TESSCO Technologies Inc (TESS) 2008 Q2 法說會逐字稿

Good morning. And welcome to TESSCO Technologies Second Quarter Earnings Conference Call. Today's call is being recorded and will be available for audio replay today at 12:00 P.M. eastern time. You can access the replay by calling 1-888-286-8010. Again it's 1-888-286-8010 and entering confirmation number 50434187. Again, 50434187. 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 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 disclosure, 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 dialog, Ted Moreau of the Cardinal Group, TESSCO's retained investor relations consultant will also join the call during the -- excuse me -- question and answer period.

I would now like to turn the call over to Mr. Robert Barnhill. Sir, please go ahead.

Good morning. As you've seen, our second quarter results fell short of your and our expectations. Our objective this morning is to let you know what's happening and what we're doing to regain the revenue and earnings growth we enjoyed last year.

During the quarter we continued to execute on the initiatives to expand our business into the new opportunities that are being created by the convergence of wireless voice, data, and video systems, and to sell more of our existing product categories to more customers.

In this quarter our earnings result were negatively impacted by lower than expected purchases and a gross profit decline from our major customer for cellular retail accessories. We also saw a profit decline that David will talk about in a few minutes from the major OEM distribution relationship for cell phone repair parts. We are working diligently to improve our margins through shaping the product mix purchased and our procurement and operational productivity.

The margins in our other businesses and from our other customers remain stable and revenues from these core customers increased 6% year-over-year but 9% sequentially. But not fast enough to offset the lower than expected purchases and gross profit decline from the two important but concentrated relationships. So we're experiencing-- continue to experience overall market slowness. The hesitancy we've seen from our customers appears to be improving slightly.

Earnings were also impacted by the investments we are making in the marketing sales and operational capability and capacity to support our growth initiatives. In this quarter, we increased expenses for the startup of our new packaging center and the new branding and marketing programs. (Technical difficulty) remain intensely focused on improving our earnings through gross profit enhancement and expense reduction and on reducing concentration by growing core customers and their monthly purchases.

I'd like Dave Young now to give you a little bit more detail, and then I'll come back with the outlook and guidance. David.

Thanks, Bob. And good morning. I'll briefly go through the highlights of the quarter.

Revenues reached $132.5 million and gross profits totaled $28.7. And I'd like to spend just some quick time now addressing the margins, just to make sure that it's clear. The year-over-year comparisons are a bit difficult.

So our consolidated gross margin was down considerably year-over-year from 25.3% to 21.6%. The year-over-year comparison again is a difficult one because last year's second quarter was a bit of an anomaly in the repair components business. So if we remember back, the second quarter of last year was the quarter that had abnormally high margins in that business, in the low 40% range. And it was -- that quarter was also before we renegotiated the arrangement with the OEM that had the effect of moving inventory to consignment and thereby freeing up a lot of cash flow for us. But also lower gross profits and gross margins to levels near the early 2000 level.

We also saw somewhat lower margins in our retail business with the large Tier 1 carrier. This reduced margin was the result of some product obsolescence issues in the quarter, related specifically to that business. As well as the fact that the larger portion of the business continues to be OEM Bluetooth products that typically carry a lower margin. The opportunity for us here is to improve the mix of products that we sell to this customer by introducing new innovative aftermarket products.

So if we exclude those two pieces of business, the year-over-year comparison is much more reasonable. We saw a small decline in margin that was really just the result of product mix among our three lines of business. And if you look sequentially and don't include those two businesses that I just discussed, their margins were actually up very slightly.

Moving on to operating expenses. Operating expenses were -- showed a 2% increase resulting from the marketing sales and operational costs to support the core business growth initiatives that Barney talked about. Our net income diluted earnings per share were $0.13 and EBITDA per share was $0.46.

Inventory turns are strong. We improved to 9.8 from 6.0. That was driven largely by the repair and components business changing to the consignment model that I just discussed. But inventory turns elsewhere are -- remain strong as well.

Day sales outstanding increased some from 33 to 38 and that's mostly due to the timing of sales to the large customers throughout the various quarters. Cash at the end of the quarter was $2.4 million. The balance outstanding on our revolving line of credit was $4.4 million. Our operating cash flow totaled $1.9 million and during the quarter, we repurchased 346,000 shares at about $4.8 million under our expanded stock buy-back program. That 346,000 shares that we bought back during the quarter represented about 6% of the shares outstanding at the beginning of the quarter.

