PCTEL Inc (PCTI) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL fourth-quarter 2011 conference call. At this time, all participants are in a listen-only mode. Later, we will open up the call for your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I will now turn the call over to John Schoen, Chief Financial Officer.

Thank you for joining us today -- February 22, 2012, for the PCTEL financial results conference call for the fourth quarter 2011. On today's call will be Marty Singer, Chairman and CEO, and I am John Schoen, the Chief Financial Officer. Before we begin, I would like to read our Safe Harbor statement. Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, new products and product development, and expectations regarding the future growth of our wireless RF businesses are forward-looking statements within the meaning of the Safe Harbor.

Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies, and obtain protection for the related intellectual property. Additional discussion of these and other factors affecting the Company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today, and we disclaim any obligation to update information to reflect subsequent events. I would now like to turn the conference call over to Marty Singer.

Thank you, John, and good afternoon -- or evening to everyone. 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 for the quarter. We achieved revenue of $20 million, an increase of 8% over the fourth quarter in 2010. Our gross profit margin was 47%. Operating margin was 10%. Net income was $1.9 million, or $0.11 per diluted share, and cash investments were at $68.8 million at the end of the quarter.

Also, as indicated in the earnings release, we were GAAP positive for the fourth quarter and for the year. The Company improved its GAAP earnings per share for the year by $0.21, and we improved our non-GAAP earnings per share by 83%. I'm going to turn the call back over to John Schoen, who will discuss our financial performance in some detail. And then after his remarks, I will comment on some of our business development, engineering, and marketing efforts over the past quarter, as well as some of our current activities. John?

Thank you, Marty. 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, gains or losses on the sale of product lines and related notes 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 a reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website, at www.pctel.com, under Investor Relations. My discussions of results will be based on our non-GAAP financial results.

Let's turn to revenue. Fourth-quarter 2011 revenue was $20 million, an increase of 8% over the same period last year. The improved sales reflected growth in antenna revenues, where sales improved for both our large distributors and to OEM equipment providers. The acquisition of Envision Wireless at the end of October contributed approximately $275,000 to fourth-quarter revenue. For the year, revenue was $76.8 million -- up 11% from 2010. Continued success in penetrating vertical markets for our antenna products, the launch of our new MX scanning receiver, GPS antenna sales, and the LTE rollout in the US all contributed to revenue growth.

Non-GAAP gross profit margin for the fourth quarter was 47%, as compared to 48% in the same period in 2010. For the year, gross profit was 47% -- up 2% from 2010. Both antenna and scanning product revenues increased year over year; however, scanning product revenue, with its higher margins relative to antenna products, increased faster than antenna revenue. Now, let's turn to non-GAAP operating expenses, which were $7.4 million in the quarter -- an increase of approximately $425,000 from the same period last year. R&D increased approximately $150,000, related to the investment in PCTEL Secure, which was partially offset by the completion of several investments in scanning receiver development.

Sales and marketing expenses were unchanged. G&A increased about $275,000, primarily related to variable compensation on higher revenue and profits for the year. For the year, non-GAAP operating expenses were $29.9 million -- up approximately $2 million over 2010. R&D was down $100,000, attributed to the completion of the MX scanner platform and Ascom integration project offsetting the new investment in PCTEL Secure. We invested approximately $1.3 million in PCTEL Secure R&D in 2011. Sales and marketing was up $700,000, due to investments in vertical marketing, regional expansion, PCTEL Secure, and higher commissions and variable comp related to increase in revenue.

G&A was $1.4 million -- or was up $1.4 million, attributed to $600,000 of expense related to the ERP system implementation project, and $800,000 largely related to higher variable compensation on higher revenue and earnings. Non-GAAP operating margin in the fourth quarter was 10%, unchanged from the same period last year. For the year, operating margin was 8% -- up from 5% last year. The improvement was driven by an increase in gross profit margin, driven by higher scanner revenue, which was partially offset by increased operating costs, as previously discussed.

