PCTEL, Inc.
Q2 2018 Earnings Call Transcript

Published: 11 Aug 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL Second Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I will now turn the call over to John Schoen, Chief Financial Officer.

[John Schoen:]

Thank you for joining us on today's conference call to discuss PCTEL's second quarter 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 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

[David Neumann:]

Good afternoon, and welcome to our call. I'll make a few comments about our business, then John will discuss our financial results. In our last earnings call, we mentioned revenue risk related to wireless operators reducing their spending on legacy systems in preparation for the capital expenditures required for 5G deployments. This reduction in capital expenditures impacted our test and measurement business in North America. As a result, RF Solutions revenue was down 22% in the half. This reduction in capital expenditures, together with the uneven nature of the Connected Solutions segment's project-driven demand, created revenue and earnings challenges in the quarter. Revenue was up incrementally in Connected Solutions for the half, but did not meet our expectations. We believe the weakness in test and measurement for the RF Solutions segment and the slowdown in deployment of macro small cells for the Connected Solutions segment will negatively affect our business for the remainder of 2018. John will provide updated guidance later. In RFS, we remain confident in the long-term opportunities to provide 5G test and measurement equipment to wireless operators, as they begin deploying 5G infrastructure. In fact, we recently delivered our first HBflex scanning receivers to our major OEMs for integration into their drive test systems. HBflex scanning receivers are used for legacy and 5G measurements in the sub-6 gigahertz and millimeter wave bands. The HBflex scanning receiver will be commercially available this quarter. To support gigabyte - or gigabit LTE speeds in 4G, operators in the U.S. and Southeast Asia are deploying licensed assisted access, or LAA. LAA is a mobile technology upgrade for LTE that increases capacity and speed by combining one or more data channels in the 5 gigahertz unlicensed spectrum with LTE in a licensed band. Like our recently released narrowband IoT testing capabilities, LAA is a software upgrade for new or existing IBflex scanning receivers. This is another example of PCTEL protecting our customers' investment and our software-defined radio-based tools, while capturing higher-margin revenue stream. We believe that scanning receivers are the ideal tool for benchmarking and troubleshooting legacy and 5G networks as the RF complexity increases across multiple technologies, applications and bands for licensed and unlicensed spectrum. In Connected Solutions, enterprise WiFi revenue grew in the second quarter, driven by a large U.S. WiFi antenna project and deliveries for a WiFi mesh network solution. Although 5G gets more attention in the press, it is important to note that more than half of the Internet traffic is expected to be carried by WiFi by 2021 using current and future ac and ax versions. PCTEL is actively developing antenna and radio solutions for its growing market, such as our recently released VenU 802.11ac panel antenna. We believe small cell antenna deployments will begin to shift from outdoor macro sites to indoor throughout the remainder of the year. We start shipping embedded antennas for indoor small cells, which is significant given most wireless usage is indoors. We remain confident in the long-term global growth of small cells for indoor and 5G applications. As many of you know, our 4G small cell antenna sales are made to large network equipment manufacturers throughout the world. Recently, one of our largest customers reduced their demand for small cell antennas for the remainder of the year. Our teams are working closely with the customer to determine the specifics of this reduction, but we have taken this reduction into account in lowering our guidance for 2018. Approximately 10% of our annual antenna revenue is impacted by the recent 301 tariffs on certain imports from China, which apply to our GPS and multi-band antennas in a limited number of related components. We instituted price increases to offset the impact of the tariffs. We don't foresee trade issues related to our deliveries in China, but there's a longer-term risk to revenue if China-based customers decide to source more from non-U.S. manufacturers. Although we're disappointed in our year-to-date results and reduced guidance for 2018, we are committed to technology leadership and returning PCTEL to acceptable revenue and margin levels. For example, our investments to prepare for 5G, industrial IoT and next-generation enterprise WiFi are generating intellectual property for our performance-critical wireless solutions. We completed a restructuring of our human resources to align skill sets with the demands of our target - targeted vertical markets, and we're deemphasizing low-margin kitting business and low-volume antenna SKUs to improve the overall margin profile and efficiency of our operations. We plan to return to positive cash flow generation, and it's important to note that the board is fully committed to maintaining the dividend. John and I will be attending the Midwest IDEAS Investor Conference on August 29 in Chicago. We look forward to meeting with investors at the conference. With that, I will now turn the call over to John Schoen for a closer look at our second quarter as well as third quarter and annual 2018 guidance. John?

