PCTEL Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar.28.13 | About: PCTEL, Inc. (PCTI)

PCTEL (NASDAQ:PCTI)

Q4 2012 Earnings Call

March 28, 2013 5:00 pm ET

Executives

John W. Schoen - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

Martin H. Singer - Chairman and Chief Executive Officer

Analysts

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Michael Crawford - B. Riley Caris, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the PCTEL Fourth Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I will now turn the call over to John Schoen, Chief Financial Officer.

John W. Schoen

Thank you for joining us today, March 28, 2013, for the PCTEL Financial Results Conference Call for the fourth quarter 2012. On today's call will be Marty Singer, Chairman and CEO; and I am John Schoen, Chief Financial Officer.

First, let me read the Safe Harbor statement before we begin. Today’s call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, new products and features, product development, acquisition efforts, expectations regarding the future growth of our wireless RF business, and our continued efforts to seek restitution from Scronce's advisors 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.

Martin H. Singer

Thank you, John, and good afternoon to all of you. For those of you who have not had the chance to beat our press release, I'd like to recap some of the non-GAAP highlights for the quarter.

We achieved revenue of $25.8 million, an increase of 29% over the fourth quarter of 2011. Gross profit margin was 39%. Operating margin was 6%. Net income was $1.2 million or $0.07 per diluted share. Cash and investments were $51.2 million. The company announced yesterday that its Board of Directors had accepted a settlement offer from Tim Scronce. The settlement relates to matters surrounding PCTEL's 2012 acquisition of certain TelWorx Entities assets of from Tim and Brenda Scronce. At the end of our remarks, I will add a brief comment on the settlement of that.

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

John W. Schoen

Thank you, Marty. Our investors will note that the company presents non-GAAP financial information in its earnings releases. The company believes that presentation of gross profit, operating profit and net income, excluding restructuring charges and noncash-based expense, including stock and stock option-based compensation, amortization and impairment of intangible assets and goodwill related to the company's acquisitions, gains or losses on the sale of product lines and related note receivable and noncash-based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the company's core results and facilitates comparisons across reporting periods.

For more information on our non-GAAP financial results and a reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website at pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results.

So let's turn to revenue. Fourth quarter 2012 revenue was $25.8 million, an increase of 29% over the same period last year. Approximately 21% of the growth was contributed by the acquisition of TelWorx in 2012 with the remaining 8% contributed by existing products. Existing antenna and site solution revenue was higher than the same period last year across both distribution and OEM channels. Scanning revenue was lower. This decline reflected interior spending delays, the spending delay in TD-LTE and a general downturn in cellular infrastructure spending.

For the year, revenue was $88.8 million, up 16% from 2011. Approximately 14% of the growth was contributed by the acquisition of TelWorx in 2012 and Envision Wireless in 2011, with the remaining 2% contributed by products and services we had for a full year in 2011. Existing antenna and site solution products experienced significant revenue growth year-over-year that was mostly offset with declines in scanner revenue for the same reasons discussed for the fourth quarter.

Now let's turn to gross profit margins. Non-GAAP gross profit margin in the fourth quarter was 39% as compared to 47% in the same period in 2011. For the year, gross profit was 41%, down 6% from 2011. The acquisition of Envision Wireless in October 2011 and TelWorx in July 2012 have established a new long-term product mix starting in 2012 that is designed to yield a total company gross profit margin in a range of 38% to 40%. The decline from previous years reflects scanning receiver sales comprising a smaller portion of total revenue.

So now let's turn our attention to operating expenses. They were $8.6 million in the quarter, an increase of $1.2 million from the same period last year. R&D expense was unchanged. Sales and marketing expenses were up $800,000, of which $600,000 was from TelWorx. G&A increased about $400,000, of which $200,000 was from the TelWorx acquisition. For the year, non-GAAP operating expenses were $30.9 million, up approximately $1 million over 2011. The company added $1.5 million in operating costs related to the TelWorx acquisition and reduced existing operating cost by $0.5 million for the year. R&D for the year was down $0.5 million, attributed to the completion of the MX scanner platform offsetting the new investment in PCTEL Secure. We invested approximately $1.9 million in PCTEL Secure R&D in 2012. Sales and marketing expense was up $1 million, all of which relates to the TelWorx acquisition. G&A expense was up $0.5 million, all of which relates to the TelWorx acquisition.

