PCTEL, Inc.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Welcome to the PCTEL First Quarter Earnings Release Conference Call. At this time, all participant lines 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 John Schoen, the Company's CFO.

[John Schoen:]

Thank you for joining us on today's conference call to discuss PCTEL's first quarter 2017 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 forwarding-looking statements reflect PCTEL's best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ from those 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. It is also available on our website and in our most recent annual report on Form 10-K. Additionally, our commentary will include reference to the following non-GAAP measures, non-GAAP EPS, adjusted EBITDA, and free cash flow. We believe these non-GAAP measures facilitate comparability of results over different periods. A full reconciliation of these non-GAAP measures to our GAAP basis measures is included in our quarter 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:]

Good afternoon. Our first quarter 2017 revenue, gross profit, adjusted EBITDA, and non-GAAP profit all improved when compared to the same period last year. We are encouraged by the direction the Company is headed. We believe there is long-term growth opportunities for PCTEL driven by recent industry developments, including the award of the FirstNet contract to AT&T and growth in small cell deployments. We have had success with FirstNet on the West Coast and we are pursuing additional markets for antenna opportunities. We expect to see test and measurement business towards the end of this year and into 2018 as AT&T deploys infrastructure for FirstNet. Small cells will present opportunities over the next several years with near-term opportunities in Asia Pacific. Small cell deployments in Asia increased by more than 40% in 2016. Carriers are deploying small cells in denser configurations into their networks to improve coverage and increase capacity. These networks support traditional users, IoT applications, and they will provide a platform for 5G. New deployments like FirstNet, new spectrum allocations and small cell deployments will drive the demand for PCTEL's performance critical antennas and our test and measurement solutions. In Connected Solutions, we are confident that our four areas of focus for antennas

[John Schoen:]

Thanks, David. Now I would like to address the first quarter 2017 and compare results to the same period last year. Revenue was $25 million, up 19%. Gross profit was 37.3%, up 380 basis points. Adjusted EBITDA was $1.5 million, up 675%. And non-GAAP earnings per share were $0.04, up $0.07 per share. Free cash flow was approximately $800,000, which is comprised roughly of $1.85 million of cash flow from operations less $1.05 million of capital spending. Capital spending in the quarter was about $500,000 higher than normal due to investments in IT which included a new IP phone system and communications system for the Company. We do expect capital spending to return to traditional levels next quarter. Drilling down, Connected Solutions revenue was $17.3 million, up 17%. Antennas for small cell, fleet, and utilities applications delivered significant growth. Gross profit was 31.3%, up 190 basis points. The leverage of fixed costs over higher volume improved gross profit. RF Solutions' revenue was $7.8 million, up 21%, with gross profit of 50.3%, up 790 basis points. Product revenue grew while services revenue was unchanged, resulting in the higher blended gross margin percent. While service revenue was unchanged year over year, it was down 35% sequentially resulting in negative contribution margin equivalent to a $0.02 non-GAAP earnings per share loss. Excluding services, the Company delivered non-GAAP earnings per share of $0.06 in the quarter. As David mentioned earlier, the RF Solutions management team expects to rectify our services revenue and profitability issues by the third quarter. Now let's turn to guidance for the second quarter 2017. Second quarter revenue is expected to be between $23.5 million and $24.5 million, gross profit is expected to be between 38.5% and 39.5%, and non-GAAP earnings per share are expected to be between $0.03 and $0.05 per share at that revenue range. At the midpoint of our guidance, revenue is expected to be about the same as the second quarter last year with non-GAAP earnings down $0.01 per share. Services are expected be about $1.5 million lower in revenue than Q2 last year and that will continue to weigh on earnings in the second quarter. Our product revenue in both Connected Solutions and RF Solutions continues to track to target in the first half. Before we take questions, I would like to turn the call over to David to make a few closing remarks.

[David Neumann:]

Thanks, John. To summarize, we are pleased with our Q1 results and the momentum that we are building early in 2017. The challenges in our services business are being addressed and should be rectified by the third quarter. Both PCTEL's businesses, Connected Solutions and RF Solutions are in a strong position to benefit from small cell deployments, FirstNet and 5G. And as a company, we'll continue to make investments in R&D, staff and capital to create and maintain our competitive advantage. With that, John and I would like to open up the call for questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from Matt Robison from Wunderlich. Your line is open.

[Matt Robison:]

Hey. Thanks for taking the question. First, I'll say - I'd like to stay in the cash flow statement, especially given the results. So services down more in the second quarter than they were in the first quarter and how should we think about, you might have said it, I apologize if you did, but how should we think about the burden there versus $0.02 in the first quarter?

[John Schoen:]

About the same.

[Matt Robison:]

Okay. So it's - the difference - you're looking for gross margin a little higher in the first quarter. So what's the OpEx factor that's driving the sequential decline in EPS?

[John Schoen:]

I'm sorry, the sequential decline year-over-year?

[Matt Robison:]

Well, I guess, your mid-range is I guess the same?

