TESSCO Technologies Inc (TESS) 2008 Q1 法說會逐字稿

Good morning and welcome to TESSCO Technologies' first-quarter earnings conference call. Today's call is being recorded and will be available for audio replay today at 12 p.m. Eastern Time. You can access the replay by calling 888-286-8010 or 617-801-6888 and entering confirmation number 16254696. Today's call is also available via webcast at www.tessco.com/go/pressroom.

As in most presentations, the following discussion contains forward-looking statements, and TESSCO's results may differ materially from those discussed here. Additional information concerning factors that may cause such a difference can be found in TESSCO's public disclosures, including TESSCO's most recent report on Form 10-K as well as prior and subsequently filed reports.

I am pleased to introduce Robert Barnhill, Chairman, President, and Chief Executive Officer; and David Young, Senior Vice President and Chief Financial Officer of TESSCO. Also, in order to facilitate dialogue, Ted Moreau of The Cardinal Group, TESSCO's retained investor relations consultant, will also join the call during the question-and-answer period.

I will now turn the conference over to Mr. Robert Barnhill. Please go ahead, sir.

Good morning. First, our thoughts and prayers go out to the people in Minneapolis. We wish them a speed and success in recovering from their tragedy.

Considering our stock's precipitous fall yesterday and again this morning, I would like to maybe break tradition a little bit and open up for questions now, to kind of get the agenda items. Then after we get those on the table, then go back, and we definitely want to spend a little bit more time on this call really exploring what our intrinsic -- the intrinsic value that we are building.

But I want to make sure that we get your issues, as we look at this stock fall, addressed in our presentation or specifically. So with that, I would like to open it to questions at this particular point. If you would go through the methodology that they said would be great.

(OPERATOR INSTRUCTIONS) Sir, there are currently no questions in the queue.

Okay. Again as we go through, make sure that we get your issues addressed, and so we can all get grounded.

We have all seen the results. Simply put, after a record fiscal year, our first-quarter results just plain fell short of our plan. It was the speed of the execution of the initiatives that we have been presenting to grow loyal customers, revenues, margin, and expenses were just not fast enough to offset the continuation of the market softness we discussed in our fourth-quarter earnings release. We did see a modest rebound as the quarter progressed. But it was just not as robust as required to offset the shortfall that we experienced in the early part of the quarter.

So let me just step back a little bit and set up this intrinsic value that we are all very confident in what we are building and what we will see as the years and quarters goes on.

We are expanding and transitioning with the exciting convergence of the Internet, voice, data and video wireless access. Our business is to provide the products and services required to enable the building, operating, maintaining, using, or reselling wireless systems. Our value proposition is to assure that our customers' success -- to assure our customers' success by delivering what they need when and where they need it to keep their systems up and running.

We are dramatically expanding our customer base, large and small, from carriers to enterprise to cellular, to small cellular accessory kiosks. We are expanding our product offering from high-tech to low-tech, from iPhone accessories to WiMAX and WiFi systems to tools and shop supplies.

We are doing this to accelerate our growth, reduce our concentration, and build an enduring corporation. The initiatives we have been discussing over the past quarters are focused of four primary success outcomes. Building loyal relationships with a vast number of customers; a robust and compelling product, service, and availability offering; and an unmatched customer experience; and bottom line, superior productivity and building superior shareowner value.

Many actions are taking place to accelerate the execution of these initiatives and the achievement of our goals. The most significant action this past quarter was a major change in the leadership of our sales organization.

Just in the three months since we made the change, we have seen the development of stronger relationships with more existing and new customers. This should result in an increase in monthly buyers and their purchases, thus increase market share. More changes will be made to drive success for our customers, [and thus their] loyalty and purchases, our manufacturers, team members, and our shareowners.

I want Dave to now give you the financial highlights for the quarter and then we will come back and talk more about what we are doing. David?