From a line of business perspective, network infrastructure revenues decreased by 2% while we saw some nice growth in our WYLAN and wireless networking business units, the broadband business unit was down somewhat. Gross margin in this line remained flat. Buyers and dollars per buyer were essentially flat. They each decreased by about 1%.

Revenues from mobile devices and accessories increased 27% as a result of increases in sales of -- mostly as related to sales of cellular accessories to both resellers and users. Gross profits in this line declined as a result of product mix and obsolescence issue with the large customer that I discussed previously. But the gross margin to all other customers was flat and the number of customers -- this was a pretty strong quarter for this -- the number of customers grew by 10% and their monthly purchases also increased by 10%. So some nice traction in that line of business.

The installation, test, and maintenance revenues showed a 2% increase. Gross profit margin decreased substantially here again as a result of the restructured relationship on the repair components business. But when you look at the non-repair components business, this line of business has a 24% gross margin. Buyers were essentially flat, but buyers per -- dollars per buyer did increase by about 2%.

So quick update on acquisitions. We acquired NetForce Solutions, a technical and sales training company, serving the wireless -- the wireless plus the telecommunications and networking industries. We did that on July 2nd, the first day of our second quarter. NetForce has been integrated into the TESSCO training business and is a compliment to the GigaWave business that we acquired in 2006. So we feel really good about this acquisition as it gives us the ability to not only meet the demand we're seeing in the market for training, but also to really create demand on training for new applications.

And then just some other important news for TESSCO real -- really quickly. The TESSCO Wireless Guide recently won a silver award presented by Multichannel Merchant. This award honors the finest business-to-business and business-to-consumer marketers from the catalog and e-commerce industry. When presenting the award, MCM cited our ability to exceed industry standards for merchandising, marketing service production, and creativity. So we're very proud of that award.

TESSCO recently received the Motorola Wireless Broadband Distributor of the Year Award in 2007 and that was really in recognition of our strong year-over-year sales growth there.

In October we hosted a really successful VAR Video Surveillance Symposium. This event included hands-on experience with video surveillance application as well as sessions on WiMax, Wi-Fi, and WLAN.

And then also in October, we were named to the Forbes' top list of America's Best Small Companies. We came in at number 157. There were a lot of pretty stringent criteria around that and we feel very proud of that distinction.

Most of the stock buy-back -- during the quarter again we repurchased 346,000 shares, which represented about 6% of the total outstanding. Since the buy-back program began in 2003, we've bought 2.1 million shares at a cost of approximately $28 million or $13.20 a share. Under the current board authorization, we now have 255,000 shares available for repurchase and as we continue to be extremely positive about our long-term market value, and we feel that the current stock price is undervalued, we do expect to continue to repurchase shares as appropriate.

I'll now turn it back to Bob who'll discuss the business outlook.

Great. Thanks, Dave. Hopefully you can see a lot of the exciting things that are going on that are going to be driving revenues and profits as we go forward.

Let me give you the outlook and at the present time, it's very difficult to us -- for us to forecast the next two quarters for really several reasons. One, as we've been saying over the past couple of quarters, the market and our customers, and our customers' customers still remain hesitant in this economy. The available market right now is tight and because of that, the competition pressures have expanded, but I believe as we discussed with the core business, we're definitely holding -- holding our margins.

Also in order to achieve our goal to expand into the new opportunities, the convergence of wireless video, voice, and data and to continue to expand our sales of more existing products to current customers and new customers, we still have new marketing initiatives to launch. And our sales force reorganization and transformation that we discussed last quarter is still in its infancy and starting to get some terrific traction. But the sales effectiveness is really just beginning and we must continue to recruit and develop new sales producers to leverage the multitude of new opportunities and leads that we're developing.

Thirdly, the new phone launches and products mix that we anticipate from our major customer is still uncertain and it's not yet a consistent flow for us.

Fourth, the supply chain for China source products is continuing to be streamlined, and made more productive, and there's a lot of opportunity here to lower -- lower cost.

Fifth, the new innovation and packaging center that we mentioned last quarter just came online and there's still some start-up costs that will continue for the next several months.

