PCTEL's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: PCTEL, Inc. (PCTI)

PCTEL, Inc. (NASDAQ:PCTI)

Q3 2013 Earnings Call

October 30, 2013 5:15 PM ET

Executives

John Schoen – SVP and CFO

Martin Singer – Chairman and CEO

Analysts

Matt Robison – Wunderlich Securities

Sarkis Sherbetchyan – B. Riley & Co.

Operator

Ladies and Gentlemen, thank you for standing by. And welcome to the PCTEL Third Quarter 2013 Conference Call. At this time all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for queuing up will be provided at that time. As a reminder this conference call is being recorded for replay purposes. I will now turn the call over to John Schoen, Chief Financial Officer.

John Schoen

Thank you for joining us today, October 30, 2013 for the PCTEL Financial results conference call for the third quarter 2013. On today’s call will be Marty Singer, Chairman and CEO; and I am John Schoen, Chief Financial Officer.

Before we begin, I' would like to read our Safe Harbor statement. Today’s call will contain forward-looking statements within the meaning of the Federal Securities laws. Comments concerning our future financial performance, new products and features, product development, acquisition efforts and expectations regarding the future growth of our wireless RF business 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 Singer

Thank you, John, and good afternoon to all of you. If you haven’t had time to take a look at our earnings release, let me recap some of the non-GAAP highlights from the quarter. First, we achieved revenue of $26.5 million, an increase of 2% over the third quarter of 2012. This is our fifth consecutive quarter in which we generated over $25 million in revenue and that puts our trailing 12-month revenue at about $104 million.

Gross profit margin was 41%. Operating margin from continuing operations was 11%. Net income was $2.3 million or $0.13 per diluted share and cash and investments were $54.9 million, an increase of $3.5 million from the previous quarter.

Now I’d like to turn the call back over to John, who will discuss our financial performance in some detail. Later after his remarks, I will comment on some of our business development, engineering and marketing efforts over the past quarter, as well as some of our current activities. John?

John 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 expenses for restructuring, gain or loss on sale of assets or legal settlements, stock-based compensation, amortization and impairment of tangible assets and goodwill, and non-cash related 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 www.pctel.com under Investor Relations. My discussions of results will be based on our non-GAAP financial results.

Let’s turn to revenue. Third quarter 2013 revenue was $26.5 million, up from $25.9 million in the same period last year. From a reporting segment perspective, RF Solutions segment revenue in the quarter was $8.2 million, up 33% from the same period last year. Revenue was up significantly in both scanning products and Network Engineering Services with engineering services revenue being about 2.5 times larger than it was in the same period last year. The increase in scanner revenue is attributed to carrier spending increasing from a low point in 2012.

The Network Engineering Services revenue growth is attributed to the rapid growth with in-building wireless network expansion.

Connected Solutions segment revenue was $18.3 million, down 7% from the same period last year. A focused effort to eliminate unprofitable site solution business and customers, public safety contraction and OEM project rotation contributed to the decline in Connected Solutions revenue. Non-GAAP gross profit margin for the third quarter was 41% as compared to 39% in the same period in 2012. The increase is primarily attributed to the increased revenue contribution of the RF Solutions segment with its higher margins relative to the Connected Solutions segment. Additionally, gross profit margin continued to improve in the Connected Solutions segment.

From a segment point of view, RF Solutions gross profit margin was 62% in the current quarter, compared to 71% in the same period last year. The gross margin change reflects the increasing contribution of Network Engineering Services revenue to this segment. Connected Solutions gross profit margin was 31% compared to 29% in the same period last year, generating the same gross profit dollars and $1.4 million less revenue.

Eliminating unprofitable site solution business and customers, consolidating the site solutions factory in to our Bloomingdale facility and supply chain improvements, all contributed to the increased margin.

Now let’s turn to non-GAAP operating expenses, which were $8.0 million in the quarter, an increase of approximately $800,000 from the same period last year. The increase includes the company’s accrual for its annual short-term incentive plan that paid out zero in 2012. Non-GAAP operating margin from continuing operations in the third quarter was 11%, unchanged from the same period last year. The 2% increase in gross profit margin was offset by a 2% increase in operating costs.

