PCTEL Inc (PCTI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. We would like to welcome you to the PCTEL second quarter 2010 conference call. At this time all participants are in a listen-only mode. Later we will open up for -- the call for you to ask questions. Instructions for queuing up will be provided at that time. As reminder, this conference call is being recorded for replay purposes.

I will now turn the call over to Jack Seller, Director of Marketing.

Thank you for joining us today, July 26, 2010, for the PCTEL financial results conference call for the second quarter 2010. 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, new products and product development and expectations regarding the future growth of our wireless RF 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 to turn the call over to Marty Singer.

Thank you, Jack, and good morning to all of you and I apologize for the early hour to those investors and analysts out on the West Coast.

For those of you who have not had a chance to read our press release, I would like to recap some of the non-GAAP highlights from the quarter. We achieved revenue of $17.8 million, an increase of 33% over the second quarter of 2009. Our non-GAAP gross profit margin was 46%, which is the same. Non-GAAP operating margin was 6%. Non-GAAP net income was $1 million, or $0.06 per diluted share, tripling earnings per share from the second quarter of 2009.

Cash and investments were $72.8 million. We generated $1.6 million of cash and investments before buying back over 200,000 shares of PCTEL stock for $1.3 million during the quarter.

Now I'd like to turn the call over to John Schoen, our CFO, who will discuss our financial performance in some detail. Later, I will comment personally of some of our business development, engineering and marketing efforts over the past quarter as well as some of our other current activities. John?

Thank you, Marty, and good morning to everyone. Our investors will note that the Company presents non-GAAP financial information in its earnings releases. The Company believes that the 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, gains or losses on the sale of product lines and related note receivable and non-cash-based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the Company's core results and facilitates comparisons across reporting periods. For more information on our non-GAAP financial results 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 the investor relations tab. My discussion of results will be based on our non-GAAP financial results.

Let's turn to revenue. Second quarter 2010 revenue was $17.8 million. This compares to $13.4 million in the second quarter of 2009, an increase of 33%. The improved sales reflect responder, Land Mobile Radio, GPS and WiMAX volume in our targeted vertical markets for antenna products. Antenna sales improved in both our large distributors and to OEM resellers of our antennas. Scanning receiver revenue saw improved sales through its OEM test and measurement resellers such as Ascom, Anite, and SwissQual.

Non-GAAP gross profit margin for the second quarter was 46%, unchanged from the same period last year. Margins for scanning receiver products were comparable to the same period last year, while antenna margins improved as the Company leveraged fixed costs over greater revenue volume.

Increasing gross margin for our antenna product line has become essential as antennas become a higher percentage of our aggregate revenue.

Now let's turn to non-GAAP operating expenses, which were $7.1 million in the quarter, an increase of $1.1 million from the same period last year. R&D increased approximately $400,000 related to investments in scanning receiver development, approximately half of which is related to the acquisition of the Ascom scanning receiver business. The $700,000 increase in SG&A expense reflected the investment and ongoing Sparco sales operations, our investments in reaching specific markets, our participation in two major industry conferences and increase in commissions and variable compensation related to higher revenue and profits.

The Conexant royalty agreement was fully paid up in the second quarter of 2009. It will drop out of our year-over-year comparisons going forward.

Non-GAAP operating income in the second quarter was $1.1 million, or 6% of revenue compared to $300,000, or 2% of revenue in the same period in 2009. The results reflect a net increase of $800,000 from higher gross profit on higher revenue netted with a smaller increase in operating costs.

Other income was $87,000 versus $201,000 in the same period last year, reflecting lower interest rates. The non-GAAP income tax rate in the quarter was 18%. Non-GAAP net income for the second quarter was $1 million, or $0.06 per diluted share compared to non-GAAP net income of $414,000, or $0.02 per share in the second quarter of 2009, the difference coming from the change in operating profit previously discussed.

Now let's turn to the balance sheet. Cash and investments ended the quarter at $73 million, approximately the same as last quarter. Approximately $4 million is classified as long-term investment securities. Of the roughly $73 million in cash and investments on hand at the end of the second quarter, the Company had approximately $1 million in operating bank accounts, $49 million in US federal government agency securities either directly owned or through AAA money market funds invested exclusively in them, $15 million in tax-exempt pre-refunded municipal notes which are backed by US Treasury securities held in escrow and $8 million in AA corporate bonds or A1/P1 corporate notes.