Great, thanks, Bob. I will quickly review the performance compared to last year's first quarter. Total revenues reached $124 million, an 11% increase. Commercial buyers -- the commercial and government buyers grew 7% and the purchases of those buyers increased by 4%.

Gross margin declined to 22.6% compared to 25.1%. This decline was mostly attributable to the reduction in our repair components business, which I will expand on a little bit later.

You will notice that we have provided some more information in the supplementary table that now includes our commercial and government business broken into three separate channels rather than only two. This -- we did this to just better reflect how we are now looking at our business.

The results from our various sales channels are as follows. For public carrier and network operators, revenues totaled $15 million, a decrease of 15%. This market continues to be difficult, as our results rely largely on large expenditures of the national carriers.

Buyers were flat, and purchases per buyer declined by 15%. Our gross margin did improve, however, from 23% to 24%.

In our reseller channel, revenues totaled $77 million, a 37% increase, as a result of the substantial growth in sales to our one large Tier 1 national carrier customer, as well as increased sales to our independent retailers and VARs.

Revenues from our large carrier customer represented approximately 26% of our total consolidated revenues. Buyers in this channel grew by 11% and purchases per buyer increased by 24%. But when you take the purchases of the large carrier out of purchases per buyer, they were actually flat for the quarter.

Gross margin improved very slightly. We expect to continue to see nice growth in this channel, as we believe that our positioning and offering the retailers, dealers, and VARs is a real value to the market.

In our user and government channel, revenues totaled $31 million, an 18% decrease that is largely the result of our repair components business for the large OEM returning to historical levels, as we had previously predicted. Buyers increased less than 1% and purchases per buyer decreased by 18%. Overall gross margins in this channel decreased substantially from 31% to 24%.

You will recall that last year's first quarter was an exceptional quarter for the repair components business. Very high revenues, gross profits, and margins during that quarter. Also, recall that last quarter we announced that we amended and extended this relationship with our OEM partner, and that the new structure would result in revenues, gross profits, and margins returning to the historical levels.

For the non-repair components business included in this channel, gross margins actually improved to 26.6% compared to 24.3%. Continuing to go down markets that deal with end-users and governments with our products as kiosks, as we look to increase margins for the business.

Consumer business, revenues totaled $2.2 million, an increase of 45%, and gross margin decreased to 40% compared to 50%.

In our lines of business, Network Infrastructure totaled $40 million, a 6% increase. Buyers increased by 3% and purchases per buyer also grew by 3%. Gross margin improved slightly.

Sales into the carrier channel, as I said before, remain difficult, but we have been able to show some growth in this line of business as their broadband and wireless -- and WiLAN product and training initiatives have produced results. We have also been able to sell some of the traditional infrastructure products into the reseller end-user channels.

For Mobile Devices and Accessories, revenues totaled $63 million, a 45% increase, as a result of substantial growth in sales to the large national Tier 1 carrier as well as growth in sales to other small resellers and users.

Commercial buyers grew by 11%, and purchases per commercial buyer increased by 31%. But when the purchases of the large carrier are excluded, purchases per buyer actually decreased slightly by about 1%. Gross profit margins in this line of business decreased very slightly.

Bob will talk in a few minutes about our proprietary products. But we are seeing some strong results from these products in this line of business, and we are able to increase margins and maintain even greater control of the supply chain. Bob will give you some more details about that in a little bit.

But our Installation, Test, and Maintenance line of business revenues totaled $21 million, a 31% decrease that is largely the result of our repair components business returning to the historical levels, as I just discussed. Buyers were flat, but purchases per buyer decreased by 30%. Our gross margins decreased to 23% compared to 31% for the same reason as the revenue decline.

If we were to exclude the repair and component business from this segment's results, gross margins actually increased very nicely from 21% to 27%.

In this line of business, our recently expanded training capabilities certainly add to our offering. We look forward to scaling the results of that business in the coming quarters.

As for expenses and income, operating expenses for the quarter increased by $1.7 million, primarily as a result of increase in sales comp and marketing expenses to support the growth initiatives, as well as increased fulfillment compensation and [freight out] expenses as a result of the revenue increase.