Now non-GAAP operating margin. That margin in the fourth quarter was 6% as compared to 10% in the same period last year. For the year, operating margin was 6%, down from 8% last year. The decline is attributed to lower gross profit margin driven by lower scanning revenue, which was partially offset by the leveraging of operating costs, they only grew at 3% while revenue grew 29%. Other income for the quarter was $16,000 -- I take that back, it was $15,000 and $100,000 for the year as the amounts are largely interest on our investments and they're all in very safe investments now. The number will continue to be small in the current interest rate environment.

Non-GAAP income tax rate in the quarter in the year was 18%, unchanged from 2011. Non-GAAP net income for the fourth quarter was $0.07 per share compared to $0.11 per share in the same period last year. Non-GAAP net income for the year was $0.27, down from $0.33 in '11. The decrease in both the quarter and the year are largely attributed to lower operating margin driven by lower scanner revenue.

Now let's turn to the balance sheet. Cash and investments ended the fourth quarter at approximately $51 million and change, about $3.1 million higher than the previous quarter. In the quarter, the company generated approximately $3.9 million of cash flow from operations with capital expenditures of approximately $745,000. The company paid a dividend of approximately $550,000 or $0.03 per share in the fourth quarter.

Now I'd like to discuss guidance for the full year and for the first quarter of 2013. For the year, we are reiterating annual revenue guidance of $100 million to $104 million and a gross profit margin range of 39% to 40%. Total non-GAAP operating costs are expected to be in a range of $31 million to $31.5 million before the impact of legal and accounting fees associated with the TelWorx investigation that we previously disclosed on March 13 on Form 8-Ka. Those expenses are expected to run an additional $1 million to $1.5 million, most of which will be incurred in the first 2 quarters of 2013. We anticipate first quarter revenue of '13 to be in the range of $24.5 million to $25 million, about 44% higher than the first quarter of 2012 at the midpoint of guidance, roughly half of which comes from the TelWorx acquisition and half from existing products, that's growth I was speaking to there. Revenue is expected to be up in the quarter for every product line. We anticipate gross profit margin to be about 39% or about the same as the quarter just ended. Operational costs are expected to be approximately $9.6 million. This includes about $1 million of legal and accounting expenses related to the TelWorx investigation. Other income is expected to be about $15,000, just like it was last quarter. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the first quarter is expected to be about 18 million shares.

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

Martin H. Singer

Good afternoon, again, and thank you for joining us for earnings conference call. Before I begin, let me provide some highlights from our recently released press release. We achieved $25.8 million in revenue during the fourth quarter. This is a 29% increase over the same period last year. We generated $0.07 in non-GAAP EPS for the quarter. For the year, as John already described, we reached $88.8 million in revenue and $0.27 in non-GAAP EPS.

Starting with the first quarter in 2013, we have begun managing the business in 2 different segments. The first is our connected solutions segment, which will contain all the antenna products, as well as the recently acquired products and services from TelWorx. The second is the RF Solutions segment, which contains all of our scanning receivers, network engineering design services and PCTEL Secure. We believe that reporting our results in this way will provide our investors with additional insight into our business operations and results. Starting with the next earnings release, we will be providing financial reporting on each segment. As a preview, though, we expect that within the $100 million to $104 million revenue guidance range. The connected solutions segment is expected to be about 75% to 80% of the total revenue with RF Solutions contributing 20% to 25%.

Finally, this earnings conference call is somewhat unusual in that we are reporting our results very late in the first quarter. As a result, we have reasonably good estimates of our first quarter revenue. We can report to shareholders that we are confident of achieving the $24.5 million to $25 million in revenue guidance that John already spoke to, and we are on track for generating $100 million to $104 million for the year.

With those highlights as background, I wanted to begin with a very meaningful product highlight that should address the 2013 and future potential of our scanning receiver product portfolio. We announced at the Mobile World Congress in Barcelona a new scanning receiver that we believe has a transformative impact on the industry and on our business model. The EX Flex delivers our traditional high-quality performance and flexibility. It is different, however, from anything that we have delivered in the past in that our customers will be able to invest in a single model that can be configured for any application, any time. The Flex supports all major cellular technologies at all frequencies. Customers will buy or rent a base model and then select the frequency such as 800, 900, 1800 and 2100, and the technology such as CMA, LTE, 3G, TD-LTE in the period of time that they want to utilize that configuration. A single module now supports all frequencies and, later this year, we will have servers support that will enable an iTunes-like approach to the delivery of feature sets. This investment, completely organic, was made over the past 2 years. Just as our 2-year investments in the MX, the EX Flex will enable us to maintain our leadership position in this industry.