In the quarter the Company generated approximately $1.8 million of cash flow from operations with capital expenditures of $222,000. The Company also repurchased 215,000 shares of its common stock for $1.3 million at an average price of $6.04. The Company has approximately $1.2 million available under its current share repurchase authorization.

Now I would like to discuss guidance for the third quarter 2010. We anticipate approximately 30% growth in the third quarter revenue compared to the same period last year at between $17.8 million and $18.2 million. This reflects organic revenue growth in both antenna and scanning receiver products as well as growth related to our recent acquisitions. We also are guiding to a higher annual revenue target for 2010. We had initially forecasted $64 million in revenue. Based on the first two quarters and our range of $17.8 million to $18.2 million in the third quarter, we believe that we have the opportunity to generate $67 million to $70 million in 2010.

Non-GAAP gross profit percent for the third quarter is expected to be in a range of 46% to 47%, about the same as the quarter just ended. Non-GAAP R&D and SG&A in the third quarter are expected to be about $100,000 to $150,000 lower than the second quarter or at approximately $7 million. Other income is expected to be about $100,000 in the third quarter. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully-diluted share count in the third quarter is expected to be about $17.7 million.

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

Thanks, John, that was a nice job. Before getting started, I would like to mention that I have Tony Kobrinetz here, our Vice President of Technology and Operations; and Mark Selinger representing the sales force, who is responsible for some of our major OEM accounts on the antenna side. When we get into the Q&A, I'll be happy to have them participate.

We are really pleased that we're able to report continued progress to our investors. You may recall that towards the end of 2008 we began to discuss our plan to focus on critical vertical markets, particularly those in which we had some momentum and that represented a meaningful market opportunity. Despite the challenges that the entire industry faced in 2009, our growth over the past four quarters suggests that our business development efforts were effective. The increase in our 2010 revenue forecast of $67 million to $70 million reflects our growing confidence.

With that, I'd like to review specific highlights in marketing and sales, product development and engineering, operations and in our organizational development. We had several notable sales and business development accomplishments during the past quarter. We have previously mentioned the importance of LTE and China to the near- and long-term growth of our scanning receiver business. In the second quarter we secured both Huawei and ZTE, the two largest Chinese LTE players, as PCTEL customers. Additionally, the second-largest US LTE operator approved PCTEL as an LTE scanning receiver supplier. We already had been serving the largest US LTE operator with these products, and we believe that we have about 50% of their business.

We also posted gains with our largest OEM customer for our scanning receiver products. Their business doubled with us over the same quarter last year. We were extremely active on the antenna solutions side of the business as well. We received a major order for New York State, delivered a new GPS tactical antenna to the military, a leading-edge WiFi mesh antenna for offloading applications, and strengthened our antenna business in several key vertical markets. These include agriculture, Smart Grid, remote monitoring and rural Internet with WiMAX. We secured both Time Warner and Square D as customers. Motorola and Cisco, by the way, two of Mark's customers, continue to be strong customers for us. Our investors might recall that we acquired the scanning receiver assets from Ascom late last year. We had several obligations and opportunities associated with the acquisition. For example, we were contractually committed to deliver two product releases of that scanning receiver to Ascom and their customers. I'm extremely pleased to report that Tony and his team have completed that development effort and, as a result, we have been able to reach a new customer.

We continued to enhance our DX product line, and we are investing in a next-generation platform that we believe will establish an industry standard for scanning speed, dynamic range concurrency and flexibility. Our scanning receiver development team is doing an excellent job. As a result, we have eliminated approximately $100,000 in development expense per quarter, starting in the third quarter.

In addition to our new WiFi mesh antenna that we already mentioned, our antenna product development group also released a new Yagi antenna optimized for Smart Grid applications, dual-band omni antennas for offloading applications and highly compact GPS antennas for military and commercial applications.

As you already know, we committed to a significant organizational change in April. We abandoned our business unit organizational structure and migrated to a fully-functional organization with Jeff Miller managing all sales, product management and marketing and Tony Kobrinetz, recently hired after an accomplished career at Motorola, managing all of our technology, development and operations. As part of that transition, we are setting stretch goals for cost reduction across the organization, including supply chain effectiveness. By next quarter we will have fully integrated our newly acquired Sparco supply chain operations into our Bloomingdale facility. As announced earlier, we brought in Rod Bothwell as our new Vice President of Sourcing and Quality to accelerate our progress in key areas, particularly material and component costs.

