PCTEL, Inc.
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Ladies and gentlemen, welcome to the PCTEL fourth quarter 2007 conference call. (Operator Instructions) I’ll now turn the call over to Jack Seller, Director of Marketing for PCTEL. Please go ahead, Mr. Seller.

[Jack Seller:]

Thank you for joining us today, February 19, 2008, for the PCTEL financial results conference call for the fourth quarter 2007. On today's call will be Marty Singer, Chairman and CEO and John Schoen, Chief Financial Officer. I will now read the 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, and expectations regarding the future growth of our wireless RF and licensing 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 IP. Additional discussion of these and other factors affecting the company’s business and prospects is contained in our periodic SEC filings. These statements are made only as of today and we disclaim any obligation to update information to reflect subsequent events. I would now like to turn the conference call over to Marty Singer for opening remarks.

[Martin H. Singer:]

Thank you, Jack. On behalf of PCTEL, welcome to our earnings release conference call for the fourth quarter. I want to thank you all for attending and for your interest in our company’s progress. We are pleased to be hosting this evening’s call from our new corporate headquarters at our Bloomingdale facility in Illinois, which houses our Antenna Products Group. One result of the sale of MSG is that we have been able to consolidate our facilities in the Chicagoland area. As we have done in the past, John Schoen will review our financial performance in some detail and will review our balance sheet and other issues. I will cover the general state of the business, discuss highlights of the past quarter, and then discuss some areas of focus for 2008. We will then open the call to your questions. The company will provide a transcript of our prepared comments on our web site fifteen minutes after the call. With that as background, I’d now like to turn the call over to John Schoen.

[John Schoen:]

Thank you Marty, and good afternoon, or evening, to everyone. Our investors will note that the company presents non-GAAP financial information in its earnings releases. The company believes that presentation of 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, and non cash based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the Company’s core results and facilitates comparisons across reporting periods. For more information on our non-GAAP financial results and reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website at www.pctel.com under “Investor Relations”. My discussion of results will be based on our non-GAAP financial results. We are pleased to note that the company closed the sale of its Mobility Solutions software group to Smith Micro on January 4, 2008. The company’s financial statements have been revised to reflect MSG as a discontinued operation. My discussion of financial results will address continuing operations. In order to facilitate comparisons with prior quarters, we have posted to our web site in a PowerPoint presentation the unaudited quarterly financial statements in the new format for 2006 and 2007 including the reconciliation of GAAP to non-GAAP financial results. So with that said, let me speak to revenue. Fourth quarter 2007 revenue from continuing operations was $19.1 million compared to $18.1 million in the fourth quarter of 2006, an increase of 6 percent. In addition, we would like to point out that Q4 2006 included $1.2 million of UMTS antenna revenue, a product line that the company exited in the first half of 2007. As you will see later, the shutting down of UMTS operations impacted gross margin% and operating costs as well. Let’s turn to gross profit margin. Gross margin from continuing operations for the fourth quarter was 49% versus 46% in the same period last year. The company saw a larger than normal percentage of its total revenue comprised of higher margin scanning receiver products. Additionally, the gross margin percent was favorably impacted by the absence of lower margin UMTS antenna products in Q4 2007. Now let’s turn to operating expenses. Fourth quarter R&D and SG&A from continuing operations were $6.8 million, down $650,000 from the same quarter last year. The primary driver of the decrease was the exiting in 2007 of UMTS antenna operations located in Ireland, resulting in lower R&D expense. The Conexant royalty was unchanged from last year. With regards to operating income, operating income from continuing operations in the fourth quarter was $2.9 million, or 15% of revenue, compared to $1.2 million, or 7% of revenue in the same period last year. The results reflect improved gross profit performance and lower operating costs. Let’s turn to other income. Other income was $200,000 in the fourth quarter compared to $900,000 a year ago and $800,000 in the third quarter this year. Other income was negatively impacted by the mark to market adjustment of our investment in a Bank of America affiliated fund, the Columbia Strategic Cash Portfolio. This is an enhanced cash money market fund that was impacted by the recent turmoil in the credit markets. In the fourth quarter 2007, the company had approximately $43 million of its cash investments in this fund. Columbia announced on December 6, 2007 that they planned to liquidate the portfolio and return the cash to its investors. As a result, a loss on this investment of $550,000, or $0.02 per share, was recorded in the fourth quarter of 2007. Since the liquidation began, Columbia has returned $14 million in redemptions and our current balance as of today is $29 million, down from $43 million. So far in the first quarter of 2008 an additional loss of $ 110,000 has been incurred based on the fund’s mark to market valuation. We anticipate that interest earned on this investment will continue to offset any valuation losses but we cannot predict the ultimate outcome of the liquidation. Now let’s turn to income taxes. The exit from the UMTS antenna operations earlier in the year left the company in an operating loss position of approximately $1 million at the end of 2007. We expect to pay no US Federal income tax in 2007 and a small amount of state and foreign income taxes. The fourth quarter non-GAAP tax provision reflects this. The GAAP income tax benefit of $7.9 million in the fourth quarter reflects a non cash adjustment of tax reserves on deferred tax assets that will now be usable going forward due to the gain on sale of MSG in the first quarter of 2008. I realize this is a bit confusing as we will not report the gain on this sale until the first quarter of 2008 but as the gain is assured, we are required under GAAP accounting rules to adjust our tax reserves in the fourth quarter of 2007. Let’s recap earnings. Non-GAAP net income from continuing operations for the fourth quarter 2007 was $3.1 million, or $0.15 per diluted share, compared to non-GAAP net income of $2.7 million, or $0.13 per diluted share in the fourth quarter of 2006. To summarize the differences previously discussed, net income from operations was higher from improved gross profit and lower operating expenses, which were partially offset by lower interest income and the fourth quarter of 2006 containing a tax benefit to true up the year. Now let’s turn to the balance sheet. As of December 31, cash and short-term investments net of debt ended the quarter at $65.5 million, up $600,000 from the end of the third quarter. The company received $59.7 million of cash from the MSG sale in January 2008. The company expects to make a $20 million estimated tax payment related to the transaction in April 2008. Of the $125 million of cash available today, the company has approximately $2 million in operating bank accounts and $94 million is invested in AAA money market funds which are in turn invested 100% in short term U.S. Treasury securities, U.S. Federal Government Agency securities, or bank repurchase agreements collateralized by the same. Approximately $29 million is invested in the previously mentioned Columbia Strategic Cash Portfolio Fund, which is in the process of liquidation. Now I would like to discuss guidance for the first quarter and the year for continuing operations. First quarter revenue from continuing operations is expected to be between $17.8 and $18.2 million, which represents an 8% increase from the same period last year. Our annual 2008 revenue guidance remains unchanged at between $76 million and $82 million. Revenue going forward is expected to be almost exclusively from the company’s Broadband Technologies Group, which contains scanning receivers and antenna products. The company expects about $100,000 of modem licensing segment revenue for the entire year. Guidance for gross profit margin percent remains unchanged in a range of 44% to 46% for the first quarter 2008 and the year. As a reminder, the fourth quarter performance of 49% gross margin contained a favorable mix of scanning receiver and higher margin antenna products. The company previously issued annual 2008 guidance for cash based R&D and SG&A from continuing operations of between $30.5 million and $31.0 million. Now that the MSG transaction is closed, we have adjusted our anticipated operating expenses. We are revising the annual guidance for cash based operating expenses down $2.0 million to a range of $28.5 million to $29.0 million. The midpoint of the new guidance range would yield R&D of $9.5 million for the year, sales and marketing of $10.7 million and G&A of $8.6 million. The Conexant royalty is expected to be $200,000 per quarter. Guidance for other income is revised lower due to the recent US Federal Reserve Board interest rate cuts and the Columbia fund liquidation previously discussed. The company expects other income to be approximately $1.0 million to $1.1 million in the first quarter and $850,000 to $950,000 in each of the second, third and fourth quarters. The annual guidance for the non-GAAP effective income tax rate remains unchanged at a range of between 15% to 20%. In the fourth quarter, the company announced a new share buyback program authorizing the purchase of up to 3 million shares of the company stock from time to time in the open market. We did not repurchase any shares in Q4 2007 because of the pending sale of MSG to Smith Micro. The window for buying back shares opens three days after our earnings release. That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

