PCTEL Inc (PCTI) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to today's PC-Tel incorporated fourth quarter 2007 earnings conference call. As a reminder, today's call is being recorded. I'll now turn the call over to Mr. Jack Seller, Director of Marketing for PC-Tel. Please go ahead, Mr. Seller.

Thank you for joining us today, February 19, 2008, for the PC-Tel financial results conference call for the fourth quarter 2007. On today's call will be Marty Singer, Chairman and CEO and John Schoen, Chief Financial Officer. I'll now read the Safe Harbor statement.

Today's call will contain forward-looking statements within the meanings of the Federal Securities loss. Comments regarding our performance and expectations regarding the wireless, RF 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. 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. I would now like to turn the conference call over to Marty Singer for opening remarks.

Thanks, Jack. On behalf of PC-Tel, welcome to our earnings release conference call for the fourth quarter. I want to thank you all for attending and for your interest in our Company's progress. We are pleased to be hosting this evening's call from our new Corporate headquarters at our Bloomingdale facility in Illinois which houses our antenna products group. One result of the sale of MSG is that we've been able to consolidate our facilities in the Chicagoland area. As we have done in the past, John Schoen will review our financial performance in some detail and we'll review our balance and sheet and other issues. I'll cover the general state of the business, discuss highlights of the past quarter and then discuss 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 I would now like to turn the call over to John Schoen.

Thank you, Marty, and good afternoon -- or evening to everyone. Our investors will note that the Company presents non-GAAP financial information in it's earnings releases. The Company believes that presentation of net income excluding restructuring charges and noncash bases 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 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 and reconciliation to GAAP measures please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website at www.PCTel.com under investor relations. My discussion of results will be based on our non-GAAP financial results.

We're pleased to note that the Company closed the sale of its Mobility Solutions software group to Smith Micro on January 4, 2008. The Company's financial statement has been revised to reflect MSG as a discontinued operation. My discussion of financial results will address continuing operations. In order to facilitate comparisons with prior quarters we have posted to our website in a PowerPoint presentation the unaudited quarterly financial segments in the new format for 2006 and 2007, including the reconciliation of GAAP to non-GAAP financial results. So with that said, let me speak to revenue.

Fourth quarter 2007 revenue from continuing operations was $19.1 million, compared to $18.1 million in the fourth quarter of 2006. An increase of 6%. In addition, we'd like to point out that Q4 2006 included $1.2 million of UMTS antenna revenue. A product line that the Company exited in the first half of 2007. As you will see later, the shutting down of UMTS operations impacted gross margin percent and operating costs as well.

Let's turn to gross profit margin. Gross margin from continuing operations for the fourth quarter was 49% versus 46% in the same period last year. The Company saw a larger than normal percentage of its total revenue comprised of higher margin scanning receiver products. Additionally, the gross margin percent was favorably impacted by the absence of lower margin UMTS antenna products in Q4 2007.

Now lets turn to operating expenses. Fourth quarter R&D and SG&A from continuing operations were $6.8 million, down $650,000 from the same quarter last year. The primary driver of the decrease was the exiting in 2007 of UMTS antenna operations located in Ireland, resulting in lower R&D expense. The connection royalty was unchanged from last year. With regards to operating income, operating income from continuing operations in the fourth quarter was $2.9 million or 15% of revenue compared to $1.2 million or 7% of revenue in the same period last year. The results reflect improved gross profit performance and lower operating costs.

Let's turn to other income. Other income was $200,000 in the fourth quarter, compared to $900,000 a year-ago and $800,000 in the third quarter this year. Other income was negatively impacted by the mark to market adjustment of our investment in a Banc of America affiliated fund, the Columbia strategic cash portfolio. This is an enhanced cash money market fund that was impacted by the recent turmoil in the credit markets. In the fourth quarter, 2007, the Company had approximately $43 million of its cash investments in this fund. Columbia announced on December 6, 2007, that they plan to liquidate the portfolio and return the cash to its investors. As a result, a loss on this investment of $550,000 or $0.02 per share was recorded in the fourth quarter of 2007. Since the liquidation began, Columbia has returned $14 million in redemptions and our current balance as of today is $29 million, down from $43 million. So far in the first quarter of 2008, an additional loss of $110,000 has been incurred based on the funds mark to market valuation. We anticipate that interest earned on the investment will continue to offset any valuation losses but we cannot predict the ultimate outcome of the liquidation.

Now let's turn to income taxes. The exit from the UMTS antenna operations earlier in the year left the Company in a net operating loss position of approximately $1 million at the end of 2007. We expect to pay no U.S. federal income tax in 2007 and a small amount of state and foreign income taxes. The fourth quarter non-GAAP tax revision reflects this. The GAAP income tax benefit of $7.9 million in the fourth quarter reflects a noncash adjustment of tax reserves on deferred tax assets that will now be usable going forward due to the gain on sale of MSG in the first quarter of 2008. I realize this is a bit confusing as we will not report the gain on the sale until the first quarter of 2008, but as the gain is assured we are required under GAAP accounting rules to adjust our tax re serves in the fourth quarter of 2007.

So let's recap earnings. Non-GAAP net income from continuing operations for the fourth quarter 2007 was $3.1 million or $0.15 a diluted share compared to non-GAAP net income of $2.7 million or $0.13 per diluted share in the fourth quarter of 2006. To summarize the differences previously discussed, net income from operations was higher from improved gross profit and lower operating expenses, which were partially offset by lower interest income in the fourth quarter of 2006 containing a tax benefit to true-up the year.

