PCTEL Inc (PCTI) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to today's PCTEL Incorporated, third quarter 2008 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Marty Singer. Please go ahead, sir.

Thank you, Jennifer. Good afternoon, and thank you for joining us for our third quarter earnings conference call. With me today are Jack Seller, Director of Marketing, and John Schoen, PCTEL CFO.

Jack will review the safe harbor statement, John will discuss our results and our financial performance in some detail, and I will comment on our progress over the past quarter and what we see in the future. With that as introduction, I will turn the call over to Jack Seller, who will read our safe harbor statement.

PCTEL's safe harbor statement. Today's call will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Specifically the statements regarding PCTEL's future financial performance and expectations, opportunities, and risks regarding growth in 2009, our forward-looking statements within the meaning of the safe harbor. These statements are based on management's current expectations and actual results may differ materially from those projected as a result of certain risks and uncertainties, including the ability to successfully grow the wireless product business and ability to implement new technologies and obtain protection for the intellectual property.

These and other risks and uncertainties are detailed in PCTEL's Securities and Exchange Commission filings. PCTEL disclaims any obligation to update or revise the information contained in any ford look statements whether as a result of new information, future events, or otherwise.

I would now like to turn the conference call over to John Schoen, who will provide with you the financial details of the quarter.

Thank you, Jack, 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 operating profit excluding restructuring charges, gain or loss on sale or impairment of assets, noncash-based expense, including stock and stock option based compensation, amortization and impairment of intangible assets and goodwill related to the company's acquisitions, and presentation of net income excluding these charges as well as noncash-based income tax expense, provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflect 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 under Investor Relations. My discussion of results will be based on our non-GAAP financial results. As a reminder, the company closed the sale of its mobility solutions software group, or MSG to Smith Micro in January of this year. The company's financial statements have been revised to reflect MSG as a discontinued operation.

My discussion of the financial results will address continuing operations. Let's start with revenue. Third quarter 2008 revenue from continuing ops was 20.1 million compared to 17.6 million in the third quarter of 2007. An increase of 14%.

Revenue for both scanning receivers and antenna products grew at approximately the same rate versus the third quarter last year. Scanning receiver revenue was up on the strength of UMTS deployments. Antenna revenue growth from the same period last year was split about half from the acquisition of blue wave earlier this year and half from organic growth. Now let's turn to gross profit margin. Non-GAAP gross profit margin from continuing operations for the third quarter was 48% versus 45% in the same period last year.

Both scanning receiver products and antenna products experienced improved margins as a result of favorable product mix and leveraging fixed costs over higher volume. Now let's turn to operating expenses. Third quarter non-GAAP R&D and SG&A from continuing operations were 6.9 million, down 300,000 from the same quarter last year. R&D expense was higher by $400,000 on engineering investments at both scanning receivers and antennas.

For example, this is the first full quarter of expenses related to our new antenna design team in China. SG&A is $700,000 lower through efficiencies resulting from our decision to divest our software business and better control of our sales and marketing expenses. The connection royalty was lower than last year by $50,000 as the contractual quarterly cap is lower in 2008.

Now let's turn to non-GAAP operating income. Non-GAAP operating income from continuing operations in the third quarter was 2.9 million, or 15% of revenue. Compared to 1 million, or 6% of revenue in the same period last year. The results reflect improved gross profit on higher revenue and lower operating expenses. In two of the last four quarters, we have achieved our long-term goal of sustaining a 15% operating profit.

Other income was $100,000 in the third quarter, compared to $820,000 a year ago. There are two factors contributing to the decline. As I will outline in more detail in the balance sheet review we are heavily invested in Federal Government agency paper for safety. The yields on that move to safety are very low compared to the commercial paper we were invested in a year ago before the credit market turmoil.

Secondly, the company experienced a $250,000 marked to market loss recorded in the quarter from the company's remaining investment in the Columbia strategic asset portfolio, and enhanced cash fund. I will discuss the Columbia fund in more detail during my review of the balance sheet and income statement guidance. With regard to non-GAAP income taxes, the non-GAAP income tax rate is 16%, and we expect it to the remain at that level for the full year 2008.