And then lastly, it's important to recognize that the nature of our business is that we typically ship products within -- immediately or within several days after booking the order. So the lack of an order backlog makes it inherently difficult to forecast future results.

So with that -- all that being said, we expect this third quarter to be significantly better than the second quarter, but our visibility into the fourth quarter is limited, so therefore we're continuing to be conservative in terms of our outlook.

So with that, we're expecting the earnings per share for the last six months of our fiscal year 2008 to be in the range of $0.35 to $0.45 and that would take the expected earnings per share as we give the fiscal year guidance to $0.63 to $0.73. And again, I'd like to just reiterate David's statement in terms of our share price being undervalued and we'll continue to repurchase shares when and where appropriate.

So as we look forward to the new fiscal year, we believe that we're in a very strong position to capitalize on strengthening market and emergence -- merging opportunities, both of which will accelerate revenues.

But on these revenues, we're striving to improve the gross profit margins through pricing, procurement, and operational initiatives, and containing fixed expenses. The net result should fuel excellent earnings growth as we go into fiscal year '09.

TESSCO is the leader in delivering what and where our customers need to build, operate, maintain, and use wireless. We have an extraordinary operational platform, depth of talent, breadth of services, and in the quarters to come, we look forward to leveraging our capabilities and assets to deliver earnings growth and success for our customers, manufacturers, team members, and you, our shareowners. So with that, I'd like to open it up for any questions you might have.

Thank you. Ladies and gentlemen, the Q&A session will start at this time.

(OPERATOR INSTRUCTIONS)

Our first question will come from the line of Jonathan Ho with William Blair. Please proceed.

Good morning, guys.

Hi Jonathan.

How are you doing? The first question I have and I've got a bunch this time. Can you give us a little bit more color on what steps you're taking to try and mitigate, I guess, the effects of the margin degradation?

Absolutely. Again, the margin degradation comes from these two relationships. And on the cellular accessory side, it's been product mix, been primarily driven by a sale of the OEM products, which carry a much lower margin than our proprietary products. And so there's several things that we're doing.

Number one, the new packaging facility will lower our total costs for both OEM as well as proprietary products. And then by continuing to build the stronger and stronger relationship, getting a larger share of the non-OEM products. A lot of that is being driven by our innovation and our speed to market in that area.

Then is we must grow the core business -- the business not from these major -- two major relationships -- at a much faster rate. And that's what the entire organization is driven towards. Again remember that that margin is relatively stable, but we want to grow that margin by getting a broader mix of product. If you look at our product areas, we go from 15% margin to 60% margin, so how do we get more of our high margin products being purchased by our customers and more of our proprietary products being purchased from our customers?

So it's a multi -- it's number one a mix, number two it's a -- you getting into the -- going downstream into the self-maintained user market, and continuing to improve our purchasing cost with -- from our vendors and driving down the cost.

And then a huge piece is the inbound freight, especially from China. And again, that was my reference to improving the supply chain as we go into a lot of the new market launches, we're using the air to bring the product in. And again as we get a better outlook and a more stable product flow, we can put it on the water with a much lower cost. So it's a multi-prong focus. Everyone in the organization is incented to drive that gross margin and we're attacking the gross margin at a -- with much more vengeance, if you will, than top-line growth. As well as and then the operating growth as far as modulating these expenses.

It looks like some of these are a little bit longer term type things versus kind of an immediate impact. So just from the color perspective, where do you see the gross margins heading back to in Q3 and for the back half of the year done? Are you going to see kind of a near term improvement on that side?

Certainly year-over-year because of the repair parts relationship that David indicated. But no, we expect to see improvement as we move in -- as we're moving into this quarter as well as the next quarter. So that's what made this quarter really a difficult quarter to explain because of that hard comp last year of the anomaly. I mean if you -- and obviously our goal is to get the entire corporation to a 25% margin rather than this 20% margin we saw this particular quarter.

So an answer is it's going to be a build, but you'll also see enough tip this particular quarter.

And for the back half of the year, I mean Q4, do you see kind of a continual improvement that's more stair step or is this going to be kind of flatlining?