Now let's turn to the balance sheet. As of December 31, cash and short-term investments net of debt ended the quarter at $65.5 million, up $600,000 from the end of the third quarter. The Company received $59.7 million of cash from the MSG sale in January 2008. The Company expects to make a $20 million estimated tax payment related to the transaction in April, 2008. Of the $125 million of cash available today, the Company has approximately $2 million in operating bank accounts, $94 million is invested in AAA money market funds which are in turn invested, 100% in short term U.S. treasury securities, U.S. federal government agency securities or bank purchase agreements collateralized by the same. Approximately $29 million is invested in the previously mentioned Columbia strategic cash portfolio fund which is in the process of liquidation.

Now I would like to discuss guidance for the first quarter and the year for continuing operations. First quarter revenue from continuing operations is expected to be between 17.8 million and $18.2 million, which represents an 8% increase from the same period last year. Our annual 2008 revenue guidance remains unchanged at between 76 million and $82 million. Revenue going forward is expected to be almost exclusively from the Company's broadband technologies group which contains scanning receivers and antenna products. The Company expects about $100,000 of modem licensing segment revenue for the entire year. Guidance for gross profit percent remained unchanged in a range of 44 to 46% for the first quarter, 2008, and for the full year. As a reminder, the fourth quarter performance of 49% gross margin contained a favorable mix of scanning receiver and higher margin antenna products.

The Company previously issued annual 2008 guidance for cash based R&D and SG&A from continuing operations of between 30.5 million and $31.0 million. Now that the MSG transaction has closed, we have adjusted our anticipating operating expenses. We are revising the annual guidance for cash-based operating expenses down $2 million to a range of $28.5 million to $29 million. The mid point of the new guidance range would yield R&D of $9.5 million for the year, sales and marketing of $10.7 million and G&A of $8.6 million. The connects in royalty is expected to be $200,000 per quarter.

Guidance for other income is revised lower due to the recent U.S. Federal Reserve Board interest rate cuts and the Columbia fund liquidation previously discussed. The Company expects other income to be approximately 1.0 million to $1.1 million in the first quarter and 850,000 to 950,000 in each of the second, third, and fourth quarters. The annual guidance for non-GAAP effective income tax rate remains unchanged at a range of between 15 to 20%.

In the fourth quarter the Company announced a new share buyback program authorizing the purchase of up to 3 million shares of the Company's stock from time to time in the open market. We did not repurchase any shares in Q4 2007 because of the pending sale of MSG to Smith Micro. The window for buying back shares opens three days after our earnings release. That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thanks, John. And again welcome to all of you. The fourth quarter was an exciting one for us. The sale of MSG represented the consummation of a year long analysis of our business, our opportunities and actions that we needed to take to achieve focus and scale. The divestiture punctuated our commitment to our RF product operations and our plan to grow those operations. With this transaction we simplified our business, focused our operations and funded our future.

We are already seeing the benefits of these strategic actions as we focus on our core competencies and primary growth drivers. In January, Bob Suastegui, VP of Global Sales held our annual sales meeting here where we bring together our worldwide sales force along with our distributors and representatives. An immediate benefit to our team was the presentation and discussion of two product lines that had synergistic characteristics both of which could be effectively sold by a single sales force. Our sales force is very well suited to represent all of our RF products and our management is comfortable with both propagation and optimization technologies and products. This focus was apparent last week at the GFMA Mobile World Congress in Barcelona.

Our business will change in other ways that we expect will immediately improve our financial performance. As John pointed out earlier, the divestiture has permitted us to refine our OpEx estimates and to reduce more costs than we initially anticipated. As a result we anticipate improved operating margins. With expect to our acquisition strategy our focus is now targeted on product rich, reasonably valued RF Companies that will complement or expand existing product families and that are compatible with our existing distribution channels. The return to our core competencies has also simplified our strategy for organic growth and for our internal investment decisions. As an example, we currently support a $50 million antenna product line with only 15 engineers. Now R&D dollars that were earmarked for MSG development can be redirected towards high growth RF products. We believe an incremental investment in our scanning receiver and antenna product lines is one of the most cost effective investments we can make. This is built in our operating cost objectives for 2008 that John just reviewed. Within our development budget we're also supporting a full pipeline of new product introductions and new technologies in our scanner receiver product line. We believe that we can bring these products to market more quickly now that our development budget is more focused.

Let me make a few comments about specific product and sales highlights from the fourth quarter as well as some first quarter events. We continue to do very well with our GPS antenna product line. As I mentioned at the Needham growth conference, several carriers and OEM infrastructure vendors have incorporated our GPS antennas into their base station configuration to provide timing for their networks. We view this as an important long-term growth opportunity as the industry continues to drive toward spatial processing and Internet-based back haul. We now provide antennas for public safety, Tetra based networks in Europe, and we have seen some positive results from our investment in antenna distribution in Europe and the Middle East. We doubled our Canopy and WiMAX antenna business from 2006 to 2008 and we see continued growth for the WiMAX product line through 2012. While the recent announcement by Sprint and Clearwire on their plans has an uncertain outcome, we remind everyone that there are 1050 WiMAX license holders worldwide and there is a lot of opportunity with the other 1048.