[Martin H. Singer:]

Thanks, John, and again, welcome to all of you. The fourth quarter was an exciting one for us. The sale of MSG represented the consummation of a year-long analysis of our business, our opportunities, and the actions that we needed to take to achieve focus and scale. The divestiture punctuated our commitment to our RF product operations and our plan to grow those operations. With this transaction, we simplified our business, focused our operations, and funded our future. We are already seeing the benefits of these strategic actions as we focus on our core competencies and primary growth drivers. In January, Bob Suastegui, VP of Global Sales, held our annual sales meeting where we bring together our worldwide sales force along with our distributors and representatives. An immediate benefit to our team was the presentation and discussion of two product lines that had synergistic characteristics, both of which could be effectively sold by a single sales force. Our sales force is very well suited to represent all of our RF products and our management is comfortable with both propagation and optimization technologies and products. This focus was apparent last week at the GSMA Mobile World Congress in Barcelona. Our business will change in other ways that we expect will immediately improve our financial performance. As John pointed out earlier, the divestiture has permitted us to refine our OpEx estimates and to reduce more costs than we initially anticipated. As a result, we anticipate improved operating margins. With respect to our acquisition strategy, our focus is now targeted on product-rich, reasonably valued RF companies that will complement or expand existing product families and that are compatible with our existing distribution channels. The return to our core competencies has also simplified our strategy for organic growth and for our internal investment decisions. As an example, we currently support a $50 million antenna product line with only 15 engineers. Now, R&D dollars that were earmarked for MSG development can be re-directed toward high growth RF products. We believe an incremental investment in our scanning receiver and antenna product lines is one of the most cost effective investments that we can make. This is built into our operating cost projections for 2008 that John just reviewed. Within our development budget we are also supporting a full pipeline of new product introductions and new technologies in our scanner receiver product line. We believe that we can bring these products to market more quickly now that our development budget is more focused. Let me make a few comments about specific product and sales highlights from the fourth quarter as well as some first quarter events. We continue to do very well with our GPS antenna product line. As I mentioned at the Needham Growth Conference, several carriers and OEM infrastructure vendors have incorporated our GPS antennas into their base station configuration to provide timing for their networks. We view this as an important, long-term growth opportunity as the industry continues to drive towards spatial processing and internet-based backhaul. We now provide antennas for public safety, Tetra-based networks in Europe and we have seen some positive results from our investment in antenna distribution in Europe and the Middle East. We doubled our Canopy and WiMax antenna business from 2006 to 2007 and we see continued growth for the WiMax product line through 2012. While the recent announcement by Sprint and Clearwire on their plans has an uncertain outcome, we remind everyone that there are 1,050 WiMax license holders worldwide and there is a lot of opportunity with the other 1,048. There were other encouraging signs in our fourth quarter antenna business. We achieved our strongest quarter with Cisco, displaced important competitors at Motorola and BelAir Networks, and had strong sales to Comtech for our industry-leading GPS product line. As John mentioned earlier, our scanning receiver business continues to be a very positive story for us. We realized a record quarter and our new WiMax scanning receivers were a hit at the GSMA Mobile World Congress Exhibit and Conference in Barcelona. The 900 megahertz frequency band is strategically important to wireless operators in Europe and beyond because of its superior propagation profile. It will become crucial to the continued rollout of 3G services around the world. Our new Quad-Band scanning receiver satisfies requirements for European operators as well. Telefonica Movistar in Spain already selected the new Quad-Band and we are confident of making additional sales in this band. We also announced that we would release a TD-SCDMA scanning receiver of applications for applications within the China market. We expect new products to be released in the second quarter. With respect to WiMax, we have conducted early trials with an operator in December with a Beta version of our new WiMax scanning receiver, which by the way was a hit at the show in Barcelona, and the results were encouraging. This market will gain real traction in late 2008. As I’ve mentioned previously, acquisitions are an element of our organic growth strategy. Our preference is to acquire product lines that would accelerate our revenue growth in focused areas. One example would be an acquisition that would help us penetrate enterprise markets that utilize LMR antennas. Another example would be investments in companies that would give us a low-cost manufacturing platform in high-growth regions. These investments would be relatively small and we are taking an extremely disciplined approach in our evaluation of various alternatives. We are examining several opportunities at this time but we have nothing to report right now. We believe that the recent turmoil in the markets might result in favorably priced assets. Our balance sheet will serve us well during this period. In summary, we are extremely pleased with the divestiture of MSG and the corresponding focus and efficiencies that we have achieved as a result of this transaction. We have experienced strong growth in our GPS and WiMax product lines and consistently strong growth in our scanning receiver product line. Our 2008 plan calls for additional investment in both antenna and RFS development and we have achieved far greater focus with our sales team, including global or key accounts. We believe strongly in the company as evidenced by the Board approval of a 3 million share stock buyback program and the strong ownership position of the management team. We expect to initiate the stock buyback when our window opens this quarter. Management is excited about our prospects and remains as committed as ever to the continued growth of our company and to shareholder value. With that, we have set aside 30 minutes for Q&A.