No. I -- we're -- as we build these proprietary products in the sales for proprietary products and get into this product mix, you will continue to see margins improve. It -- I mean the freight alone on our proprietary products from China is a big number. And just getting those operational efficiencies, which we're doing, will continue to show those improvements. And then our purchasing, with our everyday manufacturers of our branded product, will continue to improve.

Have you seen kind of a continuation just in the first month of visibility that we have here in terms of that hesitancy in the trends? I mean what are you seeing, I guess so far in the third quarter?

That's why we guided in terms of significantly better.

Significantly better?

Yeah. Absolutely. It's -- right now it feels very good and it's what this quarter, as we guided it, this will be a significantly better quarter than last. But right now, we're relatively blind in terms of the fourth quarter, recognizing that the fourth quarter will both on a retail side be coming off of the holiday season, and then typically from the core business it's the slower of all of our quarters. But at the same time, we feel that the initiatives are certainly capable of driving new buyers and dollars per buyer, that we'll hoping will power through that typical slowness.

Just taking a look at the revenue line, what are you guys thinking as far as kind of the growth rate for the back half of the year on a year-over-year basis? Should we expect it to kind of be at these levels or are you kind of expecting it to rebound a little bit?

Oh yeah. It's going to be -- the earnings improvement is going to be by the initiatives as far as gross profit and expenses, but also from top-line -- top-line growth. And we expect to see our buyers grow at a faster rate, and our dollars per. One of the things that we're hoping that, for an example, AT&T and Cingular has -- has announced that their infrastructures spend -- that they've got 50% of their builds to take place by the end of the year.

Now we're participating in that through the contractors and directly with AT&T in some markets and again this product is for what prints in the network infrastructure, the antennas, cable, connectors, filter products, and the standard site materials. Really haven't baked those numbers into our forecast because, again, this infrastructure business has been really herky jerky. So if they come through on what they say, it would really accelerate growth as we look into that third and fourth quarter.

Okay. Just taking a quick look at the obsolescence impact. I mean you guys had talked about it I guess impacting the quarter a little bit more. Was it a particular product, product segment, or was this kind of across-the-board?

No, Jonathan. It was one particular issue and it was really related to the packaging that we do. Those packaging materials that we just got a little bit long on.

Okay.

It wasn't -- so we still -- we continue to feel good about our product forecasting. So it really wasn't worry per se but it was the -- what we use to package. And a lot of that was driven by the transition from orange to blue. And so we kind of got caught with too much orange if you know what I mean.

Yeah. Yeah. Just in terms of the inventories, those appear to be notably higher relative to I guess the change in that model. Can you give -- can you just talk a little bit about what's happening there or if there's any concerns?

Sure. There were two sort of main areas where the inventory grew. One was accessories, so as we're building inventories for the holiday season, that did increase. And then when you look at broadband as well. We mentioned that sales of broadband products were a little bit slower in the second quarter and we realized that we had some impact of not having the product. So we've gone a little bit heavier on -- on broadband inventory as well. We've done a little bit of adjustments in the test and maintenance area -- the non-parts test and maintenance areas as well, but really broadband and accessories are the main growth driver.

Yeah. Another comment on the whole inventory is that in this particular market tightness we're seeing, our customers are virtually running with no inventory whatsoever. And our whole model is delivering what you need when you need it. So it's putting extreme pressure on the availability. If you don't have it, particular market will lose the business. And so that's the other side of enhancing some of these inventory levels to make sure that we have the product when the customer calls -- calls for it. But again I can assure you that the spend as well as the scrutiny as far obsolescence is more intense than it's ever -- ever been.

Okay. Just trying to understand a little bit more about the source of the customer hesitancy and why you have confidence that that -- that that is going to improve over time. I mean just -- I mean what are you hearing, or what are your customers telling you that gives you that confidence that it's going to continue to improve?

Well we -- our sales force talks to 3,000 customers, 4,000 customers a day. And we're always polling them in terms of what they're outlook is. And this VAR symposium that David referred to last week -- again we polled -- these were the resellers, and we polled them in terms of what they were doing and they're all seeing a strengthening of their customers in what they're doing.

But it's still, as I say, is that the dollars -- we measure that also by the dollars per customer, which picked up just a little bit last quarter and not to the level that -- that we would expect it to be. So again, we're cautious in terms of that, but it feels and looks like it's improving, rather than contracting. Obviously in the retail market, with what's going on with the credit crunch and housing and all that is just people are -- the acquisition is been good at the top-line as evidenced by the iPhone, but we're seeing that the sell-through has slowed a bit but is starting to -- especially as we move into holiday, expect it to really rebound.