Non-GAAP other income was $1,000 in the current quarter. As the amounts are largely interest on our investments, the number will continue to be small in the current interest rate environment. The non-GAAP income tax rate in the quarter and the year is 18%, unchanged from 2012. Non-GAAP net income from continuing operations for the third quarter was $0.13 per share, compared to $0.14 per share in the same period last year. The increase in stock price over the last year has caused the inclusion of in-the-money options in the share count.

Now let’s turn to the balance sheet. Cash and investments ended the third quarter at approximately $54.9 million, about $3.5 million higher than the previous quarter. In the quarter, the company generated approximately $4.2 million of cash flow from operations, spent $649,000 on capital expenditures yielding free cash flow in the quarter of 13% of revenue and 7% of revenue September year-to-date. This was accomplished while upgrading our factory in Bloomingdale, moving operations from North Carolina to moving to Bloomingdale and expanding the product line. The company paid $644,000 for the regular quarterly dividend, and depreciation in the quarter was $661,000.

Now I would like to discuss guidance for the fourth quarter 2013. We anticipate fourth quarter revenue, gross profit margin, operating costs and other income to be about the same as the quarter just ended. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the fourth quarter is expected to be about 18.4 million shares. As we said earlier, the increase is attributed to the inclusion of in-the-money options in the diluted share count as a result of the increase in our share price this year.

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

Martin Singer

Thanks John. Our guidance for the fourth quarter indicates that for the full-year over full-year results, we anticipate a total non-GAAP earnings increase of 60%, a 26% increase for continuing operations and free cash flow as a percent of revenue of about 8%. One reason for our optimism is the advancement of our antenna technology and the expansion of our product line. This is particularly apparent in our GPS product line. During the third quarter, we made great progress in globalizing our GPS GLONASS antennas.

We shipped in quantity in to Russia by our U.K. distributor and these antennas will be crucial to LTE network timing in that region. We also began our production shipment of GPS antennas for missile guidance programs and extended the timing application for our GPS antennas to small cell deployments. In both of these applications, we have worked closely with large OEMs, one in the defense systems integration arena and the other in cellular infrastructure. We have also supported our GPS product line with some highly innovative magnetic mount designs. Our latest heavy duty mobile magnetic mount, which permits our antennas to withstand intense vibrations, will be widely used in tracking fleets.

We were particularly pleased that our new dual-band Wi-Fi antennas were approved by Cisco for use on three of their platforms and that the New York City Board of Education selected our 4-port dual-band antennas for system-wide deployment. Our industry leading MIMO antennas are gaining traction. We had a significant design in win with Aruba for integrating our MIMO antennas in their outdoor Wi-Fi access point. We also won the panel business through Avaya for the Sochi Olympics.

We secured a meaningful contract with a major rental car company to provide antennas for machines supporting their operational logistics and we anticipate reasonable volumes over the next several quarters. Interestingly, this contract is for tracking and monitoring the health of rental equipment, not automobiles that are deployed in the field. Related to this, we also qualified our antennas with Cooper Industries for machine health monitoring applications. Shipments will commence this quarter.

Finally, we have had improved success with our towers for a large carrier and their special events program in the third quarter. And we are working closely with a major defense systems integrator on a tower deployment program which unfortunately suffered a setback with the latest Congressional Budget Negotiations.

I also want to discuss expansion of our RF Solutions business. When we acquired Envision Wireless, they were billing approximately $400,000 to $500,000 a quarter. The past two quarters we have generated $1.7 million and $1.8 million respectively. The focus on in-building wireless and especially in-building wireless design fits well with our vertical market strategy and positions PCTEL to provide services and products into the high growth wireless market.

In the third quarter, RFS provided wireless heat maps, network designs or commissioned new networks for the Daytona Speedway, The Jacob Javits Convention Center, The John Hancock Building, Harvard University and Walt Disney World. Our immediate plans are to grow this to a $10 million annual business that benefits our equipment business and possibly leads to other information based businesses.

With respect to our scanning receiver product line, we rolled out the new EX-Flex product and have seen strong sales. You may recall that the EX-Flex sets a new industry standard permitting customers to purchase or lease a base product and then to lease or buy new feature sets, technology coverage or crucial capabilities such as MIMO. Of great interest to our customers is that the Flex offers customers the ability to pay as you go, renting capabilities on a timed basis. PCTEL customers are currently evaluating the implementation of that capability. We are particularly excited about the launch of our new IB-Flex, which stands for in-building, in the first quarter of 2014, a lower power and lighter version of the Flex that will respond to the growing demand for in-building test tools.