[Operator:]

We will take our first question from Matthew Robison of Ferris, Baker Watts, Inc.

[Matthew Robison:]

Hey congrats on the good results.

[Martin H. Singer:]

Thanks Matt.

[Matthew Robison:]

You’ve sort of suggested that this great gross margin performance I guess is up like about 400 basis points sequentially was not necessarily repeatable this quarter and is there something about the scanning receiver performance that…what makes you think its not going to happen again that way?

[Martin H. Singer:]

Well, we are having another nice quarter with scanning receivers and you know we don’t do segment reporting so I do not split out the sales of scanning receivers separately from our antenna sales but I will tell you that December was unusually strong. We have some nice software so it said it was the sales over the scanning receivers and there was something else that I did mention in my remarks, we had very strong sales of specific antenna product lines for example, some elements of our GPS antenna product line that have a higher gross margin significantly higher gross margin than for example the land mobile radio antennas. So, it is really the confluence of those of two events not just the scanning receivers that led to the higher margin. You know, we are confident that margins will be in the range that John discussed and you know they are influenced by product mix and that can vary from quarter to quarter.

[Matthew Robison:]

Sir if you think the scanning receiver is going to keep up with the antenna business in LA?

[Martin H. Singer:]

In terms of growth rate? Yes.

[Matthew Robison:]

Okay. When you look at these various standards that are now being contemplated such as LTE and WiMax of course, you get another shot at your costumers every time somebody comes up with a new modulation scheme and new area interface or just respect comes and drives it.

[Martin H. Singer:]

Yes absolutely. Both factors influence opportunity towards scanning receivers. So, the China market is not just the China market with all its explosiveness, but it’s [TDSCDMA] and then on another hand you have the new spectrum opening up in Europe for more successful roll out of 3G services and technology disruption in general is very good for us, that is the beauty of the scanning receiver business, is there is really three things that drives us, expansion of existing networks and that is great for when you have an expanding CapEx market, technology disruption either spectrum or new standard, but as I have mentioned several times, Matt, at various conferences, one of the unique properties of the scanning receiver business is it does reasonably well during a recession. In other words, if CapEx spending falls at a carrier there are some poor network engineer that gets tasked with the job of having to extract more capacity, more [inaudible] from what’s already in the ground and you know, if you look at this business, the scanning receiver business it’s consistently grown, you know, 20 plus percent a year since we acquired it and we have gone through all types of cycles. So, I’m pretty confident in its continued growth.

[Matthew Robison:]

A question for John now, on the $125 million you said you had today access to, did that include the $20 million you are going to pay in early April or is that…?

[John Schoen:]

Yes, it did. So 105 is the net number at April, 125 minus 20.

[Matthew Robison:]

Okay.

[Martin H. Singer:]

Thanks Matt.

[Operator:]

And we will take our next question from Anton Wahlman of Thinkequity.

[Anton Wahlman:]

Hey Marty and John, I have three questions…one --

[Martin H. Singer:]

Are any of your questions Anton going to relate to the piece you put out earlier on pending taxes in the US?

[Anton Wahlman:]

You know what? Well, I have that in my mind, but in the mean time to warm up, first for you John, I was looking through your excellent press release here which has an exemplary amount of detail that every company ought to copy. There is one thing I couldn’t find probably because I am a little bit slow and too old and that is, actually I didn’t see from the discontinued operation, from the discontinue of actual revenue number, I kind of sort of bottom line contributions from….

[John Schoen:]

Sure. Anton, the revenue number for MSG in the quarter was $2.85 million. So, the old way would have been around $22 million with MSG.

[Anton Wahlman:]

Okay fantastic, that’s what I was looking for there. The second question really for you Marty is you mentioned WiMax growth through 2012; I seem to recall that a few quarters ago you made a statement in a previous earnings call saying something along the lines of, and I could be off, saying you expected to you know something along the lines of doubling your WiMax per year.