In addition to meeting current customer needs, we are establishing a rental lease program that will appeal to engineering firms that are reluctant to make capital investments and prefer expanding and then charging for their operating expenses. Finally, this is a responsible approach to the growing problem with e-waste. This industry has tired of investment in high-end electronics that need to be discarded to support a new frequency or technology. The EX Flex addresses this issue by protecting a customer's investment in a base platform that can be enhanced and changed rather than discarded. Finally, we are pleased to report that soon after our Mobile World Congress announcement -- that we made, by the way, with a demonstration at the Ascom booths -- we received our first Ex Flex order.

Let me complete the report on RFS product highlights. I'm certain that all of you attended our LTE MIMO webinar, in which we discussed our 2-by-2 MIMO capability and MX platform. Just in case you missed the webinar, MIMO has become a central to cellular operators in understanding their actual data capacity and how to optimize data throughput on their network. We also introduced several other new features and products, including a new MX based CLARIFY product and SeeHawk virtualization software to support new feature sets and releases and new MX capabilities, including support for FDT LTE and Blind Scan for CDMA, EV-DO and MIMO.

Just as importantly, we are seeing results from our business development for both scanning receivers and our in-building network design services. We confirmed at the Mobile World Congress that TD-LTE devices will be widely available during the second half of this year. I personally visited the China pavilion at MWC and met with several of the local device manufacturers. They are gearing up for a third and fourth quarter launch and, during this period, there will be a much higher demand for TD-LTE scanning receivers. The TD-LTE market is central to our 2013 scanning receiver forecast.

In addition to our North American activities with AT&T, Verizon, Sprint and T-Mobile, we have had recent success with TESSCO and Ericsson and other infrastructure providers in South America, Europe and China. We're anticipating adding an important OEM test of measurement reseller and finally realizing the benefit of our investment in the Comarco product line a couple of years ago.

In parallel, we have seen strong growth from our engineering services group. You may recall that we acquired Envision Wireless about 18 months ago. The concept was that our sales and distribution channels could accelerate the growth of Envision's exceptional engineering design services. They were limited in that the same professionals providing the engineering services were also building the business. The combination has worked well and the revenue has increased nicely since the acquisition. We are looking at ways, organic, to expand this operation as it benefits both our antenna and scanning product businesses.

The most positive revenue news, however, comes from our antenna product operation. Our anticipated connected solutions segment annual revenue for 2013 at the midpoint of guidance is approximately $78 million. For reference, MAXRAD, our first antenna acquisition, generated $18.5 million in revenue the year before we acquired them. Our growth reflects the continued focus on interesting vertical markets and our ability to capture more business with our key OEM customers such as Cisco, Qualcomm, Ericsson, Emerson, Harris, Caterpillar, John Deere and many others. Some of these Business Development efforts take considerable time. For example, after 3 years, our highly customized military solution is shipping in volume to Harris.

We have also seen a positive impact, although considerably lower than anticipated, from our activities in North Carolina. Over the past 2 quarters, we have delivered solutions to railroads, kitted closures and COWs, or cellular on wheels, for emergency applications. This complements our existing Union Pacific wayside GPS antenna program and our enclosure business with AT&T, WiFi and CalAmp in which we delivered Smart Grid solutions.

We also realized our first major at tower shipment. We are currently delivering towers to Ericsson for private network solutions. Finally, we are pleased to report that our internally driven, high-rejection GPS business continues to thrive. In the fourth quarter, we delivered over 17,000 units. We are confident that we will deliver over $18.5 million in the connected solutions segment revenue in the first quarter, which is typically our seasonal low for the year. We have made progress operationally as well. Our facility in Tianjin has been upgraded significantly. We have more space, excellent working conditions and it has been an essential element in lowering our antenna cost of goods sold and in meeting pricing expectations for the GPS antenna and other antenna product lines. We now have 115 people in Tianjin and Beijing.

As part of the integration plan for Lexington, North Carolina, we have reconfigured our Bloomingdale facility to expand our kitting and distribution capacity and to utilize our existing cable assembly production area to accommodate the fiber product lines that we acquired. We have also expanded the enclosure production kitting area to handle new products from Lexington and the growth of our existing business.