Okay. Just a little bit of a broader question. Can you elaborate a bit more on the potential of kind of the videos security system market and maybe the overall security market as it regard -- as it relates to TESSCO?

We are very excited about the wireless video surveillance. And we have products that -- that range from the wireless point to the multipoint to broadband, wireless video over the power line building. This is going to be very strong, both from the municipality point of view to the -- to also to the self-maintained user.

With everything from public safety to Columbine situations, Virginia Tech, there's tremendous new demand for this technology and this -- the wireless technology is really moving towards plug and play. Don't need to run wires, you can stick a camera on the side of a building, it'll pipe it back with a point-to-point system, so we see that as a very large emerging market for us.

Great. Great. I'll hop back into the queue then.

Okay. Great. Thank you.

Thanks, Jonathan.

(OPERATOR INSTRUCTIONS)

Our next question will come from the line of Randy Saluck with Mortar Rock Capital. Please proceed.

Good morning. I guess I have a couple of questions, but the first question at the outset is while I think it's great that the company has been buying back stock, obviously you see the future is very bright with great opportunities and you want to make a great investment on behalf of the company. Why is -- why is the CEO selling stock here? It seems like we're in the early innings of something pretty interesting. So the company's on one hand is buying back stock, keeping essentially the stock up, but the CEO is selling into it. I would think you'd want to be buying your own stock along with the company, or at least waiting until the opportunity is upon us. So I don't really understand that.

Right. Great question. Is it what -- what you're referring to is the 10b-1 plan?

10b-5 plan.

10b-5 plan.

I understand what they are --

Oh I understand -- I'm just for everybody on the call, I'm just --

Sure.

-- we announced the -- I had a plan in place last year, this is a replacement of that plan and it's a part of an overall estate planning process. And I totally agree with you is it has price points in it and I should be a buyer rather than a seller obviously and it -- especially in this particular market, but it's a part of an entire estate plan that my estate planners have put together to make sure I've got my portfolio in line. So I agree that it looks -- doesn't look good. And it doesn't feel good, but it, again it's a part of a macro plan that I have in place.

Well I always thought that when management teams are running a company you have the best view of what's going on in terms of the fundamentals, the opportunity. And while I understand that you don't trade on information that you shouldn't, to be selling sends very mixed signals.

I would think that -- I understand the need for diversity, but yet you're selling a meaningful portion of your shares and I would just urge you not to continue that if you think that the future's so bright. Because I as a shareholder am going to have a tough time being convinced that the stock is cheap if you're going to continue to sell your stock in the future. I just wanted you to understand that.

I appreciate --

And I am a shareholder.

Oh I understand. And it's also a very small percentage of my holdings over an extended period of time. It's a -- it's an 18 -- and again the plan has not been initiated because of again the provisions -- yet we have to have this call and we have to have the gift get out before I can do anything. Because it's an 18-month plan and again it's in the macro level and unfortunately --

So the price level's set and some of them I would presume are higher than what stock it now.

Absolutely.

Okay. So it's a tiered plan. Okay. That didn't come across in the press release.

Absolutely.

Secondly, the AT&T relationship -- maybe you can elaborate on -- I don't fully understand why the future in the near term is a little bit blurry but much clearer in the sort of outer quarters and outer years. So maybe you can describe in a little bit more detail, if that's okay, what you think is the great opportunity with AT&T and expanding the relationship and how you know that margins aren't going to be hurt in the future? They'll be able to be improved, rather -- out in the future.

Great -- a great question. There's two pieces of business that we participate. There's two primary suppliers and we participate in the portion of the business that is really phone driven. And there's two sides. There's the replenishment side for the existing phones that are in the market and then the accessories for the new launches. And in this past quarter, they pulled back some of the new launches as they continued to profit from the iPhone.

And then as we look forward, we can project the -- the sell-through of existing products, but it'd be -- it is very dependent today with their product road map, in terms of what phones and what phones we're going to be able to participate in. And then that has an affect on the ability to bring in the proprietary products.

