PCTEL, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Welcome to PCTEL's First Quarter 2021 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 first quarter 2021 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 and projections based upon current circumstances. While these forward-looking statements and projections reflect PCTEL's best current judgment, they are subject to risks and uncertainties, particularly related to the COVID-19 pandemic and the impact of our acquisition of Smarteq Wireless AB, that could cause actual results to differ materially from these forward-looking statements and projections.

[David Neumann:]

Thank you, Kevin. Welcome and thank you for joining us this afternoon. In addition to providing commentary on the first quarter financial results, we are excited to share that we acquired Smarteq Wireless for approximately $6.8 million, which is less than one times projected 2021 revenue. We will make further investments in the company and expect a modest positive impact on the bottom line this year. Smarteq is based near Stockholm, Sweden, specializing in industrial IoT and vehicular antennas, with particular focus on smart metering, electric vehicle charging stations, and heavy construction and forestry vehicles. We expect that the US infrastructure bill and EU incentives to use electric vehicles will drive demand for charging stations with wireless connectivity. Smarteq's antenna products complement PCTEL's offerings in two of our primary vertical markets - industrial IoT and intelligent transportation. While a majority of Smarteq's sales are in the European Union, we believe we can create demand for their products in the US where a majority of PCTEL's current end customers are located. The acquisition expands our capabilities to sell our GNSS antenna products and IoT devices in Europe through Smarteq's sales team, their French subsidiary and our now combined established distribution channels. To summarize, we believe this acquisition will contribute to revenue and earnings growth, expand PCTEL's presence in Europe, add product lines in our key vertical markets, increase our global R&D capabilities and provide support to launch our IoT devices in Europe. We are excited to have the Smarteq team join us and we will work with them to provide excellent support to our expanded customer base.

[Kevin McGowan:]

Thank you, David. I will review the financial results for the first quarter ended March 31, 2021 and I will provide second quarter 2021 guidance. As David mentioned, our first quarter results were within our guidance despite challenges with transportation delays in our supply chain that impacted revenues for antennas and industrial IoT devices. Revenues of $17.7 million, which were at the lower end of our guidance in the first quarter 2021 were 1.1% or approximately $200,000 higher compared to the first quarter 2020. By product line, it was our best first quarter for test & measurement product revenues, with revenues of $6.2 million, an increase of $0.1 million compared to the first quarter 2020. The first quarter 2021 revenues for test & measurement products were 2.0% better than last year as revenues for U.S. public safety applications offset lower U.S. revenues for 5G technologies compared to the first quarter 2020. Revenues for antennas and industrial IoT devices were $11.7 million, an increase of $0.3 million compared to the first quarter 2020. The increase in revenues for antennas and industrial IoT devices was from fleet and transit applications. The first quarter 2021 gross profit margin on a GAAP basis was 47.1%, slightly higher than the first quarter 2020 gross profit margin of 46.9%. An increase in the gross profit margin percentage for test & measurement products offset a lower gross profit margin percentage for our antennas and industrial IoT devices. The gross profit margin percentage for test & measurement products was 3.3% higher in the first quarter 2021 compared to the prior year because of lower intangible asset amortization and lower employee costs. The gross profit margin percentage for antennas and industrial IoT devices was 2.2% lower in the first quarter 2021 compared to the prior year due to less favorable product mix, the unfavorable impact of foreign currencies related to manufacturing costs, and higher logistics costs.

[David Neumann:]

Thank you all for joining us. Before we take questions, I would like to share a few closing comments. We are on track and we see continual improvement in revenue and earnings through the year based on the rate of 5G deployments, IoT design wins for both antennas and devices, contributions from Smarteq and the increasing rate of incoming orders for antenna products. The pandemic and regional hot spots still create risks to the industries in which we operate, but we remain confident that our business will grow this year. We are extremely pleased with adding Smarteq to our team and with our strong balance sheet, we will continue to look for additional inorganic opportunities that meet our capital allocation goals. Kevin and I will be attending the Sidoti Virtual Conference on May 19th and 20th. We will also be attending the East Coast IDEAS investor conference virtually on June 16th. We look forward to meeting with investors at these conferences. With that, Kevin and I are available to take questions. Operator?

[Operator:]

Thank you. And we do have a question coming in from Jaeson Schmidt. Jason, your line is live. Please announce your affiliation and pose your question.

[Jaeson Schmidt:]

Hey, guys, thanks for taking my questions. Just curious if you're seeing any impact from the supply chain constraints, or if you anticipate seeing that tightening within the supply chain impact, I think you guys going forward?

[David Neumann:]

Yes, so I think we mentioned in the prepared remarks that we see really two impacts one is with supply chain longer lead time on some of the components. And then the other impact is just logistics. And given that we manufacture a good portion of the antenna products on China, the transportation to the U.S. has become a bit of a challenge. Now that being said, our supply chain team and customer service team has been working on this since the beginning of the pandemic. And we've been able to manage supply chain even with the increase of lead time. And in fact, working very closely with customers, they realize that this is a global challenge. And some of our largest customers have actually improved their forecasting and given us a longer lead time on the forecast, so we can manage - and manage supply chain. So yes, this is a - I think this is a global challenge and we will continue managing it as we need to. I don't know when it's going to end but I do think it's we have a pretty good handle on it.