[John Schoen:]

Thanks, David. I will be addressing the results from continuing operations for the second quarter and the first half of 2018, comparing them to the same periods last year. Revenue was $21.6 million in the quarter and $43.3 million in the half, unchanged in the quarter and down 3% in the half compared to last year. Gross profit margin was 36.1% in the quarter and 36.2% in the half, down 560 basis points in the quarter and 520 basis points in the half. Adjusted EBITDA margin as a percent of revenue was 2% in the quarter and the half compared to 8% for the same period last year. Non-GAAP EPS was breakeven in the quarter and a loss of $0.01 in the half compared to income of $0.05 in the quarter and $0.10 in the half last year. Now I will review the results for each segment. For the Connected Solutions segment, revenue was $17.5 million in the quarter and $35.2 million in the half, up 4% in the quarter and 3% in the half compared to last year. Gross profit margin was 29% in the quarter and in the half, down 620 basis points in the quarter and 360 basis points in the half. The segment saw a significant revenue growth in enterprise WiFi applications in both the quarter and the half. However, those revenue gains were largely offset by pricing pressure we experienced in small cells, which also impacted gross profit margins. For the RF Solutions segment, revenue was $4.1 million in the quarter and $8.1 million in the half, down 11% in the quarter and 22% in the half. Gross profit was 66.6% in the quarter and 66.7% in the half, down 250 basis points in the quarter and 310 basis points in the half. As David discussed earlier, the North American market generated lower revenue. Gross margin was lower as a result of less leveraging of fixed costs on lower revenue. Now let's turn to 2018 guidance. The company is experiencing revenue pressure in both segments, as David discussed earlier. We believe this will continue for the remainder of 2018 for both segments and into the first half of 2019 for test equipment. We expect third quarter revenue will be between $19 million and $20 million, gross margin between 40% and 41% and non-GAAP earnings per share of a negative $0.06. The company is revising its annual 2018 revenue guidance to $82 million to $85 million, approximately $65 million to $67 million for Connected Solutions and $17 million to $18 million for RF Solutions. In response, the company reduced its fixed manufacturing and operating cost in July through a reduction in force. The annualized cost savings is approximately $1.8 million. We do not expect these cost savings to impact 2018 because the $700,000 cost savings for the remainder of 2018 is about the same as the onetime costs associated with the reduction in force. However, the full effect of these cost savings will positively impact 2019. Giving effect to the new revenue guidance and the cost of the reduction in force, we anticipate full year non-GAAP earnings will be between a loss of $0.04 to $0.07 per share. Before we take questions, I would like to turn the call over to David to make a few closing remarks.

[David Neumann:]

Thank you, John. We believe the reduction in revenue and earnings are short-term issues, and we remain fully committed to our long-term strategy to provide antennas, radios and testing measurement systems that solve complex RF problems. In addition to investing in performance critical solutions, we are improving our operations and focus to return PCTEL to our expected revenue and margin levels. This is a team effort, and I'd like to thank our global PCTEL staff for their dedication, effort and contributions. With that, John and I are available to answer questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Mr. Marc Wiesenberger from B. Riley FBR. Sir, you may ask your question.

[Marc Wiesenberger:]

You talked about some of the small cell pricing pressure. And in earlier calls, it was from a large purchaser. Has that spread to a larger group of customers? Or is it still primarily from one customer? And what are you doing to kind of offset that?

[David Neumann:]

So to answer the first part of the question, it's the same customer or small group of customers. To offset that, we talked a bit about the restructuring that we've done, so we're changing some things within the organization to lower cost and to improve focus. We're trying to get ahead of this. And we think, going into 2019, we'll be able to relieve some of that pressure.

[Marc Wiesenberger:]

To kind of offset some of the slowing growth, are you seeing any interesting tuck-in acquisition opportunities, either domestically or internationally, that might help accelerate some growth?

[David Neumann:]

So we have an active program for M&A. Both of the segments are looking for specific targets that would fill a gap. We're not necessarily interested in just doing an acquisition to bolt-on revenue, but we're interested in improving our distribution capabilities in Europe, building around our antenna and radio expertise. So yes, we have an active program. We don't have anything that we can talk about on this call, but it's definitely something we spend time on.

[Marc Wiesenberger:]

Can you talk about the trade war rhetoric and how it's affecting orders that are -- that have come in and potentially will come in, in the future? And is that impacting your investments that you had planned for Asia?

[David Neumann:]

It's not affecting our investments. China is a very important customer for PCTEL, so we continually - continue to invest in the region. As far as the trade war commentary, we were affected by the tariffs. We did have to do a price increase to cover that. So it didn't necessarily reduce our - reduce any business, but it's an effect that's being passed on to the customer. In the short term, we don't have any serious concerns. And I think we've talked about this in past calls. Longer term, if this does really start to ratchet up, the Chinese government may suggest that the local manufacturers work with Chinese companies who are non-U.S. companies. In that case, it would affect PCTEL. But we don't see that happening in the near term.

[Marc Wiesenberger:]

Understood. Then one final one for me. Can you talk about any developments with the team in Akron and how it's furthering the competitive position?

[David Neumann:]

Our Akron team is doing well. They moved in, in our office in the April time frame. As I've mentioned earlier in the call that we're developing some IP around some of the technologies, including WiFi and the new technologies there. And that's just coming from - a couple of those efforts are coming from the Akron office. So they're contributing quite a bit, though, in the enterprise WiFi space and helping with our engineering team, in general.

[Operator:]

[Operator Instructions] There are no further questions at this time. I would now like to turn the call over to back to Mr. David Neumann for your closing remarks.

[David Neumann:]

So there are no additional questions, I'd like to thank everyone for joining the call, and have a great day. Thank you.

[Operator:]

This concludes today's conference call. Thank you for attending. You may now disconnect.