Net income for the quarter was $866,000 or $0.15 per diluted share, compared with $1.9 million and $0.29 per diluted share for the first quarter of last year and $1.6 million or $0.28 per diluted share for the fourth quarter of last year.

Our operating cash flow was $1.1 million for the quarter. We had no outstanding balance on our revolving credit facility. Cash and cash equivalents were approximately $3 million at quarter end. Our days sales outstanding were 37 during the first quarter compared to 34 in the last year's first quarter. That is as a result of strong sales during the final weeks of the quarter.

Inventory turns were 9.3 for the first quarter of last year -- of this year compared to 7 turns for the first quarter of last year. Again this is largely a result of our repair and components business changing to the consignment model last quarter.

During the first quarter, we replaced our previous $30 million revolving credit facility with a new $50 million revolving credit facility. We continue to operate with strong cash positions, with little or no outstanding borrowings. But this new credit facility really provides for greater covenant flexibility and availability should we find opportunities that would require additional capital investments.

So in summary, our balance sheet is strong. We have the capacity to accelerate the initiatives and regain the growth and performance we saw last year. We really are encouraged about the opportunities that we see in the market. We continue to receive positive feedback on our performance from our customers and manufacturers.

Bob, I will turn it back to you to discuss some other business highlights.

Thanks, Dave. Let me just highlight just a few of the business initiatives that are going on. Where David was talking about the various opportunities that are coming to us, we launched a trial program with the leader in networking for the Internet to market their mesh WiFi networking solutions through our wireless dealer and value-added resale partner channel. Again this is just the type of opportunity that is the emerging from people that have been historically outside of wireless that now, with this convergence, are coming to TESSCO to get their products to the market.

Example of our proactive product offering. We had a complete accessory offering for the new iPhone when the iPhone came out. We were developing it and offering it to our customers with good success.

This convergence is driving the need for training. Information technologies professionals don't understand wireless to the degree that they need to; and the wireless professionals don't understand IT to the degree they did.

Over a year ago, we acquired GigaWave; that is the premier trainer in wireless, primarily for Cisco. We just acquired in this past quarter NetForce Solutions, which has been integrated into the TESSCO Training Business so that we can fulfill this opportunity we see. We feel very good about the combination of these two companies and the portfolio we are building from training.

David alluded to it earlier. Proprietary products is gaining traction. These are the products that TESSCO develops, specifies, and then has contract sourced throughout the world. It reached 10% of our total revenues, and with gross margins and profit contribution significantly higher than our corporate average.

The major -- the majority of the sales today are from the cellular and music accessories, but also included the expanding and growing offering and growing sales of tools and maintenance equipment and supplies, and advanced wireless networking systems and products.

To support this, in this past quarter we created and are opening now a new, what we are calling Product Innovation Center to perform the assembly or the packaging required to convert the incoming bulk OEM product and our proprietary products into what we call the finished goods inventory. This center will provide for the capacity expansion for proprietary products and our private packaging offering. Then also, it will greatly improve the utilization of our current Maryland and Nevada finished goods fulfillment centers.

So these are just a sampling of the things that are going on at TESSCO that we feel very good about. Now, I want David to give you an update of our buyback, our share buyback. David, do you want to hit that?

Sure. So in light of our recent stock performance, and not even counting the last couple days, but last week our Board authorized the additional purchase of 145,000 shares under our existing stock buyback program. With this increase, we now have 300,000 shares that remain available for repurchase from time to time. Purchases will continue to be funded through working capital and our credit facility. We have set no timetable for the completion of this program.

During the quarter, the first quarter, we did not repurchase any additional shares. To date, we have bought back about 1.8 million shares, at approximately $13 a share on a split adjusted basis. We have currently got about 5.5 million shares outstanding.

So we continue to believe that the repurchase of shares when appropriate is an excellent use of funds to enhance shareholder value while potentially providing some liquidity to our shareowners.