There were other encouraging signs in our fourth quarter antenna business. We achieved our strongest quarter with Cisco. Displaced important competitors at Motorola and Bellaire Networks and had strong sales to contact for our industry leading GPS product line. As John mentioned earlier, our scan receiver business continues to be a very positive story for us. We realized a record quarter and our new WiMAX scanning receivers were a hit at the GSMA Mobile World Congress exhibit and conference in Barcelona. The 900 megahertz frequency band is strategically important to wireless operators in Europe and beyond because of its superior propagation profile. It will become crucial to the continued rollout of 3G services around the world.

Our new quad band scanning receiver satisfies requirements for European operators as well. Telefonica Movistar in Spain already selected the new quad band and we're confident of making additional sales in this band. We also announced that we would release a TD SCDMA scanning receiver of applications -- for applications within the China market. We expect new product to be released in the second quarter.

With respect to WiMAX, we have conducted early trials with an operator in December with a beta version of our new WiMAX scanning receiver which, by the way was a hit at the show in Barcelona and the results were encouraging. This market will gain real traction in late 2008.

As I've mentioned previously, acquisitions are an element of our organic growth strategy. Our preference is to acquire product lines that would accelerate our revenue growth in focused areas. One example would be an acquisition that would help us penetrate enterprise markets that utilized land mobile radio antennas. Another example would be investment in companies that would give us a low-cost manufacturing platform in high-growth regions. These investments would be relatively small and we're taking an extremely disciplined approach in our evaluation of various alternatives. We're examining several opportunities at this time but we have nothing to report right now. We believe that the recent turmoil in the markets might result in favorably priced assets. Our balance sheet will serve us well during this period.

In summary, we are extremely pleased with the divestiture of MSG and the corresponding focus and efficiencies that we've achieved as a result of this transaction. We've experienced strong growth in our GPS and WiMAX product lines and consistently strong growth in our scanning receiver product line. Our 2008 plan calls for additional investment in both antenna and RFS development and we have achieved far greater focus with our sales team, including global or key accounts. We believe strongly in the Company as evidenced by the Board approval of a 3 million share stock buyback program and the strong ownership position of the management team. We expect to initiate the stock buyback when our window opens this quarter. Management is excited about our prospects and remains as committed as ever to the continued growth of our Company and to shareholder value. With that, we have set aside 30 minutes for Q&A.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Matt Robison of Ferris, Baker Watts.

Congrats on the good results.

Thanks, Matt.

Hey, you've sort of suggested that is this great gross margin performance is up like about 400 basis points sequentially was not necessarily repeatable this quarter. Is there something about the scanning receiver performance that -- what makes you think it's not going to happen again that way?

Well, we are having another nice quarter with scanning receivers. We don't do segment reporting so I don't split out the sales of scanning receivers separately from our antenna sales but I will tell you that December was unusually strong. We had some nice software associated with the sales of our scanning receivers and there was something else that I did mention in my remarks. We had very strong sales of specific antenna product lines, for example some elements of our GPS antenna product line that have a higher gross margin, significantly higher gross margin than for example the land mobile radio antennas. So it was really the confluence of those two events not just scanning receivers that led to the higher margin. We're confident that margins will be in the range that John discussed. And they're influenced by product mix and that can vary from quarter to quarter.

Do you think scanning receivers are going to keep up with antenna business in '08?

In terms of growth rate, yes.

And when you look at these various standards that are now being contemplated such as LTE and WiMAX of course, do you get another shot at your customers every time somebody come up with a new modulation scheme or new air interface or is it just the spectrum that drives it?

Absolutely. Both factors influence opportunities for scanning receivers, so the China market is not just the China market with all of its explosiveness, but it's TDS, CDMA. And then on the other hand you new have the new spectrum opening up in Europe for more successful rollout of 3G services. And technology disruption in general is very good for us, but the beauty of the scanner receiver business is there is really three things that drive it--expansion of existing networks and that's great for when you have an expanding CapEx market, technology disruption, either spectrum or new standards, but as I've mentioned several times, Matt, at various conferences, one of the unique properties of the scanning receiver business is it does reasonably well during a recession.

In other words if CapEx spending falls at a carrier, there is some poor network engineer that gets tasked with the job of having to extract more capacity, more [Erlangs] from what is already in the ground. And if you look at this business, the scanning receiver business, it's consistently grown, 20% plus a year since we've acquired it and we've gone through all types of cycles. So I'm pretty confident in its continued growth.

And so the question for John now, on the 125 million you said you had today, access to, did that include the $20 million you're going to pay in early April or is that--?

Yes, it did. So 105 is the net number at April. 125, minus 20.

Okay. I'll let somebody else ask a question and I'll probably come back on the call later.

Thanks, Matt.

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

Marty and John I have three questions.

Are any of your questions, Anton, going to relate to the piece you put out earlier on pending taxes in the U.S.?

You know what, while I have that on my mind, (inaudible), but in the meantime, to warm up, first for you John, I was looking through your excellent press release here which has an exemplary amount of detail that every company ought to copy, there is one thing I couldn't find probably because I'm a little bit slow and too old, and that is I actually didn't see from the discontinued operations -- from the discontinued operations, the actual revenue number. I kind of sort of bottom line contributions from--?