Let me comment briefly on PCTEL Secure, PCTelWorx and our 2013 focus. Last year we spent approximately $1.9 million in PCTEL Secure. We are now working actively on a strategic alternative that would involve cooperation with a company that specializes in delivering government distribution systems. However this works out, investors can expect a radically lower investment in PCTEL Secure.

With respect to our recent challenges in North Carolina, we are limited in what we can say because of our recently signed settlement. Let me simply review the financials associated with the settlement. PCTEL acquired the TelWorx assets for $18 million, $2 million of which was held in escrow or contingent upon future performance. Tim and Brenda Scronce forfeited that $2 million. In addition, they paid $4.25 million to settle with PCTEL. And PCTEL now has the right to terminate the lease in Lexington, which currently costs the company $200,000 per year. We hope to realize a $400,000 economic advantage by moving to a facility that is appropriately sized to meet the company's current operations. In total, the settlement was worth $6.65 million. We will continue to seek restitution from Scronce's advisors as detailed in yesterday's 8-K. Additionally, we will fully cooperate with SEC in their investigation of this matter. Beyond that, I have no further comments on this and would instead encourage us all to focus on the execution of our sales integration and operational plans.

In that spirit, let me close with a few other comments about PCTEL's future. In the past, we have made the statement that PCTEL needed to be over $100 million in revenue to justify the expense of maintaining public company status. After divesting the modem and software business, we worked hard to achieve $100 million in revenue to organic growth and growth through acquisition. We are now at a $100 million revenue run rate. At this point, our primary focus will be on organic growth and acquisition efforts will be focused on smaller targets that expand the customer base and product portfolio but fit within our current operation. One example might be software tools that enhance our in-building initiatives.

Finally, we recently announced stock buyback program, and we previously authorized a $0.035 quarterly dividend. We have no debt and $51 million on our balance sheet, which will be favorably impacted by the Scronce settlement. We remain committed to stability and returning shareholder value while pursuing aggressive growth targets.

Thank you for this time -- your time this afternoon or early evening. And with that, we are prepared to take questions. We have set aside 30 minutes for a general Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Matt Robison with Wunderlich Securities.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Marty, did you say you expected to do $18.5 million in the connected solutions this quarter?

Martin H. Singer

Yes. We are comfortable with that as a floor.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

To me that sounds like, given your guidance, that you're expecting also a pretty decent showing from RFS. Do we look at this -- the fact that the revenue was well below your guidance for the fourth quarter, that you're going to have somewhat of a catch-up from some push outs? Is that the way we should look at that?

Martin H. Singer

I would say this. We expect RFS to gain momentum throughout the year, first and second quarter, and that number of $18.5 million for connected solution is a floor on the revenue performance.

John W. Schoen

And just as a reminder, in general, in total, we tend to do about 52% to 53% of our revenue in second half as a group. And that is -- and that's consistent across every product, with the exception that scanners typically do close to 55% on the back half.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Yes, but I mean, this first quarter is looking a lot different than the first quarter in '12 and...

John W. Schoen

Yes. The first quarter '12 was like 3 and change. There's under $4 million of scanners in this quarter. It's above that, significantly.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Yes, sure. So given that your SG&A was pretty high in the fourth quarter and you were, like I said, a bit below your guidance for revenue, what were the factors there? I don't want to make assumptions on that, but can you comment a little bit more about that?

John W. Schoen

Well, yes, you mean the OpEx? Yes. Well, once again, the operating cost in the fourth quarter are traditionally higher because you end up with -- you start to ramp up for your audit. I think the bigger issue that we had is that sales and marketing commission expenses was higher by several hundred thousand that we had anticipated. And you'll see if you look in your model, the big difference is in sales and marketing.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Why was that?

John W. Schoen

What we had was, in our commission plans, I had forecasted at a macro level and there are, at least back then, there were salesmen who are being paid on what they did by channel that wasn't necessarily tied back to what they did in total because we were trying to make progress in certain channels and, by estimate, that was just too low.