Thanks, Dave. I would like to just highlight the key Board member changes that occurred during the quarter.

Jerry Eppler has transitioned into the role of Director Emeritus. Jerry started back 25-plus years ago with me and was responsible for helping with the initial funding of TESSCO. He has just over the years has just been extraordinary in terms of his guidance and contribution to TESSCO and to me. We will look forward to working with Jerry in his new role, and thank him for his immense contribution and wisdom and guidance over the years.

Susan Goodman term expired and -- but I want to recognize her for her contribution. Susan brought very critical marketing experience to the Board and to TESSCO. Her channel management and business skills helped us expand the development of the marketing programs that are underway to grow and diversify our customer base.

Now, I am very pleased to announce that Jay Baitler, who is the senior vice president of Staples' contract division, has joined the Board. This was after an intensive search. I am pleased and look forward to his guidance, as we consider Staples, the commercial division, their go-to-market product offering and operational strategies to be very similar to the strategies that we need to build and execute. Jay, just after the first meeting, has just made great contribution and we are excited about him being a part.

Let me just update you with our current business outlook. Naturally, the outlook assumes that the trends that -- what we are experiencing change. The wide guidance reflects the possibility of the markets' growth returning to the pace that we have seen.

It is important to recognize that it is very difficult for us to really give a far-looking projection. Is that we typically ship products within several days after the booking the orders. So lack of an order backlog really makes it inherently difficult to forecast future results.

With all of that having been said, we are currently expecting earnings in this year, considering our $0.15 this present quarter, to be in the range of $1.17 to $1.37 for the fiscal year which ends in March, the end of March.

I think it is important that you understand how this guidance relates to our performance share grants and how that reiterates. David, if you might just give us some insight on that.

Sure. The internal threshold of target levels applicable to these 2008 PSU grants were set earlier in the year by the Board of Directors at $1.25 and $1.55, respectively. So if actual 2008 earnings per share do not reach at least the threshold level, no shares will be issued pursuant to these PSUs.

The earnings impact of the projected share issuance is included in the threshold target amounts. So just please be aware that these threshold and target amounts were established as internal criteria to measure the earning of these PSUs and should not be construed in the nature of earnings guidance. Bob?

This point is worth underscoring. Is that, first of all, these goals will not change, the $1.25 and $1.55. As David said, they are [reitative].

We have today, the grants for last year, almost 60 people were granted PSUs. You can be assured that everyone is behind and committed to achieving these higher goals as we go forward to earn their PSU grants. So it is a great motivator and a great alignment, and everybody is very confident in terms that they are going to make the numbers they need.

So let me at this point open it up to any questions. So please push one or whatever it is and we will answer your questions.

(OPERATOR INSTRUCTIONS) Jonathan Ho with William Blair.

Just a couple of quick questions. First, can you give us a little bit of additional color on what you guys are seeing kind of in the carrier CapEx market? And whether there is any kind of sign of a turnaround at this point?

Yes, the biggest driver of CapEx has been AT&T, which has really put the brakes on as they integrate and kind of look at what they are doing. It has had a major impact.

As we have been talking for five years, this market continues to be very herky-jerky and, again, very difficult to forecast.

One of the major initiatives we have is there's 200,000 cell sites out there, and these sites are being maintained every month. We are continuing to hone our offering to focus on the existing sites, and whether they be enhancements for the various new technologies that are coming, or whether it is lightning storms. So we are becoming more and more aggressive on that side of the market. As well as keeping contact with the carriers when they start to do their spend, and their contractors and program managers.

But it -- and this again has been one of the major, major transitions of TESSCO. We are so dependent upon this business, and as it is borne out, is that it continues to be a difficult market.

Okay. Some of the things that we are hearing a lot about, I guess, in terms of new developments would be kind of WiMAX deployments and also maybe mobile TV as being potential catalysts going forward. As far as investments being made for new services, how do you guys see that kind of playing out over probably not the near-term but the next couple of years?

