PCTEL Inc (PCTI) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to PC-Tel, Inc. first quarter 2007 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to the Director of Marketing of PC-Tel, Jack Seller who will read the Safe Harbor. Please go ahead.

Thank you for joining us today, April 24, 2008 for the PC-Tel financial results conference call for the first quarter 2008.

On today's call will be Marty Singer, Chairman and CEO and John Schoen, Chief Financial Officer. Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, planned open mark stock repurchases, and expectations regarding the future growth of our wireless, RF and licensing business 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.

I would now like the turn the conference call over to Marty Singer for opening remarks.

Thank you, Jack.

On behalf of PC-Tel welcome to our earnings release conference call for the first quarter. I want to thank you for attending and for your interest in our company's progress. As we have done in the past, John Schoen will review our financial performance in some detail and we will 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 will 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. Before John begins his discussion of the quarter highlights, I would like to point out that we announced a special dividend today. The board of directors has approved a one time special cash dividend of $0.50 per share.

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 its earnings releases. The Company believes that presentation of gross profit, operating profit, and net income excluding restructuring charges and non-cash based expense including stock and stock-option based compensation, amortization and impairment of intangible assets and goodwill related to the Company's acquisitions and non-cash based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the Company's core results and facilitates comparisons across reporting periods.

For more information on non-GAAP financial results and reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8K with the SEC. The release can also be found at our website at PCTel.com under investor relations.

My discussions of results will be based on our non-GAAP financial results. We are pleased to note that the Company closed the sale of its mobility solutions software group or MSG to Smith Micro on January 4, 2008. The Company's financial statements have been revised to reflect MSG as a discontinued operation. My discussion of financial results will address continuing operations.

Let's start with revenue. First quarter 2008 revenue from continuing operations was $18.3 million compared to $16.6 million in the first quarter of 2007, an increase of 10%. Both our scanning receiver and antenna product lines experienced growth from the same period last year. In addition, we would like to point out that Q1 2007 included $500,000 of UMTF antenna revenue, a product line that the Company exited in the first half of 2007.

With regards to gross profit margin, gross margin from continuing operations for the first quarter was 48% versus 45% in the same period last year. The gross margin improvement reflects favorable product mix and causes reduction. With regard to operating expenses, first quarter R&D and SG&A from continuing ops were $6.7 million down $1 million from the same quarter last year. Approximately $650,000 of the decrease was from the exiting in 2007 of UMTS antenna operations located in Ireland, resulting in lower R&D and G&A expense. The remaining $350,000 was generated by efficiencies in corporate G&A. The connection royalty was lower than last year by $50,000.

While not included in our non-GAAP earnings, I do want to give some background on the $377,000 restructuring expense recorded in the first quarter. It relates to the streamlining of the corporate overhead structure after the MSG sale and an expense adjustment to our UMTS restructuring reserves. We anticipate another adjustment to the UMTS restructuring expense in the second quarter, but it will be income of approximately $250,000. We found a buyer in April for excess raw material inventory and fixed assets that were previously written off. As with the first quarter expense, the income in the second quarter will also be excluded from our non-GAAP earnings.

Let's recap operating income. Operating income from continuing operations in the first quarter was $2.4 million or 13% of revenue compared to $68,000 or break even as a percent of revenue in the same period last year. The results reflect improved gross profit performance and lower operating costs.

Now let's turn to other income. Other income was $800,000 in the first quarter compared to $950,000 a year ago and $200,000 in the fourth quarter 2007. Other income was negatively impacted in both the fourth quarter '07 and the first quarter '08 by mark to market adjustments of our investment in the Banc of America affiliated fund, the Columbia Strategic Cash Portfolio.

As we explained in our fourth quarter earnings call, this is an enhanced cash money market fund that was impacted by the recent turmoil in the credit markets. The Company currently has $25.4 million of its investments in this fund of which $15.4 million is classified as long term as the weighted average life of the underlying securities are beyond 12 months. The fund is effectively yielding zero to a slight loss as the mark to market adjustments are offsetting the interest income earned. Columbia is in the process of liquidating the fund. The liquidation program returned $14 million of our investment in the first quarter 2008. Although today interest on this investment has offset valuation losses we cannot predict the ultimate outcome of the liquidation.