We are hopeful that Ascom, Anite, SwissQual, Accuver, JDSU, and others will all be interested in the IB-Flex program.

We anticipate strong business in Russia and China over the next several quarters, as those countries roll out LTE for both FD and TD or Time Division deployments. PCTEL has become the preferred brand for LTE scanning receivers and two of the largest deployed LTE networks in the world. We believe that the features and capabilities added to our scanner products to test in-building networks, MIMO and TD-LTE Layer 3 will be popular in a rapidly growing market such as China. The ability to collect Layer 3 data from both TD-LTE and TD-SCDMA simultaneously assist engineers to deploy networks faster with dedicated testing user elements are in short supply, user elements referring to any type of hand-held device.

Our advanced receivers also do not sacrifice legacy measurements, speed or accuracy in order to collect LTE data. PCTEL Scanning Solutions allow operators to test legacy networks side-by-side with both TD and FD-LTE, while maintaining measurement integrity. Basically PCTEL allows operators to collect more with less hardware.

Importantly, we have made significant capital investments on our factory operation. We installed two Kardex Vertical Lift Modules that consolidate all of our smaller parts into a single computer organized access and retrieval system. We also completely reorganized our Bloomingdale factory floor and now 100% of the Lexington inventory and operations have been integrated into Bloomingdale and we are able to handle all of the Q3 and Q4 kitting business at our existing facility. Today the kitting business responds to special program needs for large carriers such as AT&T and Verizon Wireless.

We also provide several kits to the railroad industry and this may be an area that you want to follow up with questions, so that you can further understand what we are doing in this area. I plan to be in New York City next week to meet with current potential shareholders. B. Riley is hosting this visit. We hope to go out with other analysts and sales organizations throughout the month and perhaps in December. With respect to industry conferences and exhibits, we will be attending the MILCOM Military Communications conference in San Diego and the SPS IPC Drives industrial automation conference and exhibition in Nuremberg, Germany over the next few months.

Over the past quarter, we exhibited at the LTE Asia Conference in Singapore, ION GNSS Convention in Nashville and the RSSI Railway Interchange Convention in Indianapolis. We really go to the most interestingly named conferences in the country.

With that, we’ve concluded our prepared remarks and have set aside 30 minutes for your questions. Operator?

Question and Answer

Operator

(Operator Instructions). And you have a question from the line of Matt Robison with Wunderlich Securities.

Matt Robison – Wunderlich Securities

Hi guys. John, thanks and congrats on the working capital performance. Before I get into Marty’s question, I think I missed what you said you did for operating cash flow and depreciation, can you give me that?

John Schoen

Yes. Operating cash flow in the quarter was $4.2 million. Depreciation was $661,000.

Matt Robison – Wunderlich Securities

Okay.

John Schoen

CapEx was $649,000.

Matt Robison – Wunderlich Securities

I got that one. All right, thanks. Marty, can you give us a little bit more color on what was – where you are seeing the headwinds on the Connected Solutions business?

Martin Singer

Sure. Public Safety continues to be absolutely enormous drag. You know we’ve been hoping that public safety would just stay stable, but between the sequestration, the shutdown of the government impacting where we sell antennas and to Homeland Security and to PSA and to other areas along with the continued budgetary crunch at local and state levels – it really is the same story. I will check out our local villages and suburbs and really probably the best leading indicator is how often these guys update their fleets. And the answer is that it’s gone from two to three to five years and so Public Safety is a drag.

The other drag is not really a loss of business, but it’s just the ebbs and flow of some of our major programs. So we’ve made it very clear that High Rejection GPS and the Cisco Jackhammer program have been fantastic for us. And these move in and out of quarters and in some of those areas we weren’t as strong as we have been in the couple preceding quarters, but we expect that to return to normal levels.

On the positive side, we’re seeing nice growth in fleet, the use of our GPS and multi-band antennas in fleet. When you think about fleet management, it’s not just tracking of vehicles, there is a lot of current legislation now related to safety that requires GPS and other antennas to track exactly how vehicles are being driven, consumption of energy-related to driving patterns and so on. And we’re seeing nice growth in telemetry applications.

Matt Robison – Wunderlich Securities

How long has that been going on?

