PCTEL, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Welcome to the PCTEL Fourth Quarter 2020 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 fourth quarter 2020 and full year 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 global recession, 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. Although, 2020 was a challenging year, we are pleased with how the company managed the Coronavirus pandemic. We are optimistic about our company’s future and our ability to thrive in a challenging environment. Today I would like to share the progress we made through the second half of 2020, and more specifically, in the fourth quarter and how we have positioned the company to grow in 2021 and beyond. Despite the global pandemic, we were able to serve our customers, continue to invest in new R&D initiatives and manage expenses to maintain profitability. As you may have seen in our press release issued after the market close, the Coronavirus-induced recession impacted both our non-GAAP earnings per share and revenue for 2020. Non-GAAP earnings per share decreased from $0.47 in 2019 to $0.31 in 2020. Revenue declined from $90.6 million in 2019 to $77.5 million in 2020 but increased on a quarterly basis in the fourth quarter. I’m pleased to share that fourth quarter revenue and earnings were the strongest of the year and exceeded our guidance. In fact, we set an all-time record for scanning receiver revenue in the quarter. Our earnings were driven by consistent margins on both product lines and strong demand for our 5G scanning receiver solutions. Even more impressive than increased Q4 revenue, incoming orders for both product lines in the fourth quarter were at the highest level since the second quarter of 2019. This a strong leading indicator as we enter 2021. As shared in our press release, in Q4 we achieved $21.2 million in revenue, $3.2 million in adjusted EBITDA and non-GAAP earnings per share of $0.12, all sequential improvements over the third quarter. We achieved gross margins of 50% for the quarter, in line with the third quarter and 1% above the average for the year.

[Kevin McGowan:]

Thank you, David. I will review the financial results for the fourth quarter ended December 31, 2020 and I will provide first quarter 2021 guidance. As David mentioned, 2020 was a challenging year but we managed to generate solid earnings despite the lower revenues. The fourth quarter was our best quarter in 2020 for revenue and earnings. Revenues of $21.2 million in the fourth quarter 2020 were 7.5% lower compared to the fourth quarter 2019, but increased sequentially by $2.3 million. By product line, revenues for test and measurement products increased sequentially by $1.7 million to a record $8.6 million. The fourth quarter 2020 revenues for test and measurement products were 9.5% better than last year because of a very strong quarter for products with 5G technologies. Antenna product revenues increased sequentially by $0.5 million to $12.8 million but were 15% lower compared to the fourth quarter last year due to lower revenues of antennas for intelligent transportation projects and for public safety applications. The fourth quarter 2020 gross profit margin on a GAAP basis was 50.1%, lower than the fourth quarter 2019 by 0.2%. The higher mix of higher margin test and measurement products offset lower gross profit margin percentages for both product lines compared to last year.

[David Neumann:]

Thank you all for joining us. Before we take questions, I would like to share a few closing thoughts. I am pleased that we saw improvements in our operating results as we finished 2020. I am very proud of our employees and I appreciate their dedication, flexibility and willingness to make changes to address the immediate challenges of the pandemic and more importantly, their focus on improving processes and adopting changes that will benefit the company in the long-term. There are still unknowns with respect to the Coronavirus and its potential impact as we progress through 2021, but I have confidence that our business will recover as well or better than the overall economy this year. PCTEL is in a strong financial position, we have loyal customers and we serve attractive growing markets. Testing wireless infrastructure, supporting industrial IoT and enabling wireless connectivity will continue to be important as the world increasingly relies on remote access and the ability to work and monitor systems from almost anywhere. With that, Kevin and I are available to take questions. Operator?

[Operator:]

Certainly. And the first question is coming from Marc Wiesenberger. Marc, your line is live. Please mention your affiliation and post your question.

[Marc Wiesenberger:]

Thank you. Good afternoon. Marc Wiesenberger from B. Riley Securities. Congratulations on a pretty good quarter, gentlemen, bouncing back from some maybe tougher times earlier in the year. I am wondering if you could talk about maybe within the test and measurement segment, what percentage of sales were maybe coming from software and how should we think about that going forward?

[Kevin McGowan:]

Yeah. Marc, probably, the software content is somewhere in the range of 15% of the total revenues in that product line. We expect that percentage to be in a similar range going into Q1 next year.

[Marc Wiesenberger:]

Understood. Great. I’d love to hear maybe about how the order books are evolving over the next few quarters, specifically for industrial IoT, intelligent transportation and enterprise wireless.