Last quarter we were very dominated by the generic product, the Bluetooth product from OEMs, which carries the much lower margins. So the goal for us is to continue to innovate with the customer to present more products that they're excited about, that we can bring in. We just finished a major review where we got extremely good marks on all of our supply chain -- our effectiveness. So it's a -- it's a relatively new relationship for us, so we're continuing to build that relationship.

Okay. All right. Well, like I said before, I hope that you aren't too aggressive on that share sale plan because it's going to be awfully hard to convince guys like me to continue buying this stock.

Absolutely. I hear what you're saying and support what you're saying. Thank you.

And at this time there are no further questions inside the queue.

Bob and Dave, I have a couple, if you don't mind.

Sure, Ted.

Just kind of touching on some of the points that were brought up. First of all, someone must be buying your stock now. It's coming back in the marketplace, which is good. On your buyback, just explain to me again -- I think, Dave, you went over it -- how much was still left and do you (technical difficulty) this out of your cash flow or do you borrow and will you increase the authorization if you need to?

Right now we've got 255,000 shares available. We use cash from operations and borrowings under our line of credit. So that line of credit is sort of fungible, it's up and down, as we need working capital and whatnot. So --but yeah, we will borrow --if we see opportunities that we think are appropriate, we will borrow on it. I think the board is open to increasing the authorization. I don't want to speak for them, but I think they're open to it to the extent that they see it's appropriate.

Right. And as I understand it, you bought 346,000?

That's just in the last -- just during last quarter.

Right. So if -- obviously if you kept that pace, you'd be through your authorizations. So would this be a topic that the board would address then on this next board meeting?

Yes.

Okay.

And again, Ted, we have interim meetings so again we're -- we don't' have to wait for our next board cycle, which is 90 days from now.

Right. And Bob, secondly you've touched on it a little bit, but just talk a little bit about the over all phone and accessory environment. Number one, how do you benefit or not benefit from the iPhone and what did that do to the -- really the retail market in terms of other phone introductions and how confident are you on some of the new introductions now moving ahead? Do you know a schedule that's -- that your customers have or where are we on some of these new phone introductions?

Great and a big question. Is -- first of all, is it -- we believe that the iPhone is one of the industry's inflection points and it really shows the convergence that we're talking about as far as video and data and voice. And in the -- it's going to do two things as we move forward. One, it's going to put pressure on the carrier to expand the bandwidth because in some areas, you know on the iPhone you hit YouTube and you might wait two days to get it to download, which is going to put pressure on building out the system, which will help our infrastructure business.

It also is creating new non-Apple phones that are going to be essentially look-alikes that are going to continue to be -- expand the market. I think we all have seen the press releases. I mean, the Apple or the iPhone since introduction has sold over a million phones, which is huge when you think about that's a million access points that have been added.

In terms of what the iPhone per se is going to do for us, it is going to help business as the base of iPhones are expanded and it's going to help -- we have a full line of iPhone accessories, but because of the way AT&T and Apple set up the exclusivity, the independent channel does not have this phone, and therefore they're not selling accessories on the initial sale of the phone.

Also that we did not enjoy any of that business with AT&T and Apple because Apple brought in their incumbent accessory suppliers on those accessories. So we didn't enjoy any of that business on the front end, but we're starting to see, as the phones get older, if you will, by a couple of months, people are going back into the various stores that we sell to and buy the Apple -- Apple product.

It's going to help the generic -- the headset business, the data memory category, and it's also as we move in -- I believe it's going to help in the whole Christmas season. You've got a million -- million phones out there who they're family or whatever are going to want to give them a Christmas present and -- or holiday present -- and an iPhone accessory -- one of ours -- would be a great thing to give.

And Bob did the iPhone delay people buying other phones and accessories and delay product launches?

We believe so.

So are you starting to see that reaccelerate?

Yeah. And that's part of the hesitancy we have in these next two quarters is that until it's launched -- until the various phones are launched, we don't really have that visibility yet and so they're still in the planning stage in terms of what phones are going to be launched when.

And if there is an economic issue on buying phones, what's typically your experience in any kind of downturn or slowdown? It would seem to me that that would only be a temporary impact on phone accessories and phone buying business.

