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Edited Transcript of PCTI earnings conference call or presentation 9-May-18 8:30pm GMT

Q1 2018 PCTEL Inc Earnings Call

BLOOMINGDALE May 11, 2018 (Thomson StreetEvents) -- Edited Transcript of PCTEL Inc earnings conference call or presentation Wednesday, May 9, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Neumann

PCTEL, Inc. - CEO & Director

* John W. Schoen

PCTEL, Inc. - Senior VP, CFO & Corporate Secretary

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Conference Call Participants

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* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Marc Wiesenberger

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL's First Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I will now turn the call over to Mr. John Schoen, Chief Financial Officer. Please go ahead, sir.

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John W. Schoen, PCTEL, Inc. - Senior VP, CFO & Corporate Secretary [2]

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Thank you for joining us on today's conference call to discuss PCTEL's first quarter 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 differ materially 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 is also available on our website and in our most recent annual report on Form 10-K, both of which are available on our website.

Additionally, our comments 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, now it's -- it's now my pleasure to turn the call over to David Neumann.

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

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Good afternoon, and welcome to our call. I'll make a few comments about our business, then John will discuss our financial results.

In Connected Solutions, we continue to have confidence in our core vertical markets including industrial IoT, fleet and enterprise WiFi.

PCTEL is in a strong position to help company's design and deploy systems to improve processes using wireless technology.

Industrial IoT applications and smart grid automation, asset tracking, fleet and mass transit coordination provide long-term growth drivers for the company. To support fleet applications, the Connected Solutions segment recently launched our industry-leading Coach II antenna solution, which is a 9 in 1 antenna that supports 4 LTE carriers, 4 WiFi links and global navigation satellite systems like GPS in a single housing. The Coach II antenna's ability to support multiple technologies in 1 device, reduces installation complexity while providing exceptional performance.

In enterprise WiFi, we continue to make investments to support next-generation WiFi standards. We opened our wireless product development center in Akron in April to focus on advanced radio integration, device optimization and embedded antenna design.

The team has made significant contributions in assisting customers with radio integration and developing 802.11 AX embedded antenna reference designs for major chip manufacturers. We remain confident in the long-term growth prospects of small cells globally to support denser 4G networks, the migration to 5G and ubiquitous WiFi. As an example, in the recently announced merger between T-Mobile and Sprint, T-Mobile stated its small cells will account for approximately 37% of the planned network.

We have significant small cell business in China, and we are committed to those customers. We plan to continue to make investments in our China based operations, although we acknowledge that there are some uncertainties related to trade with China.

In RF solutions, we had a softer first quarter in North America due to deferred deployment schedules. We recognized revenue risk in our test and measurement business related to wireless operator budgets and the pending merger between T-Mobile and Sprint, but we believe these 2 are short-term issues.

With respect to 5G and longer-term initiatives, we continue to make investments in RFS to support 5G algorithm and scanner product development.

It is important to note that our scanning receivers are software defined radios and customers using our IBflex scanner in sub-6 gigahertz bands, will be able to upgrade to test 5G deployments.

While this provides a cost-effective upgrade solution for customers as they migrate to 5G, it provides PCTEL with a high margin upsell opportunity.

As previously announced, we also support 5G millimeter wave testing using our down converter solution.

Sales visibility is improving in RFS, and we are confident in our long-term revenue performance as operators begin to roll out mobile 5G in 2019.

John and I will be attending the East Coast IDEAS Investor Conference, tomorrow, May 10, in Boston, and we will present at the 19th Annual B. Riley Investor Conference held on May 23 in Santa Monica.

We look forward to meeting with investors at these conferences.

With that, I will now turn the call over to John Schoen for a closer look at our first quarter as well as our second quarter and annual 2018 guidance. John?

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John W. Schoen, PCTEL, Inc. - Senior VP, CFO & Corporate Secretary [4]

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Thanks, David. I will be addressing the results from continuing operations for the first quarter of 2018 and comparing them to the same period last year.

Revenue was $21.7 million in the quarter, down 5%. Gross profit margin was 36.2% in the quarter, down 500 basis points.

Adjusted EBITDA margin as a percent of revenue was 2% compared to 7% last year. Diluted non-GAAP EPS was a loss of $0.01 compared to profit of $0.05 last year.

Now I will review the results of each segment.

For the Connected Solutions segment, revenue in the quarter was $17.8 million, up 3%. Gross margin -- or gross profit margin was 29.3%, down 200 basis points. The segment saw a significant revenue growth in enterprise WiFi applications. However, those revenue gains were largely offset by pricing pressure we are experiencing in the small spell -- small cell space, which also impacted gross profit margins.

We expect cost reduction efforts we have initiated, will improve Q1 margins by about 50 basis points in Q2, a 100 basis points in Q3 and fully catch up with the pricing trend by the fourth quarter.

For the RF Solutions segment, revenue was $4 million in the quarter, down 30%. Gross profit was 66.8% in the quarter, down 350 basis points. The segments saw lower revenue in North American market as several carriers were late in deploying their 2018 capital budgets.

Overall margin was lower as there was less leveraging of fixed cost of goods sold.

I would like to point out a change at the corporate level starting this quarter. The company uses a non-GAAP income tax rate that corresponds to its worldwide cash basis income tax liability. The new U.S. tax legislation has caused our non-GAAP income tax rate to drop from 18% to 8%. The difference was not materially enough in the first quarter to impact the $0.01 non-GAAP EPS loss reported, but should be noted for future modeling.

