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Edited Transcript of PCTI earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 PCTEL Inc Earnings Call

BLOOMINGDALE Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of PCTEL Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Neumann

PCTEL, Inc. - CEO & Director

* Kevin J. McGowan

PCTEL, Inc. - VP & CFO

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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

* Jorge Antonio Fermin

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

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Presentation

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Operator [1]

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Welcome to the PCTEL Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to Kevin McGowan, company's CFO.

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Kevin J. McGowan, PCTEL, Inc. - VP & CFO [2]

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Thank you for joining us on today's conference call to discuss PCTEL's Third Quarter 2019 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 these forward-looking projections. Risk factors that could cause PCTEL's actual results to materially differ from its projections are discussed in the earnings press release, which was issued today, and in our most recent annual report on Form 10-K, both of which are available on our website.

Additionally, our commentary will include reference to the following non-GAAP measures, non-GAAP earnings per share and adjusted EBITDA. We believe these non-GAAP measures facilitate comparability of results over different periods. A full reconciliation of these non-GAAP measures to our GAAP measures is included in our quarterly 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 & Director [3]

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Thank you, Kevin. Welcome, and thank you for joining us this afternoon.

We're pleased with another strong quarter, driven by sequential revenue and non-GAAP earnings per share improvement. Third quarter revenue, adjusted EBITDA and non-GAAP earnings per share all increased both sequentially and compared to last year. This makes our fourth consecutive quarter of solid results, driven by the demand for 5G scanning receivers and antenna project wins for IoT applications.

We issued a press release after the market closed, announcing our results for the third quarter ended September 30, 2019. Our revenues were $23.6 million. We achieved $0.14 in non-GAAP earnings per share for the third quarter and gross margins of 45.1%, up 8.6% over last year. Increased sales of higher-margin scanning receivers and improved gross margins for antennas contributed to strong non-GAAP earnings per share for the quarter. Our focus on higher-margin antenna solutions for intelligent transportation and industrial IoT, coupled with steady demand for our 5G scanning receivers, contributed significantly to increased margins for the quarter.

As we mentioned in our last call, we expect to maintain these margins through 2019, supported in part by customers' end-of-year budget spend on test and measurement tools.

Looking forward to 2020, we believe we can maintain comparable margins on these product lines. We expect revenue for 5G scanning receivers to remain strong through 2020, with antenna product revenue accelerating later in the year as we execute on the industrial IoT initiatives.

All major operators in U.S. and many in Canada, Europe and Asia have begun deploying 5G infrastructure. The 5 largest operators in the U.S. and 4 of the top 5 operators in Canada use PCTEL's 5G scanning receiver solutions. Our 5G millimeter and sub-6 gigahertz 5G testing solutions are also used by leading operators in Europe and Asia.

Interestingly, we have begun selling our 5G scanning receivers in South Korea, which historically has not used scanning receivers to deploy wireless networks. We believe broad 5G network rollouts are in the early phases. To date, approximately 40 countries have completed 5G spectrum allocations or licensing, and another 40 countries plan to allocate frequencies between now and the end of 2021. It will take many years to completely roll out 5G to support advanced applications that require increased capacity, low latency to support autonomous systems and massive connections for industrial IoT solutions.

To help operators transition from 4G to 5G networks, PCTEL recently added a new testing capability to support dynamic spectrum sharing. Dynamic spectrum sharing, or DSS, allows operators to use both 4G and 5G access technologies within the same spectrum allocations. This gives the operators flexibility to allocate existing spectrum as needed to 5G for higher throughput applications and then revert back to 4G when not needed.

PCTEL's IBflex and HBflex scanning receivers support the DSS feature and can simultaneously test both 4G LTE and 5G signals across the same spectrum, which helps operators transition to 5G without having to use additional dedicated spectrum.

Ultimately, 5G will be an enabling technology to support advanced industrial IoT, mission-critical applications that require high throughput with low latency. Of our 3 targeted market segments, enterprise wireless, intelligent transportation and industrial IoT, the enterprise wireless segment currently generates a majority of our revenue, which is derived from 5G scanners, enterprise WiFi and public safety.

Within public safety, PCTEL has been able to leverage the strong relationships developed for its antenna solutions to promote and sell scanning receivers into the same markets. Our largest distributors for antenna solutions and public safety are now offering our scanning receiver solutions, and we have certified more than 17 engineering service companies in the U.S. on PCTEL's public safety tools.

The engineering service companies test the buildings on behalf of the local jurisdictions to determine if first responders can communicate in buildings during emergencies. Also, we received a WiFi embedded antenna design win in the quarter from a leading global access point manufacturer, and we expect our WiFi radio products for IoT applications to do well. Although, enterprise wireless has been our strongest market segment, we anticipate that our intelligent transportation and industrial IoT market segments will grow faster over the next several years to address needs in fleet, transit, energy and industrial IoT applications.

We announced a new innovative antenna for both of these market segments that combines precision location support with high-performance LTE, 5G, Bluetooth and WiFi connectivity. The Coach II antenna is designed to provide greater precision and reliability for advanced rail positive train control systems, and it supports a variety of fleet, public safety and industrial IoT applications.