You may have noticed some changes on the PCTEL website, especially to the description of our two major product lines. Our intention was to expose customers and potential customers to our capabilities and not just our products. While we are immensely proud of our products and their performance and quality, PCTEL's real strength has more to do with its competence in RF modeling, environmental testing, baseband processing, DSP engineering, network design, software engineering and rapid prototyping. Our website will undergo a major revision this quarter in order to amplify and promote these characteristics.

That's right, Jack, isn't it?

Correct.

Okay, just want to put Jack on the spot here in public. The antenna products and RF product sites already reflect emphasis on our capabilities in the markets that we can address, as opposed to a catalog-like presentation of our products.

During the quarter we had a booth presence at ENTELEC, CommunicAsia and the Cisco Live industry exhibitions. We attended several specialized industry conferences; for example, oil and gas, utilities and communications and SCADA, as well. Our plan is to allocate additional resources to targeted conferences in areas as such as SCADA, Smart Grid, defense and measurement, and to avoid the larger, less defined and more expensive industry shows. In the quarter we also had the opportunity to present at both the Baird Growth and B. Riley investor conferences. We appreciate the opportunity to communicate with existing and potential investors at these very high-quality forums.

We do see some risks. While we are well positioned in the scanning receiver market, there is some evidence that LTE network deployment has slowed as early adopters work out some of the performance issues with the new standard. There has also been some consolidation in this industry. For example, JDSU acquired Agilent's scanning assets and no doubt will compete aggressively in this market.

Finally, we still are integrating the Wider and Comarco products into our product portfolio, and we have some work ahead of us.

With respect to antennas, our two greatest concerns have to do with the general economic environment. Any disruption in the credit market could impact our largest distributors and their capacity to borrow money to fund inventory investments. The second concern pertains to the continued state and local tax revenue shortfalls. While we believe that we have already seen the worst of the drop in state and local support of public safety networks, continuing debt and lagging tax receipts could cause further weakness. As we have in the past, we will seek out faster-growing markets to compensate for the slowdown in state and local network spending.

I want to comment briefly on our M&A activity. During economic downturn we evaluated several potential acquisitions. Since January 2009 we acquired Wi-Sys in an effort to expand our GPS antenna product line and Sparco so that could build upon our momentum in health and hospitality and to participate in the distribution of bundled enclosures for wireless communications.

With respect to scanning receivers, we acquired the intellectual property and the distribution rights to interference management systems developed by Wider Networks and the Ascom scanning receiver assets. We completed all of these transactions within a year. We continue to look for interesting assets in a variety of highly-related areas. These include indoor wireless communication modules, RF components, specialized antennas for private networks and wireless test and measurement product families. We are also interested in services related to our markets.

However, as we have in the past, we will only announce acquisitions as they occur.

We are really excited about PCTEL's future and the team that we have in place to execute our strategy. We believe that we have opportunities for further efficiency gains, synergy between our two product groups and expansion through both acquisition and organic activity. As John has already indicated, we also believe that revenues are likely to increase as we complete the year.

With that, we have concluded our formal remarks, and we have set aside 30 minutes for your questions. Operator?

(Operator instructions) Matt Robison.

Good morning, and congratulations on the great performance. John, so I don't forget, can you maybe give me depreciation separate from amortization and let me know what has happened with headcount in the quarter? And Marty, can you talk about the demand funnel for antennas versus scanning receivers and how we should look at the recovery cycle for one versus the other? We've seen antenna has improved here for a while, and it looks like to scanning receivers is getting better but maybe with some caveats.

Yes. Let me answer that while John sees if he can pick up the headcount numbers, which are -- by the way, headcount is essentially the same. It's around, I want to say, 335, something like that, with a larger number being in contractors that we've had to hire to help out with the bubble in development in Germantown associated with some new platform stuff, Comarco integration and with some increasing volume here at Bloomingdale because we had reduced the staff.

The other thing I would say is that we are now up to approximately 60 people in Tianjin, in China. And so you're going to see us shifting some of our antenna product lines to China. In fact, we recently shifted one of the GPS antennas over there. And that's one of our higher-priced antennas, and traditionally Tianjin has been for very low priced SKUs.