That is very exciting. You might have noticed yesterday that there was an announcement that FiberTower signed a contract with Sprint to do their backhaul for their with WiMAX deployment. Because right now it's -- the game is between -- with Sprint and their affiliation and a strategic collaboration with Clearwire, that they are going to be the first really out of the gate.

We are working with FiberTower. We think that is going to be a very, very exciting opportunity.

Also, there's new frequencies coming out, 700 MHz, which are basically the analog TV frequencies that are going to be auctioned off. We are behind that right now, that where we see that being driven down to the enterprise as well as the big national systems.

We have a product under development that we are looking at, the school frequencies that were given to schools to create the campus-wide systems that are basically baby WiMAX systems, if you will.

So that, the WiMAX deployment, as well as the thing that I mentioned earlier as far as the mesh WiFi, are just very, very exciting opportunities. This is all about a convergence of the Internet protocol becoming a part of the offering.

You mentioned TV. We are going to see IP-based TVs that are going to ride down these systems, that are going to challenge the DSL and the cable, in terms of bringing to the household and bringing to the business the video, voice, as well as the data.

So it is a -- but it is not going to be that Big Bang, if you will. It is going to be the continued evolution of that, and we are all over it in terms of product and offering development.

Great, great. Just switching gears a little bit to maybe the accessories market, I have a couple questions there. First is, in terms of the kind of release of the iPod, I know you guys had put in the press release that you have developed kind of a full suite of product there.

How is that playing out in terms of the demand, first on the carrier side; and second, do you see kind of the independent retailers shifting over as well? Or do they typically lag a little bit in terms of picking up an accessory base?

You know, this is a big question. The first question is the iPhone and Apple are starting to change the game with the way devices are created and marketed through the carrier. You have probably seen that Google is trying to get the carriers to allow other devices to be added to their system. This is a big breakthrough for the United States. It has already occurred throughout the world.

The iPhone also is the indication, again, of convergence, to where it is focused so much on the -- in addition to voice, but the Internet. You know, it has got YouTube as a hot button on the thing. So it shows where this industry is going.

There was a lot of press that said that the 250,000 units they sold in the first week or weekend was a disappointment. But 250,000 access points is huge in terms of creating a new device.

Now, then, as it related to us, is that we were not a participant with AT&T with the iPhone accessory. So we are taking our iPhone accessories today to the independent channel. I can say that the offering that we presented is a -- we are in a backlog position right now. Because the sales exceeded our expectation going to this independent channel that is not selling the iPhone itself, but is selling the accessories.

So it is an exciting opportunity. Again, it is a symbol or an important -- it shows the convergence that we are looking at and the opportunities that are there. It also shows our level of proactivity, that where we have branded product as well as proprietary product offerings for the iPhone.

Okay, and just leading on to kind of the China sourcing side, is that also something that you are doing in terms of the proprietary products related to the iPhone?

Yes, that is coming out. As I said, we are buying branded product that is coming domestically. It might have been manufactured in Asia, but then we are developing our own proprietary products that we are sourcing right now in China.

Okay, okay. Then one final question on the new Product Innovation Center. What types of improvements does this kind of bring? I guess just relative to how things were done before.

Great question. (inaudible) a huge percentage of our conversion -- again, visualize that we are bringing product in, in bulk form, and then we are custom packaging it for our various customers including our own brands. Our facilities, our Reno, Nevada, facilities were created to handle finished product. So the conversion of this product is very difficult, or was very difficult for us to do in-house. So a majority of it was outsourced.

The outsourcing was at a higher expense. Also the flow was not optimum. So the buffered inventories we needed -- as we brought it in, and take it to a contract packaging house, and brought it back in -- was very cumbersome. We didn't have a smooth flow.

So this facility is going to give us, one, capacity; it is going to give us better productivity; and it's going to give us an enhanced offering capability to our customers. Our customers will be able to customize their packaging.