With regard to income taxes, the non-GAAP income tax rate is 16.2%. The rate is higher than 2007 non-GAAP rate as we have now utilized our net operating loss in 2008 and will pay federal and state income tax. To summarize earnings, non-GAAP net income from continuing operations for the first quarter 2008 was $2.7 million or $0.13 per diluted share, compared to non-GAAP net income of $1.2 million or $0.06 per diluted share in the first quarter of '07. To summarize the differences previously discussed, net income from continuing operations was higher from improved gross profit and lower operating expenses which were partially offset by lower interest income and a higher tax rate.

Now let's turn to the balance sheet. Cash and investments ended the quarter at $118.4 million of which $103 million is classified as short-term and $15.4 million is classified as long term as previously discussed. This is an increase of $53 million from the end of the first quarter last year. The largest contributing factors to the change were $60 million of proceeds from the sale of MSG, $4 million generated from the MSG working capital that the Company kept as part of the MSG sale transaction, and $12 million used for the stock buy back and the purchase of the Blue Wave product line.

Of the roughly $118 million of cash and investments currently on hand, the Company has approximately $3 million in operating bank accounts and $90 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 repurchase agreements collateralized by the same. Approximately $25 million is invested in the previously mentioned Columbia fund. The $21 million in MSG related estimated tax payments that we talked about in the press release, the $10.5 million special cash dividend, and the remaining 13 to $15 million in authorized stock buy back means we are forecasting the use of approximately $45 million to $47 million of our liquid cash and short-term investment securities.

Now I would like to discuss guidance for the second quarter and the year for continuing operations. Second quarter revenue from continuing ops is expected to be between 18.8 and $19.2 million including the Blue Wave antenna revenue. Our annual 2008 revenue guidance with Blue Wave is revised from a range of 76 to $82 million to between 78 and $82 million. The change in guidance does not fully consider the positive impact of the Blue Wave acquisition.

We are being cautious in our outlook as we cannot be sure that the recessionary pressures that are impacting others in the market, will not at some point impact us as well. Revenue going forward is expected to be almost exclusively from the Company's broadband and technologies group which contains scanning receivers and antenna products. The Company expects about $25,000 in revenue per quarter from the modem licensing.

Now let's turn to gross margin percent. Given the encouraging gross margin results for the last two quarters and our growing confidence in sustaining it, we are raising our gross margin percent guidance range from 44% to 46% to 46% to 48% for the second quarter and the balance of the year. Guidance for second quarter cash based R&D and SG&A from continuing ops is expected to be in a range of 6.9 to $7 million.

The annual guidance range revised for the addition of Blue Wave is between 28.0 and $29.0 million. The midpoint of the annual guidance range would yield R&D of $9.5 million for the year, sales and marketing of $10.5 million, and G&A of $8.5 million. The connection royalty is expected to be $200,000 per quarter.

We are revising our guidance for other income and expense. We are now forecasting between $400,000 and $450,000 for the second quarter and approximately $400,000 per quarter for the rest of the year. The change reflects the recent Federal Reserve rate cuts, our concentration of the investment portfolio in lower yelling but safer U.S. treasuries and U.S. government agency securities and our planned uses of cash previously discussed. The annual guidance for the non-GAAP effective income tax rate remains unchanged at a range of between 15% to 20%. That concludes the financial review.

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

Thanks, John.

As John's summary comments suggest we have made progress on our operational focus. We are holding or decreasing OpEx in most areas while growing revenue at 10% on a year-over-year basis. We are excited about our improvement in operating profit. From our perspective, our focus on spectra management has resulted in cost synergies. Management sharpened focus on operational effectiveness has also resulted in the gross margin improvement that John reviewed earlier.

At the corporate level we have been extremely busy. We consummated the MSG transaction and will generate approximately $43 million to $44 million in cash after tax. As part of that sale, we successfully moved our headquarters to our antennae facility in Bloomingdale, Illinois. As part of this transition to a focussed RF company, we have worked very hard to eliminate G&A expenses and we have been successful as our recent financial results indicate.

During the first quarter, we evaluated several acquisition targets and took our first small step with the acquisition of the Blue Wave product line. This integration is well underway and we will be manufacturing that product line here in Bloomingdale by June 1st. We have made modest increases in engineering and sales related to the acquisition as reflected in the operating cost guidance given by John.