With regards to earnings, non-GAAP net income from continuing ops for the third quarter 2008 was $2.6 million, or $0.14 per diluted share. This compares to non-GAAP net income of $1.8 million or $0.09 per diluted share in the third quarter of 2007. To summarize the difference, net income from continuing operations was higher from increased gross profit on higher revenue and lower operating costs, which was partially offset by lower interest and a higher tax rate in 2008.

Now let's turn to the balance sheet. Cash and investments ended the quarter at $80 million, of which $67 million is classified as short term and $13 million is classified as long term. This is a sequential decrease of $5 million from the second quarter this year. The largest contributing factor to the change was the company's market repurchase of 503,000 shares of its common stock during the quarter for approximately $5 million.

After the third quarter ended, we completed our authorized stock buy back with an additional 490,000 shares purchased for $4.5 million, leaving our cash and investments as of today's date at approximately $75 million. Of the roughly 80 million in cash and investments on hand at the end of the third quarter, the company had approximately 1 million in operating bank accounts, 52 million in AAA money market funds which are in turn invested 100% in short-term US Federal Government agency securities, or bank repurchase agreements collateralized by the same, 14 million in the Columbia strategic cash portfolio fund, an enhanced cash money market fund, and 13 million in tax-exempt pre-refunded municipal notes.

Now let's turn to our income statement guidance for the fourth quarter 2008. Marty will discuss guidance as well in his prepared remarks. We anticipate revenue for the fourth quarter to be in a range of 17.5 to 18.5 million versus revenue of 19.1 million in the same quarter last year. The company is seeing weaker order booking rates than the fourth quarter last year and the quarter just completed.

Non-GAAP gross profit percent for the fourth quarter is expected to be in a range of 45 to 46%, down from the 48% in the third quarter. The mix of antenna product orders we are seeing so far in the fourth quarter are of lower margin than experienced in the last quarter. Additionally, at lower volumes, we will not experience the same level of fixed cost leverage.

Non-GAAP R&D and SG&A from continuing ops are expected to be between 6.9 million and 7.1 million for the fourth quarter, reflecting higher investment than last quarter in R&D as well as a seasonal SG&A spending spike that we normally see in the fourth quarter. The royalty is expected to be 200,000, consistent with the quarter just ended. Other income and expense is expected to be a net expense of $100,000 in the fourth quarter.

The most recent round of turmoil in the credit markets is driving marked to market losses in company's remaining $14 million investment in the Columbia strategic asset fund that are expected to more than offset the interest earned on the rest of the company's investments during the fourth quarter. As a reminder, the Columbia fund is in the process of liquidating. We originally started last year with just over 43 million in the fund, and our balance is just down to under 14 million.

Additionally, the fund has announced another 2 million liquidation payment payable this week, which will bring the balance to 12 million. The fund manager will have been successful in liquidating over 70% of the original balance by October end. We are not in a position to predict the ultimate outcome of the liquidation. The non-GAAP effective income tax rate remains unchanged at 16%.

Now I would like to turn the guidance for the full year 2009. Marty will comment in more detail during his prepared remarks, but we are cautious about our outlook for 2009, given the recent trends in order flow and the overall worldwide economic outlook. With that said, we are offering the following guidance for the full year 2009.

Revenue is expected to be in a range of 80 to 84 million, which at its midpoint represents approximately 7% organic growth over 2008. We have not included the potential for acquisitions in the guidance offered. Non-GAAP gross profit percent is expected to be in a range of 46% to 48%, which is the same range as 2008. Non-GAAP R&D and SG&A are expected to be in a range of $29 million to $30 million. The connection royalty is expected to be $400,000 for the year, which is $200,000 per quarter through the first two quarters. There are no more payments due under their license after the second quarter.

Other income, which is primarily interest income on our invested cash, is expected to be approximately 1.0 to 1.2 million next year, based on our intention to concentrate our investments in short-term duration US Federal Government agency paper, as well as our expectation that our remaining investment in the Columbia strategic asset fund will continue with a net yield of zero to slightly negative. We remain exposed to marked to market losses with the Columbia fund until the liquidation is complete. The non-GAAP income tax rate is expected to be between 16% and 18%. That concludes the financial review.