Non-GAAP other income was $22,000 in the fourth quarter and $200,000 for the year. The amounts are largely interest on our investment; the number will continue to be small in the current interest-rate environment. Non-GAAP income tax rate in the quarter and the year was 18%, unchanged from 2010. Non-GAAP net income for the fourth quarter was $0.11 per share, compared with $0.09 per share in the same period last year. Non-GAAP net income for the year was $0.33 per share, up 83% from the $0.18 per share in 2010. The increase in both the quarter and the year are largely attributed to higher operating profit on higher revenue.

Now, let's turn to the balance sheet. Cash and investments ended the current quarter at approximately $69 million -- about $200,000 higher than the previous quarter. Approximately $7 million is classified as long-term investment securities, with maturities ranging between 13 and 24 months. In the quarter, the Company generated approximately $2.9 million of cash flow from operations, with capital expenditures of approximately $723,000. The Company acquired the assets of Envision Wireless for $1.45 million, and paid a dividend of approximate $550,000, or $0.03 per common share.

Now, I would like to discuss guidance for the first quarter 2012. We anticipate first-quarter revenue to be in a range of $19 million to $20 million, about 7% higher than the first quarter 2011 at the midpoint of guidance. We anticipate gross profit margin to be about 45% to 46%. Our investors might recall that the first quarter has been traditionally slower than the rest of the year for our scanning receiver product line. The carriers take time to release their budgets, and equipment delivered in the fourth quarter is typically deployed in the first quarter. As an example, our largest scanning receiver customer typically purchases approximately $2 million per quarter, but the last -- but for the past two years, only purchased $1 million in the first quarter.

Lower scanning receiver sales as a percentage of revenue mix negatively impact of total gross profit margins, because of the disparity between antenna and scanning receiver gross margin. However, for the year, we are forecasting $85 million to $87 million of revenue for all of 2012, and gross profit margin between 46% and 48%. Non-GAAP R&D and SG&A in the first quarter are expected to be about $7.4 million. R&D is expected to be approximately $2.7 million of that; sales and marketing, $2.5 million; and G&A, about $2.2 million. Other income is expected to be about $25,000 in the first quarter.

The elimination of the noncontrolling interest in PCTEL Secure is expected to be about $300,000. The non-GAAP effective income tax rate is expected to remain unchanged going forward, at 18%. The fully diluted share count in the first quarter is expected to be about 17.8 million shares. That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thank you, John. 2011 was our second year of recovery from the sharp downturn in 2009. While we have returned to 2008 revenue levels, we must maintain our momentum to deliver the growth in earnings performance that Management and our investors expect. We are optimistic about our growth potential; several broad trends in the industry should benefit PCTEL. We continue to see LTE roll out globally. This past year we benefited from strong LTE deployment activity in the US. We are now the dominant LTE scanning receiver provider in North America, and we believe we have the largest share both the Verizon and AT&T scanning receiver business.

LTE will expand in North America, and the industry predicts significant new deployment in China and in Europe over the next three years. In anticipation of that demand, we recently released a TD-LTE version of our scanning receiver. Time division, or TD-LTE, will be the dominant cellular technology in China by the end of the decade. At the same time, we have established Huawei as a significant OEM reseller of our scanning receiver product line. Our business with Huawei increased 46% over last year, and they are now our fourth-largest OEM. While we are pleased that we have reduced our scanning receiver development expenses, we should note that we have an extremely active development program to support our revenue-growth goals in this area.

We will release in this quarter a new version of our industry-leading EX scanning receiver that will support six frequency bands and fill an important price performance gap between our eight-band MX scanning receiver and our existing four-band EX scanning receiver. Separately, we will release a highly competitive and cost-effective CX scanning receiver line to address the low-performance, low-price segment of the market that our decade-old LX line has served well. Finally, we expect that the new version of our SeeHawk data collection software will continue to achieve success when combined with our scanning receivers, for users that require high-performance, scanning-only solutions.