Moving from corporate to our business operations where the real work gets done, we have been equality active. Luis Rugeles, our VP and General Manager of our RF Solutions Group continues to successfully develop our scanning receiver product line and its distribution channels. He is preparing the organization to compete in China with the release of our TDS CDMA version of the EX scanning receiver and exhibited and trialed our recent WiMAX release of the same platform.

We must continue to invest in this product line in order to protect our gross margins by staying in front of the technology and product curve. Our operating expense guidance for the balance of the year reflects that investment. There are too many companies that get lulled to sleep by their leadership position in a market only to find out later that others have noticed their success and entered their market space. We are working hard to maintain our leadership position with our valued OEM distributors and cellular customers. Let me close my discussion of RFS with the good news that BSNL in India and Telefonica Spain both selected our RF scanning products for their test and measurement needs, with Telefonica Spain selecting our EX platform.

Our investment in global sales is paying off. Jeff Miller our Vice President and General Manager of our antenna products group or APG has been equally active in moving this group forward. In addition to his team's excellent work with the Blue Wave product line acquisition, he has finalized an agreement with Allcatel Lucent pertaining to GPS timing antennas and we have had two significant WiMAX design wins in the quarter with major OEMs that use our antennae products. We will see the benefit of these commercial accomplishments this year and and I might add, we should see some benefit in the second quarter of a WiMAX sale.

Speaking of development facilities, APG opened its China design center. Our expectation is that this design team, currently four people, will support our contract manufacturers in China as well as our Tangen manufacturing facility. It is important that we have engineering resources closer to our supply source, we are also adding a Director of Material Sourcing in China. I am happy to point out that since Bob Suastegui joined us as Vice President of Global Sales, we have met or exceeded our quarterly revenue goals. He is 3 for 3 and we want to keep that momentum going. During the first quarter, Bob's team supported all the sales accomplishments just discussed. Additionally, we we filled several gaps in our sales coverage and reduced staff in other areas. We are becoming more productive without padding net heads in the sales organization.

We continue to have confidence in the following three trends that favorably impact our business. One, consistent growth, public safety and private enterprise wireless networks. Two, the roll out of new technologies; and three, the growing congestion of network traffic particularly in high growth emerging regions. We have been fortunate that our products have been to date somewhat shielded from recent recessionary pressures. Our antenna business is dominantly focussed on private networks, of which public safety is one applications.

The growing use of LMR or land mobile radio spectrum by enterprises, the need for public safety to exploit the higher band width networks, and conversion from wire to wireless within businesses all drive growth for our antenna business. An impact of new technologies on our businesses is self-evident. We benefit from technology change in the roll out of new standards as we have discussed. Network congestion benefits all of our businesses. Carriers and test and measurement companies need to find more capacity and optimize performance and reengineer networks with high interference. They also need indoor antennas.

Our product initiatives and our recent acquisition attempt to exploit these trends. New product releases in RFS focus on markets with high growth and increasing congestion. Our WiMAX product line and our GPS antennae product will ride the roll out of new technologies. GPS timing antennas are required for new carrier standards, and our WiMAX antennas meet the requirements of the point to point and last mile applications that will dominate the earlier phases of WiMAX deployment. Our recent acquisition of the Blue Wave product line focuses specifically on the application of LMR antennas to rapidly growing wireless enterprise networks.

Finally, we are pleased to offer our shareholders some immediate benefit from the recent sale of MSG. We believe that the special one-time dividend which we announced today, along with our continuing interest in the repurchase of our shares reflects our commitment to returning value to our shareholders. Ultimately though PC-Tel must deliver value to shareholders by consistently delivering revenue and earnings growth. Our improvement from a breakeven first quarter a year ago to a 13% operating profit in the first quarter this year is the type of performance that we want to continue to deliver to our shareholders. We believe that we can do that with a strong focus on organic growth and operational effectiveness complimented by acquisitions that support those efforts.

With that, we would like to open up the call to questions. We have allocated 30 minutes for the Q&A. Operator?

Very good. (OPERATOR INSTRUCTIONS).

Our first question is from Michael Coady with B. Riley.

Thanks. First let me offer my congratulations to everyone, Marty, John, Jeff, great results, and I am happy to see the continued stock buy back and I think the dividend is a great idea.

Thanks Michael and by the way the B. Riley conference was terrific this year. It was a great venue for us.

Thank you very much. Glad to hear it. Look forward to your participation next year.