We will be able to -- we are doing what we call print on demand, where we print on the art card the compatibility for that particular product. So it is always update, is always fresh. It's allowing us to keep the product in bulk form until essentially we get an order.

So it is going to result in reduced inventory levels, better customer satisfaction, and increased productivity and capacity, in summary.

Excellent, excellent. Thanks, guys.

Ted Moreau, with Cardinal Group.

Yes, good morning. Wanted to ask a couple questions that seem to be, in my view, some of what you have addressed to some degree. May have been unique and maybe one-time developments in the quarter, and hopefully we will get back to more normal quarters going forward.

But first, getting back to the iPhone, was there any impact on your other accessory and retail, businesses from the iPhone, waiting for the iPhone? Did it take away from some other businesses? Might that have been just a onetime development in the quarter with your large customer?

You know, with our large customer, they indicated that they had a positive addition of new subscribers. But as it related to us they really didn't have the level of new phone launches that they typically have. A new launch drives a lot of our accessories, where we basically fill the channel.

There was huge anticipation for the iPhone. So the iPhone created definitely a buzz that, even with the large customer, we served the independents and everybody was kind of waiting. The subscriber was waiting to see what was going to happen. You can't empirically prove it, but it certainly is a feeling that we have in terms of it inhibited the new phone launches from this particular customer. But then what were the other pent-up demands?

Now with that having been said, as David said, our quarter was really backloaded in terms of that business.

Right. Are you seeing a continuation of that trend? Meaning are you seeing new launches now starting to develop and getting back to a more normal industry environment? Or is this still pretty uncertain (multiple speakers)?

Right now, we are dealing with the summer.

Right. So the fourth quarter or the December quarter is usually when (multiple speakers) September.

Oh, yes. I mean we're -- that is part of the -- as we move into the holiday with the accessories, we have got exciting new packaging and new branding and new products. So that is going to be the exciting time, as we move into that October, end of September or October time frame. That is where all the carriers will be doing the new phone launches, and it's going to be exciting times.

So it is not unreasonable to expect getting back to -- in a quarter or two, getting back to maybe a more normal environment from this aberration that maybe have occurred in this quarter.

Yes, definitely on the accessories, and definitely on the other product areas. I mean it has been -- this is -- the summer has been almost a bit European in terms of the level of vacations.

Right. Well, and then the other issue, which also has been mentioned is the carrier space. Everything we see there is because of the consolidation, primarily with AT&T-Cingular, we are still -- even though there is an expectation of pent-up spending, it doesn't seem to be materializing that dramatically and that it may spill into '08.

But it looks like there is a lot of pent-up demand in the carrier market that ultimately would start to materialize in your cell site business.

Absolutely. The other thing that is exciting about the iPhone is the iPhone requires a much higher bandwidth and capacity. So it's going to put great pressure on the network, where it's going to have to be enhanced and built out with more sites and higher capacity sites.

Because as they get more iPhone's out there it is going to be a self-fulfilling prophecy that as this bandwidth requirement -- when people are trying to go on to YouTube and download a video, and they're not going to be able to do it, there is going to be implied pressure from the consumer to get that bandwidth. The only way they can do that is to add more cell sites and enhance the existing cell sites.

Right. Bob, you have made it clear and it is obvious from your business models here that your dependence on the carrier business continues to move in other directions, which is good. That seemed to be exemplified in the fact that your Network Infrastructure business is actually up, even though modestly, even though the carrier market was down.

So obviously you are getting broadband wireless, WiFi, enterprise and municipal markets and others that are offsetting that?

Absolutely, if you look at that Network Infrastructure, one of the areas that is driving that is just the wireless networking, the fixed broadband arena; and then also going down into the self-maintained user in enterprise; and then enhancing our VAR and dealer programs.

So it is a parallel program. To give you an example of that, we talked about accessories and they're primary resell driven. But we are having more and more opportunities come to us and that we are pursuing with the enterprise as they do their own procurement of the accessories they need to take care of their people's iPhone, BlackBerry, cell phone requirements.