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

Thank you, John, and thank you, Jeff. My remarks this evening will focus on four areas. Trends in our business environments which are impacting PCTEL, operational and sales progress, and guidance for the fourth quarter in the 2009 year, and our M&A efforts. As we mentioned at the outset we have set aside 30 minutes for your questions.

Let me talk about the trends first. As we have explained at various investor presentations, our antenna and scanning receiver businesses are exposed to different markets. Over 90% of our antenna business is focused on the enterprise space. Our definition of enterprise includes public safety as well as business operations.

Within the enterprise space, we focus on vertical markets, such as in-building wireless, SCATA, fleet management, dispatch, military operations, and wireless LAN as we compete in the carrier antenna space on an exception basis only. GPS antenna and WiMAX antennas are two product lines with exposure to the antenna face. Our scanning antenna lain derives limited revenue from private, in this case, military networks. Our scanning receivers are integrated into third-party test and measurement systems and then distributed to the carriers worldwide.

Both businesses take advantage of a leveraged sales model. In our antenna business we sell to distributors and OEM suppliers of wireless equipment. In our scanning receiver business, a significant portion of our sales are made to OEM vendors of wireless test and measurement equipment. The differences between the two product lines expose to us different risks and opportunities.

As John has already summarized, we have been able to navigate through a challenging economic times because most of our antenna sales are to the enterprise and demand is consistent with reduced carrier capex investment. We are currently being helped by a few trends. More businesses are converting their operations from wire to wireless networks. This is helpful to our antenna business as enterprise solutions utilize VHS and UHF radio frequencies.

Demand for greater bandwidth over wireless network also helps drive our business as does the wireless growth in developing economies. Our scanning receivers are, for example, being deployed in China and India. These positive trends explain in part why we have been able to continue to grow revenues despite a difficult economic environment. There are unhelpful trends as well. WiMAX is clearly being deployed at a far less aggressive rate than initially anticipated. Most deployments are dominately last mile fixed offerings. Mobile WiMAX is still limited to trial status.

More importantly, the general business environment characterized by a lack of liquidity is likely to impact negatively our Land Mobile Radio and our in-building growth opportunities among others. With these potential risks, we believe our attention to our cost structure has already enabled us to do more with less. As John's financial review indicates, we have made progress in leveraging our underlying cost structure, efficiencies in SG&A have more than offset our increased investment in R&D.

We must continue to develop our highly leveraged sales model, OEM and distributor channels. We believe over time we will achieve a financial molds with op ex at 30% of revenue. It is our long-term goal to achieve a sues tinnable operating profit of 15%. We have been successful in achieving this model in two of the past four quarters. We are committed to this goal and we'll take appropriate action to manage our op ex in response to slower growth.

On the sales front, we released four new antenna product and two new scanning receiver products during the third quarter. In addition to enhancing performance of our SeeGull E X platform, we released a new E X WiMAX scanning receiver that [prist] at the 3.5 gigahertz frequency band. This will enhance our ability to market our products in Europe and elsewhere.

With respect to our antenna product line, we continue to roll out our new multiband GPS antenna that is compatible with the three major satellite services GPS, Galileo, and Glomus. We also released an integrated GPS timing antenna and receiver that substantially reduces costs for our customers. We continue to build upon our in-building presence with the introduction of a new 700-megahertz antenna for public safety applications. We have made promising inroads into defense applications, specifically icom in Iraq with new wide band UHS mobile antennas.

We have been very pleased with several developments in marketing and sales. Although as I will discuss later, there is softness in the WiMAX market, we are beginning to see reasonable results in the point to point and point to multipoint WiMAX market. We shipped 2,500 WiMAX sector pams to a major vendor during the quarter, and we are now sole sourced for several SKUs with another OEM vendor. During the quarter, we also received certification in Russia for our WiMAX product line. We have also witnessed continued growth in canopy antenna sales into Motorola, which is a proprietary precursor to WiMAX that has benefited from the slower WiMAX deployment.

