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Edited Transcript of PCTI earnings conference call or presentation 9-May-17 9:15pm GMT

Thomson Reuters StreetEvents

PCTEL Inc Earnings Call

BLOOMINGDALE Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of PCTEL Inc earnings conference call or presentation Tuesday, May 9, 2017 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Neumann

PCTEL, Inc. - CEO and Director

* John W. Schoen

PCTEL, Inc. - CFO, SVP and Corporate Secretary

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Conference Call Participants

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* Matthew Sewell Robison

Wunderlich Securities Inc., Research Division - MD

* Michael Roy Crawford

B. Riley & Co., LLC, Research Division - Senior MD, Co-Head - The Discovery Group and Senior Analyst

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Presentation

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Operator [1]

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Welcome to the PCTEL first quarter earnings release conference call. (Operator Instructions) As a reminder, this conference is being recorded. I will now turn the call over to John Schoen, the company's CFO.

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [2]

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Thank you for joining us on today's conference call to discuss PCTEL's first quarter 2017 financial results. With me today is David Neumann, the company's CEO.

Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect PCTEL's best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from those forward-looking projections. Risk factors that could cause PCTEL's actual results to materially differ from its projections are discussed in the earnings release, which was issued today. It's also available on our website and in our most recent annual report on Form 10-K.

Additionally, our commentary will include reference to the following non-GAAP measures: non-GAAP earnings per share, adjusted EBITDA and free cash flow. We believe these non-GAAP measures facilitate comparability of results over different periods. A full reconciliation of these non-GAAP measures to our GAAP basis measures is included in our quarter earnings press release that was issued earlier today.

With that, it's now my pleasure to turn the call over to David Neumann.

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David A. Neumann, PCTEL, Inc. - CEO and Director [3]

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Good afternoon. Our first quarter 2017 revenue, gross profit, adjusted EBITDA and non-GAAP profit all improved when compared to the same period last year. We're encouraged by the direction the company is headed.

We believe there's long-term growth opportunities for PCTEL, driven by recent industry developments, including the award of the FirstNet contract to AT&T and growth in small cell deployments.

We have had success with FirstNet on the West Coast, and we're pursuing additional markets for antenna opportunities. We expect to see test and measurement business towards the end of this year and into 2018 as AT&T deploys infrastructure for FirstNet.

Small cells will present opportunities over the next several years, with near-term opportunities in Asia Pacific. Small cell deployments in Asia increased by more than 40% in 2016.

Carriers are deploying small cells and denser configurations into their networks to improve coverage and increase capacity. These networks support traditional users, IoT applications and they will provide a platform for 5G.

New deployments like FirstNet, new spectrum allocations in small cell deployments will drive the demand for PCTEL's performance-critical antennas and our test and measurement solutions.

In Connected Solutions, we are confident that our focus -- I'm sorry, that our 4 areas of focus for antennas, small cells, enterprise WiFi, fleet and utilities, will drive growth for PCTEL. In particular, small cell, fleet and utilities contributed double-digit growth over the first quarter last year.

In RF Solutions, we continue to build applications to leverage the installed base of the IBflex to address small cell and in-building applications.

Product revenue was up significantly in the U.S. and in Asia Pacific compared to the same period last year. While we are pleased with the product success, we acknowledge that our engineering services revenue encountered significant headwinds this quarter, which detracted from earnings. Our RF Solutions management team is committed to rectifying this situation by the third quarter. John will have more on this later in the call.

I would like to note that John and I will be attending the East Coast IDEAS Investor Conference on May 17 in Boston, and we will present at the 18th Annual B. Riley Investor Conference held on May 24 in Santa Monica. We look forward to meeting with investors at these conferences.

With that, I now turn the call over -- I would like to turn the call over to John Schoen for a closer look at first quarter financial results and the second quarter 2017 guidance.

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [4]

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Thanks, David. Now I would like to address the first quarter 2017 and compare results to the same period last year.

Revenue was $25 million, up 19%. Gross profit was 37.3%, up 380 basis points. Adjusted EBITDA was $1.5 million, up 675% and non-GAAP earnings per share were $0.04, up $0.07 per share. Free cash flow was approximately $800,000, which is comprised roughly of $1.85 million of cash flow from operations less $1.05 million of capital spending.

Capital spending in the quarter was about $500,000 higher than normal due to investments in IT, which included a new IP phone system and communication system for the company. We do expect capital spending to return to traditional levels next quarter.