[Martin H. Singer:]

That is absolutely true. Anton, that is absolutely true. Now, for us of course when we refer to WiMax it’s a combination of the precursor to the standard canopy and canopy on WiMax was a combined group of antennas doubled from ’06 to ’07 and we have a very good chance of doubling again in ’07 to ’08. Again, I don’t give specific revenue by product line because that will be a segment reporting foul for the foreseeable future but we are still confident of that and, you know, when you think about our antenna business, we have three pretty nice growth areas, the WiMax antenna space along with its precursor canopy grows at a pretty good clip, the GPS antennas are much more than fleet management and has been really spurred on by the need for timing antennas in the new, you know, spatial related technologies, and the third area is our general data category of mesh WiFi and RFID. You have to remember though that roughly half of our antenna business is comprised of land mobile radio antennas and that as you know, is a slower growth type of business. Its steady, it’s profitable, we have a very nice share in it but you know, if you look at let’s say, some of the players in the net space like Motorola certainly are dominant share in general [out of mark] you know, they grow anywhere from 5% to 8% and so that balances are some of the high growth activities we have.

[Anton Wahlman:]

Okay. Yeah, I was just thinking there I mean…would WiMax, I mean you talked earlier in previous call also about India? By the way, I think I missed something but I don’t think you mentioned too much about India this time around but seeing as India seems to be at the moment the most powerful WiMax employment market, can you maybe elaborate a little bit on your initiatives there and how that could help perhaps your WiMax exposure profile both on the antennas as well as the scanners?

[Martin H. Singer:]

Sure, you know I’ll tell you that we actually did sell quite a few scanning receivers in India last year to the auspices of tens in Nemo and other resellers and what has been helpful there is that we may have lost Biju Nair too with our transaction to Smith Micro but his brother Madhu is our director sales in India and is doing a great job for us and we have established two distributors, [S-Techs] and Richardson Electronics. In addition, Jeff Miller and I have both visited there along with Denton Clutterbuck, our director sales for Europe of the Middle East and India and we spent a great deal of time with operators in the ministry and we are pitching and we are now in trials with our WiMax antennas with some the base station providers there and I think you know who those players are and we expect to see our WiMax antennas in some of the initiatives related to the supply of high band with inter-rural areas.

[Anton Wahlman:]

Okay. Good. Now, final question in terms of you mentioned some of the areas where you are looking to make acquisition, no complementary building sales et cetera. It makes no sense to me. Could you maybe discuss a little bit your philosophy for the kind of valuations that you would have to see? You had mentioned at some point a few quarters ago that you were looking at a certain multiple EBITDA and you know given where the market is gone over the last 3, 4 or 5 months, has there been any adjustments to which you see are, valuation expectations in that regard and at this draw a distinction between public companies and private companies? The reason I asked that is that if you know, for seeing is obviously a compression valuation of the public companies but private companies tend to have very lofty expectations relatively speaking and your EV now in the market is within striking distance of like $30 million and you could tell any, you know, little private companies that they are worth in a very little money like that then I mean the kind of reaction you get is like you have drawn a cartoon on Mohammed or something. I mean they take that as an insult. So, you know how do you kind of cross the line? You know dealing with the private companies that might have higher valuation expectations than sort of the market cap or the EV that you are enjoying in the market could be possibly?

[Martin H. Singer:]

Well the simple answer to that of how you do that is you say no. We are not under the gun to effect a transaction in a specific time period and we are not going to behave desperately or go out and violate our valuation principles just to meet somebody else’s expectations or for the sake of hoping on a new product line or company. So to restate our disciplined approach, we’ll look for valuations in the 7 to 8 times EBITDA of trailing performance provided that we can see a way that that valuation will mean something between 4 and 6 times EBITDA on a go-forward basis. You know in the antenna space, we wouldn’t expect to pay more than one times revenue in the current environment, and we will look first at opportunities where we can absorb product lines without absorbing companies. And I think that is really one of the key elements to our success or our planned success in this area. We are also not going to strike out into a totally new area. We are looking for product lines that fit into our distribution channel, fit into our manufacturing style, and fit into our current markets. You know other than that I could, you know, just continue to talk about various parameters, Anton, but I do appreciate the opportunity to respond to your question and give the sense that we are not going to be chasing properties.

[Anton Wahlman:]

Well thank you for your thoughtful, intelligent, helpful, and exemplary answer there. Mr. John, back to the tax issue, you mentioned 15% to 20% this year. I know you are not giving guidance longer term per se but should we expect that I mean, where you are with sort of profitability I mean, if we sort of extrapolate out here you’ll have obviously a very solid profitability consistently here in ‘08 and in ’09 let’s say that that’s going to be even an improvement on that which one would hope. Then I mean are we looking at the tax rate that is going to be higher or can you... [inaudible] at or below 20%?

[Jack Seller:]

Yeah, the 15% to 20% tax rates are non-GAAP is the same thing as the 35% rate on GAAP. Hey, you could have got about $7 million in non-GAAP adjustments that we make when you add all of the stock base and the company amortization of intangible and so 35% is pretty close to the statutory rate. We are particularly in the tax advantage arena.

[Anton Wahlman:]

Okay. So basically this is where it is going to be and that’s it?

[Jack Seller:]

Correct.

[Anton Wahlman:]

Okay.

[Jack Seller:]

This is the full burden tax rate without a lot of R&D credits, has permanent differences.

[Anton Wahlman:]

Thank you very much.

[Martin H. Singer:]

Thanks a lot Anton.

[Operator:]

And we will take our next question from Kenneth Muth from Robert Baird.

[Kenneth Muth:]

Hey guys, now we are done to kind of two revenue segments in the RF and the antennas. Could you just give us a little bit of insights of how you guys look at those two segments of growth for 2008? I mean what is going to be the kind of normalized growth rate now that we have a lot of things pro-forma’d out? How do we look at the scanners versus the antennas and if you have any sub-segments within the antennas that is fine.