We had four strong sales events in China. We received our first GPS timing antenna order from a major OEM for an application in China. In our first significant scanning CDMA receiving order for deployment in China's CDMA networks. We also secured two new clarify contracts in that country directly from large carriers, and we sold our GPS antenna for a military application as well.

We continue to grow our presence in Latin America. During the third quarter,We secured our first clarify contract in Chile, and our first scanning receiver order from Nextel in Brazil. The later reflects our decision to enter into a licensing agreement with Motorola a few years ago and to meet the long-term international market requirements to support item-base networks with solid test and measurement tools.

John has already talked about guidance but I just wanted to add a few comments. While we were pleased that we were able to grow revenue and gross profit margin for the third quarter, it has become clear that the market has softened for at least some of the reasons just discussed. Before I discuss the revenue guidance in more detail let me briefly summarize these factors. As we have already mentioned, we expect the business environment will be challenging. Indeed, in the WiMAX space network operators who intended to offer data-only services have revised their business plans. It is clear that they need to offer a double play of voice and data to realize a reasonable return on their investment.

We anticipated $2 million in WiMAX antenna sales in the fourth quarter this year that will not materialize because of these delays. We had also anticipated a small bump for our new WiMAX scanning receivers. These orders first moved out of the second quarter, then out of the third quarter, and we now no longer anticipate receiving them in 2008. We do, however, believe that we will capture this revenue in 2009.

We also reported earlier that we have sold off the remaining antenna products from our Irish operation. While the revenue was small and of relatively low margin, we had some in the forecast for the second half of the year. That, we will not be able to replace in 2008. These factors, along with a generally deteriorating economic environment, will result in lower fourth quarter revenue than we originally anticipated.

As John indicated, we believe we'll generate between 17.5 million and 18.5 million in revenue in the fourth quarter. As a result we anticipate revenues of 76 million to 77 million for the year. We believe that we can achieve the 2009 revenue guidance that John discussed, based on new technology deployments that will require our scanning receivers and the pressure on network engineers to squeeze more capacity out of the same infrastructure. We expect our scanning receiver business to grow no less than 10% on a year-over-year basis.

While we expect the public safety business will be flat year over year in 2009, we expect 10% to 20% growth in our GPS product line and significant growth in our WiMAX sales despite the slow rollout of the mobile application for WiMAX I've already discussed. Regionally we still expect strong growth in China and South America. In total, we are forecasting a 3% to 5% growth in antenna revenue.

One area that you all have expressed interest in is our M&A activities. Perhaps some of you saw Jack Welch on CNBC's morning call program a few weeks ago. He pointed out that in times such as these you attempt to bury or buy your competitors. Looking back, we are pleased about several decisions that we have made that put us in a reasonably strong position to not only weather but to perhaps thrive in these challenging times. You will recall that we divested our software group for approximately $64 million, a $62 million gain on our initial investment.

We divested the remaining CIGNA assets and realized a $9 million tax benefit that helped us protect this gain. While we returned much of this money to the shareholders in the form of a $4 million share buyback for $34.2 million that was completed in October, and a $10.5 million special dividend, we have held on to that asset anticipating that we would soon be in a buyers mark.

As of today we have $75 million in cash and investments, $13 million of which is considered long term and that John has already reviewed, and we believe that this as asset will be extremely valuable to us in this recessionary market as the price of various assets in the industry continues to decline. We believe that there are many strong candidates for acquisitions, and that those targets have limited alternatives in the current environment.

We are currently evaluating several of these target companies. Again we are planning on making only neutral to - acquisitions, and we will focus on small companies, $2 million to $15 million in revenue. Based on our experience, we are best at integrating operations with those size characteristics. We believe that we have extremely good opportunities to invest a portion of the remaining $75 million.

Despite the current economic challenges, we met or exceeded our objectives for the third quarter, we are extremely pleased to report on our progress in delivering new production, penetrating new markets, and controlling our costs. We continue to be shareholder focused. This past year we declared a special dividend, maintained our gross margins during a period of significant cost increases and continued to support our stock through stock buybacks.