Sure. Anton, the revenue number nor MSG in the quarter was $2.85 million so the old way would have been around $22 million with MSG.

Okay. Fantastic. That's what I was looking for there. The second question really for you Marty, is you mentioned WiMAX growth through 2012. I seem to recall a few quarters ago you made a statement on a previous earnings call saying something along the lines of, and I could be off saying you expected to -- something along the lines of doubling your WiMAX (inaudible - multiple speakers) year-over-year.

That's absolutely true. Anton, that's absolutely true. For us, of course, when we refer to WiMAX, it's a combination of the precursor to the standard canopy and canopy and WiMAX as a combined group of antennas doubled from '06 to '07 and we have a very good chance of doubling again '07 to '08. Again, I don't give specific revenue by product line because then we'll be in segment reporting hell for the foreseeable future but we're still confident of that. And when you think about our antenna business, we have three pretty nice growth areas. The WiMAX antenna space along with its precursor canopy grows at a pretty good clip. The GPS antenna is much more than fleet management and has been really spurred on by the need for timing antennas in the new spatial related technologies and the third area is our general data category of mesh, WiFi and RFID. You have to remember, though, that roughly half of our antenna business is comprised of land mobile radio antennas, and that, as you know, is a slower growth type of business. It's steady, it's profitable, we have a very nice share in it, but if you look at let's say some of the players in that space like Motorola, certainly a dominant share in general LMR, where they grow anywhere from 5 to 8%. And so that balances some of the high-growth activities we have.

Okay. Yes, I mean I was just thinking there, with WiMAX, I mean you talked earlier in previous calls both about India -- by the way, maybe I missed something, but I don't think you mentioned too much about India this time around, but being as India seems to be at the moment the most powerful WiMAX deployment market can you maybe elaborate a little bit on your initiatives there and how that could help perhaps your WiMAX exposure profile both on the antennas as well as in terms of canopies?

Sure. I'll tell you that we actually did sell quite a few scanning receivers in India last year through the auspices of TEMS and Nemo and other resellers. And what has been helpful there is we may have lost [Bijou Naiere] with our transaction to Smith Micro, but his brother [Madou] is our Director of Sales and India and is doing a great job for us and we've established two distributors, S-Techs and Richardson Electronics. In addition, Jeff Miller and I have both visited there, along with Denton Clutterbuck, our Director of Sales for Europe and Middle East and India, and we spent a great deal of time with operators in the ministry and we are pitching and we are now in trials with our WiMAX antennas with some of the base station providers there. And I think you know who those players are and we expect to see our WiMAX antennas in some of the initiatives related to the supply of high bandwidth into rural areas.

Okay. Good. Now a final question. In terms of -- you mentioned some of the areas where you're looking to make acquisition, complementary building sales, et cetera, makes all sense to me. Could you maybe discuss a little bit your philosophy for the kind of valuations that you would have to see? You had mentioned and at some point in a few quarters ago that you were looking at a certain multiple to EBITDA and given where the market has gone over the last three, four, five months, has there been any adjustments to what you see are valuation expectations in that regard and maybe can you draw a distinction between public companies and private companies? The reason I ask that is if what we're seeing is obviously a compression of the valuation of the public companies but private companies tend to have lofty expectations relatively speaking and you're EV now in the market is within striking distance of $30 million and any private companies that they're worth very little money like that, then I mean you get the kind of reaction you get is like you would have drawn a cartoon of Mohammed or something. They take that as an insult. So how do you kind of cross the line dealing with private companies that might have higher valuation expectations than sort of the market cap, the EV that you are enjoying in the market?

Well, the simple answer to that of how you do that, is you say no. We're not under the gun to effect a transaction in a specific time period and we're not going to behave desperately or go out and violate our valuation principles just to meet somebody else's expectations or for the sake of bolting on a new product line or Company. So to restate, our disciplined approach we'll look for valuations in the 7 to 8 times EBITDA of trailing performance, provided that we can see a way that that valuation will mean something between 4 and 6 times EBITDA on a go-forward basis. In the antenna space we wouldn't expect to pay more than one times revenue in the current environment and we will look first at opportunities where we can absorb product lines without absorbing companies. And I think that is really one of the key elements to our success for our planned success in this area. We're also not going to strike out into a totally new area. We're looking for product lines that fit into our distribution channel, fit into our manufacturing style, and fit into our current markets. Other than that, I could just continue to talk about various parameters, Anton, but I do appreciate the opportunity to respond to your question and give the sense that we're not going to be chasing properties.

Thank you for your thoughtful, intelligent, helpful, and exemplary answer there. John, back to the tax issue, you mentioned 15 to 20% this year. I know you're not giving guidance longer term per se, but should we expect that, I mean, where you are, with sort of profitability, if we sort of extrapolate out you'll have obviously very solid profitability consistently here in '08 and '09, let's say that that's going to be even an improvement on that, which one would hope, then I mean are we looking at a tax rate that is going to be higher or can we still be below 20%?

Well, the 15 to 20% tax rate on non-GAAP is the same thing as a 35% rate on GAAP. Because I have got about $7 million in non-GAAP adjustments that we make when you add up all the stock-based and the comp and the amortization of intangible and so 35% is pretty close to the statutory rate. We're not particularly in a tax-advantaged arena.

So basically this is where it's going be and that's it?