Now let's turn to guidance for the second quarter 2018 and the year. Second quarter revenue is expected to be between $23 million and $24 million. Gross profit is expected to be between 39% and 41%, and non-GAAP diluted earnings per share from continuing operations are expected to be between $0.05 and $0.07 at that revenue range.

We believe the deferred capital budget deployment in the U.S. carrier market for test tools and the pricing pressure in the small cell antenna market, we experienced in the first quarter, will flow through to the year. We are revising our annual 2018 revenue guidance range to between $97 million and $99 million. We do not anticipate that it will have an impact on 2019 revenue and beyond as the 5G rollout begins.

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

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

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Thank you, John. We're seeing improvement or we're seeing progress in both segments in the second quarter. There are some major market opportunities that we are excited about on the horizon. We believe our investments, such as the R&D center in Akron and our 5G algorithm development will drive growth. We are well positioned to capture market share in a modestly growing market, expand into new markets and provide shareholders a long-term returns.

At close, I would like to thank the global team at PCTEL for their continued efforts and contribution to our success.

With that, John and I are available to answer questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question will come from Jaeson Schmidt with Lake Street Capital.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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I just want to start quickly on the pricing pressure, you guys obviously expected to proceed throughout this year. Can you talk a little bit about the competitive dynamics in that market, what's really driving this?

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

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Well, the small cell space, this is really driven by the end customer that expects a fixed cost reduction, basically for every bid. So it's up to PCTEL and the team here to be competitive and to manage our cost structure that we can satisfy those pricing expectations. So there's one large customer in China, which is driving most of our small cell business and that's really the situation.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Okay. That's helpful. And then staying on the China topic, I know you mentioned kind of concerns around potential trade with China, potentially creating headwinds in the future. How much are you baking in that potential risk into the full year outlook?

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

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We're definitely keeping an eye on it, it has impacted our guidance. Now there's really 2 risks or challenges with China. Given all the news, potential trade war between the U.S. and China. China already has an initiative in place called the Made in China 2025, where they want by 2020 to have 40% of major components manufactured domestically, and then by 2025, have a 70% of those components manufactured domestically. We are already competing with Chinese vendors for the business that we have and that's not going to change. Our customers competing globally, and they expect to have the performance at the right price to compete globally. So I'm not as concerned, at least in the next 3 to 5 years, that PCTEL can't be competitive against the Chinese manufacturers and provide a very good product at a very good price.

Now the other risk, which I also think is relatively low and that is similar to the ban on ZTE, that there could be a ban on other companies in China like Huawei. Now I'm not too concerned about that because even if you look at the history with ZTE, there was a negotiation and settlement put in place before they went to an all-out ban. So yes, we have to be aware of this and keep this in mind as we are planning. But I don't see a big issue with China for us in the short-term, and we continue to make investments, so we have a large staff there, we'll continue to support our customers.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Okay, that makes sense. And the last one for me and I'll pass it along. You noted seeing some nice strength in the enterprise WiFi market. Curious if you could disclose what percentage of your Connected Solutions business now is made up of the Wi-Fi business?

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John W. Schoen, PCTEL, Inc. - Senior VP, CFO & Corporate Secretary [7]

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Yes. We really don't want to get in to publicly talking about what the verticals are, together. But at the end of the day, what we really look for is, which verticals are driving growth. And in that case, there was growth in -- I can say there was double-digit growth in that particular vertical year-over-year for this quarter, but that's about as far as I want to disclose.

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Operator [8]

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(Operator Instructions) Your next question will come from Marc Wiesenberger with B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [9]

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Given that you have done work with Sprint over the years. Do you see that potential combination being affected going forward, is there's going to be a potential bigger opportunity or a potential threat to the business?

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David A. Neumann, PCTEL, Inc. - CEO & Director [10]

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I think long-term, it's a potential opportunity. We do business both with T-mobile and with Sprint. Given that the amount of spectrum that both entities have, if this merger does go through, they will create more competition for AT&T and Verizon. They'll have the spectrum, they'll have the funding. And in the long term, I think all 3 operators will make more investments in test and measurement for their networks and also deploy more infrastructure, which would help us with small cells. So I think long-term, it's good, short term, I'm not too concerned because it's going to take a year for this merger to happen. So I think it'll be business as usual. But then we will go through the integration, there will be some disruption, but after the merger is complete, I think it's good for PCTEL.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [11]

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Great. One more, you mentioned the new product, the Coach II and how it reduces the installation complexity. Can you kind of talk about how that's going to improve efficiencies for your customers and kind of quantify that a little bit?

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

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So if you think about it, if you have a set of WiFi antennas, you have set of LTE antennas and you have a GPS antenna, they are all going to require installation and most probably, multiple holes in the roof of whatever vehicle you're putting these systems on. So -- and you're going to have issues just with the layout of the antennas on the roof. It's really going to be up to installers to lay them on properly. PCTEL is well known for the performance of our individual antennas and we also have a very good reputation, when we need to put multiple antenna elements together in one package. So that they don't more or less cause interference with each other. So with this package, it's the antennas is of 5 or 6 inches in diameter, it's one hole to drill into the roof of the vehicle and it's a complete system. So you have the individual performance by technology and it's a very user-friendly package.

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Operator [13]

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(Operator Instructions)

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David A. Neumann, PCTEL, Inc. - CEO & Director [14]

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Okay, if there are no other questions, Thank you for joining the conference, if you're in Boston tomorrow, be sure to stop by the conference. John and I will be there. And have a great afternoon. Thank you.

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Operator [15]

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This concludes today's conference call. We thank you for your participation. You may now disconnect.