Drilling down, Connected Solutions revenue was $17.3 million, up 17%. Antennas for small cell, fleet and utilities applications delivered significant growth. Gross profit was 31.3%, up 190 basis points. The leverage of fixed costs over higher volume improved gross profit.

RF Solutions revenue was $7.8 million, up 21%, with gross profit of 50.3%, up 790 basis points. Product revenue grew while service revenue was unchanged, resulting in the higher blended gross margin percent.

While service revenue was unchanged year-over-year, it was down 35% sequentially, resulting in negative contribution margin equivalent to a $0.02 non-GAAP earnings per share loss. Excluding services, the company delivered non-GAAP earnings per share of $0.06 in the quarter.

As David mentioned earlier, the RF Solutions management team expects to rectify our services revenue and profitability issues by the third quarter.

Now let's turn to guidance for the second quarter 2017. Second quarter revenue is expected to be between $23.5 million and $24.5 million. Gross profit is expected to be between 38.5% and 39.5% and non-GAAP earnings per share are expected to be between $0.03 and $0.05 per share at that revenue range. At the midpoint of our guidance, revenue is expected to be about the same as the second quarter last year, with non-GAAP earnings down $0.01 a share. Services are expected to be about $1.5 million lower in revenue than Q2 last year, and that will continue to weigh on earnings in the second quarter.

Our product revenue in both Connected Solutions and RF Solutions continues to track to target in the first half.

Before we take questions, I would like to turn the call over to David to make a few closing remarks.

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David A. Neumann, PCTEL, Inc. - CEO and Director [5]

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Thanks, John. To summarize, we're pleased with our Q1 results and the momentum that we're building early in 2017. The challenges in our services business are being addressed and should be rectified by the third quarter. Both PCTEL's businesses, Connected Solutions and RF Solutions, are in strong position to benefit from small cell deployments, FirstNet and 5G. And as a company, we'll continue to make investments in R&D, staff and capital to create and maintain our competitive advantage.

With that, John and I would like to open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matt Robison from Wunderlich.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [2]

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First, I'll say -- I'd like to stay in the cash flow statement, especially given the results. So services down more in the second quarter than they were in the first quarter, and how should we think about -- you might have said it, I apologize if you did. But how should we think about the burden there versus $0.02 in the first quarter?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [3]

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About the same.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [4]

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Okay. So it's a -- the difference -- you're looking for gross margin a little higher than the first quarter. So what's the OpEx factor that's driving the sequential decline in EPS?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [5]

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I'm sorry, the sequential decline? Or are you...

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [6]

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I guess your mid-range is, I guess, the same, $0.04 to $0.05.

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [7]

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Yes, compared to last year, yes, yes. Because at the end of the day, services in the second quarter last year broke even, you're going to lose $0.02, which means products are going to [gain] $0.01. Products are $0.01 more profitable than they were last year and services are going to be $0.02 worse than they were last year, meaning we go from $0.05 to $0.04 at the midpoint.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [8]

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And do you think OpEx is going to be back up towards $8.8 million again?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [9]

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No. It will probably be sequentially down, probably 200k. Yes, I mean, we have all our year-end costs in the first quarter with the audit and everything.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [10]

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What do you have in mind for fixing things up by the third quarter?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [11]

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There are some large sales funnel projects that we are pursuing that we feel good about. And -- but sales funnels take time, and that's why we are -- we think it's going to take until Q3 for that stuff to hit the ground.

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David A. Neumann, PCTEL, Inc. - CEO and Director [12]

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And we're going after some larger projects, and we're also looking at utilization and trying to balance full-time employees versus flex force to try to reduce some of our costs as well.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [13]

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Okay. What do you think about -- you've taken inventory down quite a bit, John. Do you think you're going to be able to have a positive cash flow in the second quarter?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [14]

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Yes. Yes, because the first thing that's going to happen is CapEx is going to drop from just under $1.1 million, probably into the normal $500,000 to $700,000 range. So you're going to pick up a $0.5 million there, and then we’d continue to hammer inventory, especially in Connected Solutions.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [15]

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So that goes down even more?

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David A. Neumann, PCTEL, Inc. - CEO and Director [16]

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Yes. We're going to need -- in order to get to similar results that we got last year, we're going to need to continue to mine the balance sheet, the working capital, inventory in particular, with the goal of taking out another $1.5 million in the next 3 quarters of inventory.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [17]

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Dave, it looks like RF Solutions, the scanning receiver business was pretty strong. What was the backdrop for that?