Correct. This is a fully burdened tax rate without a lot of R&D credits as permanent differences.

Thank you very much.

Thanks a lot, Anton. Operator next question.

And we'll take our next question from Ken Muth of Robert Baird.

Hey, guys, now that we're down to two revenue segments in the RF and the antennas, could you give us a little bit of insight of how you guys look at those two segments of growth for 2008. What is going to be the kind of a normalized growth right now that we have a lot of things pro forma'd out, how do we look at the scanners versus the antennas and if you have any subsegments within antennas that's fine.

I'm reluctant, Ken and I'm not trying to be evasive, of getting into growth by area because we'll get measured on a increasingly diminishing basis here. I'll tell you this, as I've already said, half of our antenna product line is in an LMR that is lower growth. The scanning receivers have delivered consistent 20% growth year-over-year for a while. And in the antennas, we have some opportunities for really high growth and the WiMAX area and the GPS area and the data area, mesh, WiFi and RFID, is slightly lower than the GPS and WiMAX.

Okay. And then you guys are obviously feeling pretty good about how you've reorged the Company because it looks like your pro forma operating income is going to be just under 8% for the year and if the way things go throughout the year you're going to exit the year at kind of a 9 or 9.5% range. Does that sound kind of where you're thinking?

I'll let John answer.

Yes. If you do the math backwards on the mid point of the guidance, we're pretty confident that that is going to be our annual average.

Okay.

Obviously with much more skewing in the second half because we have seasonality in our revenue base.

Where were we in the fourth quarter?

We were at 15 points in the fourth quarter but then in the first quarter it would obviously drop down to single-digits because of the revenue drop compared to fourth quarter.

And then how do you guys kind of look at the share repurchases. Is that something you're going to be aggressive in this quarter or is it something you're going to try to be careful and just try to do throughout the year?

Well, we're certainly going to buyback shares if they're available at attractive prices starting when the window opens.

The window opens Friday.

And we have about two weeks or so. I don't know if you remember this, Ken, or for the people on the conference call remember, but in order to be more aggressive, the Board actually voted to expand our trading window. Before we were restricted to the middle month of each quarter and now we've extended it so that we can buy one week into the last month of the quarter. And that should help us buyback some shares as we go forward with our plan.

Okay. And then on the scanner business, could you just give us kind of a rough breakdown of geographic locations on that revenue? Is the vast majority in the United States, or if you could just--?

No. I'll tell you we did about 55% of the sales are outside of the United States. It's difficult data for us to get because as you'll recall, most of our sales go through our OEMs, TEMS, Nemo and so on, and so we only can obtain the data on the end user via their good graces. Luis Rugeles who heads up that area recently did a pretty thorough review with them, and -- as well as some of our other OEMs such as ASK.com and SwissQual and Andrew, the old Grayson Wireless that is now part of [ComsCo] and we're pretty confident that roughly 55% are outside the U.S.

Okay. And then was it fair to assume that the licensing, the way you guys have couched that, most likely ends by the end of '08 or would that dribble through?

Yes, you'll probably see, I want to see about 50 K in Q1 and then it just drops off to like 10, 20K a quarter and it drops to almost nothing in '09.

Okay. Thank you very much.

Thanks a lot, Ken.

And we'll take our next question from Doug Whitman of Whitman Capital.

Hey John, if you could touch on, in the accounts receivable category, how much of your accounts receivables roughly is the result of the software division that you sold off?

There is about $2 million in the accounts receivables at 12/31 is the accounts receivable we're retaining as part of the deal.

Okay. And could you cover also a little bit more detail both on kind of -- I'm not sure if I quite follow what the likelihood is of receiving the additional outstanding money from Columbia and then also the remaining cash that you have, how is that currently managed and how is it deployed?

Sure. Well, let's start with Columbia. To kind of take it down into what is in the underlying assets of our $29 million, there is $2 million in cash awaiting distribution which is actually supposed to come out next week. There is $7 million in fairly liquid corporate securities and there's $20 million in asset backed securities. With the exception of about $600,000 in that $20 million of asset backed and those are already marked down 50%. That's the loss we already reported. The assets in the portfolio are performing and the fund's current yield is 4.5%. And the markdown on those specific asset backed items I just talked about account for virtually all of the net asset value loss to date.

As far as the liquidation goes we're not in a position to predict redemptions but as I talked about before, when you add together the $14 million we already got, the $2 million that's getting ready to pull the trigger on I've already gotten 38% of the money back in what, 60 days. So the issue that we've got as we said is that so far from what we could see is even if the rest of that $600,000 that is nonperforming goes bad, I mean I'm earning 350,000 to $400,000 of interest a quarter.

That's kind of what we know about -- about Columbia. Columbia has said that their priority in the liquidation is to preserve capital and so far their actions to date have been consistent with that priority.

With regards to how I'm managing the rest, given that I've got a longer term horizon here in the Columbia site, the rest we're putting all in very short-term AAA money market funds and they're all going to be, as I said, they're all going to be in funds that are restricted to either investing in U.S. treasury short-term stuff, U.S. government agencies or repos backed by FIN. Because if I had all of the money available to me today, I would have probably put about 30 million to $40 million of it in a forward-looking ladder anyway that would not have been available on demand money anyway. So instead of me deploying it in a ladder of my own for the longer term piece of the ladder, I'll use my Columbia piece as that portion.