PCTEL antennas have become a critical component of systems as wireless networks become more complex. To complement our industrial IoT antenna portfolio, PCTEL is leveraging our RF and radio expertise to expand our product offering to include ruggedized IoT radio solutions. These solutions will increase our product portfolio for our OEM customers to include ruggedized access points, device interface cards and antennas. Our first of several WiFi radio product releases for OEM integration will be announced later this month. We believe these solutions will begin to generate revenue in the second half of 2020.

With respect to China, we are encouraged that trade discussions are progressing and further tariff increases are on hold. However, the uncertainty in relations with China, restrictions on trading with certain Chinese entities and the current tariffs present some risks to our business. Our plans to increase our manufacturing flexibility have not changed. We are making progress with the transition to contract manufacturing, which reduces our exposure in Tianjin. Manufacturing transition will continue through 2020.

Longer term, I believe China and the U.S. will work through these issues, and China will continue to be an important market and operating area for PCTEL. Even with the challenges in China, we are pleased that this is our fourth consecutive quarter with improved sequential results. We expect to finish the year strong doing what we do best, delivering products that solve complex RF problems.

With that, I'll now turn the call over to Kevin for a closer look at our third quarter. Kevin?

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Kevin J. McGowan, PCTEL, Inc. - VP & CFO [4]

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Thank you, David. I will address the financial results for the third quarter ended September 2019, and I will provide fourth quarter 2019 guidance.

Revenues were $23.6 million in the third quarter, up 28% compared to the third quarter of 2018. Revenues were 1% higher sequentially because of higher antenna product revenues, and both test and measurement revenues and antenna product revenues were higher compared to the third quarter last year.

With strong sales of 5G scanning receivers, test and measurement revenues were $7.2 million in the third quarter 2019, $3.7 million higher than last year's third quarter. Antenna product revenues were $16.5 million in the third quarter 2019, 11% higher compared to the third quarter of 2018 and 3% higher sequentially. Third quarter antenna product revenues were higher for antennas for intelligent transportation and fleet applications, offsetting declines for small cell antennas.

The third quarter of 2019 gross profit margin for GAAP improved by 8.6% to 45.1% due to the favorable product mix of test and measurement products and improved gross margin percentage for antennas. The gross margin percentage for antenna products was 4.4% higher in the third quarter of 2019 compared to the prior year, primarily due to a more profitable mix within the product line but also the favorable impact of foreign currency changes and because of the cost reduction actions taken in 2018.

Adjusted EBITDA was $3.1 million for the third quarter 2019 compared to a loss of $0.6 million in the third quarter 2018. Adjusted EBITDA margin as a percentage of revenue was 13% in the third quarter 2019 compared to negative 3% for the third quarter of 2018.

Non-GAAP diluted earnings per share was $0.14 in the third quarter of 2019 compared to negative $0.06 in the third quarter of 2018. Non-GAAP earnings per share was higher compared to last year because of higher revenues and higher gross profit margins.

Our GAAP results included $0.3 million for restructuring expense related to the company's transition plan for China manufacturing. Cash and investments increased by $1.3 million to $38.1 million at the end of the third quarter of 2019 as free cash flow was $2.1 million during the third quarter of 2019.

We also recognize that our strong balance sheet allows us the opportunity to repurchase our shares. Our Board of Directors approved a share repurchase program, pursuant to which PCTEL may repurchase up to $7 million of shares of its common stock. The repurchase program may be made from time to time in the open market and negotiated purchases effective immediately through the end of 2020. This share repurchase program affords us the flexibility to be opportunistic in our capital allocation strategy, and this program offers an opportunity for us to reiterate our confidence in the strength and future growth potential of PCTEL to our shareholders.

(technical difficulty)

Now let's turn to fourth quarter 2019 guidance. We expect fourth quarter revenues will be between $23 million and $24 million. The GAAP gross margin percentage is projected to be in the range of 44% to 46%, and the non-GAAP earnings per share is projected to be in the range of $0.11 to $0.12.

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 & Director [5]

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Thank you all for joining us. Before we take questions, I'd like to share a few closing thoughts.

We're pleased with our performance year-to-date in 2019. Our company's well positioned to grow over the next several years. We hold a dominant position in providing tools for 5G deployments. Our enterprise wireless business is strong. There's a growing global market for us to address in intelligent transportation, and the number of industrial IoT opportunities continue to increase. Customers have and will continue to come to PCTEL to solve their difficult RF challenges, which enables us to drive growth and increase shareholder value.

Kevin and I look forward to attending and meeting with investors at the Southwest IDEAS Investor Conference in Dallas on November 20.

With that, Kevin and I are available to answer questions. Operator? And cut.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question on the line. Jaeson Schmidt from Lake Street.

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

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Just want to start with your comment on a new embedded WiFi win. Is that with an existing customer or is that a new customer?