Martin Singer

The fleet and telemetry have been a source of growth over the last year. And next year in our planning, we’re putting a pretty big push on both of those areas. Partly obviously, to get the growth in those verticals, but we’re just not anticipating much of a recovery in Public Safety and we need growth in those areas to compensate.

Matt Robison – Wunderlich Securities

What’s going on in the channel front with the scanners?

Martin Singer

Are you talking about Ascom, Anite, Accuver and so on?

Matt Robison – Wunderlich Securities

Yes.

Martin Singer

Yes. Well, as you know, the SwissQual was acquired by Rohde & Schwarz. And while that wasn’t helpful, I am pleased to say that it looks like we still have significant business through that channel. Ascom has been spectacular as a partner. Our investment in Comarco a few years ago recently had a major payoff for both of us in an upgrade of Verizon equipment.

Anite has a product that they acquired in the partial dismantling of Andrew, called the FSR1, that has been successful in some of the extremely low cost markets. And our business with Anite is down on a year-over-year basis, but that has been more than offset with David Neumann’s success in penetrating new channel partners. These include JDSU, improving Accuver which existed, improving ZTE, improving Huawei. And so in general channel sales have been up significantly year-over-year, that’s been a strong story.

Matt Robison – Wunderlich Securities

And for Ascom reported a lot of strength though last night, it would – does that correlate with what you are seeing from?

Martin Singer

Yes, I think that they have a really well-focused leader in that division, Rikard Lundqvist, who is doing a terrific job of improving efficiencies and having more direct control over sales. We’ve seen Ascom become much more active in the test and measurement arena, sort of with renewed energy. And I think that that division is doing quite well.

Matt Robison – Wunderlich Securities

Okay. Thanks for now.

Operator

(Operator Instructions). Your next question comes from the line of Sarkis Sherbetchyan with B. Riley & Co.

Sarkis Sherbetchyan – B. Riley & Co.

Good afternoon.

Martin Singer

Good afternoon, Sarkis.

Sarkis Sherbetchyan – B. Riley & Co.

So, huge growth in RF Solutions. Can you comment on the growth in in-building and what affect that might be having on your services business, as well as how will this all plays into your LTE opportunity please?

Martin Singer

Well, let’s start with the most direct part of that question, which is how does in-building impact services. In-building for our services business is our only services business. Our engineering group, NES, that reports into our solution is 100% focused on in-building. So for example, it doesn’t matter whether it’s an arena like the United Center, an office building like Willis Tower or a government building or a campus, this group provides a heat map of the wireless coverage. And they are capable of printing out and providing to the system integrator or the landlord or the tenant, a bill material for additional equipment that would be required to improve coverage and capacity.

They also test Wi-Fi and can make recommendations if you want to put in a network for offloading and give you the information that’s required to negotiate with the carriers on how antennas should be manipulated around tilt or azimuth. So when we look at the growth from $400,000 to $1.8 million a quarter that is completely a function of in-building growth.

With respect to our other businesses, I think everybody understands clearly that in our Connected Solutions, our antenna products are used almost exclusively for private wireless networks. Now some of these are outdoor like the SCADA networks that are used for oil and gas and the telemetry functions in oil and gas. But many of our antennas and related ancillary RF products like filters, cables, amplifiers, surge arresters and so on are used for in-building applications, health care, Kaiser Permanente, industrial wireless, many of those types of functions. And so in-building is an important component of our Connected Solutions growth.

Finally, when you look at our scanning receivers. Scanning receivers are now understood to offer tremendous advantages over user element or UE-based test tools such as handsets or other type of limited capability analysis tools. And these scanning receivers are what the engineers use to develop their heat map and their recommendations. And we are coming out with an in-building EX-Flex that we’ll be demonstrating at the Mobile World Congress in February. And we believe that the opportunity there is going to be significant for this smaller cost reduced, low power for S batteries swappable version of our product. So in all those areas, in-building is quite important.

Sarkis Sherbetchyan – B. Riley & Co.

Okay. And Can you also touch upon how that plays into the LTE opportunity?

Martin Singer

Well, LTE is going to likely actually to an explosion of small cells, which is going to acquire additional analysis, but in general it is not going to eliminate the need for distributed antenna systems. And you’re going to require both improved coverage and capacity for in-building applications. And there is really nothing about LTE that’s going to eliminate engineering or product opportunity.

Sarkis Sherbetchyan – B. Riley & Co.