[Kevin McGowan:]

Yes. Sure. I could take that, Marc. The IoT business, especially with devices, we started releasing those products for customers to do integration into their systems. And I think we have talked about this before that some of the products, specifically the access point, the customers have the ability to load their own customized software into the unit for their application. So ruggedized unit has some customization capabilities, so that takes customers a bit of time to develop that and then on our end, even though we have the products ready, we still needed to go through FCC certification. So we have -- we are in that process now for both the access point and the interface card, expect to finish the certification, I would say, in the next month or two and then we can start taking orders. So there’s a definite interest by a few of our large existing customers that are buying antennas for the IoT applications. So I would expect orders probably starting in the second quarter into Q3 for those devices. The wireless sensor modules are ready now and they are being evaluated by customers as well. There’s probably three opportunities on that front. Won’t necessarily be as large as the access points, interface cards, but there are some opportunities. With respect to the enterprise wireless -- and within enterprise wireless we have a test and measurement equipment. So the 5G and 4G is kind of a separate component altogether. But within enterprise wireless there’s also the Wi-Fi business. So we are continually developing new antennas to the specifications of some of the larger Wi-Fi manufacturers and typically a longer process to go through approval. And to be quite frank, the margin profile on those antennas can be somewhat challenging. The -- I think you had mentioned the transportation as well, probably, referencing the traffic management system that we deployed in New York. Those opportunities are still being managed by the larger operators. We did close a few smaller deals last year, but there’s still plenty of opportunity, and in fact, I was reading in one of the magazines about the importance of traffic management. And so I think what’s interesting for PCTEL is that for the two leading operators that are promoting that solution. They both expect in PCTEL’s antenna. So I think we are in decent shape but we are really waiting for them to close those deals.

[Marc Wiesenberger:]

Great. That’s a lot of helpful color. I appreciate that. Can you talk about, well, I guess, is it -- would you agree that recently a lot of the investments we have seen have been around kind of the macro layer and maybe less so with metro cell deployments? And I guess, as we get a little bit more activity around millimeter wave and kind of more densification, I guess, are you expecting that to accelerate and what are the implications for PCTEL as that kind of investment transition does happen?

[David Neumann:]

Yes. So I think millimeter wave is important, but long-term millimeter wave will be for urban dense environments. It’s just not economically viable to deploy that in rural areas and I think that’s one of the reasons too, you saw the -- I am sure you saw the C-band auction and the operator spending, I think it was over $80 billion for spectrum in mid-band, because with the mid-band spectrum, you get kind of a good mix of good coverage and good throughput. So from PCTEL’s perspective, we have the antennas for 5G. We have timing antennas, which will be important for the systems, whether they are macro or micro. And then on the scanning receiver products, the IBflex are already designed for inbuilding applications. So they are very good for in building, dense areas, very easy to use in a backpack. HBflex will do both 5G and 4G, so that’s a plus. But I think longer term, what’s most interesting for us is that you have -- and again, as an example of C-band auction, where it’s new frequencies deployed in the same area and you had asked, Kevin, about the percentage of software upgrades. And once C-band starts rolling out and even CBRS, a lot of the product that we have in the market, especially for the scan receivers can be upgraded via software. So we have talked in the past that you can upgrade a 4G scanner to 5G scanner through software. But you can do the same for frequency bands. So for all the spectrum, and of course, it’s going to take time to clear it. I think some of the reports are indicating towards the end of the year first batch of frequencies will be available. For all those customers that are using PCTEL scanners in the U.S. and we have a relatively dominant position, they will be able to upgrade those units at a very good price for them and the upgrade is a great margin for us. So I do think there are opportunities for software upgrades there.

[Marc Wiesenberger:]

Yeah. That’s great. Can you talk about any supply chain constraints and potential impacts on gross margins if at all, and I guess, what kind of visibility do you have over the next few quarters in terms of your input costs?

[Kevin McGowan:]

For Q1, it mainly would affect antennas, test and measurement, not really have an impact on the inputs. We are modeling slightly lower year-over-year percentages. There are a lot of variables there between currency, freight costs and tariffs, and we are expecting a little bit, still challenging environment for freight and logistics from China. We have seen a strengthening of the Chinese currency, which is a bit of a challenge for us. So those are some of the impacts that we will see in Q1.

[David Neumann:]

Much like…

[Marc Wiesenberger:]

Okay.

[David Neumann:]

… working with our customers, we stay in close contact with the supply chain, our suppliers. So of course, there are some periodic challenges that come up. We just have to work through. But I don’t think anything that’s very material.

[Marc Wiesenberger:]

Understood. And then one final one for me. Is there any way that you could quantify the drag COVID has had related to kind of delays and maybe limited access to some either areas for test and measurement or for design wins and things like that?

[David Neumann:]

Yeah. I have got a relatively long list, Marc. So on the antenna side, I think, it’s more straightforward. The biggest issue that we had with COVID and delays is just the iterative nature of designing a complex antenna with electronics for a customer. So we do a design, customer reviews it. We do prototypes, customer reviews those. They do testing, we do modifications. So it goes back and forth. So we -- I think we really felt that early in 2020, because some of the revenue that we had forecasted, it was just delayed just because of the sales cycle got lengthened. For the test and measurement, portion and in the scanning receivers, I think, it’s more at a macro level. So we talked about how small of a 5G footprint there is today, and we say, less than 10%, I think, it’s closer to 8% of the LTE networks. But for operators, really to take advantage and deploy 5G, I think, they need to do spectrum auctions in many cases. We know Europe has been locked down through COVID, so you have delays doing spectrum auctions there. We saw the spectrum auction delays in Southeast Asia, where we had a product that we anticipated it to sell last year and just got pushed into this year. So definitely some impacts, and yeah, I think, we are still working out of this situation. Hopefully, it will clear up by the second half of the year. But it’s -- I think what’s also important to note too is, in both cases it didn’t result in lost market share. So it’s definitely a delay. But it’s not -- we are not losing market share.