We believe that all of these actions will continue have and will continue to lead to shareholder value. While we need to acknowledge the severity of the current economic out and its potential impact on our business we need to remind investors of the positive trends that we are seeing that will distribute to our growth longer term.

That's factors are, more businesses are converting their operations from wire to wireless networks. This is helpful to our antenna business as enterprise solutions utilize VHF and UHF radio frequencies. Again, demand for greater [bandwidth] over wireless networks also helps drive our business as does the wireless growth in developing economies. Our scanning receivers are being deployed in China and India.

Finally, we have a solid balance sheet with sufficient cash to fund working capital, take advantage of acquisition opportunities and return value to shareholders where we feel it is appropriate.

That concludes my prepared comments and we'll now open the call to take your questions. We have set aside 30 minutes for this portion of the conference call.

Thank you. (OPERATOR INSTRUCTIONS) Michael Coady with B. Riley.

Good afternoon.

Hey, Michael.

Marty, could you describe the trend of order bookings in September and through October? It seems as though we've heard pretty consistently it was in the last two weeks of September that things fell off. However, different companies, different managements are saying that things actually stabilized after that, although the environment is still uncertain. How would you classify it just in general over the last couple months?

You're asking in -- that question for both businesses, the antenna business, or the scanning receiver business?

I'll take all detail that you'll provide.

Well, just by its nature, our scanning receiver business is very, very lumpy. We tend to get large orders from the OEMs, and the timing is never really, the kind of timing that allows to you get a lot of visibility or to give a clear view on backlog. And our third quarter in scanning receivers actually did not really slow down. It was at a more normal run rate.

You may recall in the last quarter we warned everybody that we had an unusually strong quarter for scanning receivers, and there was a particular customer who wanted shipments in the second quarter that normally would have been in the third and even fourth quarter. So in terms of the scanners we're running at about our normal run rate. In the antenna business, I would say that what we've seen is some softness and what we traditionally refer to as our project business, where we have large OEMs that have, let's say, a GPS project for fleet management or so on. And it's been difficult -- here's how we would describe the difficulty.

It's difficulty in actively replacing new projects for some of the projects that are turning down. We are replacing them, but at a slower rate than we have replaced them in the past. I wouldn't describe it as a dramatic fall-off in the visibility of our orders, but rather the speed with which we can replace the project business. The other answer I would give to you is that a couple of our distributors showed very strong order placement in the third quarter, but we've seen a couple distributors that seem to have a more general problem.

I think there's consolidation going on there, and so we've seen a shifting around and a decrease in the volume of business coming from some of our traditional distributors. I think also that the spike in costs that everybody experienced in the second and third quarter with transportation slowed down business. Independent of anything else you heard about business, liquidity factors and so on, people were placing premiums for freight and transportation, and I think that that, people have so much to spend, and if they have to spend it on transportation, the number of units they order goes down. So those were the type of trends we saw, Michael.

Okay. Thanks. I appreciate that level of detail. In terms of the M&A pipeline, you mentioned that you've been active there. Would you characterize anything -- I obviously can't say too much, but some near-term opportunities? Waiting for the price to reach a certain point?

I don't think we're waiting for the price to reach a certain point. I think we've, in all these cases, we have pretty frank discussions. I think it's a matter of completing the due diligence.

Okay. Just a couple of quick ones. John, what do you expect share count to be in Q4?

Expect it to be about 18.5 million.

Okay. Do you have a geographic break down on revenues in the third quarter?

You know what, I don't. Typically that's something we do for the Q.

Okay. Thanks for answering my questions. Good luck in the fourth quarter, and good job handling the economic environment.

Thanks.

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

Hey, Ken.

Hi. On the guidance you're talking low end of 80 million to 82 million, how, kind of, confident are you? I know we don't have a ton of visibility, but kind of the crystal ball in front of us at this time, do you feel that's kind of your low end, or is that still somewhat of an aggressive guidance?

