know, I recently returned from a business development trip in India and met with BSNL, MTNL, Aircel, ITI, and the Ministry and others. India's wireless communication growth overwhelms our experience in the U.S. or Europe. According to all of these operators and to the Ministry, operators deploy a new base station every 30 minutes which is roughly capacity for about 800 new subscribers. The average coverage radius of a cell site in New Delhi is 100 meters, and operators plan to grow cellular subscribers from 200 million to 500 million within three years or less. Internet access is limited but will grow form 2.5 million connections to over 20 million connections in the next 18 to 24 months, and many of those connections using the WiMax or other wireless facilities. This growth is important to PCTEL.

In our Broadband Technology Group we deliver products for propagation, our antennas, and optimization, our scanning receivers and interference management systems. The demand for improved propagation and optimization tools increases directly with increases in network complexity. Rapidly expanding GSM networks require new frequency plans on a monthly basis. Improved propagation in the form of in building antennas drive the demand for new product. The delivery of internet service in urban and rural areas creates demand for WiMax and the WiFi networks. Mobile data customers will need our connection management software, and we believe that our decision to participate more actively in India, as well as some of the other high growth opportunities will benefit PCTEL and its shareholders.

I wanted to offer some perspective on the negative news that you've recently seen regarding WiMax, the departure of Sprint's CEO has fueled speculation that the new leadership will reconsider the commitment to 4G and the implementation of WiMax. There's several economic interests at play here. We think that's it's unlikely that Intel, Motorola, Clearwire, and others will abandon their commitment to WiMax. There's a lot at stake. Sprint with its unusual control over Spectrum at 2.3 to 2.5 gigahertz has an enormous asset that would disrupt the costs in delivering broadband wireless services. It is also important to remember that there are over 1,000 WiMax Spectrum holders around the world. We saw five different networks in India, as an example.

So for those of you who have contacted me regarding the impact of Sprint's direction on WiMax, I would summarize my response as this, we believe that WiMax networks will be built and that operators will continue to build point-to-multipoint, and point-to-point networks. If there were any threat we would anticipate some risk in the 80216E, the mobility version of WiMax, that element of WiMax was never the primary focus of PCTEL's efforts, however.

With that, we'll open the conference call to field your questions. We have set aside 30 minutes for the Q&A. Operator, you can open the line?

Yes, sir, thank you. (OPERATOR INSTRUCTIONS.)

We'll pause for just a moment to give everyone an opportunity to signal for questions. And we'll take our first question from Douglas Whitman of Whitman Capital. Please go ahead.

Thank you. Congratulations on a great quarter, guys. Sorry for the background noise. Can you hear me?

We can. It's a little noisy, but we'll try to puddle through it, particularly if we hear compliments.

Well, you know, then I'll start with my usual question, if you could comment a little bit on (inaudible) a couple of quarters, a little more into WiMax. The world market appears to be growing (inaudible) in Japan and so on, and you (inaudible) that away from the United States, and what you're seeing in the world market and whether you're feeling better about the WiMax opportunity perhaps than you had (inaudible) three months ago? And then the usual question, obviously, which is about buyback, you wouldn't want (inaudible) ask you that? And one other question which would be if you could comment a little bit about the margin (inaudible) the margin improvement this quarter, is there more room potentially in the RF Group for further margin group?

Okay. Let me take them in reverse order, margin, buyback, and WiMax. On margin improvement, yes, we do believe that we can improve margin, particularly in the antenna area. I will say that in our scanner area our margins are already quite strong, as you know, and we can benefit from selling a little bit of clarifying, also some software, so say with our scanners. So I would say that they would stay the same, but the factors that will move our margins higher in our antenna product lines are pretty straightforward. The more we use our building the better the margin. We consume or amortize those fixed costs.

Second, our newer products, WiMax, GPS, and so on, have strong margins. And, third, we believe we're doing a better job in supply chain management. We've now reduced the number of SKUs we have dramatically. If you go to our website, we used to have 8,000 SKUs available for order. We're now at, John, is it between 1,200 to 1,500?

About 1,500.

About 1,500, and by the way John has already taken accounting action to accommodate any inventory that's related to discontinuing some of those SKUs, so you're not going to see a hit related to that. And this is all due to the very good work of Jeff Miller's team, with [Jim Jacobotsi] in product realization and [John Cosna] in supply chain management. So I do believe that we're going to see an improvement there.