Martin H. Singer

So, Matt, let me give you a very specific answer to the increase in some of the sales and marketing expense increase. We made a strategic decision to reward the scanning receiver sales force for attracting more OEM business from infrastructure providers like Ericsson, AT&T, Huawei and so on. And we knew that this was going to be a pretty long business development cycle. And so in a year where we saw some consolidation in our test and measurement OEMs and some lower sales there and we would have normally predicted lower commissions, we nonetheless ended up with sort of a front-end loading for strategically focusing that sales force on getting large infrastructure business. And I'm happy to report that they were actually quite successful in that and we believe we will get a benefit for that in 2013. Let me also say that we have not changed that plan and now that we feel we're established with some of these large switch vendors, the commissions will be paid out in a more linear way.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Did you see some channel shift away from you from some of your traditional RFS channels?

Martin H. Singer

It's not so much shifting away from us. I mean, I don't want to get into the specific names of our OEM resellers, the test and measurement one. But if you look at their reports, you can see that, overall, or a couple of bigger ones, really suffered a significant decline. And even though we might have 80% of that OEM reseller's business, we nonetheless got hurt. At the same time, I do believe that there's some truth in what you're saying in that a lot of the switch vendors -- Ericsson, Alcatel-Lucent, Huawei -- want more direct control of how they configure test equipment and so there's a bit of a demand for us to go direct there. And so I actually anticipate, over time, a shift and, I think, it was wise for the executive team responsible for this commissioned plan to set up special incentives for establishing traction with the switch vendors.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

A couple more for John. John, can you -- give me the depreciation number later on, but give us a backdrop for the magnitude of the charge related to PCTEL Secure, how did you arrive at that number?

John W. Schoen

Yes. So what we did was, at October 31 each year, we do our annual goodwill tests, okay? And so what we did was we took a look at what sales funnel was saying for first and second quarter and we weren't seeing it convert to backlog in the fourth quarter as one would have expected when we -- when we had done our original valuation. And so what that becomes is a indication of goodwill impairment. So that takes you through all this net present value calculations. And, effectively, what we did was we lowered the revenue numbers going forward for that operation from -- we had it in the $18 million to $20 million range, and we're in the $15 million to $17 million now which is what we had discussed when we had our call about the -- this last call in March. I remember, Matt, I think you had asked what did we see, and we said we saw 15 to 17.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Yes. We're talking about PCTEL Secure, that sounds more like TelWorx.

John W. Schoen

I'm sorry, I thought you're asking about TelWorx, I'm sorry. The write-off in TelWorx was about roughly $1 million. In effect...

Matthew S. Robison - Wunderlich Securities Inc., Research Division

You mean PCTEL Secure was $1 million?

John W. Schoen

I'm sorry. PCTEL secure, I apologize. I got a lot of stuff on my mind today. It was about $1 million. And here's the issue. We're currently looking for strategic partners in order to help take this to market in the government space. And because at this point we haven't been able to establish a firm contract yet with a partner, I'm obligated to declare for accounting purposes that my future cash flows are to indeterminate. And indeterminate accounting jargon means 0. And so when you do annual test of intangible assets, you need to take the future cash flows and compare them to the intangibles you have and if they are less, you have to impair the asset. So it's pretty much a math-driven calculation. If we had a contract already with someone, I would have been able to do an estimate based on a contract and I would have been okay, but I'm just -- I'm not quite there yet.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

So is that 100% write-down, then, of PCTEL Secure?

John W. Schoen

100% of the, basically, of the R&D in process that was left on the books. There was roughly $1 million left.

Operator

We do have a question from the line of Mike Crawford with B. Riley & Company.

Michael Crawford - B. Riley Caris, Research Division

Marty, based on the midpoint of the guidance you gave for the year, it works to $24 million in RF Solutions revenue in 2013. I believe...

John W. Schoen

What we were quoting is the RF Solutions, which is services plus --

Martin H. Singer

Scanning receivers.

John W. Schoen

Scanning receivers. And if you take the number that he quoted for connected solutions and back the rest out, then that's the RF Solutions number. And that's about right, $24 million to $25 million.

Michael Crawford - B. Riley Caris, Research Division

And how much are services?

Martin H. Singer

We're really just -- remember, we're doing segment reporting in 2 segments here, Mike. So we're not going to drill down into product lines or segments within that. So the midpoint is roughly 78 and 24.

Michael Crawford - B. Riley Caris, Research Division

Okay. Maybe phrased differently is you mentioned that the scanning receiver revenues were down this year. I believe they were down prior year as well. So...