Just a--I'll throw a couple of questions out there in general, and the gross margin was fantastic and glad to see the guidance for that continuing in that range. Will the Blue Wave acquisition have any negative impact in the second quarter? I mean I heard John's guidance but that might then bounce back in the third quarter once that's integrated; and then the second question would just be some of the drivers within the antenna products group and maybe a qualitative mix between scanners and antennas. Thank you.

Sure.

I think what we said when we announced the acquisition of the Blue Wave product line is we did anticipate that during the first period, really most of the second quarter, we are anticipating approximately a 25% gross margin because we are going to have that product manufactured for us under a TSA, a transition services agreement. After that we anticipate that that product line will reach our normal levels for APG and actually a little bit higher than our land mobile radio product line. So we do not believe that that will be a drag. If fact, as we get going in the third and fourth quarter, we expect that those products could favorably impact our gross margin.

With respect to your second question on drivers for the antenna business, there are a few important drivers. As I mentioned in my remarks, we benefit from the roll out of new technologies in all of our business areas, but no place is more important than the successful roll out of WiMAX in a point to point and last mile applications which we feel are going to dominate the early deployment of WiMAX. And it is important in two ways. One, it is a new technology, but last mile and point to point are very important in some of the emerging markets, Latin America, India, China and so on. So that is clearly a driver.

We also said in the earlier remarks that some of the new standards, for example UMTS, require alternative forms of timing and our timing antennas benefit from the roll out of those new cellular standards; and as the carriers utilize the internet for back haul packet switching as opposed to T1DS3 and circuit switching, they rely on GPS for timing there as well because they lose the timing that is inherent in the T1 format. So those are all important drivers, also in the antenna area there are two other areas worth mentioning. Land mobile radio, which most of you I believe think of as public safety, is clearly moving over to the enterprise space.

That was one of the reasons that we acquired the Blue Wave product line. You see companies with manufacturing operations that were at one point wired for their communications and then on another point, perhaps blue tooth or Wi-Fi moving to a more robust communication protocol and using land mobile radio. We believe that that trend is going to persist and that there are opportunities for us to attack vertical markets.

The last driver that I think is worthy of note and I just had a discussion with a CTO from one of the carriers and I won't mention his name but he said in-building is the next frontier and that is true for us both in antennas and scanners. In antennas, we believe that there is very strong opportunity so they would distribute antenna systems, our indoor cellular antennas, and ultimately with the delivery of femto cells will be an entirely new market for antennas, and we think that's important. Of course as you look at companies that do test and measurement and optimization and worry about interference, nowhere is that going to be more pressing than successful indoor coverage; and then you asked for qualitative information about mix.

As you know, we are reluctant to break out revenue of our product line but I will tell you that we can say strongly that we continue to have a strength in our scanning receiver business that is consistent with our goal to get that business up into the 24 to $25 million range for the year. But at the same time, I don't want our shareholders and investors to walk away and think that this gross margin improvement that we have is entirely due to scanning receivers. We are getting favorable product mix within ABG itself and Jeff and his team in ABG are making strong progress in the factory and operations.

Michael does that answer your questions?

That does, Marty, thanks for the thorough answers and good luck for the balance of 2008.

Thank you.

Our next question is from Matt Robison with Ferris, Baker Watts.

Hey. Let me echo the congratulations that Coady gave you, nice to see such good profitability from the Company.

Can you talk a little bit about the antenna business, give us some flavor for the market size penetration and where, what--where you are in terms of adoption in some of these high growth markets; you mentioned one of them obviously with DS&L and how you can get into some of the other carriers in these sorts of markets?

Well, that question Matt, is one of the toughest questions for us; and if I had a really terrific answer for you I would give it without qualification.

The problem is that the antenna--the antenna market that we participate in is highly fragmented. You have lots of players varying in sizes and it is not like the base station market where you can calculate the number of base stations associated with each carrier, their potential growth, and the antennas that are required for it. Only a small fraction of our business is related to base station antennas. You go into the other areas, enterprise use of LMR, public safety use of LMR, mobile antennas that are used in both enterprise, LMR and (inaudible) carriers, and GPS that's used for fleet management, timing, aviation guidance systems; and it is very difficult to assess the exact size.