[Jack Seller:]

Yeah, I am reluctant Ken and I am not trying to be evasive bit getting into, you know growth by area. You know, because we get measured on an increasingly diminishing basis here. I’ll tell you this as I have already said; half of our antenna product line is an [Elimar] that’s slower growth. The scanning receivers had delivered consistent 20% growth year over year for a while and in the antennas, you know, we have some opportunities for really high growth and the WiMax area and GPS area and the data area mesh WiFi and RFID is slightly lower than the GPS and WiMax.

[Kenneth Muth:]

Okay and then you are obviously feeling pretty good about how you’ve re-ordered the company because it looks like you are a kind of pro forma operating income now is going be just under 8% for the year and as the way things kind of go throughout the year. You are going to exit the year kind of 9% or 9.5% range, does that sound kind of what you are thinking?

[Martin H. Singer:]

Let John answer.

[John Schoen:]

Oh yeah, if you actually do the math backwards on the midpoint of the guidance, we are pretty confident that is going to be our annual average.

[Kenneth Muth:]

Okay.

[John Schoen:]

Now, obviously with much more skewing in the second half because we have seasonality in our revenue base.

[Martin H. Singer:]

Where were we in the fourth quarter?

[John Schoen:]

You were at 15 points in the fourth quarter but then in the first quarter we obviously dropped down to single digits because of the revenue drop compared to the fourth quarter.

[Kenneth Muth:]

Okay and then how do you guys come and look at the share repurchase? Is that something that you are going to be aggressive on this quarter or is it something you are going try to be more careful and just try to do throughout the year?

[Martin H. Singer:]

Well, we are certainly going to buy back shares if they are available at attractive prices starting when the window opens --

[Kenneth Muth:]

Window opens Friday?

[Martin H. Singer:]

-- and you know we have about 2 weeks or so. I don’t know if you remember this Ken or for the people on the conference call remember but in order to be more aggressive, the board actually voted to expand our trading window. You know before we were restricted to the middle month of each quarter and now we have extended it so that we can buy one weekend to the last month of the quarter and that should help us buy back some shares as we go forward with our plans.

[Kenneth Muth:]

And then on a scanner business could you just give us kind of a rough breakdown of geographic locations and that revenues, the vast majority in the United States…

[Martin H. Singer:]

No, I will tell you we did about 55% of the sales are outside of the United States. It’s difficult data for us to get because as you will recall most of our sales go through our OEMs. [inaudible], Nemo, and so on, and so we only can obtain the data on end user via their good graces. Luis Rugeles who heads up that area recently did a pretty thorough review with them and as well as some of our other OEMs such as ASCOM and Swiss Call and Andrew, you know the old Grayson Wireless that’s now part of part of Comsco and we are pretty confident that roughly 55% are outside US.

[Kenneth Muth:]

Okay. Is it fair to assume that the licensing and the way you guys have coached that most likely end by the end of ’08 or that kind of triple through?

[Jack Seller:]

Yeah, you probably see what I am saying about 50K in Q1 and then it just drops off to like 10, 20K a quarter and it drops off to nothing in ’09.

[Kenneth Muth:]

Okay. Thank you very much.

[Martin H. Singer:]

Thanks a lot, Ken.

[Operator:]

And we will take our next question from Doug Whitman of Whitman Capital.

[Doug Whitman:]

Hey John if you could touch on in the accounts receivables category, how much is your account receivables roughly is result of the [self-work] division that you sold off?

[John Schoen:]

There is about $2 million of the accounts receivable at 12/31 is the accounts receivable we were obtaining as part of the deal.

[Doug Whitman:]

Okay. And could you cover also a little bit more detail both on kind of I’m not sure if I quite follow what the likelihood is receiving the additional outstanding money from Columbia. And then also, the remaining cash that you have, how is that currently managed and how is it deployed?

[John Schoen:]

Sure. Well, let’s start with Columbia. The kind of take it down into what’s in the underlying assets of our $29 million? There’s $2 million in cash awaiting distribution which is to come out next week. There is $7 million in fairly liquid corporate security and there’s $20 million in assets backed security. With the exception of about 600 grand of in that $20 million of asset backed, and those are already marked down 50%, that’s the loss we already reported. The assets in the portfolio are performing and the fund’s current yield is 4.5%. And the mark down on those specific asset backed items that I just talked about account for virtually all that asset value lost to date. As far as the liquidation goes, I mean we’re not in a position to predict reduction but, you know, as I talked about before, when you had to get at the $14 million you already got, the $2 million that’s getting ready to pull the trigger on, I mean, I’ve already got 38% of the money back in what 60 days? So the issue that we’ve got as we said, is that so far from what we could see is that even if the rest of that $600,000 is non-performing so it’s bad, I mean I’m earning $350,000 to $400,000 of interest a quarter. So that’s kind of what we know about Columbia. I mean if Columbia [inaudible] their priority in the liquidation is to preserve capital and so far their actions to date have been consistent with that priority. With regards to how we are managing the rest, you know, given that the….I’ve got a longer term horizon here in the Columbia site. The rest we’re putting all in very short term, AAA money market funds, and they’re all going to be, as I’ve said, they’re all going to be in funds that are restricted to either investing in US Treasury short terms stuff, US government agencies, or repose as, you know backed by [inaudible] because if I can’t hold the money that’s available to me today, I would have probably put about $30 million to $40 million of it in a forward looking ladder anyway that wouldn’t have been available on demand money anyway. So instead of me deploying it in the ladder of my own, for the longer term piece of the ladder, I’ll use my Columbia pieces for that portion.

[Doug Whitman:]

Okay. So, the $600,000 to date that’s also going back to Columbia that’s been written down but there’s basically no likelihood of it?