That it's -- it's a good -- we talk on one side in terms of the tightness of the market, but the people that stepped up and put down big bucks for the iPhone was a million people. So the high-end market is still strong.

Right.

That's part of our innovation is we want to make sure that we've got the high end accessories to capture that market. Because you're right on the -- on the everyday phone there's tremendous price pressure on making sure the accessories are low cost.

Right. Let me ask one more question and then we'll see if there's any others in the queue. But getting back to the infrastructure market, number one, AT&T and Cingular are now talking a little more positively about starting to increase spending. And I wondered what impact that would have not only the traditional base station business -- an impact on you, but you mentioned the broadband wireless business is a little slower than you had thought. I would think that would move ahead regardless of where we are in the -- on the base station infrastructure spin cycle. What do you see from --

You mean on the WiMax, Wi-Fi systems?

Right. Right.

Okay. There's -- again it's a big question is the -- as we mentioned on the everyday -- the cellular system, we see these people picking their head up in terms of building out their systems.

On the WiMax and Wi-Fi, the focus has been on how the T1 carriers such as Sprint are going to build out. And this is all going to be based on what they call the 802.16e standard, which is under development and testing. And Lucent and Alcatel, they had their first mobile hand-off on a commercial WiMax system last week in the Dominican Republic.

So what this says is that you're really probably not going to see any scale-out -- build-out from the WiMax -- the Tier 1 carriers -- until later -- later next year. But while the T1 -- Tier 1 networks represent the big purchase dollars, there's many opportunities that we're pursuing for the WiMax solution. Namely the ISPs, the wireless ISPs, and the lower-tiered data carriers, and then the enterprise market.

And the enterprise market is where WiMax is going to be used to connect additional buildings or branches to the central network, college campuses. This is where that wireless video surveillance comes in because the WiMax is a much more robust system than Wi-Fi. And we've got -- we continue to develop new products.

TeraWave, the acquisition that we made last year, has the proprietary products and it's more than doubled in the past -- past year. We just added the Symbol Motorola product line, which gives us the ability to sell -- these are Wi-Fi radios -- into the reseller. We have a mesh trial program with Cisco right now. And then we continue to add the TeraWave products, which are more the support products -- everything from cable to connectors. So this is a very robust opportunity that we are pursuing and developing product on a -- on an aggressive basis.

Great. Well thanks. I have some other questions, but I think that we pretty much captured the outlook here, so thanks again.

Thank you. We also have a follow-up from the line of Jonathan Ho with William Blair. Please proceed.

Jonathan. Are you there?

Can you hear me?

Now we can.

Okay. Just one last question. Can you talk a little bit about your initiatives with the sales force to kind of reach new customers and what you guys are planning to do there I guess to improve customer growth?

Absolutely. And that -- as we announced last quarter, we made a major change in the sales leadership. And we have focused teams on -- for each of our five primary markets. And the major initiative is -- is one to ratchet up the frequency of customer interchange, which we have done. And then to ramp up the account manager staff that we are doing as we speak. And then we've created a development-training program to make them productive very quickly.

We're also creating a market development team that is primarily responsible for new customer acquisition. We are getting -- as I mentioned -- we are getting tremendous amount of leads and opportunities off the website and off our various tools, and our emailing, and print mailing campaign. And it's -- we're at the point today where we have more unassigned accounts and more leads than our sales force is capable of processing. So this is a very important initiative for us (technical difficulty) continue to build on this --the growth of our -- of our sales team that is market and region centric that we are going after each particular market in each particular region. So it's a very -- very important initiative for us and we're accelerating that.

Okay. Thanks you guys.

And there are no further questions inside the queue. I would like to turn it over to management for closing remarks.

Right. Thank you. Very good questions. I appreciate the questions and I trust that we answered them to your satisfaction. And as I mentioned before is that we remain intensely focused on improving our earnings through the gross profit enhancement that we've been discussing and expense reduction. And concentrating on growing the core customers and their monthly purchases, but at the same time is continuing to build stronger relationships with our major customers as we help them with their success.

So it's -- we are the leader. We have the great platform and we have great things ahead of us. And again, we are totally committed to the success of building value for you, our shareowners. So thank you and look forward to talking to you over the quarter or next quarter.

Ladies and gentlemen, at this time your conference call has ended. You may all disconnect and enjoy the rest of your day.