PCTEL, Inc.
Q2 2022 Earnings Call Transcript

Published: 13 Aug 2022

[Operator:]

Welcome to the PCTEL Second Quarter 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I will now turn the call over to Kevin McGowan, the Company's CFO.

[Kevin McGowan:]

Thank you for joining us on today's conference call to discuss PCTEL's second quarter 2022 financial results. With me today is David Neumann, the Company's CEO. Please note that a webcast replay will be available on our website. Before we begin, let me remind you that this call may contain forward-looking statements and projections based upon current circumstances. While these forward-looking statements and projections reflect PCTEL's current judgment, they are subject to risks and uncertainties particularly related to the COVID-19 pandemic, global supply chain and logistics challenges, global economic circumstances including recession, geopolitical circumstances and opportunities to expand our distribution channels that could cause actual results to differ materially from these forward-looking statements and projections. Risk factors that could cause PCTEL's actual results to differ materially from its projections are discussed in the earnings press release, which was issued today and the Company's annual report on Form 10-K. The Company assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. Additionally, our commentary will include reference to the following non-GAAP measures

[David Neumann:]

Thank you, Kevin. Good afternoon, and thank you for joining us. In today's call, we will discuss the second quarter performance and outlook for the third quarter followed by our long-term vision, our growth strategies and the progress we are making in each of our product lines. To start, I'll summarize our performance in the quarter, and Kevin will provide more details later in the call. We're pleased to report $25 million in revenue for Q2, a 15% increase year-over-year and 11% sequentially. The Company has grown revenues steadily over each of the past six consecutive quarters driven by improved market conditions and new product releases. GAAP net income was $400,000 or $0.02 per share compared to GAAP net loss of $200,000 or minus $0.01 per share in the second quarter of 2021. Non-GAAP earnings per share was $0.10 compared to $0.07 in the second quarter of '21. Non-GAAP gross margin was 46% due to the strong scanning receiver sales in the quarter. The team has done a great job through the first half of the year, executing on our vision and successfully managing inflationary pressures and supply chain challenges. We continue to see improvements both in transit times and shipping fees although they both are still considerably higher than before the pandemic. We also continue to optimize our contract manufacturing approach and are investigating potential manufacturers in Eastern Europe and Mexico to strengthen our cost efficiency and ability to mitigate risks. Wireless connectivity is expanding rapidly as more systems rely on wireless networks and automation to drive productivity particularly in growing wireless connectivity verticals such as 5G carriers, public safety, rail, logistics, agriculture, vehicles and utilities. We are a global leader in designing and distributing RF scanning receiver products for wireless carriers and public safety applications. Our long-term vision is to expand our leadership position to include antenna and industrial IoT wireless products that enable connectivity for the most critical applications. Our long-term vision is supported by three core growth strategies

[Kevin McGowan:]

Thank you, David. I will begin today with a detailed review of our second quarter financial results followed by our third quarter 2022 outlook. Our revenues in the second quarter were at the high end of our expectations and our earnings exceeded our expectations. Total revenues of $25 million were approximately 15% higher in the second quarter of 2022 compared to the second quarter of 2021 due to higher revenues in both our antenna and industrial IoT devices product line and in our test and measurement product line. Revenues for antennas and industrial IoT devices were $17.6 million in the period, an increase of $2 million compared to the second quarter of 2021. This increase for the second quarter of 2022 is due to both an increase in revenues related to antennas for fleet applications and a full quarter of revenue recognized from Smarteq, which was acquired at the end of April 2021. Test and measurement revenues were $7.4 million for the second quarter of 2022. Our test and measurement revenues were $1 million higher compared to the second quarter of 2021 primarily due to stronger sales for 5G products through OEM customers. The second quarter 2022 gross profit margin on a non-GAAP basis was 46%, which was 1.5% lower than the second quarter 2021. The decrease in the gross profit margin was primarily due to lower gross margin for antennas and industrial IoT devices. The non-GAAP gross profit margin percentage for antennas and industrial IoT devices improved sequentially but was lower by 3% in the second quarter of 2022 compared to the second quarter of 2021 primarily because less favorable product mix offset favorable operating leverage. The non-GAAP gross profit margin percentage for test and measurement products was higher by 1.4% in the second quarter of 2022 compared to the second quarter of 2021. Operating expenses on a non-GAAP basis were $9.7 million in the second quarter of 2022, an increase of $0.8 million compared to the second quarter of 2021 and $0.1 million higher sequentially. The year-over-year increase primarily resulted from higher incentive compensation expenses, sales and marketing costs related to travel and trade shows and a full quarter of Smarteq operating expenses. Adjusted EBITDA increased by 18% to $2.6 million in the second quarter of 2022 compared to $2.2 million in the second quarter of 2021. Adjusted EBITDA as a percentage of revenue was 10% in the second quarter of 2022, approximately the same as the second quarter of 2021. And non-GAAP diluted earnings per share was $0.10 in the second quarter of 2022, higher by $0.03 compared to the second quarter of 2021. Cash and investments were $28.3 million at the end of the second quarter of 2022. When compared to the end of the first quarter, our cash and investments increased by approximately $0.6 million as free cash flow of $1.6 million offset cash used on financing and other cash flow activities of $0.6 million. Financing activities in the second quarter included payment of our quarterly dividend. Our cash and investments on hand and cash flow supports our capital allocation strategies of paying quarterly dividends and having available funds for M&A activities. Turning to guidance. With our backlog going into the third quarter and continued demand for our products, we expect to achieve revenues in the third quarter in the range of $25.5 million to $26.5 million. Based on product mix, we expect our non-GAAP gross profit margin percentage to be in the range of 44% to 45%. And we expect our non-GAAP earnings per share to be in the range of $0.09 to $0.11. The third quarter 2022 revenue guidance represents a year-over-year increase compared to $22.4 million in the third quarter of 2021 and at the midpoint of the range is approximately 16% higher than the third quarter 2021. With that, I will now turn the call back to David.