Okay, that’s helpful. And North America appears to be particularly strong in your RF Solutions business. So when do you think we can see upticks in Europe as well as China, particularly with respect to the TD-LTE roll-outs that you mentioned in your prepared comments?

Martin Singer

Well, it’s interesting that we’re already selling product now in China, already selling product in Europe. TD-LTE will be an enormous growth factor for us in 2014. I think you will see strong sales in the first quarter. And with respect to Europe, Europe is really in a very early stage, but I think will also contribute to our growth in 2014. And quite frankly will compensate for the fact that some of the scanning receiver markets in United States are saturated. We’re really the preferred vendor in two of the major operators, but those operators have acquired quite a bit of the testing capability already.

Sarkis Sherbetchyan – B. Riley & Co.

Okay, that’s helpful. And what are some of the things you can do or you would like to see to overcome some of the revenue headwinds you seem to be navigating in the Connected Solutions business?

Martin Singer

I think there are three things. Number one; accelerate our in-building growth on all fronts. So in addition to antennas and ancillary equipment that we want to sell with in-building, we want to really grow our engineering services and the sale of scanning receivers and new test equipment that we are developing for those applications. So that’s number one.

Number two; vertical markets. There are some vertical markets in which we are very strong and we intend to dominate in those vertical markets. An example would be fleet. And we think we have a great opportunity in both fleet and telemetry and in certain markets like healthcare to become a dominant provider of antenna-based communication solutions.

And the third, interestingly enough is kitting. We have really a great capability here of putting together solutions for operators, or for railroads, different participants and trends where you may have radio communications, but next to that, you might have enclosure with 15 different types of parts. For somebody – and let’s not refer to any particular company, but a large company may have to spend anywhere from $100 to $200 to issue a PO.

And if they are issuing a PO for 15 components that go into one component, it’s not particularly efficient, and then somebody has to put it together. So we’ve been doing this. We’ve been focusing a great deal of attention and this is why we made the acquisition of TelWorx last year, to look at some high value kits that we can put together for in-building applications, transportation applications, shelter applications and so on, where we give companies the ability to issue a single PO for a collection of equipment that’s pre-tested that then they can install.

And this is a type of business we like. It’s somewhere between 1000 and 50,000 of a particular type of kit. And where we can apply some of our engineering skill and reuse our procurement and distribution capabilities to satisfy needs that help customer simplify mobility.

Sarkis Sherbetchyan – B. Riley & Co.

Thanks. That’s very helpful.

Martin Singer

Any other questions?

Operator

And you have a follow-up question from the line of Matt Robison with Wunderlich Securities.

Martin Singer

Hi, Matt.

Matt Robison – Wunderlich Securities

Yes. I guess this is more into the mundane. John, your cash flow was exceptionally strong this quarter. I saw the working capital metrics, but was there anything else about that, that jumps out and is there – how should we expect to see a kind of reversion to a lower level in the current quarter?

John Schoen

Well, if you kind of look at the quarter, the cash flow from operations of $4.2 million. 800K was contributed by freeing up cash from the working capital and the rest was straight EBITDA flowing through. I would expect for next quarter – cash flow to be a little lower, but I am not so sure but to get another 800K positive bump, but the EBITDA should flow straight through. And as you can see that we’ve got a really decent EBITDA number as we’ve been getting our cost improvements.

And I know when we were talking about headwinds, but I mean we went out of our way to eliminate unprofitable bad business in site solutions, in order to get ourselves focused on good business. And so I think that’s what we’re really seeing, is that the EBITDA is flowing through and we’ve now got receivables and inventory back down to where we think we want. And so I would say a cash flow from operations in the $3 million to $4 million range next quarter is what we expect.

Martin Singer

Yes. Matt, that point that John made is really an important one. So the team of Jeff Miller and Tony Kobrinetz and John Schoen, when we had the difficulty with TelWorx, one of the things we said we were going to do is A; we are going to move it all up here, which Tony did and then he by the way filmed a video of a bowling ball going down the empty warehouse down there to demonstrate the job that had been done.

And then Jeff did a customer analysis, of what they were buying and what type of kits and went through and said, this is going to cost us some revenue in the short-term, but we’re going to move this gross margin up which is exactly what’s happened. And I think now we’re focused in a very efficient way, you can come to Bloomingdale and the entire kitting operation that we moved now resides in the Bloomingdale factory and in really a nicely laid out operation.