[Jaeson Schmidt:]

Okay. Did that take away some revenue in Q1? And I guess relatedly is that impacting what guidance could have been for Q2 as well?

[Kevin McGowan:]

Jason, it did impact revenues for Q1. It did - we didn't take into account for Q2, but as David mentioned, we had more time to prepare and work with our customers and work with our suppliers. So we don't think it's as big an impact in Q2.

[David Neumann:]

And historically, Q1 is typically light anyways, especially on - even though we did really well with the scanning receivers. Now those forecasts or budgets don't usually get approved until later in the quarter. And then you have Chinese New Year with manufacturing. So the Q1 is usually a bit lighter Q2 is much stronger, and we do see improvements but we're being conservative because of some of the potential challenges.

[Jaeson Schmidt:]

Okay, that's helpful. And then last one for me and I'll jump back into queue. Looking at the Smarteq acquisition, how should we think about the potential growth rate there or what was sort of the historical growth rate Business?

[David Neumann:]

Smarteq, I think it's going to be consistent with the growth rate in the markets that we focus on as well. So if you break down the products, they fit very nicely in our intelligent transportation of vertical market that we focus on. And then also industrial IoT. So they - they're in I would say, some new and interesting areas, such as the charging stations for electric vehicles, which were not in but still in the IoT space. I would estimate that their growth rate in those spaces would be similar to what we estimate for our antennas. So it's probably high single digits to low double digits growth for the antenna business. I think the biggest difference between Smarteq and PCTEL is a majority of our revenues in the U.S. And a majority, if not all revenue for Smarteq is coming from Europe.

[Jaeson Schmidt:]

Okay. Thanks a lot, guys.

[David Neumann:]

Thanks Jaeson.

[Operator:]

Thank you. We did have another question coming from John Bair. John, your line is live. Please announce your affiliation and pose your question.

[John Bair:]

Thank you. John Bair with Ascend Wealth Advisors. Just wondering if you could speak to what you're seeing in the area of being able to get back into buildings and lining up your testing systems and so forth in that regard?

[David Neumann:]

Yeah, I think there's two components there one, many of the buildings are starting to allow visitors back in the buildings. So it helps our engineering services companies which repurchases the scanning receiver and public safety solution from PCTEL. But I also believe that over time, the building owners realize it's much easier to test buildings when they're empty. So in the last, I would say quarter, maybe a little bit longer, we've been - I mean the R&D and engineering services company partners have been able to get in buildings, because they're empty, and they can do their testing, they don't have to necessarily worry about keeping distance with the people in the building. So between those two, that businesses start to pick up. It's a very strong area for PCTEL, because based on our scanning receiver history with the cellular market was relatively and I don't want to make oversimplify for the engineering team, but relatively straightforward to add the P25 and other protocols to our scanning receiver. So we're able to get to the market first. As I mentioned previously, we've got over 100 engineering services company using the tools. And now that they can get into the building, what we're seeing an uptake in purchases of that system.

[John Bair:]

Do you see any potential issue with - I mean, hearing a lot of different companies and different industries saying they're going to bring your workforce back and so forth? And do you think there's any potential issue with being able to meet an increased interest in the building management companies to allow for more servicing and testing and so forth? In other words, any kind of personnel issues, staffing issues?

[David Neumann:]

I don't know if I understand your question, John.

[John Bair:]

Well, if you're - if these companies and in building management are starting to open up and allow the stuff to come in. Are the folks that are actually doing the testing and so forth? Is there a potential issue that they won't be able to meet - have the personnel to do that? I mean to be a nice problem, I guess, but…

[David Neumann:]

I would say rate of purchases of our tools is pretty strong. And it's not that - I don't think there's a shortage of engineers to do the testing. I don't think that's really an issue and keep in mind too that our tools are sold to engineering services companies that are basically spread out across United States. So yeah, quite a quite a bit of competition in each city. So I would believe or think that if there was a shortage from one engineering company in an area that some of the other companies could step up and in fill that need. So I don't think that's an issue.

[John Bair:]

Okay. Very good. That's all I have. Thank you.

[David Neumann:]

Good. Thank you, john.

[Operator:]

Thank you. And there were no other questions in the queue. At this time. I'd now like to hand the call back to David Newman to make any closing remarks.

[David Neumann:]

Thank you and thank you all for joining us this afternoon. I would like to thank all of our employees for grinding through some of these challenging times. I do think we are at the tail end of some of the challenges, and the rest of the year looks pretty good. And we are excited to execute and grow through 2021. Also would like to welcome our Smarteq team again. We are really in the first week of integration/transition, but it is exciting to have them as part of the team. And, of course, want to thank our customers, suppliers and distribution partners for their loyalty to PCTEL and working closely with us. So with that - Stay safe. Be well. And I will turn it back over to the operator.

[Operator:]

Thank you for joining us today for PCTEL's first quarter 2021 Earnings Call. You may now disconnect your lines.