[David Neumann:]

Thank you, Kevin. I would now like to dive deeper into our progress against our three key growth strategies that I spoke to earlier in the call

[Operator:]

[Operator Instructions] Your first question is coming from Jaeson Schmidt of Lake Street Capital.

[Jaeson Schmidt:]

Congrats on some really nice results here. Just want to start with Q2. I'm curious if there was any demand you couldn't ship because of the supply chain. And I guess relatedly, the outperformance in the quarter, was that driven more by just better demand than expected? Or did better supply chain conditions really start to show themselves in Q2 compared to what you guys had initially expected?

[David Neumann:]

Yes. So I don't think we were limited beyond other companies with supply chain issues for delivering product. Of course, there's longer lead times for some components for both the scanning receivers and antennas alike. But the team has done a pretty good job working very closely with customers to make sure that they don't go into any kind of line down situation and to really meet their specific needs for deliveries for products. So I don't think it was necessarily products shifting into Q2 because of supply chain issues. But if you recall, coming into the year in Q4 and then in Q1, we had a very strong backlog. So that definitely helps us with the quarter, more so for the antenna products because a good portion of the products that are shipped within the quarter come from a backlog where the scanning receivers are more, I would say, transactional and our orders taken are usually shipped in the same quarter. Now that being said, the two orders from our OEMs for Gflex and HBflex within the quarter were considerably higher than we would expect. And it puts us in a pretty good position coming into Q3 with some backlog on the scanner front, too.

[Kevin McGowan:]

I think, Jaeson, on your second question, the demand from those OEM orders is a key reason why we're able to hit the high end of the revenues for the quarter.

[Jaeson Schmidt:]

Okay. That's helpful. And then you mentioned the introduction of the Smarteq portfolio into the North American market. Just curious how feedback has been so far.

[David Neumann:]

Of course, we prioritize the products that we thought would be most applicable for the U.S. And one of those products is the EV charging station of SmartDisc antennas. Smarteq has been very successful in the Nordic countries with the EV charging stations. And we see the demand picking up in the U.S., a lot of vendors for charging stations. And to some extent, this bill that's about to be passed, giving credits for some EV cars will help drive some of that as well. So we've brought those products into the U.S. They're in trials. Some customers are using those, whether they're OEM or white labeled. And then beyond that, the other vehicular antennas, so where their antennas would have the quickest need in the U.S. are the ones that we brought over first. And likewise, we're going the other way too. We're introducing some of the PCTEL antennas up, perhaps didn't have as much traction in Europe. And now we're going to promote those through Smarteq. We've brought on one new distributor in the region. And we've just recently hired a head of distribution for that area. So we think there'll be an opportunity to move PCTEL products to a greater extent in Europe, too.

[Jaeson Schmidt:]

Okay. And just the last one for me, and I'll jump back in the queue. Some continued nice traction in the test and measurement business. I know you highlighted some big orders there. How should we think about that business here in the second half? Can you build upon this first half momentum?

[David Neumann:]

So these two orders were through OEMs. So they're predominantly for the wireless operators. So this is a 5G wireless operator need. That doesn't include the continued traction that we're getting in public safety. It's not growing necessarily at the same rate as cellular through the first half of the year, but there are a lot of opportunities. So we've done very well in building a testing space with the IBflex. We introduced SeeHawk Central, which collects the data, presents the reports, allows the users to manage their systems. And then we just launched -- or just announced the upcoming launch of SeeHawk Monitor. And SeeHawk Monitor is going to be important because that does two things

[Operator:]

Your next question is coming from John Bair of Ascend Wealth Advisors.

[John Bair:]

Couple of questions. Is there any particular area that you're seeing real strength in, in orders?

[David Neumann:]

I think we mentioned it earlier in the call. Agriculture is definitely a strong area for the antennas. We mentioned the big orders for the 5G test and measurement equipment for the operators. Utilities is doing well. Some of the vehicular space is doing well. But beyond, I think agriculture is probably the strongest on the antenna front.

[John Bair:]

And the other thing, any new customers or new areas that you're making any headway in?