Bob, you mentioned enterprise several times. Some of the other companies that we monitor and follow are clearly showing strength in the enterprise business with the drivers of ondemand video, gigabit ethernet, and others.

What is your exposure? Are you able to measure exposure to the enterprise business and how it is impacting your demand for your other non-carrier products?

Well, it is definitely we are moving deeper and deeper. When we say the enterprise, we go from utility companies, to the transportation companies, to the railroads, and then to the just good old enterprise.

What we are seeing is they are becoming much more -- more and more capable of installing and maintaining their own equipment. In other words, they have got the technicians on staff.

Then also they are driving the private systems. They are putting in their own WiFi systems. They are putting in their own campus systems. They are putting in their own wireless surveillance systems. So this is -- and it is a vast market for us.

That is where our marketing challenge is coming in, where it is very easy to identify where the carriers are, and where the contract managers are, and where there are contactors.

But now, getting into this vast market, where there's hundreds of thousands of potential buyers for us is the exciting, but at the same time, challenging to get in there and build our --.

We have a very good reputation in the wireless space per se. But when you get into the enterprise space, it is a -- we have got to do a lot of spadework to make sure they know who we are and what we can do for them.

Is your new marketing initiative and changes there helping in that regard?

Absolutely. That is where we have got some just exciting, exciting things going into this market.

Two more quick questions and then I will turn it back.

That is the other side of this whole government market, is the same thing. It is just a vast. We are moving; but as I said earlier, it is all about accelerating this movement of our execution.

Right. Clearly on the government side, municipality side, though, you read more and more about WiFi networks being sort of their communication's core infrastructure. I don't know how the funding is going there, but clearly there is a lot of designs out there in the various municipalities.

Absolutely, yes.

On the -- just to clarify on this test and maintenance, because that clearly impacted your comparative results, especially since it is generally pretty profitable.

But the aberration you had last year, the strong demand with your OEM customer, what was the reason for that? And now that you're back to more normal levels -- there some spike in demand a year ago?

Yes, it really was a change in the model of the OEM, where they were selling more of their products to what they called outsourced repair centers versus internal repair centers. Under the old program that we had with them, we would make considerably more money on sales to those outside repair centers. But since we have amended and extended that deal last quarter, that has all sort of normalized. That noise is gone.

So clearly in the quarter, you had a number of developments that impacted the comparative profitability -- the iPhone, the carrier spend, and the test and maintenance comparison. The other businesses seemed to hold up relatively well.

Yes, and to your point, it was almost a perfect storm in the negative. So -- and that's -- we are looking into this quarter's turning those trends around.

Right. Bob, maybe just one final strategic question. You have your list of imperatives and initiatives. You have addressed several of them, one of them being the recruit and retaining of good personnel, which obviously your recent acquisitions and changes in your marketing areas are addressing.

Another imperative is to improve profitability and returns. I am sure you're not satisfied with where you are on the margin side and rate of return. You know, where -- what might be the upside financial targets that you have achieved in the past that might be reasonable objectives going forward?

Well, we believe that the initiatives that we have is we can -- starting with proprietary products and looking at the various areas -- improve that gross margin level.

Then as the volume builds, we will get the operating leverage that, again as David mentioned, that this particular quarter kicked in on the negative side, where we were spending money on these initiatives, the marketing side, and the compensation side as we build our sales force and we build our various leadership.

But then that is going to remain relatively fixed. As the volume comes back we will regain that operational leverage.

Great. Well, thanks.

(OPERATOR INSTRUCTIONS) There are currently no further questions.

All right, so thank you for your input. We remain, hopefully as you can hear and see, very energized about our opportunities in wireless and the initiatives that we are developing and executing. We are extraordinarily committed to regaining the profit and revenue growth we achieved last fiscal year in the quarters to come.

So appreciate your support and look forward to building the good news to share with you as we go through. So thank you.

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Good day.