Martin H. Singer

No. It's really been like a --

John W. Schoen

Roller coaster.

Martin H. Singer

A roller coaster. It was -- 2010 to 2011 was up significantly, almost $3 million to $4 million. And this year, it was down significantly, maybe, let's say, in the neighborhood of $5 million. And it's really related to 3 or 4 factors, we mentioned them before. There was a delay in the rollout of TD-LTE. The breakup of AT&T and T-Mobile impacted both accounts significantly. And then our largest OEM reseller test equipment had a contraction that has been widely reported. And those are the 3 reasons. Now, I believe in each of those cases, we're poised for a nice rebound this year. There's no question in my mind after being at Mobile World Congress that TD-LTE is on track. As I said in the script, I visited the China Pavilion there and there was an impressive number of TD-LTE device manufacturers. I interviewed them. I interviewed them about their launch plans. I talked to the operators and the infrastructure. And there's no question about the launch this year. And as you know, as you begin to deploy these networks, you have a high need for scanning receivers because you've got to place them out in the field, so they can see the network and the network can see something so it can be tested. And on the AT&T and T-Mobile side, that's in the past, we're seeing a pickup in spending by those customers. And our largest customer is recovering quite nicely. And I think they'll do okay. But, Mike, I interrupted you. Why don't you complete your question.

Michael Crawford - B. Riley Caris, Research Division

Right. Well, my question was -- it was my impression that scanning receivers in 2011 were down from what they were in 2010 and that further, they were down in 2012 versus 2011. And so the question was did you expect them to be up in 2013 versus 2012?

Martin H. Singer

We do expect them to be up. We expect both the engineering services and we expect the sale of scanning receivers to be both up in 2013. And we're already seeing a nice quarter-over-quarter improvement, first quarter 2012 to first quarter 2013, in both of those areas. And we'll be reporting that later.

John W. Schoen

Mike, it kind of sounds like what you're really asking is a modeling question.

Michael Crawford - B. Riley Caris, Research Division

It is important to the modeling given the high margin.

John W. Schoen

I get it. So just in general, at the segment level that we report at, when you add services and scanners together, historically, they run in the 70 to 72, 73 point level. It's lower than the scanner numbers you're used to but that's kind of the blend. The blend of the other connected solution will be 30 something, 30, 32, bouncing in that range, very close to what antennas were before we added TelWorx to it.

Michael Crawford - B. Riley Caris, Research Division

Okay. I did notice in Q4 that the inventory was up. I suspect that's related to TelWorx and probably not expected to be up given that the revenues were relatively flat. Is there any concern regarding that inventory or...

John W. Schoen

Well, first, let me speak to the year, what happened in the year, because the numbers bounce around by segment. So inventory for the year is up about $3.7 million, okay? Roughly, just under $2 million of it is the acquisition at TelWorx, okay? Antennas are only up about $0.5 million, you'd expect that because they're a growing business. The problem we've been having is in scanners. As we have said in multiple calls, we had expected a huge 2012 in scanners, we have a single contract manufacturer that we have to advance buy in 6- and 9-month increments. And we had to basically buy for a lot bigger plan that we actually came and so we got about $1.5 million worth of inventory to work off that we're still trying to work off. But that's basically what happened in the quarter and in the year.

Michael Crawford - B. Riley Caris, Research Division

Okay. And just to be clear, on the scanning receivers, has there been much of a rent option for customers before?

Martin H. Singer

Actually not. And we believe that there's a huge demand for rental and our EX Flex program was driven specifically by 2 overwhelming requests from customers. One was flexibility, so they didn't end up with this problem of e-waste, sending products back for configuration, or simply having to add new products. But the other was rental. And what we're going to be able to do with this product is essentially download a feature set for a specific time period and that can be changed through Internet communication with the customer. And it's going to develop an option that has really not existed. And before you get worried about the cannibalization of our sales, I would point out that there's going to be a meaningful price tag associated with the base unit and rental will be primarily related to the specific feature sets. So we think that this is a winning strategy and we're pretty excited about it as our customers. One other point I'm at, Mike is I know that you have some experience with some of the large engineering firms in cellular. They're among the groups that are extremely interested in rental. And where we have seen in rental is from those engineering groups. And this is going to give them a lot of flexibility.