In addition to LTE deployment, in-building wireless and offloading will drive industry growth. In the past, 90% of cellular engineering focused on the outdoor cellular network. Now that 90% of cellular use is indoors, there is increased attention on indoor coverage and indoor capacity. Our acquisition of Envision Wireless and our subsequent formation of our Network Engineering Services group, NES, is strategically and tactically consistent with this trend. We anticipate continued sales in antennas and other RF equipment to meet the requirements of cellular operators to offload traffic onto in-building WiFi networks, and the sales of scanning receivers and network engineering services to improve in-building cellular coverage.

This past year, we provided antennas and ancillary products for several high-profile venues, such as Cowboys Stadium, Stanford Field, Wrigley Field, and [Xcel] Arena, just to name a few. We ended the year with a flurry of new antenna product introductions. We introduced the two new GPS antennas for military applications. These antennas support both L1 and L2 satellite communications, and permit soldiers to alternate between the two systems. We also released a new 5-GHz military and public safety 90-degree sector panel antenna for the Harris Corporation. This antenna will be of value to all of our OEM resellers in the defense systems integration business.

In addition, we released five new commercial-grade BOA Omni antennas, and completed a trial with Purdue University that illustrated the outstanding performance of our offloading antennas designed for stadium applications. We anticipate doing more with Purdue University, particularly in MIMO applications. We also provided a variety of network engineering services in support of in-building and outdoor distributed antenna (DAS) deployments. These services range from initial RF baseline testing and deployment validation through final acceptance testing. We have delivered these services in a diverse set of venues, from the Library of Congress in the United Nations building to Mandalay Bay Hotel and McCarron Airport to West Point and outdoor DAS at Golden Gate Park.

Vertical markets for our antenna products continue to grow. Antennas are widely deployed for smart grid, water management, fleet management, industrial wireless networks, precision agriculture, healthcare systems, and as we previously mentioned, offloading. This past quarter, Cisco selected us as their antenna supplier for smart grid backhaul solutions. Keeping pace with these growth opportunities requires incremental investment in our business development and sales efforts. While we were pleased that a major Russian operator a standardized on our CLARIFY interference management system, in 2011, the sales support for that effort came from the UK. Similarly, our antenna sales support for EMEA -- Europe, Middle East, and Africa, has been located in Israel.

In 2012, we are expanding our sales presence throughout EMEA. In total, we will have added 3 to 4 new business development and resources by mid-year 2012. This is in addition to the employees and contractors we have added to support in-country sales in China and our expanding sales in Southeast Asia. This expanded sales team will also manage our growth in the Philippines and Australia. Our revenue growth plans also include PCTEL Secure and our new product, ProsettaCore. As announced last quarter, we successfully delivered a prototype of an off-the-shelf Android-based smartphone, with the ability to enable or disable the ProsettaCore security software and firmware.

As all of you know, mobile device security has emerged as serious concern for the military, government agencies, healthcare, financial enterprises, and individual consumers. A recent article in the New York Times mentioned our efforts in demonstrating and then preventing threats that can record your conversations, steal files and pictures. More recently, there have been several articles about the demand for applications that can detect and defend against malware that attacks Android-based devices. We are pleased to report that we filed three patent applications that are intended to protect the core inventions in our approach, and that we have demonstrated our prototype to several systems integrators and military associations.

The Company has also made progress in improving its operational effectiveness. The competitive environment for antennas has been challenging -- prices are under a constant pressure, some of our distributors have vertically integrated certain product lines, and there are always new competitors from low-cost manufacturing regions. Despite these pressures, we have made progress on gross margin.

Just to go off-script for a second, I was looking at some data comparing 2011 to 2008. Basically, we shipped about 4.8 million antennas of various types in 2011, compared to 4 million in 2008, at basically the same revenue level. And yet, our gross margins improved. So, there was sharp price pressure, but we have become significantly more efficient. As I was saying, despite these pressures, we have made progress on gross margin. This reflects our success in continuing to deliver high-value scanning receivers and the efforts of our antenna operation to exploit opportunities for product cost improvement.