I will say this. In North America we believe we are number one in land mobile radio and we are extending our reach outside of this country with applications related to tetra and to enterprise; and that is an important market for us. In GPS we believe we are in the top three vendors of GPS antennas for timing and fleet management, but I would be hard pressed to give you an exact size for that market; in part because there are military aspects to that market, commercial aspects to that market, and then--in commercial I mean both carrier and private enterprise.

In WiMAX, I will tell you that with the key three OEMs we have strong fraction with each one of them. I will say though, that I think our strength right now is going to be in point to point and in last mile; and we believe we have some particular advantages including the--the application of our phase shifter from our Sigma acquisition to the WiMAX. I think that that is potentially of importance. In Wi-Fi which is Wi-Fi data, mesh, RFID, that market is huge and we have a very, very small percentage, lots of room for growth. And indeed in WiMAX there's lots of room for growth as well.

You asked how we are participating. Jeff along with Bob have established distributors in every single region in the world which is really quite different than our profile a year ago. We have strong distribution now in Asia, India, China, Latin America, Europe, and of course in North America and we simply didn't have that presence a year ago; and we believe that distribution is key to making advances there.

With respect to customers, our plan is on scanning receiver side to continue to exploit our OEMs. Just so you know, Matt, approximately 55% to 60% of our scanning receiver business is outside the United States. We are addressing that aggressively, but that's all through the [hospice] OEM resellers of test and measurement equipment and that's really the distribution system that Luis Rugeles had set up.

I hope that answered your question.

Well, you kind of--you touched a lot more topics than I was really looking for. I really wanted to focus on the scanning receiver area and try to get a better feel for your visibility there, where you are and the upgrade cycle towards your products.

Well as you know we put out the new platform, the EX platform and what they're doing down in Germantown is they are systemically adding each one of the new standards to the EX related to where we think the greatest opportunities are. We will have scanning receivers available for every single major standard in every single market and we'll be announcing those releases throughout the year.

Do you touch these customers that your OEMs are serving or is it pretty much just going in the channel and then you hear about it when they reorder.

No, we definitely touch the customer directly. The way we work is we work closely with the OEMs and we supply them our scanning receivers for integration to test and measurement. But Bob's direct sales organization does two things, they sell directly where that's possible; but they educate both carriers and third parties on how scanning receiver can enhance the engineering required and they attempt to pull in test and measurement constellations that include a scanner to get those benefits. They go directly to the customer to perform that.

Do you think that scanner business has enough organic growth so that even after the Blue Wave it will be a percentage comparable to what it is now of your overall business?

We think so.

Okay. That's all for me.

Thanks, Matt.

Our next question will come from Delroy Warmington with Delwar Capital.

Yes, quick question. How critical is the adoption of WiMAX to your success?

How critical is it?

Yes.

Well, we are being successful now without a huge WiMAX contribution so I would say in that sense we can succeed and be profitable. On the other hand, the way I look at your question is how critical is the adoption of WiMAX to our growth, and I think it is critical to our growth. We bet on WiMAX in terms of an investment in our organic development. We have a complete product line for both U.S. and non-U.S. standards, and we have put out a complete--a profile of parbolics, flat panel, and sector panels and we have certainly moved the product into our distribution channels and we expect to get in that area 100% growth year-over-year.

So it is important to our growth. We believe we are going to achieve that. For our scanning receivers I do not think it is as critical to the success. If you look at the operation that Luis Rugeles manages and the sales that Bob Suastegui's organization make, they're dominated by existing cellular and the roll out of new technologies within the cellular standard. So I think that they can be quite successful without a huge roll out of WiMAX.

Okay, and one last question, would you mind discussing your DSO and where do you think it will normal in your business to be, what number of days?

The DSOs?

Yes.

John would you like to answer the question on what our DSOs and what is a normal?

Yes, a normal--you're talking about day sales outstanding for accounts receivable?

Yes.

Yes, normally in the 60 to 65 day range for both businesses.

Okay. Thank you.

Okay, thank you. I hope we answered your questions.

Yes.

Our next question is from Kevin Dede with Morgan Joseph.

Hi guys, this is Jim Moore in for Kevin Dede.

Hi.

First off congratulations on a good quarter; and secondly, I am just wondering, is your strategy going forward strictly going to relate to the hardware now that MSG's gone, or there still any interest in software? I may have missed that.