The range contemplates that we see a first half slightly higher than the guidance that we gave for the fourth quarter. We gave a guidance of 17.5 to 18.5 We see the trend, at least in the first half, as the economy goes through its recessionary throws, to be in the 18 million to 19 million a quarter, which is slightly above where we're at today. You run that math out, and it does contemplate that there's going to be some things that we see happening in the second half of next year. So I think we're pretty confident that 80 million low number.

Okay.

And the range, I think, was 80 to 84.

He was quoting midpoint.

It seems actually -- you've done a nice job, even at that lower number your gross margin guidance was 46 to 48. That still seems sufficiently high actually given the revenues are a little bit lower. Are you doing anything there on additional cost savings, or how are you able to keep the margins at that level?

Yes, one of the comments I made in my remarks, Ken, was that we are really pushing the leverage sales model. I think today we stand at 20 people in the field, and that includes everybody. Not too long ago it was 25, and we had a wheel group of manufacturers reps. We brought Bob in a year and a half ago, and since that tame we've actually strengthened our sales and our sales expense has gone down, and you are going to see some positive results of that in the fourth quarter, full benefit of some of the actuals we took in the third quarter.

Those will be rolled forward into next year. We're also going to be making some decisions, Ken, about the allocation of our sales dollars to different regions in the world, perhaps cutting back on some of the more expensive areas and reallocating a portion of those expenses to regions where we feel we can get a better return. G&A continues to decline. John has done an outstanding job in reducing expenses and IT, in human resources, in treasury, in corporate governance, and so on. I will mention that as you know, I think this past year my salary was frozen.

And as we evaluate what our expense structure is for 2009, I think it's quite likely that you will see reductions -- salary reductions or salary freezes across the entire executive team, reaching down maybe to the top 20 people, so that we can avoid, taking some harder losses within, let's say, the factory and, we can hit our op ex target. I think as we've mentioned at the last few conferences, and if you go on to our website, our longer term goal was to get this consistent 45% to 48% gross margin, to get down to 30% operating expenses by 2011 and to become a consistent 15% to 16% operating profit company. I think we're actually ahead of our schedule. In two out of the last four quarters we've been a 15% operating company. We've been able to keep our margins up above 45%, 46%, and I think by the beginning of 2010 you are going to start to see us at a 30% operating expense company. And that's our goal. Go ahead, John.

Specifically to your question on gross margin, yes, your math would be correct, the closer you get to the low end of the range, the lower you'd also be in the range of the gross margin percent. So 46% goes with 80, and 48% goes with 84.

Okay. And what about the tax rate quickly, John, for '09?

16% to 18%.

Yes, 16% to 18%. We're going see a slight bump in that tax rate, and the reason is, is because I was able to, with the disposition of the remaining Sigma product lines, I have less goodwill tax deduction going forward, which I should get on my tax return. So I would model somewhere closer to 17%, maybe 17.5%, in that range, most likely.

Great, thank you. Okay.

We'll take our next question from Eric Kainer with ThinkEquity

Thank you very much for taking may call, and congratulations on a very fine quarter. Obviously we all wish we had a better environment as we were moving forward, but that's just not the reality of the situation. I wonder if you can talk a little more specifically, especially to the public sector spending, where obviously you're selling a lot of your antennas in. Both domestically and to the extent that you have overseas sales there, what might you be expecting or what might be implicit in your thinking as we roll that forward into 2009?

I've been thinking quite a bit about this, and trying to align our forecast with reality here, and on the downside, as you know, tax receipts are down, and tax receipts are used for building out public networks. On the other hand, there are not a lot of governors or mayors or other public officials, when you look at the TSA or any other part of the Federal Government that has networks that are anxious to be in a position of not replacing antennas when they bend in the wind or not building out those networks that are central to public safety.

So I do anticipate, that the lack of tax receipts are going to mean fewer police cars that are deployed, fewer new fire engines, maybe a slower rate of growth, but, that's sort of the blessing and the curse of Land Mobile Radio. In a great year, it grows 8%, in a bad year it grows 3%. So maybe a really bad year it's flat. So I think if you look at half of our antenna business, it's 0% to 3% growth. And that's how we're thinking about it.