With respect to the buyback we bought back just under 600,000 shares, [517], at an average price, John, of?

$7.84, $4.1 million.

$7.84. And with that I think we've consumed all of our authorization essentially and we have to go back to the Board and ask for additional authorization before we can make any significant purchases. But we did pretty well for the short time that we were in the market, you know, the middle month of every quarter, and I feel good about our aggressive action there.

With respect to WiMax, I will say that I still feel pretty good about some of the WiMax markets in the United States. I would say that point-to-point, and point-to-multipoint are going to do reasonably well.

You are quite right, Doug, that the markets outside the United States are really impressive. I personally saw one of the WiMax networks delivering broadband wireless to a rural area in India. I spoke at a very high level to the Ministry of Communications and also at BSNL, and there's absolutely no question that they are committed to the delivery of WiMax as a way of going from 2.5 to 20, to 22 million high speed internet users.

And that same phenomena is present in China and Japan and other parts of the world. I do think that you're going to see a little bit of resistance on the 80216E, you know, the fully mobile version of WiMax. It's still going to take some time to implement because the footprint, complete compliance with the standards, having a large number of device suppliers in with robust products and so on.

I should tell you, though, that as far as WiMax goes, we're in there now with dual mode connection managers for the operators in the United States that handle both 3G and 4G, and we like our future in that market.

One quick follow-up on when is your next Board meeting to discuss (inaudible)?

It's in November, it's right after -- I think it's the week after [AEA], and that will be, you know, we may raise this earlier.

Okay.

Thank you for your questions, Doug.

We'll take our next question from Matt Robison, Ferris, Baker Watts. Please go ahead.

Hey, nice results and outlook. Congratulations on that.

Thank you, and thanks for your continued coverage.

My pleasure. So this -- it looked like the margin trends are going the right direction and did we -- should we anticipate any kind of mix shift in the fourth quarter or is it just better absorption on the antenna side that's helping out with margins?

You know, I'm anticipating a little bit greater strength in connection management. I can't tell you the specifics because it would violate our relationship with our carrier customers, but I can tell you in the aggregate we saw a dramatic increase in the number of subscribers. It's just an uncomfortable area for us to get into to report numbers, and we don't want people being able to triangulate on the success of our customers through our earnings release conference call.

But I do expect a little bit stronger mix there, a stronger participation there. I think we'll have a very strong scanning receiver quarter, but I have to tell you, I think we're going to see an increase in antennas, as well. The exact percentage will possibly shift a little bit, but I believe that the margin improvement we will see will be from native improvement within antenna, more than just a mix change.

What's the nature of the investment in the distributors, and are they going to be able to sell anything besides, you know, antenna widgets, I mean what are you --?

Well, not to use a pejorative term to describe our antenna business.

I apologize for that.

But I'll tell you I'm really excited about Richardson, explicitly because they don't look at their business as widget redistribution. They go in there and they look at solutions. And in going after solutions I think that we have an opportunity for both antennas and scanners. None of these distributors, Matt, will ever take a look at our software. That requires a direct sale, the involvement of Biju or me or our direct sales force.

The distributors we have fall into different categories. Some of them are country specific, and some of them are market specific. So we've lined up some distributors who actually are specialists in land, mobile radio or public safety, or we've lined up some distributors who are specialists in handling navigation, you know, GPS. And others that handle unlicensed Spectrum and delivering into the enterprise. So, for example, we have distributors who deliver to large --

We'll take our next question from Michael Cody, B. Riley.

Excuse me, there was a mistake.

That's fine.

We hit a mute button. We're not -- we should still talk to --

And that's fine. You're still on with him.

I hear you.

Matt, did you hear what I said?

You said -- no, I heard a mute, I didn't hear what you were saying. I can hear you now.

Okay. So I was saying that we have distributors that handle commercial buildings into which we sell things like antennas for indoor cellular, or antennas for mesh networking or for enhancement of WiFi. So those are the natures of that. The investment is actually modest, although it's correlated with us putting a direct sales guy in the region to manage them.

So, for example, our new Director for Sales in India and some of the related countries around there handles both direct sales and then manages a set of distributors, similar for our Director of Sales in Japan, our new Director of Sales in China. So you've really made two commitments. One is to get guys with feet on the street in the region and to enhance their sales ability by their sales ability or capacity by teaming them up with distributors.