[John Schoen:]

Let’s look at it differently. Of the original $43 million, there was about $1.2 million in what’s now a non-performing paper and it’s already been written down to $600K. So, of the $29 that’s left, there’s the $600 that’s remaining, and you know, it will either work its way out or the [NAV] will continue to drop. The whole rest of the portfolio was performance which is generating a 4.5% yield.

[Doug Whitman:]

And the top question, why was two-thirds of the company’s cash at that time with Columbia in one fund?

[John Schoen:]

Well, I think it’s what we were after is the underlying representation of the fund was that it wasn’t the hand cash fund that we were running about an extra 500 to 600 basis points overtime with that fund, and to date they had demonstrated on demand withdraw performance over the last couple of years that we’ve been in it.

[Doug Whitman:]

We’re actually in it since 2003.

[John Schoen:]

But to answer your question, we are now spreading even the treasury in the US government in between various funds.

[Doug Whitman:]

Okay. Marty, could you touch a little bit, you’ve talked about product mix. Can you talk a little bit also in gross margin and product mix? Is there more stuff that you can do in gross margin? Are you pretty much hit the threshold of efficiencies looking for over the next year to?

[Martin H. Singer:]

No. I believe there is more that we can do. First, anything that we can do to drive sales of our GPS product line and our scanning receiver product line, and additional stuff for sales with scanning receivers can move the needle. Second, volume helps quite a bit as it helps us absorb the fixed cost of our factory. The third thing though is that, I believe that we are making progress on a monthly basis on underlying efficiencies in our supply chain. If you go to our catalog on our website, it’s really remarkable. We’ve gone from basically 8,000 asset SKUs to about 2,000 asset SKUs. And the more money we can generate per SKU, the higher our gross margin would be. So, we are actively eliminating non-performing or marginal SKUs and focusing on those products units that can deliver the greatest value for us and to drive efficiency throughout the company from order handling to our purchasing of the parts and so on. By the way, Doug, I just want to comment to the operator. We are giving quite a bit of echo feedback on this line. We’ve been having trouble with the lines throughout the call. Did I answer your question, Doug?

[Doug Whitman:]

Yes. No, it does. And one other quick question would also be on the R&D spending. Is some of that also going to generate improved gross margins or primarily for new products?

[Martin H. Singer:]

Really it has opportunity to fall so we are taking some of our antenna product from all lines right now. Putting them through or redesign for enhanced manufacturability. And we have 3 dedicated ads at this time for redesign.

[Doug Whitman:]

Last comment would I found a company that sells at 2 to 3 times enterprise value, EBIT and basically 0.5 market capital to revenue. So we certainly would like to see PCTEL’s management and their board institutes a more aggressive buy back because that seems like a great opportunity.

[Martin H. Singer:]

Thank you Doug for the confidence.

[Operator:]

We will take our next question from Brian Horey of Aurelian Management.

[Brian Horey:]

Hi. Thanks for taking the question. With respect to the acquisition process, are you inclined to look for kind of one acquisition of size or you think it more likely to have a series of smaller, you know, product focus acquisition?

[Martin H. Singer:]

Well, you know, that’s a very good question and it’s one that is difficult to answer precisely but it might be useful and could you just repeat your first name again?

[Brian Horey:]

Brian.

[Martin H. Singer:]

Brian, it might be useful to think of where we’ve been successful and where we haven’t been successful in acquisition. You know, as you know, we acquired cyber pixie for $1.5 million. We sold that for really total consideration of….you know when you include the accounts receivables of $65 million. We acquired Max Red for $20 million, each million in revenue. We acquired product lines from Andrew for about $10 million, $11 million or $12 million of revenue, and we acquired DTI for $10 million with $1 million turn out. And at that time they were generating $8.3 million and we’ve been able to grow organically. So, when I looked at our success, it is definitely been on the sub-20 and the most successful acquisitions have been smaller than that and I think that in, you know, looking at our one big area, the acquisition of Sigma, which is, you know, one of the bigger mistakes I’ve made in my career. You know, I walked away with a few principles, and a few ideas about what we should be doing. One, I think smaller is better than larger. I think, two, I’ve got to operate within the available bandwidth of my current management team to absorb companies. And three, you know, I wanted the risk averse in terms of putting our money to work. So that’s a long way of suggesting that we’re looking for smaller acquisitions that help us compliment our existing product line and distribution channels.

[Brian Horey:]

Okay, that is a good answer. Thank you. And then, I had a follow up which is really, I guess to…the first is EarthLink is kind of announced a pull back from WiFi and I think there is, you know, kind of a broader reexamination of that kind of public WiFi as a business model I guess. And I am wondering, you know, what effect you guys see that having on the business.

[Martin H. Singer:]

WiFi for antennas has definitely slowed and when I look at the data area, mesh and RFID are probably going faster than WiFi area and certainly the reason new site is one factor. Although, I would point out that’s never been a major focus for us. Most of our WiFi antennas are highly specialized antennas that provide directional or coverage support for the enterprise. So, you know, we sell high performance antennas that extend the range and improve specific targeted coverage. We don’t really focus on the rubber ducks that might be associated with an access point in a Starbuck’s hot spot for example. But the greater threat to WiFi is not the decision of EarthLink or Boingo or whatever to pull back from hot spots. The greater threat is more and more of these antennas are simply designed into the access point by the vendor and so the role for independent vendors here is going to be marginalized their stroke forward. See, we move on and we’ll continue to design and developed and distribute the highly specialized WiFi antennas that are used by the enterprise or, you know, for example we discussed a few quarters ago that one of things we do is we’ll [up band] an antenna, a WiFi antenna for special use within the public safety arena. You know, 4.9 for homeland security. So, that will continue to be the type of lower volume but higher margin opportunities that we will go after with WiFi.