Well, remember it is not that we have no interest in software. The reason that we divested MSG was the despairty between a connection management business which was software and an RF business that's dominated by propagation and optimization in the area of spectrum management. If there were opportunities in software businesses that pertain to spectrum management, we could have a strong interest, and there are several areas: tools related to optimization, propagation analysis, the deployment of antennas, and so on.

So there is a tool business related to our existing businesses that does have some interest and indeed we look at those businesses from time to time. And I would remind you that if you look at a scanning receiver, you can think of that as a piece of hardware if you want but it is a software defined radio. It's DSP-based technology and software competency and software development is a dominant part of that development organization. So again, it is not software per se that we jettison as part of our corporate culture; rather it was a connection management business that did not have a strong relationship to our two other product families.

Okay. Thanks for the color on that, and in terms of revenue break down in geographies, I had to step off the call for a second so I may have missed that. Do you guys break that out?

We made one comment, but I will just tell you briefly that scanning receivers is roughly 55% to 60% outside of the United States, and antennas are roughly 20% outside of the United States. We don't give regional break down other than that; and we rely on reports from our OEM resellers of our scanning receivers to make that assessment.

When you actually look at our Ks and our Qs where we have to do the geography footnote it is somewhat skewed to look like it's more U.S. than it really is because many of the international customers take title in the United States for their U.S. subsidiaries.

Okay, but if you could, do you--could you give some sense as to where you see fastest growth or if you mentioned that?

Well, as we've mentioned on previous calls--calls there's no question that there is enormous growth outside the United States across cellular--all cellular technologies and WiMAX. Eight million new cellular subscribers, months in India, a new base station every 30 minutes, projections that both in China and India you will add 200 million subscribers to each market within two to three years. I mean these are enormous numbers.

On the other hand, we have to be careful about chasing profitless--profitless prosperity in some of these markets and we have to pick and choose markets that we can go after that have some advantage with higher levels of engineering content and value and so there's lots of value for us in the U.S. and in Europe and in South America; but there's no question if you are just looking for raw growth, you can't do much better than China or India.

Okay. Great. Understandable. All right. Well thanks a lot for the insight and good luck going forward.

Thanks.

Our next question is from Douglas Whitman with Whitman Capital.

As well, congratulations on the strong quarter and John in reducing the DSOs as well for the Company.

Perhaps you could comment a little bit beyond the usual conservatism, Marty, you mentioned that you had stronger quarter this year than a year ago and a year ago the economy was obviously more of a help to you than it was this year. Can you talk a little bit about where you--that John had some comments about concern about the economic effect, where you expect to see the economic effect and why you haven't seen it, why most of the other companies have this quarter?

Yes, I think that the dominant reason that we have not been impacted as, let's say, other companies that are in the hardware and infrastructure is that so much of our business in antennas is related to private networks. We consider land mobile radio applications and public safety be a private network, and it is a blessing and a curse being in that market. It is 6% to 8% growth, that's a blessing but a 6% to 8% growth that is a curse; it is not high growth that you want to see from high-technology, but it is a relatively safe haven in this type of environment.

The other reason that we believe--well there's two other reasons, the other reason that we believe that we have had some benefit here is that we still are getting some advantage from technology change. So if you look at scanning receivers, we have released new technology versions of our EX platform that allow us to participate in a--in new regions and in new markets and in rolls outs and to some extent that's true of WiMAX as well.

But the third and perhaps the most interesting element of our ability to navigate through this period right now is a point that I have made in several of our investor conferences. That is that scanning receivers is a particularly attractive business during this kind of economic period. If a carrier decides that they're going to limit their CapEx, then there is some poor engineer that has the task of driving or harvesting more capacity out of the infrastructure that they already have in the ground.

So, the test and measurement vendors will sell the equipment with our scanning receiver and make the argument that with the data that they can get from this equipment, they can get greater capacity without having additional CapEx expenditures. So I think that that is a small advantage in this market.

John, do you have anything to add to those three drivers?

No, that captures the main things that we look at in our model.

Thanks.

Is it that you don't want--it would be kind of fool hearty to not be concerned about the economic outlook at some point having an affect on your business; but am I hearing that you haven't seen it, but you are nervous that you are going to see it?

That's pretty accurate and that's why in your guidance we did not fully consider the potential positive impact of the acquisition of the Blue Wave product line. So the revenue that we see as potential there has not been fully absorbed in the guidance because we want to take a cautious view towards revenue throughout the rest of the year.