Specifically, we have greatly expanded our Tianjin operation. We now maintain a workforce of over 100 factory personnel in Tianjin. More importantly, however, we have supported that expansion with a state-of-the-art antenna design center, managed by a PhD engineer with exceptional experience and industry credentials, local product management, and expanded sales efforts. We are approaching critical mass in China, and we achieved our first meaningful in-country antenna sale last year, beating out several local suppliers. In addition to our own operation, we developed a strong relationship with a new contract manufacturer, in whom we have great confidence.

We hope to expand that relationship, and perhaps represent some of their other RF products within the US. Over the past year, we also made significant investments in our quality infrastructure. For example, we implemented common platform data collection systems in both out Tianjin and Bloomingdale facilities. This investment will result in an enhanced or tighter performance management of manufactured products. We also invested in state-of-the-art inspection equipment and accelerated life-testing procedures that will yield more robust products.

As John indicated in his comments, we hope to grow revenue by another 10% to 12% in our core business, with incremental growth associated with PCTEL Secure and our new network engineering services group. We also intend to improve profitability and make progress against our goal of reestablishing PCTEL as a 15% EBITDA Company. We should reach nearly 13% EBITDA in 2012. These represent our broad growth goals, but I also wanted to share specific goals that we have established for 2012. These are to improve gross margin by an additional 0.5% to 1%, largely through antenna product line efficiencies.

Two -- to implement our new ERP system around July, and with that, reduce our G&A that has spiked over the past year. Three -- to achieve a major TD-LTE sale in China in 2012, and established the new low-cost CX as a leading product in price-sensitive markets. Four -- to provide design services for 20 major venues, and provide us with additional scanning receiver and antenna opportunities through those efforts. Five -- for our High Rejection GPS antennas to maintain its dominant market share in 2012, we expect to double our European sales of this product.

Six -- for PCTEL Secure to deliver product at three major customers during 2012. Seven -- for our MX scanning receiver to dominate the LTE market as that market expands to China and Europe. Our goal as a Management team is to report back to you at the end of 2012 on our success in achieving these goals, along with our broader success in achieving the revenue growth and earnings that our investors expect. I want to thank you for your time this afternoon or early evening. And with that, we are prepared to take questions. We have set aside 45 minutes for a general Q&A session. Operator?

(Operator Instructions) Matt Robison, Wunderlich.

How has the mix changed for antennas versus scanners in the December quarter compared to September? The gross margin was down a bit. So, was that a function of antennas being a bigger percentage of the revenue?

We had stronger antenna revenue relative to scanning receivers in the fourth quarter.

And so, the scanning receivers are then -- actually declined a bit sequentially?

No, I think they were more or less flat.

Okay. So, sequential growth in revenue essentially came off of antennas, and that was what --

Yes, yes. Sorry about that

And Envision, I guess, also.

Sorry about expanding our antenna business, Matt. (laughter)

What is the impact of Envision on your margins?

Really, on gross margins, it has a negative impact; but on bottom line, it's pretty positive. (multiple speakers) Because all of the costs are in the COGS, when you look at engineering services. But that literally is all of the costs. So, on a contribution, they are fine. On gross margin, it's a little bit of a hit. But their revenue was low enough in the fourth quarter; we only had them for two months, and it was not much of an impact.

And I know Cisco has talked about that stadium project you guys mentioned. Was Envision part of that activity?

No.

Okay. So, what kind of work are they doing?

Well, I think we mentioned a few of the specific areas; but as an example, they did the United Nations building. They have done several large businesses throughout the year. We mentioned, for example, they have been active in Las Vegas -- they did Mandalay Bay Hotel, McCarron Airport, Library of Congress. And one of the other venues I mentioned was putting in the DAS system at Golden Gate Park.