[David Neumann:]

One of the key strategies is to expand our distribution channels and our number of distributors. And the reason is just reach customer -- new customers, getting the point-of-sale information, figuring out what products are selling best into what areas. And it just gives us a lot more leverage than trying to build a direct sales team to try to reach every single end customer. So I would say that we're seeing quite a few new customers come through distributor networks and distributor channels. And hence, we'll continue to focus in that space.

[John Bair:]

Okay. So in other words, these newer distributors that you're bringing on board are giving you exposure to potential new markets? Is that...

[David Neumann:]

Yes, think about it. So you're working on a project and you need a couple of antennas to do the prototypes. You go to a distributor. You buy the antennas. Once you have that product up and running, then you go back to the distributor and you buy the antennas in more volume. So it's just a very efficient way to provide product to end customers.

[John Bair:]

Okay. And then overall, are you seeing an increase in your overall backlog? Or is the turnover pretty quick on that?

[David Neumann:]

Well, this quarter was definitely at the high end. Backlog may have been another record, but keep in mind that that's heavily weighted towards scanning receiver orders. So I would say on the antenna front, it's probably pretty close to what it's been historically for a quarter in a given year. But the scanner backlog was higher than it usually is.

[Operator:]

[Operator Instructions] Our next question is coming from David Wright from Henry Investment Trust.

[David Wright:]

My question is about the long-term vision that you were describing. How is that contemplated to affect margins if it's successful?

[David Neumann:]

Well, in general, we focus on products for the more, I would say, critical applications. So products that require -- that are rugged, that require the strong RF capabilities, in a lot of cases, mechanical designs that can withstand the elements. So focusing on those areas allow us to increase the price, have better margins, high reliability. And then over the longer term, Kevin can cover this a bit, but we do expect to get leverage as we grow. Typically, on the engineering front, we're going to make -- continue to make investments probably about the same rate as growth for the Company. On the sales front, probably about half the rate of growth. And then in terms of G&A, we have enough G&A in place now that we could support a company twice the size. So we would get some leverage there and be able to increase the overall margin percentage over time.

[David Wright:]

But I mean let me -- if I might ask, does your long-term vision have some financial goals to it? Or is it just launch new products, expand distribution channels and get more market share?

[Kevin McGowan:]

We've got financial goals. Right now, we've targeted 2023 to be in the $115 million to $125 million range in revenues and a range of 11% to 13% EBITDA. So we're at 10% EBITDA this quarter. And kind of following up from what David said about how we can improve profitability, it's leverage on the FX. And then from where we stand here, we think we can improve the margins on the antenna side. We are down from where we were last year on the antenna margins. But with some of the things that we're doing with -- improving freight costs and improving some of our efficiency in the U.S. operations and targeting certain lower-margin products from a pricing perspective will allow us to improve those margins as well.

[Operator:]

Your next question is coming from [Steve Rudd from Blackwell Millennium].

[Unidentified Analyst:]

A quick question. I don't know where we stand at. I mean obviously, great quarter. You're on the right track. I've been in and out of the Company over 20 years or so. And typically, when we are on an upswing like this and we have cash, we utilize some of that cash or a good deal of that cash to share buybacks. I don't know where you are on a buyback program. I know there was one in place through 2021. And honestly, I've just been lazy in updating myself. So if you would be good enough to update as to where we are and where we might be headed.

[Kevin McGowan:]

Yes. We did end up buying about $7 million worth of stock between the end of 2020 and 2021, but that was completed in September of '21. Since then, we haven't approved any new programs. And we do consider it each quarter. Our Board reviews it. But at this point, there are no pending programs.

[Unidentified Analyst:]

So just to follow it up, I understood that the program was ended in 2021. But what I'm aiming towards is we do have a fair amount of cash. Our valuation is currently low. Our prospects are high. It seems an opportune time. And the market price in general is a depressed market -- stock market, that is. So it seems we've hit almost the perfect triumvirate of opportunity here to authorize a buyback and act on it. So what are your thoughts about that as you go speak with your Board?

[David Neumann:]

So as we went through the last Board meeting, which we finished in the last week or so, there was a discussion about a buyback, the amount of cash that we have on hand. Our strategy is -- long-term strategy has always included M&A. So we acquired Smarteq in '21. We continue to look for opportunities in the antenna space. It's still a very fragmented space. Most of those companies are on the smaller side, which creates some challenges in valuation and just being sure the owners are ready to sell. But the Board and the management team want to use this cash for acquisitions. We'd like to find a couple more Smarteqs or larger antenna companies along the same -- in the same areas, especially in the U.S. and Europe. And we'll review the capital allocation again at the next Board meeting. But at least at the last meeting, we've decided to continue to look at M&A and not do a buyback immediately.

[Operator:]

[Operator Instructions] Okay. We appear to have no further questions in the queue. I'm now going to hand back over to David Neumann for any closing comments.

[David Neumann:]

Well, thank you all for joining us this afternoon. Thank you to our employees, our suppliers and, of course, our customers for their commitment to PCTEL. I wish everyone a good afternoon. Thank you and stay safe.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.