So that's more or less the headcount story. I'll let John responded to the other financial question after I finish answering the visibility.

It in general, Matt, it's always the case that we have better visibility on antennas than on scanning receivers. In scanning receivers there are really four OEMs that dominate a lot of our sales, and we often do not have visibility to all of their projects as we go through the quarter. And as you can see by accounts receivable, our scanning receiver sales are often back-end loaded for the quarter.

Having said that, we think scanning receivers will improve marginally second to third quarter. They will certainly be up year-over-year. But you are absolutely right; we are seeing a stronger acceleration of growth in antennas. And I think that has to do with three things. The first thing is that Jeff Miller and Rishi Bharadwaj, our Product Manager, Business Development; and Bob Suastegui, in Sales, have already put together a very effective vertical marketing strategy. And we've been able to focus on some markets that appear to have 30% and 40% growth.

As I mentioned, being in Smart Grid, being in utilities are riding the wave associated with offloading traffic onto WiFi mesh. Bel Air in Canada has become a strong customer, very specialized applications like remote monitoring water -- wastewater or flow in oil wells, which has become an interesting topic. So that is a very strong reason for that growth.

Another reason is that our distributors have come back, and I think that's largely due to improved business opportunities for them as well, but also because they've had some access to credit. And I worry about that issue, but right now they are able to borrow money to build up their inventory.

And the third is, in development, without getting into a great deal of detail here, Tony's team, specifically Jim Giacobazzi and his team underneath, have just done a remarkable job handling a number of new projects. We are able to represent ourselves to customers -- and this is highly associated with being effective in vertical markets. We are able to represent ourselves to customers as having great capabilities and rapid prototyping and being able to take their ideas and move them into a product and demonstrate that to them. And we have something like, I don't know, Tony, 70 active programs right now?

Correct.

Yes, 70 active programs, and we are not missing a beat. These guys have not slipped the schedule now for about a year and a half or two years, and it's been terrific performance. So I am extremely pleased with the transformation that we've experienced in antennas.

And the last reason, of course -- and I don't break these out -- is that our acquisitions have worked quite well across the board. But Sparco has helped us ride another wave, the wave of enclosures for bundled communication links for remote monitoring, whether it's Smart Grid or something else, and they have helped us strengthen our already reasonable momentum in hospitality and health. And our other acquisitions have also contributed. We sold some of the Ascom scanners, we sold some of the wider interference management systems, and Wi-Sys is now fully integrated into our product line. It's indistinguishable from other PCTEL GPS antennas.

So those are really the reasons, and because of guys like Marc Selinger that manage accounts like Cisco and Motorola, we really have a history and we are able to get some visibility now of what their demand is going to be by quarter, and that is a little bit different from scanning receivers. I hope that answers your question.

John, do you have an answer on the financial?

Yes, on the depreciation, it was $549,000 this quarter.

Okay, so Marty, you covered a lot of ground there. You mentioned about LTE and what sounds like the kind of issues that your type of products might actually be able to help fix. If they are coming out with late stage of deployment issues that have slowed things down, it sounds like the kind of things where they would have to do some network diagnostics to get over some thresholds. Is that -- and completely typical for new technology. Do you see that as potentially a demand source at some point? And when do you think that that side of the business will start to come back?

Well, it is already coming back. We're up considerably in scanning receivers, not as far up as we are in antennas. And you are quite right; the type of issues that people have right now are issues that are amenable to the type of capabilities our scanning receivers have.

Nonetheless, you would prefer LTE to be rapidly deployed because the larger and more complex the networks become, the more scanners are going to be required. So yes; when you don't have phones out, the scanning receivers sit in the shoes of the phones to see the network. And when you have early implementation issues, the scanning receivers are very important in diagnosing issues. But all that said, we would prefer there to be 50 strong networks out there in the world, and then you would see real demand.

As it is, I see demand really picking up in November, and I see 2011 as a very, very strong year for LTE scanners.

Prior to that time frame, what type of networks do you think are going to be driving most of your scanner business?

Well, we are going to see a big push from China, and certainly there's still a lot of work to do with 3G networks, and we saw a lot of our combinatorial products. And don't forget that our scanners are used every day in benchmarking, competitive benchmarking by all the operators. So our bread-and-butter business will continue to grow.