Okay. So the $600,000 to date that is also going back to Columbia that's been written down, there is basically no likelihood of it--?

Well, here, and state it a different way. Of the original $43 million, there is about $1.2 million in what is now nonperforming paper that has already been written down 600 K. So of the 29 that's left there is the 600 that's remaining and it will either work its way out or the NAV will continue to drop. The whole rest of the portfolio is performing, which is generating the 4.5% yield.

And the tough question is why was two-thirds of the Company's cash at the time with Columbia, in one fund?

Well, I think where we were at was that the underlying representation of the fund was that it was an enhanced cash fund. We were earning about an extra 500 to 600 basis points over time with that fund. And to date, they had demonstrated on-demand withdrawal performance over the last couple of years that we've been in it.

Well, actually since 2003.

Yes. But to answer your question. We've now -- we are now spreading even the treasury and the U.S. government stuff in between various funds.

Okay. Marty, could you touch a little bit -- you've talked about product mix, can you talk a little bit also on gross margin and product mix. Is there more stuff that you can do in gross margin or are you pretty much hit the threshold of efficiencies looking forward over the next year or two?

No, I believe there is more that we can do. First, anything that we can do to drive sales of our GPS product line and our scanning receiver product line and additional software sales with scanning receivers can move the needle. Second, volume helps quite a bit as it helps us absorb the fixed cost of our factory. The third thing though, is that I believe we are making progress on a monthly basis on underlying efficiencies in our supply chain. We have -- if you go to our catalog on our website, it's really remarkable. We've gone from basically 8,000 active SKUs to about 2,000 active SKUs. And the more money we can generate per SKU, the higher our gross margin will be. So we're actively eliminating non-performing or marginal SKUs and focusing on those product units that can deliver the greatest value for us. And it drives efficiency throughout the Company, from order handling to our purchasing of parts and so on. By the way, Doug, I just want to comment to the operator, that we're getting quite a bit of echo feedback on this line. We've been having trouble with the line throughout the call. I don't know. Does that answer your question, Doug.

Yes. No, it does. And one other quick question is would also be on the R&D spending. Is some of that also going to generate improved gross margin or is it primarily for new products.

Really it has an opportunity of both so we're taking some of our antenna product lines right now and putting them through a redesign for enhanced manufacturability and we have three dedicated heads at this time for redesign.

Okay. Well, last comment would be I found a Company that sells at 2 to 3 times enterprise value on EBIT and basically 0.5 market value to revenue so we certainly would like to PC-Tel's management and their Board institute a more aggressive buyback because that seems like a great opportunity.

Thank you, Doug, for the confidence.

(OPERATOR INSTRUCTIONS) And we'll take our next question from Brian Horey of Aurelian Management.

Hi. Thanks for taking the question. With respect to acquisition process, are you inclined to look for kind of one acquisition of size or do you think you're more likely to have a series of smaller product focused acquisition?

Well, that's a tough -- that's a very good question and it's one that is difficult to answer precisely, but it might be useful -- and could you just repeat your first name again?

Brian.

Brian. It might be useful to think of where we've been successful and where we haven't been successful in acquisition. As you know, we acquired cyberPIXIE for $1.5 million. We sold that for really total consideration of when you include the accounts receivable of $65 million. We acquired MAXRAD for $20 million, $18 million in revenue. We acquired product lines from Andrew for about $10 million, 11 million or $12 million in revenue and we acquired DTI for $10 million with $1 million earn out and at the time they were generating $8.3 and we've been able to grow it organically. So when I look at our success it's definitely been in the sub 20 and the most successful acquisition have been smaller than that. And I think that in looking at our one big error, the acquisition of Sigma, which is one of the bigger mistakes I've made in my career, I walk away with a few -- I walk away with a few principles and a few ideas about what we should be doing.

One, I think smaller is better than larger. I think two, I've got to operate within the available bandwidth of our my current management team to absorb companies. And three, I want to be risk averse, in terms of putting our money to work. So that's a long way of suggesting that we're looking for smaller acquisitions that help us complement our existing product line and distribution channels.

Okay. That's a good answer. Thank you. And then I had a follow-up, which is really I guess two. The first is, Earthlink has kind of announced a pull back from WiFi and I think there is a broader re-examination of WiFi, public WiFi as a business model, I guess. And I'm wondering, what effect if any you guys see that having on the business?

Well, WiFi for antennas has definitely slowed. And when I look at the data area mesh and RFID are probably growing faster than WiFi area and certainly the reason you site is one factor. Although I would point out that's never been a major focus for us. Most of our WiFi antennas are highly specialized antennas that provide directional or coverage support for the enterprise. So we sell high performance antennas that extend the range and improve specific targeted coverage. We don't really focus on the rubber ducks that might be associated with an access point in a Starbucks hot spot for example. But the greater threat to WiFi is not the decision of Earthlink or Boingo, or whatever to pull back from hot spots, the greater threat is more and more of these antennas are simply designed into the access point by the vendor. And so the role for independent vendors here is going to be marginalized as you go forward. So we move on. And we'll continue to design and develop and distribute the highly specialized WiFi antennas that are used by the enterprise or for example we discussed a few quarters ago that one of the things we do is we'll upband an antenna, a WiFi antenna for special use within the public safety arena. 4.9 for Homeland Security. So they'll continue to be the type of lower-volume, but higher-margin opportunities that we'll go after with WiFi.