[Marc Wiesenberger:]

Sure. And actually one more for me and then I will turn the mic back over. But I think last year, earlier in the year and middle part of the year, maybe you had put some longer term targets out there. And I am wondering have you rethought those targets and how do you feel relative to kind of the more medium-term relative to where you might have thought the company’s growth prospects were prior? Thank you.

[David Neumann:]

Well, I think, early in the year, we were -- we didn’t make any changes and then midyear we did make a change and with the anticipation that COVID would go through 2020 and into 2021. At this point, I don’t think we are making any further changes either way. The biggest challenge now is that there’s still unknowns. I think all of us want to be optimistic and think that we are going to get through this relatively quickly with the vaccine and a lot of the infection rates are going down. But we just want to be careful. So we are not going to change any of our estimates at least through Q1 and probably into Q2 until we see some -- see real improvement in the economy.

[Marc Wiesenberger:]

Understood. Thank you very much.

[Operator:]

Thank you. The next question is coming from John Bair. John, your line is live. Please mention your affiliation and post your question.

[John Bair:]

Thanks. Thank you. John Bair, Ascend Wealth Advisors. Good afternoon, gentlemen.

[David Neumann:]

Hello, John.

[John Bair:]

Hi. I was wondering if you could share any insights on trends that you are seeing in the rail transportation markets that you address and how might that ever elusive infrastructure bill potentially benefit you if they ever push one of those things through and regarding sensor and monitoring, that kind of thing?

[David Neumann:]

Yeah. So rail industry is a great market for PCTEL. We have been involved in rail for many years. A lot of trackside antennas, Positive Train Control systems. Like all other industries, the rail industry is updating systems, integrating more IoT applications with sensors, communication systems. And historically, for PCTEL, going back maybe three years and prior, the rail business was really just an antenna play. Over the last couple of years, once we integrated our sales teams and our sales team with rail, learned more about the capabilities that we have with our scanning receivers and we are starting to see some opportunities there too. So for especially as IoT systems and the wireless and cellular IoT systems are deployed, are in testing, rail like everyone else will need to test those networks, make sure there’s good communication. So we have begun to see some real opportunities on the scanner side too.

[John Bair:]

Are you seeing more interest in that, I guess, what I am trying to get at is, if you are seeing an overall uptick in interest in actually purchase and implementation and not just kind of plotting along and it’s…

[David Neumann:]

I think there’s interest and there are plenty of trials.

[John Bair:]

…sensors and you are opening up and you are starting to look a little bit more at saying, okay, yeah, we are going to open the purse strings on this kind of thing?

[David Neumann:]

There are plenty of trials, lots of interest in designing products. And as I mentioned, interest in the scanning receivers as well. The -- I would say, the purchases in that space are, I would say, consistent and we haven’t seen a huge uptake. But there are real problems to be solved where IoT systems, antennas, scanners play a role, but it’s really going to be driven by their overall budgets.

[John Bair:]

Okay. And then there’s been pretty good move in agricultural prices and so I am wondering how -- if you are seeing any impact, again higher interest inquiries, et cetera, from the ag market and the OEMs that you work with in that regard?

[David Neumann:]

Ag is still a strong business for us. On the antenna side, precision agriculture has always been a good market for PCTEL. We typically don’t go into dollar values or percentages on an individual market or customer bases. But I would say, the agricultural markets for PCTEL are consistent, if not a bit stronger.

[John Bair:]

Great. Very good. Thank you very much.

[David Neumann:]

Thank you.

[Operator:]

Thank you. And the next question is coming from James Galaspy . James, your line is live.

[Unidentified Analyst:]

Just a comment on Thomson’s, the Quotron System, MIS system here at Morgan Stanley, it shows your dividend as zero. You might talk -- call Mr. Thomson and update him. That’s all I wanted to say. Thank you.

[David Neumann:]

Thank you. And that is not true. It’s not zero.

[Unidentified Analyst:]

Right. $0.055, I believe. So…

[David Neumann:]

Yeah.

[Unidentified Analyst:]

Thank you.

[David Neumann:]

Thank you.

[Operator:]

And there were no other questions in queue. I would now like to hand the call back to David Neumann for closing remarks.

[David Neumann:]

So thank you all for joining us this afternoon. We recognize our employees earlier. I’d like to also thank our customers, suppliers and distribution partners. I would like to hope and think the challenges of 2020 are behind us and we will continue to improve through 2021. Definitely have some opportunities ahead of us and we are looking forward to it. So thank you.

[Operator:]

Thank you for joining us today for PCTEL’s fourth quarter 2020 earnings call. You may now disconnect your lines.