And we are looking to do about 20 very high-profile venues this year. But we also do quite a bit of other engineering with them. And as I said, this is turning out to have been a terrific acquisition, because in addition to the incremental revenue having some resources to apply to the important area of in-building, we are getting absolutely terrific feedback on the characteristics of our scanning receiver when applied to in-building. And we are getting a -- it's almost like a search engine for new opportunities for antenna deployment. So, we believe this is going to work out pretty well, Matt.

But -- so, municipal WiFi seems to be making a bit of a comeback. Is that going to be an area of focus for these guys?

Well, yes and no. In the sense that that municipal WiFi is used for outdoor applications, less so; when it's used in airports or buildings, very much so. Remember, NES is really focused on in-building, and we are going to stay focused in that area with their engineering services.

Okay. So, you are not going to be getting involved with some of these wireless ISPs that are building out and helping them --

It's not at the top of our priority.

Okay. I will let somebody else have the call. John, what was the depreciation?

I want to say -- hold on. In the quarter?

Yes.

I want to say it was about $650,000. I will double check, but it's in that range. It's pretty close to what it was last quarter.

Why -- you pretty much done with the CapEx for the ERP.

Yes. If you look at the year, we did about $4.9 million in CapEx, of which about $2.8 million was the ERP. So, when you are normalizing for next year, your CapEx number should be back down in the mid $2.5 million range, which is where it has historically been.

And what happens for the next five months until you deploy it?

Well, there will -- included in that number will be probably $300,000 or $400,000 worth of additional CapEx. But it's buried in the number I just gave you.

Okay, thanks.

Steven Beckert, Baird.

First off, I just want to ask -- I know you guys had a goal for 2011 of seeing a 2% gross margin improvement on antennas. Did you meet that by the end of the year? And how should we think about that going forward? Are there further gross margin improvements to be had in the antenna side?

We did not make that goal. We did have an improvement, but we did not make that goal. And there were three reasons for that -- one, we had a spike in logistics-related costs, related to transportation and energy. Second -- we moved, as part of our transition plan, we were not only moving production from Bloomingdale to Tianjin, but also from a nonperforming contract manufacturer into Tianjin. So, we went from a zero position in inventory to a non-zero position in inventory.

There was some E&O associated with that, with some of the inventory that that contract manufacturer had. And so, that was a bit of a hit against a gross margin. And I would say the third is -- we had one product that had a little bit of rework in it in the antenna area, and so there was a warranty cost somewhere along line of about $350,000. Having said all that, we still made nice progress. But we didn't hit the 2%. We are looking for a full 1%, 1.5% improvement going forward this year. I think we have a handle on the E&O, we think we have a handle on the logistics costs, and we do not anticipate duplication of this rework issue that we had.

Okay, thanks.

I appreciate the question. That is the type of thing that I would like to do with our analysts and investors, is -- when we state goals, I do like the idea of coming back at the end of the year and reporting on whether we achieved those goals or not.

Thanks. That is super helpful. So, on PCTEL Secure, I was really excited to see those three patents that you got, ProsettaCore. But do you expect to see revenue from ProsettaCore this year? And if so, is that in your guidance?

It is not in our guidance, but we do expect to see revenue from ProsettaCore. This is -- although we have done defense work before, this is a different type of defense work, and the contract process is extremely long and complex. We are working on a couple of projects right now, we have been working on them ever since we delivered the prototype. And it's going to take a little while still to work out those two contracts, but we will report back to you as soon as we have some progress to tell you about.

That is great. Do you think that the competitive environment has changed at all for ProsettaCore, within the defense market, at all since you started the investment?

Yes. I think it has improved.

It's improved, okay.

Yes. Well, number one -- the interest in this area has increased exponentially. There is just really -- it's almost frothy, the type of interest there is in security right now, and extends beyond defense. But secondly -- ever since we filed our patent application, it's really clear to a number of players in this universe that we have something unique; as we have tried to point out at various industry events and when we speak at investment conferences, what we are doing is just in a different category than what other people are doing.