Okay.

Okay, Brian.

Yes. And then if I could just sneak in one more, I know you guys do not have a lot of direct contact with your end customers in a lot of cases because you're going through somebody else from a distribution standpoint. But I'm sure you guys must try to keep some tally of CapEx budgets and that kind of stuff and I'm just wondering what you're seeing from a broader high-level view as you look into '08 and monitoring what people are talking about as far as that goes?

We certainly don't have any independent economic indicators other than the ones that you would see in the economists or an RCR or another telecommunications rag. It's something that we're going to pay attention to, but as I pointed out, we're somewhat insulated from recessionary pressures in the scanning business and half of our antenna business is associated with things like public safety and Homeland Security that aren't quite as exposed. So thanks, Brian for your questions.

Okay. Thank you.

And we'll take our next question from [Jim Devlin] of Henley and Company.

Good evening gus and congratulations on a good quarter and a tremendous asset sale.

Thank you.

Just on this stock buyback. It's been a while. What are the restrictions? Like what, 10% of the daily volume unless you can negotiate blocks or something like that?

John, why don't you answer.

25,000 shares a day is our limit or -- and then you're allowed one block a week.

Okay. And we now, I guess, sub the cash sometime during the quarter, I guess the cash is already in the bank.

Correct.

About $120 million?

125 million, as we said earlier in the call.

And I guess the stock closed around $6.20 so we have about a 30 million, $35 million market cap?

Well, enterprise value, it depends on what you think is being discounted, our enterprise value or the cash.

Well yes. Enterprise value to cash. My suggestion or I don't know if you guys have looked at this. Is obviously you've announced you're willing to buyback about 14% of your shares outstanding. As a growth/value investment, have you guys looked at perhaps the opportunity of paying some kind of dividend? You guys have mentioned that you're holders as well?

Yes. The Board has considered all of these alternatives and we'll continue to evaluate all of them. We have nothing to report on that, however at this time.

Okay. Hey, it looks like like you could pay about a 6 or 7% yield at these prices and still grow the business pretty well.

Again, it's something that the Board takes under consideration on a regular basis and--.

Okay.

We'll continue to look at ways to enhance shareholder value.

All right, guys. Congratulations, thanks again.

And we'll take a follow-up question from Matt Robison of Ferris, Baker and Watts.

Hi. Can you hear me?

Yes, you're breaking up a little bit, Matt.

Okay. What I wanted to understand better and maybe you talked about it John, I want to talk about the pattern of sales and marketing expending spending, really steep decline and starting to decline in the fourth quarter and it looks like probably a recovery of that spending area in the current quarter and going forward and then kind of the opposite effect in the G&A with that looking like it's going down to get to the run rate you just talked about. And also, I would like to, if you could give me a little flavor of the direct versus distribution mix in your sales and just -- it sounds like just about all of your products go largely through distributors and if you can talk about how you recognize revenue into those channels, if it's just a sell in or if you have a sell out model and if there is a variance between the more traditional resellers versus the OEMs?

Yes, I think I can talk about distribution channels and I can talk a little bit about the G&A expenses and then I'll let John handle the rest. With respect to distribution, I think we have reported this in the past and certainly when we first acquired MAXRAD, we thought that about 70% of our sales went through distribution and about 30% were direct. And we have been pleased that that shifted a bit and now we believe that about 50% of our sales are direct in antennas and about 50% go through distribution and that means that we are getting a little more traction with some of the OEMs such as Motorola, both WiMAX and Land Mobile Radio and of course Canopy and Alvarion and Cisco and others.

And that's OEM direct in that context?

That's OEM direct. And I've talked to you a few times about the benefit that we've had from Bob Suastegui joining us and he in turn has brought on a great guy for worldwide national accounts with a lot of experience in antennas and he's helping to really professionalize our efforts there. And it's clear that we've got to go into new territories in a cost effective way and we have to use manufactures, reps and we have to use distributors and in the U.S. we have some absolutely outstanding distributors and manufacturers reps and we always want to maintain those relations but there is something to be said for expanding our direct sales and antennas and also the knowledge we get from having more direct interaction with those customers. So the short answer to your question on antennas is about 50/50.

A little reluctant to give the exact split on the direct versus OEM resale in the scanners, but I think you could look at a 65/35 type of number. And that will vary a little bit Matt, depending on whether we're selling scanning severs or the CLARIFY interference management system. Basically 100% of the CLARIFY products are direct. We have to go to carriers, we have to show them how this product operates, we often have to collect data for them. And it's a very intense sale. But you could use 65 to 35.

Now in terms of G&A, I'm really pleased with progress we've made here and some of the progress that John has made recently. If you look at just in terms of a straight staff numbers, earlier this year we had G&A associated with Sigma, we had some management there. We had G&A, two people in strategy and marketing at fairly high levels and we had a HR person overseeing all of our HR activities. Well, now that we've eliminated one division, we really don't need the same type of support at HR, rather the two locations have HR support. And we've been able to eliminate -- when I look at it in total, it's a pretty big number.