Now, the more promising aspect of that is that the same type of antenna is used for public safety are used in Land Mobile Radio networks, apply to enterprise, for example, SCATA, supervisory control and data acquisition. All of those networks are moving from wired to wears, and we'll see a benefit from. That it could be the case that we are going to see some retrenching of spending plans. On the other hand, all of that spending is going to be on wireless and not on wire.

So if you're looking for a part of the market that might not be impacted quite as negatively as all the telecom, I would maintain that we would be in that part of the market that we're likely to see less of a dramatic downturn than other areas. Now, if you go outside the US, for the first time, we're really exploring some interesting opportunities outside the US, and in, let's say, military networks or the military entities of other countries. And I think that we have some good opportunities there that will be entirely new. So on the downside, Eric, you have tax receipts are down, leading to less spending. We're not going to be immune to that. On the enterprise side, for the alomar type of public safety antennas, you have difficulty in getting credit, people spending less, but on the positive side, these are the type of networks that still to have go up, still have to be maintained, still have to be refreshed, and again, I don't know a lot of mayors and governors and other government officials that want to see the public safety network degrade. I'll mention one other element here.

I was just in Israeli, and I won't tell which you company, but there's a company already building base stations for the TV white spaces. As you know, the FCC has taken a pretty aggressive posture here and said all those white spaces at 700 Meg can be used for a national public safety network. And all the people who were complaining that we're in the microphone business or the speaker business, you know, broadcasting within theaters and stuff like that they've said, yes, it's a bad complaint that it might interfere with your micro phones. By the way, you're a pirate, and we still would like to see these networks used for public safety. Well, that's an entirely new network, and I believe that those networks are going to be deployed, and that would be very positive for our product.

You mentioned in your answer there SCADarks which is always intriguing to me. How exposed are you to the oil and gas industry and might that provide potentially a little bit of surprise on the up side as we look into 2009?

Well, you know, I think that's actually a pretty good observation, and your question makes me think that I should have mentioned that in our prepared comments. As you know, we made the acquisition of the blue wave product line back in April, and we're anticipating doing a little less than $1 million dollars a quarter, and we're actually doing a little better than that. And those are ruggadized jogging antennas that can be used for any number of purposes, but specifically are used quite widely in oil and gas industry. And for the first time, PCTEL is now attending conferences and exhibitions in that space. And our product, the blue wave product line has great brand recognition and now with the financial strength that we have, there's a lot more confidence in buying these product. And I think we could see an up side in that area this year.

Great. Thank you very much. And good luck as we go forward.

thanks a lot, Eric.

and we'll go next to Brian - with -- management.

thanks for taking my question.

Sure.

I wonder if you could estimate for us what share of the growth for this upcoming year will come out of emerging markets, do you think.

Hard to say. The way I look at it is that right now on the scanning receiver market about 60% of our business, as best we can tell, is coming from outside the United States. But we have to rely on our OEMs to give us essentially point of sale information, which is something we only get update every six months or so. Of that, of get update every six months or so. Of that, of that 60%, way say about 1/3 is coming from emerging marks. China, India, eastern Europe, Russia, other parts of Asia.

And antennas, I think it the's safe to say that almost none of our sales comes from emerging mark. The bulk of our antenna sales, over 80%, are in the US and in South America. We have some antenna sales that are made outside of the United States, the other 20%. But once again it's difficult to tell you where those products end up. I'll give you an example. Right now we're designing an embedded antenna for an OEM base station provider for the WiMAX technology in Israel. That antenna is embedded and shipped to different places around the world. Now, some of those are likely to go to emerging economies, but we can't tell you exactly, you know, how many of those are being shipped there, but some are. But in terms of direct sales, the answer would be zero. And then there would be a percentage of our sales in WiMAX, where we're embedding our antenna that we're essentially leveraging an OEM to ship to other places.