And we’re selling value kits with reasonable gross margins associated with them. And it does make a difference on the EBITDA.

John Schoen

I think the model that we’re happy with now is EBITDA flows through. We have working capital where we wanted so there shouldn’t be any major bumps in the road there, minus about 2.5% of revenue in CapEx for a year. And now we’re at 11%. We expect to go into that 13 point range as our goal for next year. I think that’s – when I looked at the analyst models for yourself at Riley, that’s about 10 EBITDA and 12%, 13% range.

And so lets say three points for CapEx from that and we know we’re right in that 8% to 10% sweet spot for free cash flow.

Matt Robison – Wunderlich Securities

Now, so you were a little ahead of schedule I think on some of that overhead reduction that you talked about. What should we expect? I know you said that fourth quarter was going to be kind of a duplicate of the third quarter which was sort of a duplicate of the second quarter. So what are you going to do with the mix here in the fourth quarter? It sounds like – do you think that it’s basically going to be the same with Connected Solutions [indiscernible].

John Schoen

Actually, it’s just – coincidentally it’s the way the sales funnel is shaping up and the backlogs rolling in plus or minus a little bit in each of our product line, it’s coming in just about exactly what we did in the Q3.

Matt Robison – Wunderlich Securities

Do you think it will be more or less back-loaded?

John Schoen

From a – no, it’s…

Martin Singer

No, it actually looks pretty nice.

John Schoen

Yes.

Martin Singer

Where we’ve got a huge funnel right now in engineering solutions. The issue is we could drive that business up over where it was in the third quarter, it’s up more capacity constraint right now. We’re really trying to grow our group. And by the way, we moved into new – we will be moving into new facilities in Melbourne. I am going down there in a couple of weeks to open it up.

And I would say that the funnel on scanning receivers also looks very strong. We’ve got a good backlog right now and it’s reasonable for antennas at this point in the year. So I don’t think it’s going to be heavily back-loaded.

John Schoen

But kind of to the point of your question, you’re wondering if its back-end loaded. Is it going to make working capital go up and affect our cash flow. I think I am pretty confident in pretty much a zero change in the working capital.

Matt Robison – Wunderlich Securities

Okay. And how we should be looking at seasonality as we enter ’14?

John Schoen

Well, if you look at Connected Solutions and you did a regression analysis, you would see that they pretty much do 47%, 48% in the first half of their revenue and 52% and 53% in the back half [indiscernible]. That seems to be the pattern.

The scanning is in that same range, 47%, 53% and the issue you’ve got is you’re going to see continued sequential increases in services.

Martin Singer

If I am worried about anything for the first quarter, it would be – so the first quarter is one that’s been tough for us from time to time on scanning receivers. As people sought through new budgets and saw on what they want to spend but I think two out of three areas are going to look reasonably strong in the first quarter; Engineering Solution, Engineering Services and Connected Solutions. And we should be pretty stable on the scanning receiver. But if there is exposure would be there.

John Schoen

If I had to call just using the regression analysis plus what we think we’re going to do services, on the percent of the year, Q1 probably would be around 23%, Q2 would be around 25%, and maybe it’s 25.5% and 26.5% to get to your 100% of the year.

Matt Robison – Wunderlich Securities

You think the nature of what's going on with China Mobile mitigate the seasonality you’re talking about or is it basically managed with the seasonality?

Martin Singer

Yes, the shortlist should come out by the end of the year. And immediately upon the publication of that shortlist, there will be some business for everybody on it.

John Schoen

I mean if China Mobile comes earlier, then what we would do is, we will you pull out of the bank end of the year and put it in the front-end.

Matt Robison – Wunderlich Securities

Okay. The selection of Nokia is apparently between themselves direct in their channels is going to be the biggest western vendor there. Does that have any impact for you guys?

Martin Singer

No.

Matt Robison – Wunderlich Securities

Okay.

Martin Singer

No.

Matt Robison – Wunderlich Securities

All right. Thanks a lot.

John Schoen

Okay.

Martin Singer

Okay, thank you. Any other questions?

Operator

There are no further questions at this time. I would now like to turn it over to Marty Singer for closing remarks.

Martin Singer

I want to thank all of you for participating on this call. We looking forward to seeing you either at industry conferences or on the road show in New York City and we look forward to updating you on our fourth quarter results in 2014. Thank you very much.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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