And with respect to other elements of G&A, we had some pretty aggressive initiatives in upgrading our IT department and some of our systems. And we've been through I think what should be the heaviest period of expense there and one of the areas of decline in OpEx has been that. The last area, of course, and this is directly reflects -- this directly reflects John's efforts. We continued to drive down the cost of being a publicly held Company. Sarbanes-Oxley, outside audit fees, and so on. So that's where we've made progress. And John, do you want to discuss R&D. He had some questions about R&D and sales?

And more sales and marketing, the volatility there.

It was volatility in the third and fourth quarter in that our base line had been running $2.5 million a quarter. In Q3 we actually, finally, did a final settlement with one of our larger UMTS customers that we exited so we had a 200 K increase in cost for a receivable write off and then totally unrelated we had better collections in Q4 which was 100 K benefit. So we're still playing roughly $2.5 million at the baseline as we go forward. And once again, in the first quarter for our -- remember that we have got about a 300 K bump to that 2.5 baseline that goes with our trade shows and then that falls out of the run rate after that.

Okay. Now you had -- getting to one point that I think Doug touched on was the receivable going up. Is that a function of back -- timing of shipments in the quarter?

Absolutely. It's directly related to RFS having a record quarter and a lot of the demand which we were able to respond to shipped in the second half of November and in December and so it's not even due yet.

What is your -- what is your lead time on your products?

Well, for -- we actually go through biweekly sales forecasts meaning that we keep our supply chain attuned to, so the -- I know on the RFS side they were able to ship every single dollar that -- so they're about two weeks ahead because we're constantly monitoring the funnel.

Hey, Matt, did you have a question about our WiMAX antenna presence at 3GSM?

No. Actually, no, I wanted to -- my other question was more about the distributors and the way your recognized revenue? It sounds like it's all sell in, right John?

Right. It's all sell in. There are a couple of OEMs on the antenna side that have a hub but they just send us a report as to what they draw out of the hub.

How do you manage how clean the channel is?

Well, I think the -- we can look in -- as an example, our biggest distributors we can look in to what they've got in inventory because once again, they're -- they kind of run off of a [conbon] system and we're actually tied to how much weeks of inventory they're supposed to have and so that's how we actually do our build schedule.

How is that looking these days?

Well, you got to remember, they actually give us purchase orders, hard POs when they've hit their conbon trigger. So for us we're not seeing anything extraordinary in the channel.

So as far as you're concerned, a lot of the fear that is out there is misplaced in your case, it would seem?

We believe our channel is selling through.

Thanks a lot. Sorry, I didn't have a question for WiMAX.

I had an answer for you that I've been dying to give.

Well, it's your call, man. Let's hear it.

So you know we've talked about the Sigma deal quite a bit, and our disappointment with the UMTS. But Jeff Miller's team put together fantastic show and we really had two highlights to the show. One was the WiMAX antenna, another was WiMAX scanner, but what was very interesting related to Sigma is that even though we were unable to have a successful UMTS product line with the remote and variable tilt, Jeff's team has incorporated that technology that we got out of that acquisition into what I think is now a leading-edge product. And we had customers, competitors, distributors, really crawling all over our booth to see how we had developed this product. And it was really pretty slick. We have a mount at the bottom of this WiMAX antenna, Matt, that is replaceable and we can turn a WiMAX antenna from a manually tiltable antenna to one that is remote and electrical. It's totally modular. I think it's going to help people meet their CapEx barriers to getting into the game with a variable tilt antenna. And it's a terrific product.

So they can buy the low-cost piece when they're not very heavily deployed and then as the need to optimize things and deal with sell radius on--?

Exactly. When they have to start to manage the cell configuration, they can just pop out a module at the bottom of the antenna and turn this thing from a manually controlled device into an electrically controlled device.

Are you seeing the usual suspects in terms of competition for doing those kind of things--?

Absolutely. Absolutely. But in the WiMAX, arena, we think we have a little bit of an edge right now.

How far -- how long until you -- so you're in the LTE space, is that basic -- is there anything special about LTE that would result in a product cycle or is that more in the UMTS.

It really looks like UMTS. It really looks like UMTS.

Interesting. Thanks for adding that.

Okay, thanks.

And we'll take our final question from Doug Whitman of Whitman Capital.

Just a quick follow-up. I just want to make sure, John, I understood, going back to Matt and Anton's questions, the total revenue was $22 million if we included -- since we're looking at this for accounts receivable days?

Correct.

It would have been $22 million. So you're -- basically your account receivable days would have been flattish to very mildly down?

That's correct.

Okay. And then last comment, I can't help but resist again. You can buy $1.5 million and you're hearing from a lot of shareholders that we would like to see your Board get a little more active in buying back stock and if I look at the buyback you can do this quarter, unless you get a block it's less than $2 million out of over $100 million in value. So we certainly hope your Board will go back and revisit it. Thank you. Thanks for the good quarter.

And that does conclude the question and answer session. I would now like to turn the call back over to our speakers for any additional or closing remarks.

Thank you all for participating in the call. This concludes the conference call. Please note that we are scheduled to present at the B. Riley investor conference in Las Vegas on April 2. We look forward to seeing many of you there. Thank you for joining us on this call and on the webcast today.

A replay of today's conference will be made available beginning at 8:15, Central standard time running through February 26, 8:15 Central standard time. You may access the replay by dialing 719-457-0820, or 888-203-1112, and entering the password, 4932970. This does conclude today's conference. We do appreciate your participation. You may disconnect at this time.