Michael Crawford - B. Riley Caris, Research Division

I'm sure that drive testers will appreciate that. Changing the subject a little bit, when you embarked on the PCTEL Secure initiative, one of the things you said you were trying to accomplish was to get more mileage out of your Germantown engineers that you thought you could -- that were perhaps just underutilized and kind of a no growth-ish scanning receiver business. So now that PCTEL Secure is going away, is there any change that you would be looking to make regarding Germantown operations? Or is there something else you're looking for them to do? Or is there anything you can comment in that regard?

Martin H. Singer

Sure. There's not going to be any change in base level of development engineering. In fact, they've done a really nice job in taking down their development expenses from the high point of MX working through the new development of the EX Flex, without a significant bubble in development engineering. I would also say that, indeed, we did use Germantown quite extensively with the beta testing and a lot of the work related to PCTEL Secure. Going forward, what we're really interested in is moving the scanning receivers along with our engineering team into more of these in-building applications. What we're really discovering, Mike, is that between connected solutions, the range of products that Jeff has now, our engineering group that we acquired with Envision Wireless and our scanning receivers along with a lot of the visualization software that they have are really in a great position to exploit the continued growth in building. And we're looking at using our engineering team to enhance our software tools and enhance some of the in-building characteristics of our scanning receivers.

Michael Crawford - B. Riley Caris, Research Division

Okay. And then last question, a little different topic as well. But you single out CalAmp as bringing a new deal in 2012. How important, in general, are these business partners like CalAmp in filling your deal pipeline?

Martin H. Singer

I'll tell you, I think that's one of Jeff's greatest accomplishments in connected solutions, is that he's spent, he and his entire team has spent a lot of time developing long-term relationships where the goal is to deliver a solution or to be part of the solution that goes into an important vertical market. So Jeff's team really focused on areas like utilities, SCADA, railroads and then specific applications in there. And as you know, CalAmp is one of the solution vendors that's heavily focused on areas like utilities and railroads. Our entire sales process, custom engineering, is focused on the needs of these solution providers. A really great example is our work with BelAir that's not part of Ericsson or work with Cisco in providing custom antenna solutions that go on to their industrial caliber WiFi base stations for either cable strand-mounted systems or in-building systems. And that's been how we've recovered in the antenna space despite the continuing decline or flatness in public safety. What's a really important observation about the antenna business is that back in 2008, if you looked at antennas, it was about $51 million and about half of that was in public safety. And with the recession, we lost half of that public safety business and it really hasn't recovered. And what the connected solutions segment has done is they've rapidly grown the antenna business by focusing on these vertical markets and these really important partners. And they've done that without the benefit of a rebound in public safety. Long-winded answer, but it was a good question.

Operator

[Operator Instructions] And we have a follow-up question from the line of Matt Robison.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

John, I didn't get the depreciation number I asked for before. And, Marty, on this EX Flex proposition, what -- how do we break down the hardware versus -- the basic hardware platform, I should say, as a percentage? Is this going to be like we see with other companies that have maintenance revenue on the software, maybe 15% or 20% kind of a thing? Or is it much smaller than 80% initial purchase?

Martin H. Singer

Well, let me answer the question and then John can give you that depreciation number. So this is definitely more like razor, razor blades than it is a maintenance contract. We will get a reasonable price for the base. But all of the revenue, whether purchase or rental, is going to be associated with important feature sets of the frequencies, the technologies and the whole configuration that you get. I don't have a percentage, though, to give you over the phone. If it's important to your model, we'll work on that as we move forward with this program.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Your gross margin guidance and the way you're talking about this implies that there's a revenue aspect to the rental that could defer some gross profit contribution. Is that part of it? Or are we just looking at a mix just to -- basically a mix shift towards antennas and the services type business that's driving the margin?

Martin H. Singer

Yes, I think it's primarily the mix shift. It's not our participation in rental. And my hope is to slow that mix shift a little with successful introduction of the EX Flex and expansion of our business through rental.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Okay. So what was the depreciation?

John W. Schoen

$670,000.

Operator

[Operator Instructions] And we seem to have no further questions at this time.

Martin H. Singer

Okay. Well, thank you, again. And let me close by reminding all of you that PCTEL will be presenting at the Jefferies Conference in New York; the Baird Conference here in Chicago; and the B. Riley Conference in Santa Monica. All those events are in May. Thank you, and we look forward to updating you at our next earnings call.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may all disconnect.

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