[Brian Horey:]

Okay.

[Martin H. Singer:]

Okay Brian?

[Brian Horey:]

Yes and then if I could just speak one more which is, I know you guys don’t have a lot of direct contact with your end customers in a lot of cases because you are going through somebody else from the distribution standpoint but, I’m sure you guys must, you know, trying to keep some tally of CapEx budgets and that kind of stuff, and I am just wondering what you are seeing, you know, from a broader high level view as you look into ’08 and monitor what people are talking about as far as that goes.

[Martin H. Singer:]

You know, we certainly don’t have any independent economic indicators other than the one you would see in Economist or in RCR and other telecommunications rag, and it’s something that we are going to pay attention to but as I point it out we’re somewhat insolated from recessionary pressures on the scanning business and half of our antenna business was associated with things like public safety and homeland security that aren’t quite as exposed. So, thanks Brian for your questions.

[Brian Horey:]

Okay, thank you.

[Operator:]

And we will take our next question from James Devlin of Henley & Company.

[James Devlin:]

Hi good evening guys and congratulations on a good quarter and a tremendous asset sell.

[Martin H. Singer:]

Thank you.

[James Devlin:]

Just on the stock buyback, it’s been a while. What are the restrictions like what 10% of the daily volume unless you can negotiate blocks or something like that?

[Martin H. Singer:]

John what is your answer?

[James Devlin:]

…..$25,000 shares today? Is there a limit or then you will have one block a week?

[John Schoen:]

Okay, and we now, I guess, sub the cash sometime during the quarter. I guess the cash is already in the bank. We got $120 million bucks.

[Martin H. Singer:]

$125 million as we said earlier in the call.

[James Devlin:]

And, I guess the stock closed around $620 so we’re at about a $30 million, $35 million dollar market cap?

[Martin H. Singer:]

Enterprise, that depends on what you think as being discounted or enterprise value to cash.

[James Devlin:]

Yes, enterprise value to cash. My suggestion…I don’t know if you guys have looked at this is obviously you know, you’ve announced you’re willing to buy back I guess about 14% of your shares outstanding. As a growth/value investment, have you guys looked at perhaps the opportunity of paying some kind of dividend? You guys have mentioned that you are holders as well.

[Martin H. Singer:]

Yes, the board has considered all these alternatives and we will continue to evaluate all of them. We have nothing to report on that, however, at this time.

[James Devlin:]

Okay, it looks you could pay about a 6% or 7% yield at that these prices and still grow the business pretty well.

[Martin H. Singer:]

Again, it’s something that the board takes under consideration on a regular basis and, you know, we will continue to look at ways to enhance shareholder value.

[James Devlin:]

All right guys, congratulations. Thanks again.

[Martin H. Singer:]

Thank you.

[Operator:]

And we’ll take a follow up question from Matthew Robison from Ferris, Baker.

[Matthew Robison:]

I want to understand better, maybe you’ve talked about John or talk about the pattern of sales and marketing spending really steep decline and of course the decline at fourth quarter and looks like probably a recovery of that spending area in the current quarter and going forward and then kind of the opposite effect in the G&A with that looking like it’s going down to get to the run rate you talked about, and also, I would like you to give me a little flavor of the direct versus distribution mix in your sales and it sounds like just that all your products go largely through distributors and if they can talk about how you recognize revenue under those channels and just to sell in or if you have a sell out model and if there is a variance between more traditional resellers versus the OEMs.

[John Schoen:]

Yes, I think I can talk about distribution channels and I could talk a little bit about the G&A expenses, and all that… John handles the rest. With respect to distribution, I think I have reported this in the past and certainly when we first acquired Max Red. We thought that about 70% of our sales went to distribution and about 30% were direct and we have been pleased that that shifted a bit and now we believe that about 50% of our sales are direct in antennas at about 50% go to distribution and that means that we are getting a little more traction with some of the OEMs such as Motorola, both the WiMax and land mobile radio and of course canopy and Alvarion and CISCO and others.

[Matthew Robison:]

OEM direct in that context?

[Martin H. Singer:]

Yes, OEM direct and you know, I have talked to you a few times about the benefit that we’ve had from Bob Suastegui joining us and he in turn has brought on a great guy for worldwide national accounts with a lot of experience in antennas and he is helping to really professionalize our efforts there and it’s clear that we’ve to go into new territories in a cost effective way. We have to use manufactures reps and we have to use distributors and in the U.S., we have some absolutely outstanding distributors and manufacturers reps. We always want to maintain those relations. But there is something to be said for expanding our direct sales to antennas and also the knowledge we get from having more direct interaction with those customers. So, the short answer to your question on antennas is about 50/50. We’re a little reluctant to give the exact split and direct versus OEM resale in the scanners but, you know, I think you could look at a 65-35 type of number and that would vary a little bit, Matt, depending on whether we’re selling scanning receivers or the clarified interference management system. Basically, 100% of the clarified products are direct. You know, we have to go to carriers. We have to show them how this product operates. We often have to collect data for them and, you know, it’s a very intense sale but you could use 65 to 35. Now, in terms of G&A, I’m really pleased with progress we have made here and some of the progress that John has made recently. You know, if you look in just in terms of straight staff numbers earlier this year, we had G&A associated with Sigma, you know, we have some management there. We, had G&A, two people and strategy in marketing at fairly high levels and we had an HR person overseeing all of our HR activity as well. You know now that we’ve eliminated one division, we really don’t need the same type of support at HR rather the two locations and HR support, and we’ve been able to eliminate…you know, when I look at it in total, it’s a pretty big number and with respect to other elements of G&A, you know, we had some pretty aggressive initiatives in upgrading our IT department and some of our systems. And we’ve been through, I think, what should be the heaviest period of expense there and one of the areas of decline in OpEx has been that. The last area of course, and this directly reflects John’s efforts, we continue to drive down the cost of being a publicly held company. Sarbanes-Oxley, outside audit fees, and so on. So, that’s where we’ve made progress and John, do you want to discuss R&D, he had some questions about R&D.