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David A. Neumann, PCTEL, Inc. - CEO and Director [18]

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Strong for Q2, well...

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [19]

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Q1.

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David A. Neumann, PCTEL, Inc. - CEO and Director [20]

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The budget -- oh, for Q1. Verizon continues to be a very strong customer for scanning receivers, and we saw even stronger activity in Asia for the scanners.

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Operator [21]

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(Operator Instructions) Your next question comes from Mike Crawford from B. Riley.

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Michael Roy Crawford, B. Riley & Co., LLC, Research Division - Senior MD, Co-Head - The Discovery Group and Senior Analyst [22]

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Regarding your DAS business, is that something you see stabilizing at some point or probably continuing to fade relative to small cell-type solutions for in-building?

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David A. Neumann, PCTEL, Inc. - CEO and Director [23]

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For the engineering services?

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Michael Roy Crawford, B. Riley & Co., LLC, Research Division - Senior MD, Co-Head - The Discovery Group and Senior Analyst [24]

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Yes.

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David A. Neumann, PCTEL, Inc. - CEO and Director [25]

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For engineering services, with DAS, most of the large venues are built out. And that's one of the challenges that we have is the work that we're doing now are typically smaller projects. So we're trying to close some larger deals, so that we can send engineers on site for a longer period of time and cover more of their costs. But still a bulk of the work for engineering services is around DAS. We do, do some small cell work, but most of it is DAS.

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Michael Roy Crawford, B. Riley & Co., LLC, Research Division - Senior MD, Co-Head - The Discovery Group and Senior Analyst [26]

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And so this larger funnel of larger projects, those are for distributed systems engineering or yes -- and global?

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David A. Neumann, PCTEL, Inc. - CEO and Director [27]

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Yes, they're for DAS systems, yes.

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Michael Roy Crawford, B. Riley & Co., LLC, Research Division - Senior MD, Co-Head - The Discovery Group and Senior Analyst [28]

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Okay. And so it's been, boy, a decade of public safety markets being hampered by lack of customer cash to upgrade systems. But do you think this is poised to finally turn with the FirstNet infrastructure build?

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David A. Neumann, PCTEL, Inc. - CEO and Director [29]

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Yes. So I think there's really 2 parts to that. One is on the Connected Solutions side, for antennas, for the fleet vehicles. As the different departments upgrade their systems, I think they will start buying more antennas that are compatible with the FirstNet system. So we should see increased sales for antennas. And then for the infrastructure, from what I've seen from AT&T, although they're going to put in another $40 billion of their own money in addition to the $6.5 billion from the government, most of that work will start later in the year. So we do anticipate we'll see some additional scanning receiver sales, but it's probably towards the end of 2017 going into 2018. One benefit for the scanning receivers is we already support the Band 14, which is a 700 megahertz. So we have product today that we could deliver as soon as AT&T starts building infrastructure.

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Operator [30]

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(Operator Instructions) Your next question comes from Matt Robison from Wunderlich.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [31]

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Just looking at the pattern of expenses, a pretty big increase in G&A. What's the backdrop for that? And should we expect to have a similar kind of proportional expenses in the current quarter?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [32]

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No. So the main impetus for that going up is that we are paying our short-term incentive plan this year all in cash. And last year, it was paid to the executives in stock. And so that expense now adds in. But I do expect us -- the OpEx to shrink into the $8.5 million, $8.6 million kind of range Q2. Q1 seems to be our highest expense quarter.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [33]

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[Payroll] tax and all that, I assume?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [34]

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Yes, you've got payroll tax, you've got the audit -- remember I have to book my audit expenses when the work is done. I can't just smooth it 1/4, 1/4, 1/4, 1/4.

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Matthew Sewell Robison, Wunderlich Securities Inc., Research Division - MD [35]

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And you think that the $8.5 million, $8.6 million kind of stays in that kind of zone through the rest of the year?

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John W. Schoen, PCTEL, Inc. - CFO, SVP and Corporate Secretary [36]

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It probably goes down a little bit in Q3 traditionally and then it pops back up again in Q4. But on an average, $8.5 million, $8.5 million -- I mean, $17-ish million in the back half is probably pretty decent.

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Operator [37]

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(Operator Instructions) I would like to thank everyone for attending today's conference call. You may now disconnect.