We are not simply looking for the footprints or the signatures of viruses or exploit that people stay up all night trying to find and then download that information to your device. What we are doing is, we are defining the parameters of acceptable behavior on a mobile device, and then we are monitoring that device for aberrations. It's a much -- it's much more of a behavioral rather than a taxonomic approach. The other area that has opened up for us is this -- Tony Kobrinetz and his technical team that is leading this had a great insight, and it went into the third patent application that we filed.

And it was this -- that there is a kernel here that is applicable to industrial fixed wireless. So, in the past, I have talked about the sabotage of vulnerability of industrial wireless networks. It was back in 2010 that Siemens engineers inadvertently leaked a back-door password to their communication modules, and there were people who could wreak havoc with industrial wireless networks that utilize that module. Well, in the same way, these exploits that exist in the Android world and in other worlds are very malicious. And just as we have developed a delivery system to demonstrate how these malicious implants can get into a mobile device, there are delivery systems for implanting these exploits into fixed wireless.

And so, one aspect that has changed for us is that we are seeing how we could potentially use our invention in industrial fixed wireless. And there is actually an elaboration on that point, which is this -- even if we were to move in a direction where, let's say with a partner like a defense systems integrator, took over our technology for use in mobile devices, in channels that were difficult for us to penetrate, we would always have an interest and an ability to use this technology in industrial wireless networks. So, I believe the competitive landscape and the general opportunities for us have improved.

Thanks. That is super helpful. One more follow-up on this topic, and then I will get back in the queue -- do you ultimately anticipate this to be more of a licensing revenue model, then? Or how should we think about that piece?

There is no question in my mind that PCTEL is not a Company that is going to buy handsets or develop handsets, put the software and firmware on them, and sell to highly unique vertical markets. We have always intended to license the software onto other people's platforms. The question is how we do that. And I think that is going to evolve as we understand who our potential customers and our channels will be.

Got it. Thanks a lot.

Chris Segala, B. Riley.

Just quickly following up on the PCTEL Secure -- is that something that you guys are still assuming will be breakeven in fiscal year '12? And then, hopefully, it will see some incremental profits in '13?

In our plan, I think we still have looked at this as having a burn rate that impairs earnings at a certain level. It really is dependent, Chris, on the amount of revenue that we can get from the couple of customers we are working with right now. 2013 is still our forecasted year for going profitable. I will make one comment that is a little bit of a nuance, that you might want to follow-up with John later on. But as we announced, we intend to acquire all of the outstanding shares of the venture on an accelerated basis. And because of that, we will be absorbing more of the cost this year than we had initially contemplated when I originally discussed breaking even this year. So, that is a little bit of a negative hit, but we thought it was a worthwhile investment so that we could get complete control of the IP and the assets and the strong future that we think is associated with this.

Okay. Thank you. And then, just turning over to the offloading opportunity -- just curious how you guys are looking at the size of this market? And maybe can provide a little more color as far as -- what are some substitute solutions out there, as we hear about the move towards smaller-cell architectures in wireless networks, et cetera?

Yes. I think that is a good question. I thought that this was a terrific week for our Company, Chris. There were two or three articles that came out on the spectrum crunch in the US. Did you see any of those?

Yes, I saw a few of those. Those are very applicable.

I made a point of forwarding them to a couple of analysts. But the description of that problem, of how increased smartphone activity and the use of data is just consuming the bandwidth and all the spectrum that is available, really describes the underlying requirement for our products, both on the antenna and the scanning receiver side. So, let's step back for a moment from offloading. All offloading is for cellular, is a way of dealing with the spectrum or the bandwidth crunch. Right?

Right.

There are many ways of doing it, but fundamental to all of this is going to be the use of our scanning receivers -- to help people distinguish between the signal and the noise floor; to re-harvest or re-farm spectrum when you move from one technology to another, to get greater bandwidth; the use of our scanning receivers, to improve the assignment of frequencies; and to reduce interference between neighboring cells.