[John Schoen:]

Oh, yeah. Compared to last year, yes, yes. Because at the end of the day, services, in the second quarter of last year, broke even and they're going to lose $0.02, which means products are going to advance $0.01.

[Matt Robison:]

Okay. Or I guess it's actually -

[John Schoen:]

Products are a penny more profitable than they were last year and services are going to be $0.02 worse than they were last year. Meaning, we go from $0.05 to $0.04 at the midpoint.

[Matt Robison:]

And is OpEx going to be back up towards 8.8 million again?

[John Schoen:]

No. It will probably be sequentially down probably 200K. And you got to remember we have all the year-end costs in the first quarter with the audit and everything.

[Matt Robison:]

What do you have in mind for fixing things up by the third quarter?

[John Schoen:]

There are some large sales funnel projects that we are pursuing that we feel good about and but sales funnels take time and that's why we are - we think it's going to take till Q3 for that stuff to hit the ground.

[David Neumann:]

And that we're going after some larger projects and we're also looking at utilization and trying to balance full time employees versus flex force to try to reduce some of our costs as well.

[Matt Robison:]

Okay. What do you think about - you've taken inventory down quite a bit John and you think you're going to be able to have a positive cash flow in the second quarter.

[John Schoen:]

Yes. Because the first thing that's going to happen is CapEx is going to drop from just under 1.1 million probably into the normal 500,000 to 700,000 range. So you're going to pick up 0.5 mil there and then we continue to hammer inventory, especially in Connected Solutions.

[Matt Robison:]

So that goes down even more?

[John Schoen:]

Yeah. I mean we're going to need to - in order to get to similar results that we got last year, we're going to need to continue to mind the balance sheet, working capital, inventory in particular with a goal of taking out another 1.5 million in the next three quarters of inventory.

[Matt Robison:]

Dave, looks like RF solutions, the scanning receiver business was pretty strong. What was the backdrop for that?

[David Neumann:]

Verizon continues to be a very strong customer for scanning receivers and we saw even stronger activity in Asia for the scanners.

[Operator:]

[Operator Instructions] Your next question comes from Mike Crawford from B. Riley. Your line is open.

[Mike Crawford:]

Yeah. Regarding your DAS business, is that something you see stabilizing at some point or probably continuing to fade relative to small cell type solutions in building?

[David Neumann:]

For the engineering services or for - for engineering services, with DAS, most of the large venues are built out and that's one of the challenges that we have is the work that we're doing now are typically smaller projects. So we're trying to close some larger deals so that we can send engineers onsite for a longer period of time and cover more of their costs. But still a bulk of the work for engineering services is around DAS. We do some small cell work, but most of it is DAS.

[Mike Crawford:]

And so this larger funnel of larger projects, those are for distributed systems engineering or yeah and global?

[David Neumann:]

They're for DAS systems, yes.

[Mike Crawford:]

Okay. And so it's been, I mean, boy a decade of public safety markets being hampered by lack of customer testing to upgrade systems, but do you think this is poised to finally turn with the Firstnet infrastructure build?

[David Neumann:]

Yes. I think there's really two parts to that. One is on the connected solutions sides for antennas for the fleet vehicles, as the different departments upgrade their systems I think they will start buying more antennas that are compatible with the Firstnet system. So we should see increased sales for antennas and then for the infrastructure, from what I've seen from AT&T, although they're going to put in another 40 billion of their own money in addition to the 6.5 billion from the government, most of that work will start later in the year. So we do anticipate we'll see some additional scanning receiver sales, but it's probably towards the end of 2017, going into 2018. One benefit for the scanning receivers is we already support the band 14 which is 700 megahertz. So we have product today that we could deliver as soon as AT&T starts building infrastructure.

[Operator:]

[Operator Instructions] Your next question comes from Matt Robison from Wunderlich. Your line is open.

[Matt Robison:]

Thanks for taking a second one. Just looking at the pattern of expenses, pretty big increase in G&A. What's the backdrop for that and should we expect to have a similar kind of proportional expenses in the current quarter?

[John Schoen:]

So the main impetus for that going up is that we are paying our short term incentive plan this year all in cash. And last year, it was paid to executives in stock and so that expense now adds in. But I do expect us, the OpEx to shrink into the 8.5, 8.6 kind of range Q2. Q1 seems to be our highest expense quarter.

[Matt Robison:]

About payroll tax and all that I assume?

[John Schoen:]

Yeah. You've got payroll tax, you've got the audit. Remember, I have to book my audit expenses when the work is done. I can't just smooth it one fourth, one fourth, one fourth, one fourth.

[Matt Robison:]

And do you think that 8.5, 8.6, kind of stays in that kind of zone through the rest of the year?

[John Schoen:]

It probably goes down a little bit in Q3 traditionally and then it pops back up again in Q4. But on an average, 8.5, 8.5. 17-ish in the back half is probably pretty decent.

[Operator:]

[Operator Instructions] I would like to thank everyone for attending today's conference call. You may now disconnect.