And the other application, of course, as these networks become more and more congested because of data use, the impact on the efficiency and network design is -- all those issues are really amplified.

You said China, is TD-SCDMA particularly incremental for you in China, or is it just all three of the networks over there?

All three of the networks, and we really finally have traction not only with a couple of operators but a couple of the infrastructure providers. The difference for us in China, in part, is that when we talk about OEM resellers for most of the world, we are talking about Anite, Ascom, Swiss Qual and Accuver. When we talk about OEMs in China, we are talking about large infrastructure suppliers like Huawei who integrate this into their own systems.

So that has been a good development. Our head of sales personally spends a lot of time in China, and he's built up a really strong market rep holding distributor in China for us, and that's working out well, and we've recently expanded our staff there.

You mentioned WiMAX. Do we think of that just for niche applications in rural, or are you seeing more 4G wireless type --?

Not seeing very much 4G wireless, and you know that I've been consistent on this from the beginning. I think one of the Baird analysts said a long time ago -- name me one network that's been mobile data only and highly successful. Then, after five seconds, he said -- I'll give you the quick answer; there aren't any.

And with respect --

Hey, Marty, I think that was another analyst that told you that.

Yes, I think you may have said that, too. My view is that there are three applications for WiMAX. There's a fully mobile system, there's point-to-point, and there's point-to-multipoint, where WiMAX replaces the pedestal in wireline. And I think you can make a case for point-to-multipoint, which is essentially not mobile, and you certainly can make the case for point to point. You could backhaul a rural Internet. I think it's a tough go for a fully mobile network, but I think there is a fair amount of business in those first two applications, and we are certainly still working with OEMs to make sure that our WiMAX antennas are designed in effectively.

Okay, I'll yield the floor, thanks a lot.

Mike Crawford.

Thanks; hey, on the antenna side, it's nice to see the improving margins. To what extent would you attribute that to just a mix, say, away from Land Mobile Radio to some of the more higher-margin vertical applications? And, to what extent would it be to some of the efforts you're doing to improve your material and components costs?

That's a good question. Although Tony has been great, I think I can't give him credit yet for improving the gross margins, but I will, next quarter.

Let me first apologize for something. I think I may be creating some confusion. I think, in your mind, when you hear me say Land Mobile Radio, you say Land Mobile Radio equals public safety. But Land Mobile Radio are the same type of application or antennas that work in all these vertical markets. So, just as you might use a Yagi or even an omni or a flat-panel or any of those antennas, or a GPS surveillance, you might use all those antennas in a police network. The same antennas could go into fleet management, asset tracking, flow control and so on, in a private enterprise.

So Land Mobile Radio as a generic applies to both public safety and the vertical markets, and I think I've created some confusion by maybe having you think that LMR equals public safety. It doesn't. LMR applies to any of these applications in that spectrum.

But, having said that, I think you're basically onto something. Public safety applications of Land Mobile Radio are often at a lower gross margin than vertical market applications of these antennas because sometimes there's customization and so on. We do an antenna that's associated with a submersible device for water management. There are some particular design things we have to do and so on. Or, if we sell into the military and we sell a particular type of antenna that has an active element to it, we can charge more for that.

So I do think that the margins reflect going into some of these vertical markets. I also believe that we are seeing the natural result of higher volume because we get to amortize more of the bricks and mortar over each unit that we put out of here. I think you're seeing the impact of some more intelligent application of work between Bloomingdale, Tianjin and our contract manufacturers, and I think we are seeing some other efficiencies.

But I think, next quarter, we'll start to realize some gains from the work that Tony and Rod are doing on procurement practices. And so we should see some continued improvement.

Okay, thanks. And then, I don't know to the extent you're going to be able to answer this one, but on the one hand you say that Wi-Sys is now fully integrated into the product line and being produced at Bloomingdale. If you step back to just over a year ago to IWCE last year, I think the guys from Wi-Sys at the show were saying they were thinking, with PCTEL's access to the DoD, that they could grow this business 4-X times versus the run rate when you acquired the company.

So is this a business that's still standalone, to the extent that you could track it and monitor the progress toward that goal? Or is it (multiple speakers)?

