PCTEL, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good day, ladies and gentlemen and welcome to the PCTEL First Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. And at the conclusion of our prepared remarks, we’ll conduct a question-and-answer session. As a reminder, this conference is being recorded.I will now turn the floor over to Kevin McGowan, the company's CFO. Sir, the floor is yours.

[Kevin McGowan:]

Thank you for joining us on today's conference call to discuss PCTEL's first quarter 2020 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, in this unprecedented COVID-19 era 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 materially differ from its projections are discussed in the earnings press release, which was issued today and the company's most recently filed periodic report on Form 10-K and subsequent filings including the report on Form 10-Q for the first quarter of 2020. 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, 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 GAAP measures to our non-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.

[David Neumann:]

Thank you, Kevin. Welcome and thank you for joining us this afternoon. I would like to start by saying that I'm pleased with our team's response to the COVID-19 crisis and our ability to continue to address the needs of our customers that provide essential services for critical infrastructure.My highest priorities are to keep our customers', employees safe, protect corporate assets such as cash and production capabilities and continue to make investments to meet our customers' needs for our antennas radio solutions and test and measurement equipment.In our call today, I will cover three topics

[Kevin McGowan:]

Thank you, David. I will address the financial results for the first quarter ended March 2020 and I will provide second quarter 2020 guidance. I will also discuss the steps the Company is taking to maintain its strong financial position.Revenues were $17.5 million in the first quarter 2020, 15% lower compared to the first quarter 2019. As David mentioned, this was a historically strong first quarter for test & measurement product revenues, driven by an increase in sales of 5G scanning receivers, upgrades to add 5G technology, and an increase in sales of public safety applications.Revenues for test and measurement products increased 10% compared with first quarter last year, to $6.1 million. However, antenna product revenues declined 24% compared to the first quarter last year to $11.5 million. Some of our larger antenna customers delayed taking inventory of run-rate products. In addition, the timing of customer purchase orders and supply chain disruptions due to the COVID-19 pandemic also impacted first quarter revenues.The first quarter 2020 gross profit margin on a GAAP basis improved by 4.9% to 46.9% due to favorable product line mix of test and measurement products as well as a higher antenna gross profit margin as compared to the first quarter last year. The gross profit margin percentage for antenna products was 2.0% higher in the first quarter 2020 compared to the prior year due to a more profitable product line mix and cost reductions in our China operations.Adjusted EBITDA was approximately 700,000 for the first quarter 2020, compared to $1.4 million in the first quarter 2019. Adjusted EBITDA margin as a percentage of revenue was 4% in the first quarter 2020 compared to 7% for the first quarter 2019. Non-GAAP diluted earnings per share was $0.01 in the first quarter 2020 compared to $0.04 in the first quarter 2019. The decline in first quarter 2020 non-GAAP earnings per share was primarily due to the lower gross margin contribution from the antenna product line.Cash and investments declined $1.4 million to $38.3 million at the end of March 2020. In the first quarter of 2020, we generated cash from operations of $4.3 million, primarily because accounts receivable declined by $3.4 million. We used cash of $2.0 million to repurchase approximately 375,000 shares, $1.1 million for withholding taxes for stock-based compensation, and $1.0 million for the quarterly dividend.PCTEL’s balance sheet remains very strong with its significant cash and investments and no debt. We also expect sequential growth in revenues and earnings. However, due to uncertainties as a result of the COVID-19 pandemic and the potential financial impact related to disruptions in our operations, supply chain, and customer demand, we are proactively managing our costs and our working capital.At the outset of the second quarter, we took several steps to reduce our expenses and conserve cash. We reduced operating expenses through reductions in salaries, director fees, and discretionary spending and we terminated our share repurchase program to conserve the $5.0 million remaining in the program. We also reduced non-essential capital expenditures. We believe that being proactive will protect and strengthen our solid financial position.As David mentioned, COVID-19 has presented unprecedented challenges that continue through today. These challenges make it difficult to accurately forecast financial results. Nevertheless, we want to give our investors some indication of our expectations for the second quarter based upon current information.Generally, we are forecasting higher revenues and earnings for the quarter. More specifically, we expect our second quarter revenues will be between $19.5 and $21.5 million. Further, we project our GAAP gross profit margin percentage to be in the range of 45% to 47% and the non-GAAP earnings per share to be in the range of $0.05 to $0.08.The sequential increase in revenue is primarily driven by higher antenna product revenues. Again, we are making these projections based upon current information and circumstances which could change.Before we take questions, I would like to turn the call over to David to make a few closing remarks.

[David Neumann:]

Thank you all for joining us. Before we take questions, I would like to share a few closing thoughts.Our top three priorities in the short term are driven by the unknown length of the COVID-19 crisis and the potential depth of the crisis-induced recession. First, we have a talented and loyal workforce and we will continue to take measures to protect them from the virus and do our best to maintain full employment.Second, we are in a strong financial position, we have access to capital, and we have taken additional steps to reduce expenses to alleviate the burden on cash. Third, we are in very competitive markets and we will continue to make R&D investments, as we have in previous downturns, to ensure we have the products our customers want and need.Protecting our employees, managing our cash position and prioritizing R&D investments benefits all stakeholders. The demand for reliable connectivity solutions for critical infrastructure will continue well past this crisis. Our long-term strategy is to position the company to accelerate growth organically and inorganically when conditions stabilize.With that, Kevin and I are available to take questions. Operator?