Okay. Thank you, and congratulations again on the strong profitability.

Thanks, Doug, we appreciate it.

(OPERATOR INSTRUCTIONS)

We'll next go to Shao Wang with Lotus.

Good afternoon.

I missed the first part of your call so I apologize if you have already said this. Three questions.

I am sorry. Just could you repeat your name again.

Sure, Shao Wang.

Oh thanks.

Hi Marty.

Hi Shao

Three questions I missed the beginning of your call so I apologize if you've already said this.

First, I don't know if you gave out a head count number. Second, John, I didn't know if you thought about cash as a--minimal cash levels, do you think about that as a percentage of revenues or where do you get uncomfortable with respect to cash balance on the low side; and third, I think in response to a question you had commented that you expected the Blue Wave gross margins to increase after the initial shipments, I am wondering if you can provide a little color about how you go about doing that?

Yes, let me answer your questions in reverse order.

Okay.

Blue Wave will be lower in the second quarter than in the following year, as I said earlier to--in response to a question; and when we acquired those product lines, that our initial product shipments will be based on manufactured product that we are getting under a transition services agreement with what's left of the Blue Wave organization. So that gross margin will be lower. And then as we move that production into our contract manufacturers and the final assembly into Bloomingdale, then that gross margin will be higher than the gross margin associated with our land mobile radio portfolio, lower than some of the areas in our antenna portfolio. So that's your first question.

The second was I believe on head count. We have fewer than 300 full-time employees. That is dominantly in three locations, Bloomingdale, Illinois; Germantown, Maryland; and Tangen, China; with the remainder of those employees being scattered in various sales offices, small design center, and so on.

The most rapidly growing area in our head count quite frankly has been Tangen. We are up to over 40 people there, just a couple of years ago we were down at 16. And the volume coming out of that facility has increased, and then we have some small number of contractors that you would add to that number.

As far as the minimum cash I'm going to allow John to answer that.

Yes, as we talked about one of the issues that we have in evaluating our cash is our investment in Columbia given where the liquidity in the existing commercial paper markets are at, is that until that begins to free up our view is that the 45 to $47 million that we've committed is at this time the level that we want to commit. Our issue with Columbia is that until such time as the commercial paper markets return to their historical liquidity levels this really looks like a bond bladder of about 36 months at this tire length but with about an 18 month average. So as we go forward, we will continue to when we see that liquidation take place to then reassess where we are at. But clearly with our stated desire to continue to make modest acquisitions, you take $47 million off of 118 and that still leaves us plenty of room with the liquidation process of Columbia to make those acquisitions.

I hope that answers the question.

How about from an operational perspective, you are generating cash, where are you--?

Well, as an example this quarter we generated free cash flow, I want to say, about $1.5 million net of your classic definition of free cash flow from ops. And we typically like to have a buffer because we can have multi-million dollar swings in any particular quarter especially for expenses that we pay out an annual basis. So, ideally we would like to keep between 5 and $10 million available as a cushion for operations, and then the rest would be for opportunities.

Got it. Thank you.

Our next question is from Gene Weber with Weber Capital Management.

Congratulations, Marty and John. I have got a fairly boring question for you, John.

Yes.

Related to this--this Columbia thing again. So if I kind of do some quick math here, you said that you currently hold I think $25.4 million.

Yes, $25 million, $10 million matures within 11 months and 15 million matures thereafter.

And did you say that you got $14 million back in the first quarter.

Yes, Gene, if you go back to the very first day when the fund started its liquidation, we had $43 million. If you actually go back to our last earnings call.

Okay.

Okay, so take $43 million minus $1 million in writedowns gets you to $42 million and then we've got $17 million back between the fourth quarter and the first quarter.

Okay.

$3 million and $14 million, that gets you to $25 million.

Okay. So, the write downs for--is that kind of--is that a realized loss?

No, those are unrealized mark to markets. So effectively what happens is they got to go out and they see what the paper trades for. If the paper trades for $0.97 on $1.00 on a particular security, they have to take a mark to market from the principle number down to whatever the last trade was even if they have no intention of trading it and holding it to maturity.

Okay. So, what was your--during the first quarter, what was your net write down then?

It was about $400,000 which equaled the interest.

Okay.