No, I think we have said, Mike, that GPS now represents a pretty significant portion of our business, I believe over 25%. Not long ago it was about 10%. So I think that, with the acquisition of Wi-Sys and with our growth over the last two years, GPS has, let's say, doubled, and I think that we have opportunities to expand it further.

When I think about our business, I think about it as LMR, okay, which is a combination of public safety and vertical markets being about 50%, GPS being about 25%, and all other data-related products -- WiFi, WiMAX, RFID and so on -- being about 25%. And that's basically how I look at it.

And so Wi-Sys is fully integrated. It's part of our GPS product line. And GPS is an area that we are going to continue to build upon. It's one of our targeted areas for acquiring other assets. It's one of our targeted areas for finding attractive vertical markets.

Okay, thanks, and then last question relates to your remaining buyback authorization. Is that something that is just a matter of having a telephonic board meeting and getting approval for -- to extend that out if you're favorable to use it up?

Yes. We meet from time to time as we -- we had an initial $5 million authorization on this last round. And I will meet with the board telephonically prior to our next board meeting; we'll discuss what we would like to do there.

Okay, great, thanks.

Will Power.

Yes, great, thanks, good morning.

Did you say, great?

I think I said, at least, good morning.

Oh, okay.

But it does look like very good numbers.

Good.

A couple follow-up questions for you, then one additional. The LTE comments, I think you suggested that you were seeing at least some signs of a slowdown due to, perhaps, some late-stage issues. Is that pretty broad-based? Are there certain geographies where that has been more pronounced?

Well, look, the most active area with LTE is the United States. So I think that these are startup problems like you have in all technologies, as Matt mentioned earlier. And I think, as they move into this and you've got heavier loads and you are looking at signal-to-noise differences and on other issues, you have some tweaking. And so I do think that some of the trial stages for the smaller networks, these smaller networks as they are being built up, have been extended. And while they are extended and while this work is done, our product is certainly being deployed, but not at the same level it would be if networks were fully operational and the networks reach critical mass by this point in time.

I don't think it's unusual; I just want to set expectations appropriately, Will.

Right, okay, no, that's fair. And then on the China comments, it sounds like you are building some nice relationships there. I know you referenced while way and ZTE. Just for my own clarification, are you displacing somebody there at Huawei and ZTE, or how does the competitive landscape there look, given the progress you seem to be making?

The competitive landscape is very, very tough. You have some local suppliers that are small, and of course you have Rohde & Schwarz, you have Anritsu, and you have Agilent. I think the market is large enough that we are growing with the growth in the market, but I do also believe that we are making some inroads because of specific characteristics of our products. As you know, what we've really spent a lot of money on in Germantown in building our scanning receiver is making sure that we are very early in our support of all of the global standards and, more than that, that we are able to incorporate new global standards and deliver combinatorial products; so, you know, TD-SCDMA and GSM, in the same box. And because of some of these special capabilities, also our dynamic range, I think that we are making some competitive headway.

But I guess I would choose to say at this point that I believe that what we're really doing is finally getting established with a go-to-market strategy that permits us to grow with this growing market.

Okay, and then a question on operating margins -- I believe you suggested that R&D and perhaps SG&A should both be lower sequentially in Q2, if I heard you right. I'm just wondering if you could give us a little bit more color around that.

And then I guess, as part of that, with margins improving here, I guess, at 6% in the quarter, how should we think about -- or what are some of your longer-term goals or ranges as you think about operating margins?

I'm going to let John give you the detail, but it bothers me that we are not where we were in the third quarter of '08, when we were a 12% to 15% operating margin Company. And there's no excuse for us not being at that level. And our plan is to exceed those levels when we get back to $20 million a quarter. When we were at $20 million a quarter, it was difficult to find a company quite like us that was generating that profit. We got whacked by the recession. Although we responded, I think, quickly to the changing economic environment, you could argue that we didn't respond quite enough and you saw a dramatic drop in our earnings and our operating margin.

So I think that's going to change. I think we're going to get back to being a 12% to 15% operating margin company and perhaps better. John?

Yes, that is our long-term target. When the revenue gets into the 20s, we should be at those levels. And as far as my comment on sequential decrease, yes, part of that is from the restructuring that we just did. Even though we don't comment about restructuring because it's a GAAP measure, we did see significant reductions for the decrease in headcount related to going to a functional organizational structure. Now, a large portion of that is in cost of goods sold. But you are going to see sequentially, going forward, engineering and SG&A coming down because of that.