All of that is right in the wheelhouse of why antenna -- why cellular carriers require sophisticated scanning receivers. So, we think that that spectrum crunch is very important to the future growth of our scanning receiver business. With respect to offloading, one simple thing to consider is that there are 4,000 arenas in the United States that will ultimately move to some type of offloading solution. They may use other types of systems or structures to move around the traffic, but all of those solutions require antennas.

One of the really appealing aspects of PCTEL's role in this is that we have a basic common-denominator product in any type of offloading solution that you could contemplate. Another common is this -- a lot of the alternative approaches to dealing with the spectrum crunch and the issue with having adequate coverage -- if you look, for example, at residential applications, those will most likely use something like a femtocell. The focus of PCTEL has always been on the enterprise. And in the enterprise, you are going to see heavy utilization of DAS, WiFi, or as you say, small-cell structure. All of those involve network engineering, all of those involve scanning receivers, and all of those involve antennas.

Excellent. Thanks a lot, Marty. And then, final question here -- kind of update us a little bit on the M&A front, if you are seeing any incremental opportunities out there, and what the pricing environment looks like.

There are lots of opportunities out there. We are active, as always, evaluating potential opportunities; but there is nothing to report on at this time. I do believe that the environment has improved.

Okay. Thanks a lot, and good luck.

Thanks.

Brian Horey, Aurelian.

Marty, I wanted to follow up on the last question -- can you talk about how you see the DAS opportunity rolling out for you? And beyond the network engineering, where else do you fit into that opportunity?

Well, I think we mentioned to you that one of the really interesting ways to expand our antenna business is to move more aggressively into what we refer to as ancillary RF. And so, for example, we acquired Sparco and got a set of enclosures. And I think we reported last quarter that our cable business is expanding, and we are looking at including other products such as filters, amplifiers, surge arrestors, and so on.

All of those elements -- all of those RF elements, when you think about DAS, are included in a DAS-type application. And so, we think there is opportunities to complement our antenna base with RF ancillary products that we either OEM or acquire or make. So, for example, right now we have really jumped into the cable business. There is a PCTEL-branded cable at a very competitive price, and we are able to do [kitting] -- the type of kitting that is relevant in a DAS application. So, we think we will benefit in that way.

Okay. Do you see a specific product, beyond the components that you mentioned, that gets targeted at that application?

We do. But I would prefer not to comment, because some of these areas are active areas of investigation for us now, with either OEM suppliers or other targets.

Okay. Understand. And then, on the small-cell opportunity, I think historically -- you can correct me if I'm wrong -- but you haven't played a lot, from an antenna standpoint, in the macro-cell space.

That is exactly right, Brian. And we will probably stay away from anything that smacks of a cellular base station antenna, no matter what size. We don't break out our gross margins in the antenna side, but they are so significantly higher than the gross margins associated with cellular base station antennas, we just don't want to touch that area.

Okay. So, you wouldn't see yourself getting into a small-cell opportunity as it relates to carrier CapEx, but more these kind of ancillary opportunities, like stadiums and arenas and so forth?

And other vertical markets that cellular operators are interested in looking for a way to handle. Or, quite frankly, just the vertical market on a completely different spectrum, where they are designing their own unique system, whether it's fleet management or precision agriculture or water wastewater management. Vertical markets, enterprise, in-building, and offloading are the main themes to growing our antenna business.

Okay. Understand. And then, lastly, I wondered if you could just try to walk us through the selling process and the selling cycle on the PC Secure side, and kind of -- who do you have to sell, how long do you -- and I'm assuming that is kind of multiple parties. How long do you think that takes till you start to see revenue start to show up?

What I am seeing now, that it's roughly a 6- to 12-month process. So, for example, if you have a target government customer, you most likely have to go through an existing contract that is owned and operated by a large defense systems integrator. That defense systems integrator will have a specialized division to handle those types of deals. And you really have to get, along the way, at least two and possibly three agreement signed. And there is a vetting of custom requirements that has to be done.