Bob, do you want to comment, at all, on what you've done to build this up?

Thank you, Marty. As a matter of fact, what we are doing specifically is trying to increase our reach into each market and then within each segment in that market. So, as Marty was stating, there are different market segments in each of these international areas that to a fair extent the direct sales force has been unable to reach, so we have put a great deal of time and energy into augmenting our direct team by adding the indirect channels to allow the region capabilities of that sales team in the field.

What are you doing to get some of these overseas carriers to adopt MSG?

Well, we have made direct visits, for example, I have personally visited with Vodafone in Europe, and we have also reached out to the carriers in Latin America. I have gone down to Brazil on a couple of occasions already in the last couple of months.

Along with Biju.

Along with Biju.

That's our local guy (inaudible).

Absolutely. So we have taken a very direct and a very, very focused attack to the large carriers to try to penetrate them with the MSG products.

Have you gotten any kind of a sales pipeline yet?

We do.

Absolutely.

We've, you know, we're feeling good about our pipeline for '08. We have some deals that will consummate in the fourth quarter. And, as we said, we have two new non-U.S. carriers who have adopted our product, and we just can't tell you their names.

Good. Thanks for the update. I'll let somebody else ask a question.

And we will now go to Michael Cody, B. Riley. Please go ahead.

Thanks. Hi, Marty. Hi, John. Let me echo my congratulations on the quarter and the outlook.

Thanks.

Could you just spend a minute on India, you talked about it a little bit in the presentation, exactly what you're doing there and what your expectations are?

I'm sorry, what did you say?

You had mentioned India --

India?

-- in your prepared remarks and just wondering what you're doing there, how you're spending your time, and what your expectations are?

Well, we established a guy right at the end of June as our Director. He's getting -- we're putting in some additional technical support. We've had multiple executive visits. I just came back from a business development trip, as I said in the earnings release, script earlier, where I visited with BSNL, you know, the Government operator, MTNL, the Government operator in New Delhi and in Mumbai, and then we met with IPI, the manufacturer, sort of equivalent to what Western Electric was to AT&T, and then we met with a variety of the private companies, as well as the Ministry.

And we have a very good feel of that market, and so we're establishing, we've already established Richardson as a distributor. One other very focused distributor, we're adding to those distributors. We believe that we're going to be able to report some sales to you in the fourth quarter as a result of this, and we actually have some modest sales in the third quarter.

We think there's a great WiMax opportunity there, a great GPS antenna opportunity. The strongest opportunity by far for us, though, is the scanning business. You know, we work through our large OEM providers, [Nemo], which is now part of [Aknight], and [TEM], and I am also anticipating some success with our connection manager. They're already distributing high speed data cards, [PCMCA] cards, and we think there's a reasonable market in a couple of these operators for a connection manager.

Okay. Great. Well, that's it for me. Good luck. Thanks.

Thanks.

We'll take our next question from Ken Muth of Robert Baird. Please go ahead.

Hey, John. Just a quick clarification that you talked about on the guidance for '08, first of all, on the EPS for the entire year. I know you talked about how you're comfortable with the Street estimates for revenue. I missed what you were talking about on the EPS side?

Yes, the range that's out there, we're comfortable also with the EPS range.

Okay.

It's hard for me to specific because of the people that do non-GAAP some people include the Conexant royalty, some don't, and one of the analysts just does GAAP, and I have to speak generically, as a group.

And then, I'm sorry, also on the gross margin for the entire year, what was the range there?

Our non-GAAP range -- let me just -- hold on a second -- the non-GAAP range for the entire year is in the 53% to 54% range.

Okay. And then what you have going on on the WiMax front, which would be a new platform for you, if that were to be ramping a little bit faster does that have a negative impact on these -- on the gross margins?

No.

Okay. And do you see the -- when would you kind of see, an inflection point in your mind of WiMax ramps of antennas?

Well, I think we'll see sales, I mean we're -- we have sales right now, we'll see sales in the first quarter, and fourth quarter and first quarter, from I think we're going to get another OEM infrastructure provider and we'll start to see the benefit of that I'd say end of second quarter, beginning of third quarter, so that's a reasonable inflection point.