Okay. And the list of things that you guys worry about for next year, where does -- there's a lot of different scenarios out there now for what might happen to the emerging markets, and they're lagging us in terms of the downturn of the cycle, and things have gotten, depending on the market you're looking at, a lot more dislocated in the last few weeks. And the relative list of worries, where does a more pronounced downturn in growth in places like China and Russia and India, where does that rank on the list of places to keep you guys up at night?

I would say, interestingly enough, that is maybe number 10 on my list of things to worry about. And I'll tell you why. If I look at the numbers that John has given you, I break my business almost mentally into a 1/3, 1/3 and 1/3. A third for Land Mobile Radio antennas,1/3 for all other antennas, and 1/3 for scanning receivers. And if I look at Land Mobile Radio antennas, most of that business is right here in the US, some of it is elsewhere, but a very small amount. If I look at all my other 1/3, WiMAX, Wi-Fi, GPS, the type of business I had there, were not terribly exposed to deployment. We are in WiMAX, but if you look at the whole constellation of our sales, it's still a relatively small percentage. The type of antenna that we ever that we get great margin forks like a GPS antenna, is used in timing applications, or other cellular networks, usually not in emerging countries. So the first 1/3, LMR, not at all. The second 1/3, all other antennas, not at all. And now if I go to scanning receivers, I would say I worry a little there, because some of the scanning receivers are finding their way into China and India, a little bit into Russia, but out of that amount, that 27 million, let's say, a third, broad strokes, not a huge exposure. It's really an up side.

Okay. That's helpful.

Does that help you?

Yes, that's very helpful color. Thanks. And we will take our final question from Chao Wang with Lotus.

Hey, it's been awhile.

good afternoon. Thanks for take my call.

Sure.

Couple questions. One, do you have a headcount number at the end of the September quarter?

330 with contractors. And by the way, the fastest growing area of pet com force has been in Tangen where we've picked up some of our own antenna projection. That was about 40 to 45 people, but 330, 335 with contractors, and our headcount is actually down slightly second quarter to third quarter.

It may be a little bit early. As you go through the budgeting process do you have a sense as to what that might be, say at the end of 2009.

You know what I said is I'm not anticipating right now layoffs. We're going to be able to deliver what we need to deliver in terms of earnings and profit. Taking the actions that I discussed in my earlier comments, we continue to work on delivering a more highly leveraged sales model, better gross margin performance, and we plan to first tax those who can afford the tax on our company, John, me, other executives, looking at either a freeze or salary reduction, and then a broader freeze in some areas of our business. And then as I said, continued focus on G&A expenses, continued focus on sales. So right now we're not anticipating dramatic actions there. We're certainly looking at it carefully, but we think we can achieve our model with the current budget that we're laying out.

Got it. Totally separate, on the interference detection patent issue, could you provide a little color on what you think the legal expenses associated with that, or is it not --

Right now they're immaterial. The first thing we're trying to do is to make sure that we're dealing with others who have legitimate patents. And we believe in that this particular case, the intellectual property that has been proposed is leg mutt is illegitimate. We've been proven right. All 13 claims were uphead and we are very confident on our current appeal on a second patent. After we have a correct understanding of the intellectual property strength of these industry participants, then we'll assess where we want to go with that. But right now, asking for reexamination in front of the US PT oh is perhaps one of the most cost-effective things we can do in the IP world. It's not litigation, it's an administrative procedure.

And just to be clear, these are people using our intellectual property, not the other way around.

Yes, he knows.

If this goes the way you think it will go could way see an increase on the G&A litigation expense three or four quarters out?

I wouldn't comment on that because, for two reasons. Let me just say I don't know, and the third, anything I would say anything I say in a conference call like this is going to be reviewed by parties on the other side, and I don't want to discuss what my actions are going to be at this time.

Got it. Thank you.

Okay. Jennifer, are there any other questions in queue?

That was the final question.

Okay. Well, I thank all of you for your participation in our call, and we look forward to discussion our results at our next earnings release call. Thank you.

Ladies and gentlemen, a replay of today's conference will be made available beginning at 8:15 p.m. (OPERATOR INSTRUCTIONS). This does conclude today's conference. We thank you for your participation. You may now disconnect.