So, for example, we are releasing our commercial quality product at the end of March. It is a baseline product. But that baseline product has to be modified to meet specific needs. So, I will give you a simple example -- you are working on a tablet versus a phone. You are working in one type of environment geographically versus another. And -- or there may be a different processor involved. So, there is -- I think the honest answer is 6 to 12 months of cycle time. And I would ask all of you to remember, we initiated this at the end of January last year. We signed an OEM contract to procure prototype development phones.

We delivered a prototype. We secured interest from a variety of customers. And now, we are delivering the completed product in something like 13 months from the day that we started this program. And I believe we will have revenue this year. So, there is a lot of activity. I would also say that part of the business development and selling process is really getting engaged with appropriate associations in the military space, which we have done. So, for example, our ProsettaCore product is on display this week in Fort Lauderdale at the AUSA show.

Okay. So, you have to sell first the agency that is the ultimate consumer of the product, and then go sell whoever the contractor is that is going to assemble and distribute the product [to it].

Correct.

And in terms of the -- you said it is going to be kind of a software license revenue model. Is that going to typically be a big upfront license? Or is it a combination of an upfront license and then some kind of per-unit royalty as they ship handsets?

It varies.

Okay.

It really does vary. But it will be a variation of what you just described.

Okay. Fair enough. Good luck with that.

Thank you very much.

(Operator Instructions) Matt Robison, Wunderlich Securities.

John, when you expect to consolidate the PCTEL Secure? And what do you think the impact will be on minority interests?

I think what it will be -- by the time we finalize it, probably late second quarter. So, let's say for the back half of the year. The elimination of minority interests would go away.

Okay. So, we will just assume a full quarter in the second quarter --

Yes, a full quarter in Q3, [a full quarter], in Q4 it goes away, and maybe one-third of it goes away.

And no revenue yet that early. So, should we just assume the same kind of burn rate as in the first quarter?

Yes.

Okay. Thank you. That is all I had.

Steven Beckert, Baird.

I was wondering -- how are you thinking about the prospects for High Rejection GPS antennas in 2012, specifically in light of the recent LightSquared developments?

That is a great question, Steve. And it's interesting that although we were highlighted in all the press releases that came out from LightSquared, we actually sold very little to them. Our primary sales are to the major infrastructure guys -- Alcatel-Lucent, Ericsson, and so on. And their need for High Rejection GPS antennas goes well beyond the potential interference issue with LightSquared. They are worried about interference when they are next to the [airport]. They are worried about interference in other highly congested areas. And we believe we are going to see an expansion of this business in Europe this year. So, we are not concerned at all about -- well, we are not concerned in terms of our business prospects, about what is happening with LightSquared. We do have some other areas of concern in what this means for spectrum.

That is really helpful, thanks. And then, I was also just wondering -- are you seeing any signs of recovery within public safety? Or is that still unchanged?

No signs at all. I will make -- there is a couple of exceptions. Broadband surveillance, broadband video surveillance, seems to be a growth area. There are some antennas needs there. But Illinois is a great example. I think there was just a huge press deal with Governor Quinn today, on being $83 billion short in near-term pension obligations, and how that translates into absolutely no discretionary funds for any other programs.

On a personal note, I have a son at University of Illinois. And I don't know if the bill is paid off yet, but midway last year the state owed something like $500 million to the University. And this drama is being played out in state after state after state, and we continue to see municipalities delaying the refreshing of their police car fleet, the hospitals delaying the acquisition of new ambulances, and so on. So, public safety, I would say this -- it has been at least steady state. But we have had to replace a big hole in our business plan since 2008 with business activity in these vertical markets.

Okay, that is really helpful. Thanks a lot, guys.

And there are no additional questions in queue at this time.

Okay. With that, let me thank you for your time and for all of your questions. We look forward to seeing many of you at industry events. I will be at the Mobile World Congress next week. And for those of you who are there, we will suffer together with a lack of public transportation that has been announced with the coming Metro strike there. So, if you would like to meet with me at the Mobile World Congress, please contact my Administrative Assistant, Don Munn, and he will set up some time for you. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.