Okay. And then, Marty, you made -- the way you're kind of tracking right now on the guidance with Q4, I mean Mobility probably is looking to only be like a 5% grower YOY in '07 versus '06, what -- with the new customers you have and kind of your thoughts there and maybe what's going on, how do you look at that Mobility business for today or a year from now?

Well, I think we will see obviously stronger growth in '08 than we did in '07. I think as I discussed at the last earnings release conference call, or perhaps it was my last presentation, there were two elements that really hurt our growth this year. One was one of our major U.S. customers that we worked hard to win initially was going to roll-out their service in February, it didn't start to roll-out until Memorial Day, and advertising really didn't commence till late in the third quarter. So that actually subtracted a substantial amount of revenue from what we thought we were going to do this year.

And the second thing, quite frankly, is consolidation. You know, we went out separately and won AT&T, Cingular, SBC, Southwestern Bell, and over a two-year period all those customers became one, and with that a reduction in revenue that we really felt this year.

And so next year with two of the major customers that we added over the last 18 months, as well as these wins in Europe and in Latin America, you know, I think as a lot of the forecasts from the different analysts show we're anticipating 30% to 50% growth in that segment.

And you're comfortable with that 30% to 50% growth?

Yes.

Okay. All right. I'll pass it on and come back maybe.

Uh-huh.

And we'll take our next question from Anton Wahlman of ThinkEquity. Please go ahead.

Hey, Marty, could you discuss a little bit IMS, in particular in the context of there's a bewildering array of thinking out there in terms of how soon will IMS be here and, of course, there are so many different aspects to IMS, and of course you're only part of certain aspects, in particular of IMS? Could you kind of see when does the world -- in the applications that you are addressing, you know, when do they go from sort of, you know, early field trials to larger, broader, controlled, you know, small launches, significant field trials? And then when can they get out of that stage into the true mass markets?

It's a good question, Anton. As you know and as I think you've written, UMA is a reasonable approach for a lot of the world going into the unlicensed band for voice, and certainly that's the low-hanging fruit for some of the operators.

We believe, however, that IMS is a more powerful approach because it can do multiple types of services. And you are right, there's a huge array of IMS based services. We're really focused on two. IMS based voice call continuity, or another way of saying it is just convergent voice over WiFi and over cellular.

And then IMS based instant messaging. And that's important because the carriers are so interested in keeping all of their text business and they see a real threat right now and an ability to get out of all of these sales, silos, and have somebody be able to text or instant message anybody on any type of system, whether it's AOL, Yahoo, Google, it's very appealing to them and they can come-up with great plans that give them some particular benefit.

We think that we, as I said and I went out on a limb in my script, we think we will sign our first major IMS contract within the next two quarters. And it will be of some significance, and it will focus on the two applications that I mentioned, and I believe that we'll see some implementation of that by the second quarter of 2008.

The only threat -- I don't really see UMA as a long-term threat to IMS. I will say on the issue of voice for those who are interested in extending 1X and not doing EBDO that [MTO] cells may represent a near-term competitive approach to IMS. You know, the concept of having a [cento cell] in a residence, you come in from cellular, you lock-on or scan on to that cento cell, and then your traffic is carried off to the network over the internet.

So the only problem with that, of course, is you have to get a cento cell to be down at the price range of a phone. And the second problem, of course, is that you have to have a very, a very sympathetic internet provider who is willing to carry all of that voice traffic, and it may not be so easy in some cases to implement. But barring that, I believe that the IMS future is pretty strong, particularly in those two areas, and that we'll get beyond the trial stage in the second half of '08.

Thank you. That answers my question.

Thank you.

We'll take our next question from [Gene Weber] of [Weber Capital Management]. Please go ahead.

Marty and John, congratulations.

Thanks, Gene.

Back to India for a second. I take it from your comments that you really don't have a lot of business there or you haven't had a lot of business there so far in 2007?

That's correct. Although it's sometimes hard for us to tell exactly, Gene, because we sell our scanning receivers, as I say, really 60% of them, 70% of them into TEMs and Nemo, and then they resell their test equipment in various places outside the world, and we don't really get the equivalent of point-of-sale information. I will tell you that we know that we have started to have success actually this past quarter, and we're anticipating a reasonable sale in this area in the fourth quarter of this year.

Okay. That's good. And do you have any -- since India is basically zero percent of your revenue for '07 or, you know, or a very tiny percentage, any idea of what it might become next year?