Yes; other than that, it is offset a little bit. I don't know, John, if you want to comment on how we are changing our bonus payments and how that impacts earnings.

Well, you will see -- and I did mention it in the commentary -- we are seeing a rise in variable comp, but specifically in SG&A related to commission. We also changed our bonus plan this year for not only the top officers, but for the entire executive team, to move from paying all of our bonuses in stock to taking half of that bonus payment in cash. So that is beginning to come into our non-GAAP expense rate. And next year we are contemplating moving 100% to that. Did that answer your question?

Yes. No; that's helpful. Thank you.

(Operator instructions) Shao Wang.

Three separate questions, one on the LTE side -- Marty, you mentioned that as a potential risk. I'm just a nervous Nellie here. Any change on the SeeGull side? I thought you had expected a pretty nice buildout in -- by 2011 there.

Yes, 2011 is still okay. I'm just saying that the trials are really lasting through all of 2010. We thought there would be some stronger deployment by the end of the year. We may see that in November-December.

I know it's a little bit earlier. Is there any shift in where you think the fat part of the bell curve might be in terms of how those, say, 15 networks might roll out?

I would look to second and third quarter of 2011.

Got it. Totally separate, any comments on the public safety stimulus fund release?

Yes. We are seeing some benefit of that; but I think, as I mentioned to you before, Shao, clearly a third of the stimulus money simply went to salaries, and a third of it went to construction and a third of it went to projects. Some of those were IT projects, some of them were public safety. We think we've benefited a little bit, like the state of New York. But in general, what we are seeing is that police car fleets are not being turned over every two years, they are being turned over every four years or five years. And that hits everybody who's in that business. Some of the rapid deployment force surveillance has slowed down. There's some obvious exceptions, like City of New York having surveillance cameras on the George Washington Bridge and all the tunnels and stuff. But it's not being deployed as aggressively as originally contemplated, simply because there are no funds.

So my hope at this point for public safety, Shao, is just that it doesn't go down further from this point because, if that stabilizes, we can still make a meal of our vertical markets that have been so strong for us the last six to nine months.

Got it. A quick question for John -- when you were around $20 million or so in revenues, you commented on your operating margin target. At that time, you were probably in the high 40s, low 50s, maybe, for gross margin. Is that still reasonable?

Yes. The range of 46 to 48 points is the target range for that.

Shao, I have the chart right in front of me. In Q3 '08, we're at 48, and we've been between 46 and 48 now for two years.

Right. You got over that in the prior quarter, though; you were at almost 51 in --

Q3 '08, we were at 48%.

Right. 2Q '08, you got up to almost 51%.

Yes, in that we had an exceptionally strong --

Oh, that's right.

(Multiple speakers). Oh, we had a big scanning receiver order that --

Yes, I remember that now. I'm sorry.

I think we were over $6 million in that quarter in scanning receivers. And at the time, that was like a $1.5 million to $2 million difference from our run rate. So that's what drove that.

Yes.

Okay, and one final minor issue -- I might be remembering this wrong. When you acquired Sparco, for some reason I thought they had exposure in the education market as well. Is that true?

A little bit in education, a little bit in education. But --

Nothing there worth commenting on, relative to the hospitality number?

Well, no, I'll tell you, the Sparco -- everything about Sparco is worth commenting on. I think it has opened our eyes to a couple different ways for us to do business. One is that, in terms of acquisitions, it certainly has made sense to look at companies that have products and a value-added reseller capability. And, insofar as we can elaborate on the education sector, we will. But what I would say is this. Although they were strong in education, we weren't. We had established some traction, however, in hospitality and health, and they helped us elaborate upon some things that were already in, as well as Smart Grid.

And so that intersection where they were strong and we had established some momentum was what has really made this thing work out quite well. Education is something that we really have to work at to build upon it.

Okay, good enough; thank you, gentlemen.

Okay, and I think, with that, we'll have to close off the discussion. I appreciate your attending this session with us. And of course, we'll update you next quarter. We are planning to present at the Rodman & Renshaw annual global investment conference, September 12 to 15 in New York, and we look forward to seeing many of you at this event and in the coming months. Thank you.

Operator, are you ending the call?

Yes, sir.

Thank you.

This concludes today's conference. You may now disconnect.