[Operator:]

Yes. Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Mark Weisenberger from B. Riley. Go ahead.

[Aman Gulani:]

Hey guys, thanks for taking my question and this is actually Aman jumping in for Mark. First question I wanted to ask can you talk about what you're seeing from customers in terms of 5G rollouts both domestically and internationally? Specifically, if you could talk about any changes in trends from the beginning of March relative to April and May?

[David Neumann:]

Well, thanks Aman for joining us and asking the question. 5G rollout is still -- I would say still pretty aggressive. The U.S., China, Japan, South Korea, all have robust deployment plans. And even earlier this year, I think Verizon came out and adjusted their CapEx to increase it to address 5G. So, in those markets, it's still relatively strong and there's still a need for the test and measurement equipment and we're providing the scanning receivers.Now keep in mind too that in some of the markets where it's officially deployed, it's typically deployed in areas where there's a need for capacity. It's not ubiquitous. So to get the full coverage even in the markets that are I would say a bit ahead of the game, it's going to take a year or two to really fully deploy the network.And if you look at historical networks 3G, 4G, they typically have a life span of anywhere from seven to 10 years and we're still very early in 5G. So, I would anticipate that the U.S. is going to be relatively strong for the rest of the year. And as I mentioned previously, the merger of T-Mobile and Sprint I think will drive that as well. And at some point DISH will enter the picture and then they'll need equipment for their 5G network. Asia is going to be strong and we think there is a bit of a slowdown in Europe now, mostly because they're making additional investments in 4G versus putting in new more expensive 5G.And in general, given some of the work from home and municipality closures it's just taking a bit longer to get the citing to put in new systems. But in general, we think we're pretty bullish on 5G and the test and measurement equipment and we think it should be strong for the rest of the year.

[Aman Gulani:]

Okay. Thank you. That's helpful. And then, shifting gears a little bit. Now that T-Mobile and Sprit have completed the merger, can you talk about some of the spending trends you were seeing from them going to the final phase of the merger? And then how you think that's going to change going forward and implications for PCTEL?

[David Neumann:]

Yes. So, for T-Mobile and Sprint, this is really driven mostly by the test and measurement equipment. So, early on even before the merger T-Mobile was rolling out 5G. They're a relatively large customer of ours for the scanning receiver and basically upgraded most of their equipment to 5G. In parallel, before the merger, Sprint is also using our test and measurement equipment. Now, it's -- what's interesting is Sprint's is typically sub-6 gigahertz spectrum, the legacy 4G spectrum, T-Mobile was deploying a millimeter wave system and they've also gone to sub-6. But in Sprint's case, they had a number of units for PCTEL that could be upgraded via software. So, we upgraded those to support 5G. And now postmerger, we continue to upgrade tools to support them with the rollout.

[Aman Gulani:]

Got it. Thank you. Just last question for me, I wonder if you could talk about some of the potential impacts of COVID-19 on state and local governments in terms of like regulatory time lines for approvals of permitting and site access and all that sort of stuff. How do you think that's going to like impact CapEx time lines for your customers? How are you sort of thinking about that?

[David Neumann:]

Yes. So, that's a great question. With COVID-19, number one, there is still many unknowns. So we're making our projections, planning our business on what we know today, but there still could be additional changes. And then along the lines of your points you're making with the governments and it's not just the government, I would say customers in general, there's a fairly widespread work-from-home initiative. So it's just the general process of getting orders in POs processed, it's taking longer.And with the municipalities closed, the area that we see the biggest impact is really with our public safety. The scanning receiver historically when we talk about scanning receivers we're talking about the mobile operators. About 1.5 years ago or so we developed some new technology to run on the scanners for public buildings to make sure that the public communication systems P25, DMR systems are fully functional, so that when first responders go into those buildings they have confidence that they'll be able to communicate. So, that product line for PCTEL has been doing very well.And now with COVID-19, the biggest challenge is the testers can't get access to the buildings. So, like PCTEL, we're not allowing any external vendors in just to keep people safe and that's inhibiting some of the testing of these buildings. And for that it's been -- our scanning receivers for public safety have slowed down a bit. But long-term demand if anything with COVID-19 and people working remotely and having the need to monitor things, having the need to control things remotely, I think it plays very well for the IoT market, plays very well for wireless communications for 4G and 5G and WiFi. And so long term, I think PCTEL is in a very strong position to meet those needs. But with COVID-19, it's -- there's still a lot of unpredictability and we just have to manage it day-by-day.

[Aman Gulani:]

All right. Thank you. I'll pass it on.

[Operator:]

[Operator Instructions] And there appear to be no further questions. I'd like to now turn the call back over to David Neumann for any closing remarks.

[David Neumann:]

Thank you, and thank you all for joining us this afternoon. Our team is extraordinary. I want to thank them as well for their contributions, flexibility and patience during these sometimes extremely stressful times. We look forward to updating you on our next call. Have a great afternoon and thanks again.

[Operator:]

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.