That's really hard for us to forecast, but I will tell you my experience at Safeco when I did test and measurement is when, you know, we opened up Japan over a two-year period we went from zero to $5 million. We opened up Israel and over a two-year period we went from zero to $3 million. We opened up CALA, and we're able to go from zero to $7 million in that period. So I think that by opening up a strong sales presence, working with distributors and, you know, building a sales engine there, we could see growth that exceeds those amounts from, you know, six or seven years ago in a previous but related life.

Got it. Okay. And then my last question on India is margins. I have the -- unfortunately, hold a position in a company that had sold telecom CPE equipment, mainly handsets, wireless handsets, and some lower end data equipment into India, and I had to exit that market because of the margins demanded by some of the names, the carriers that you mentioned earlier -- how do you know that you're going to be able to maintain your margins in India?

Well, there's a couple of things. One of the most interesting discoveries for me on this business development trip was, well, first of all, you're right, it's a very margin sensitive business.

But what the operators are doing is they're going out to the major OEM infrastructure providers and saying, "Look, we're not really interested in doing a bid that goes after the specific price for your infrastructure or your base station, your switch, whatever. What we want you to do is supply a bid for us that gives us a price per [erline], you know, traffic occupancy delivered at a certain quality level. So don't tell us what you need in test equipment, don't tell what you need in service, don't tell me what you need for base station or antenna, just deliver that."

And so I believe that a lot of our business will be through the infrastructure vendor, and fortunately we're such a low percentage of the overall configuration price that goes into an operator, I think we're a little bit less exposed.

The second thing I would say is that India may be for us a little bit what our initial foray was into China. As you know, we deliver antennas both to Cisco and Motorola in China, and we were required to set-up a very small but I think cost effective operation in [Tangen] and do some outsourcing. So we may have to make some modest investment in India to accomplish some local manufacturing but that is the dominant way that you would address gross margin pressures in that market.

Okay. Thank you. It's a good answer, and appreciate it, and good luck in Q4.

Thank you.

(OPERATOR INSTRUCTIONS.)

We'll take our next question from [Susan Callas] of KHX. Please go ahead.

Good morning.

Hi, Sue.

That was a very, very strong sequential growth in revenues and great margin improvement, just a great quarter. The outlook is very good. Just, you know, I think we've really gone through the India story, which is a very good story. And in the U.S. I wondered if the a big story now is kind of what Google is going to do with WiMax and phones, and what it could be if there's another carrier for, to compete with the mobile carriers -- do you have an opinion on whether another carrier could fund it like a Google or Google could be a potential player and whether you'd have an opportunity to play in that business?

Well, you know, fortunately, we're in the position of selling munitions and arms to all sides in the conflict, so to some extent we're agnostic about who owns the network or what has or what entity gets into this. I do believe that there is room for Google to play in a network that promotes high speed wireless service.

The only real risk I see is this, Susan, and one of your fellow analysts asked me this very tough question. He said, "Name me one data only wireless network that's been very successful?" And there aren't a lot that come to mind.

And so I think you have to look at WiMax this way. First, is there a point-to-point opportunity that offers real competition to Comcast and others delivering cable, if you will, a wireless cable play over that spectrum?

Second, for those cellular operators that are offering high speed data like [EVDO] and [HSBPA], one of their greater costs has become backhaul, you know, instead of T-1 now they need [DS3] to backhaul all of that data because unlike voice it's not intermittent traffic, it's continual traffic, and so the backhaul expenses have become large. And I think you'll see WiMax is a meaningful entity in trying to disrupt the costs.

Your question is interesting, because if you go to the third aspect, Mobility, I really think one of the keys to making 8016E successful is to have a voice component, because voice is still the killer application. And so I, for one, am sympathetic to that point of view, that voice added to 8016E significantly helps the chance of WiMax as a mobile service doing well.

It's a great answer. Thank you.

Did that answer your question?

Yes, great.

Okay. Thanks a lot.

And at this time we have no further questions, so I would like to turn the conference back over to Mr. Singer for any additional or closing remarks.

Well, again, I want to thank everybody for attending, and I look forward to updating you on our progress both at AEA, which I'll be attending in November, and then at our next conference call. Thank you.

That does conclude today's presentation. Thank you for your participation. You may now disconnect.