[John Schoen:]

More sales in marketing volatility there.

[Martin H. Singer:]

There was volatility in the third and fourth quarter and that, you know, our baseline did run about $2.5 million quarter in Q3. We actually finally did a final settlement with one of our larger UMTS customers that we exited so we had a $200K increase in cost for a receivable write off, and then totally unrelated we had better collections in Q4 which was in our case a benefit. I mean we’re still playing roughly, you know 2.5 million as a baseline as you go forward and for the first quarter, remember that we’ve got about a 300K bump to that 2.5 baseline that goes with our trade show. And that falls on the runway after that.

[Matthew Robison:]

Okay. Now you had low points that Doug touched on with the receivable going up. Is that a function of back timing of shipments in the quarter?

[Martin H. Singer:]

Absolutely. It’s directly related to RFS having a record quarter and a lot of the demand which we were able to respond to, shift in the second half of November and December, and so it’s not even due yet.

[Matthew Robison:]

What’s your late time on your products?

[Martin H. Singer:]

Well, we actually go through five weekly receivable, I mean five weekly sales forecast meetings that we keep our supply chain attuned to, so I know on the RFS side, they were able to ship every single dollar that the... they’re about two weeks ahead because we’re constantly monitoring the funnel. Hey Matt, did you have a question about our WiMax antenna presence at 3GSM?

[Matthew Robison:]

No, actually, my other question was more about the distributors and the way you recognize revenues. Sounds like its all sell in, right John?

[John Schoen:]

Yes. It’s selling and there are a couple of OEMs on the antenna side that have a hub, but we get…they did send us a report as to what they draw out of the hub.

[Matthew Robison:]

Okay, how do you manage how clean the channel is?

[John Schoen:]

Well, I think we can look in as the example our biggest distributors we can look in to what they’ve got in the inventory. Once again, they kind of run off of a [con bond] system and we’re actually tied to how much weeks of inventory they are supposed to have and so that’s how we actually do our bill schedules.

[Matthew Robison:]

How is that working these days?

[John Schoen:]

You have to remember they actually give us purchase orders, hard POs when they hit their [con bond] trigger. So for us we’re not seeing anything extraordinary in the channel.

[Matthew Robison:]

Okay and so, you know, as far as you are concerned a lot of the fear out there is misplaced in your case?

[John Schoen:]

We believe our channel is selling through.

[Matthew Robison:]

Thanks a lot. Sorry didn’t have a question for the WiMax.

[Martin H. Singer:]

I had an answer for you that I’ve been dying to give.

[Matthew Robison:]

Well, it’s your call, man. Let’s hear it.

[Martin H. Singer:]

You know, we’ve talked about the Sigma deal quite a bit and, you know, our disappointment with UMTS, but Jack Miller’s team put together a fantastic show and we really had two highlights for the show, one was the WiMax antenna and another was WiMax scanner but what was very interesting related to Sigma is that even though we were unable to have a successful UMTS product line with a remote and variable tilt, Jack’s team has incorporated that technology that we’ve got out of that acquisition into what I think is now a winning edge product and we have customers, competitors, distributors, really crawling all over our booth to see how we had developed this product and it was really pretty slick. We had a mount the bottom of this WiMax antenna mat that is replaceable and we can turn a WiMax antenna from a manually portable antenna to one that’s remote and electrical. It’s totally modular. I think it’s going to help people meet their CapEx barriers to getting into the game with a variable tilt antenna and it’s a terrific product.

[Matthew Robison:]

So they can buy the low cost piece when they’re not very heavily deployed and as they need to optimize things and deal with --

[Martin H. Singer:]

Exactly. We have to start to manage the cell configuration; they can just pop out a module at the bottom of the antenna and turn this thing from a manually controlled device into an electrically controlled device.

[Matthew Robison:]

Are you seeing that the usual suspects in terms of competition for --?

[Martin H. Singer:]

Absolutely. But in the WiMax arena, we think we have a little bit of an edge right now.

[Matthew Robison:]

How long till you….so you’re in the LTE state? Is there anything special about LTE that would result in a [inaudible] or is that more of in the UMTS?

[Martin H. Singer:]

It really looks like UMTS. It really looks like UMTS.

[Matthew Robison:]

Interesting. Thank you very much.

[Martin H. Singer:]

Okay thanks.

[Operator:]

And we will take our final question from Doug Whitman of Whitman Capital.

[Doug Whitman:]

Just a quick follow up. I just want to make sure John understood the…going back to Matt and Anton’s questions, the total revenue was $22 million if we included since we’re looking at this for accounts receivable days.

[John Schoen:]

Correct.

[Doug Whitman:]

It would have been $22 million, so you’re basically your accounts receivable days would have been flattish to very moderately down.

[John Schoen:]

That’s correct.

[Doug Whitman:]

Okay. And then last comment, I can’t help but resist again, you can buy $1.5 million and you’re going to a lot of share holders and we would like to see your board get a little more active in buying that stock and if I look to buy back you can do this quarter unless you get a block. It’s less than $2 million at over $100 million in values. So, we certainly hope your board will go back and when revisit it. Thank you. Thanks for the good quarter.

[Operator:]

And that concludes the question and answer session. I would now like to turn the call back over to our speakers for any additional or closing remarks.

[Martin H. Singer:]

Thank you all for participating in the call. This concludes our conference call. Please note that we are scheduled to present at the B. Riley Investor Conference in Las Vegas on April 2nd. We look forward to seeing many of you there. Thank you for joining us on this call and on the webcast today.