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

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That is with an existing long-term customer, but is -- and most of our customers, they have multiple programs, new programs. So this was a new access point that we bid on, developed the product and then eventually won the bid.

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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 can you just talk a little bit about your visibility into the first half of next year or if you've seen visibility improve over the last 3 months here?

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

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With visibility, the 2 product segments are very different. So when you look at the scanning receiver business, and in test and measurement in general, the visibility is relatively short. So when we do our forecast and do our estimates, it's really based on the rate of deployment for 4G and 5G networks. So that really hasn't changed.

Within the antenna space, there are several customers that we have long-standing supply agreements to manufacture antennas for specific product lines. And then we also have a number of stocking distributors, which are relatively consistent in their sales. So we have some visibility there, but I would say we're still reliant quite a bit on project-based business. So as some projects roll off and finish, it's up to the business development team and sales team to replace those with additional projects.

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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 final one for me, and I'll jump back into queue, I know you mentioned selling scanners in South Korea. How should we think about that potential opportunity for you guys?

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David A. Neumann, PCTEL, Inc. - CEO & Director [7]

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Well, I think the bulk of those scanners have already been sold. So there will be some incremental sales. I don't think it's necessarily going to be large enough that would change any of our forecasts or expectations for Asia. But it's just interesting that for the 5G technology, the Korean markets see the value of collecting RF information independent of UEs. And I think it's important, too, because Korea, once they deployed 5G, they saw, I think, a 3x uptake in the amount of data on the network. So it's one of the early adopters for 5G. And so I think that bodes well for us selling scanners across the rest of the world as the networks are deploying.

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Operator [8]

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We have our next question from Jorge Fermin from B. Riley FBR.

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Jorge Antonio Fermin, B. Riley FBR, Inc., Research Division - Research Analyst [9]

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Filling in for Marc today. Have you been able to gain traction with any additional government agencies for your antennas, for the FirstNet related purposes similar to what you did for New York City?

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

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So the New York City deal, it was more of an industrial IoT, intelligent transportation system. It's related to FirstNet in that it's -- the infrastructure is considered mission-critical, but it wasn't necessarily an antenna sale specifically for FirstNet. Now with the NY DOT opportunity in that deployment, we're excited about it because, for one, it was a relatively large deployment. I think we had mentioned before, it was one of our largest, if not largest, antenna sale, and it's the first one. So there are going to be other opportunities, I would say, even in New York area for the other boroughs, and then across the U.S. as a municipality, see the benefit of linking the traffic signals to raw traffic, to clear ways for emergency vehicles and to help to support their mission-critical infrastructure.

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Jorge Antonio Fermin, B. Riley FBR, Inc., Research Division - Research Analyst [11]

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Great. And then you also mentioned a small China transition expense this quarter. How should we think about the financial impact of this -- that transition moving forward?

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Kevin J. McGowan, PCTEL, Inc. - VP & CFO [12]

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We've previously disclosed about $1 million of the total expense, which we will incur. Probably about half of it, we'll incur this year. And predominantly, most of the costs are for employee separation costs.

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Jorge Antonio Fermin, B. Riley FBR, Inc., Research Division - Research Analyst [13]

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Got it. And then my last question is, we're starting to hear some discussion about private 5G networks. Can you talk about what you're seeing in the marketplace and potential impacts for your business?

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

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Yes. Private 5G, I think, is interesting for us because it opens up another market, so we're not just selling into the carriers. I think one of the examples I read recently that Volkswagen in Germany is going to put in a private 5G network across their facilities. And within the manufacturing space, specifically, 5G's interesting because one of the main benefits of 5G is a low latency, which means you can have the robotics and the improvements in automation, which you really can't get -- or it's more difficult to get today with WiFi or even 4G. So it, for sure, expands our markets, gives us an opportunity to sell the scanning receivers into a wider set of customers.

I think it's still in the early stages. If you think about 5G, there's really 3 drivers. The first is the enhanced bandwidth, which a lot of the operators are deploying now just to offload some of the pressure off of 4G. The next set of major enhancements will include the low latency. So then I think it becomes more of a factor for factories and warehouses, et cetera. And then the third phase is the massive IoT capabilities. So for us, most of our sales for the scanning receivers are going into operators. It's still early deployments. But at -- I would say, at a later stage as a private sector deploys 5G, it will be another opportunity for PCTEL.

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Operator [15]

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(Operator Instructions) There are no further questions over the phone. I would now like to turn the call back to David Neumann for closing remarks.

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

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Well, I guess, you can tell that we recorded the call today. So let's have better control over that and better experience. So I apologize on behalf of our service provider for that. But in closing comments, we are very pleased with the performance over the last year. As we finish the year and get into 2020, I believe that the company is in a strong position, both from a strategic standpoint and execution to grow and provide the returns investors expect. I, of course, would like to especially thank our employees for their dedication and hard work, and our partners and investors for their continued support. We look forward to updating you on the next call. Thank you, and have a great afternoon.

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Operator [17]

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Thank you for joining us today for PCTEL's Third Quarter 2019 Earnings Call. You may now disconnect your lines.