Yes.

Okay.

To date we made about $1 million in interest between those two quarters, and we've had about $1 million in mark to market losses.

Okay. So if things continue to trend the way they are, and you say it may take 36 months you will get your money back but there effectively won't be any interest along the way?

Yes.

Okay. That's what I thought. I'm not holding you to that, but I just kind of wanted--

Yes, that's effectively what it would do. If it continues the way it is going, it's a zero yielding investment where you get it all back in 36 months.

Okay. Well, thanks a lot.

Okay.

Thanks, Gene.

Our final question in the queue is Steve [Roode] with USIP.

And operator, that will be the last question.

Fair enough.

Thank you.

Hi. It is basically one comment and then two quick questions.

John, on the Banc of America Columbia fund that you've put yourself into now, just a heads up, some of those sound terrific, but I think you really got to drill down into what they're holding. I know for our funds that we have in cash we are now in strictly T-bill funds as opposed to those that have Ginnie's and Fannie Mae's and repos. When have bank backed repos that are secured by, in theory, secured by Government debt you could be sitting with some obscure bank that doesn't have enough of those assets in there.

So burn--no, fool me once shame on me, fool me twice or whatever, fool me once shame on me, fool me twice shame on me. Please examine that a little bit.

Thank you, Steve, did you have a question.

Also observedly, Marty I know you are not a guy to be rolled over too easily. There's an article in the Sunday Times page one, two weeks ago about how a fair number of the broker dealers actually knew that these funds were becoming illiquid, they took the best customers out and they left their less than best customers in or even sold the funds to those less than best customers.

Given that's the deep pocket there you might want to look into it. I have no particular point of view on Banc of America or Columbia fund but it is not as benign as it seems that you are stuck with this and others aren't. So for a few bucks it may worth rattling the cage.

Let me just jump forward to the questions now. The--we have, and do you guys, is any of that clear I mean any of that?

We understand, we're pretty well-educated on this at this point.

Okay. Great. The net income for the year, if I did my numbers right should be roughly $7 million.

I am sorry. Say that again.

Net non-GAAP income should be roughly $7 million.

For what period?

The year.

Well, no, that's why I give ranges for the elements.

I picked kind of the center range.

No, none of the numbers that I added-- that I did if you took the--to get to $7 million you would have to take the bottom end of every range, the most negative of every range that I gave.

And I am sorry I also put in 20% for tax.

No, you would still have to get--you would, like I said, in order to get a number as low as $7 million you would have to be really be low balling every number we gave; but that's why I am not going to get into specifics about--because we don't forecast net income.

Steve, I am not sure what your relationship with our company has been or if you've followed our guidance but we guide on two numbers, revenue and gross margin.

I took the $82 million, I multiplied it by 46% and then I backed out--

I know but you can multiply it times 47 or 48 and you could take the OpEx up. Like I said, I don't want to debate this on the call.

No, that's okay, I was just taking at the very low because I'm more conservative. Marty, give us a sense. I will just do it again, 47 or 48. I simply took every number at the low end, that's how I did it. It certainly sounds like I struck a low end chord and I wasn't meaning to put anybody off.

Tell us what the share count will be at the end of the year assuming no more repurchases.

Well right now it is at 19.8.

Right, and at the end of the year assuming no more repurchases.

Well, it would stay at 19.8.

Would it with the issuance of additional shares?

No, we have--I mean the only thing that could happen, Steve is that we would have an acquisition and we would have to grant but we don't grant--our awards are all done for the year in terms of annual compensation and so on.

And do we have any--any shares that would otherwise, right now we are including that would come off in the event that some passage of time and the person hasn't exercised them--?

It could but we haven't done an analysis of that.

You have not done an analysis of that yet?

No, we don't have really--

Turnover is a very small portion of our historical change in share count.

Okay. Although we have let some people--right, I mean given that those folks we sold off that division, don't some of them no longer have their shares?

Yes, but that's already embedded in the numbers.

Okay. Thanks very much.

Okay, thank you.

I want to thank all of you for joining us today on the call and the webcast. In the coming quarter we will be presenting at the Baird Growth Stock Conference in Chicago on May 15th. We hope to see many of you at that investor event and to be speaking with other interested investors in the coming quarter ahead of our quiet period in mid-June. Thank you and look forward to talking to you next quarter.

Operator, we are done.