PCTEL, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Welcome to PCTEL Second Quarter Earnings Release conference call. At this time, all participants are in a listen-only mode. 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 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 Second 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 forward-looking statements reflect PCTEL's best current judgment, they are subject to risks and uncertainties that could cause actual results to materially differ 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. It's 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

[David Neumann:]

Good afternoon. First half 2017 revenue, gross profit, EBITDA margin and non-GAAP earnings per share improved when compared to the same period last year. We confirm our annual revenue targets for antenna and scanning receiver products. Last week, we announced that we sold the assets of our Network Engineering Services business. PCTEL is now a products-focused company, and we will continue to leverage our deep RF expertise to develop antenna systems and scanning receiver test products to solve complex problems. Our mission is to provide performance-critical RF technology solutions. Our long-term view for antenna solutions and scanning receiver opportunities has not changed. Digital automation drives the need for more wireless capacity and higher reliability. Although overall carrier infrastructure spend is expected to be flat or declining, the portion allocated to new spectrum and new deployment models, like small cells and FirstNet, will grow. In Connected Solutions, we had a number of significant wins in the second quarter for small cells, enterprise WiFi and fleet. We started volume shipments of our new integrated TDD LTE small cell antenna with a major OEM, we were awarded a design win with a key WiFi OEM for 802.11ac Wave 2, and we began shipping our high provision multiband GNSS antenna for fleet applications. Product sales to major utilities remain strong. In RF Solutions, cellular and noncellular wireless applications continue to drive demand for our IBflex and MXflex scanning receivers with strong sales in the U.S. These scanning receivers are widely used for public LTE networks and are now being used to design, deploy, optimize and monitor private wireless networks. The scanning receiver's software-defined radios can be programmed to measure non-3GPP frequency brands for private LTE networks, P25 and TETRA for public safety and in other noncellular applications such as satellite radio. Our antennas and scanning receivers are both well-positioned to take advantage of growth in public and private wireless systems and applications. To further this effort, PCTEL recently joined a Citizens Broadband Radio Service, CBRS, alliance. This group is focusing on promoting LTE-based solutions in the 3.5 gigahertz spectrum that are now being made available on a shared basis. Anticipated users and use cases will support enterprise, industrial IoT and neutral host solutions, all consistent with PCTEL's capabilities and focus areas. I would like to note that John and I will be attending the Midwest IDEAS Investor Conference on August 30, 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 and first half financial results as well as third quarter 2017 guidance.

[John Schoen:]

Thanks, David. I will be addressing the 2017 results for the second quarter and first half and comparing them to the same periods last year. The reason we will be reviewing the year-to-date performance and trends going forward is that revenue and operating results for the company are historically uneven by quarter due to the ebb and flow of large customer projects. As a result, our primary focus is on annual results and how we are progressing toward our financial targets on a year-to-date basis. Revenue was $21.5 million in the second quarter and $44.5 million in the half, an increase of 1% in the quarter and 10% in the half compared to last year. Gross profit margin was 41.7% in the quarter and 41.4% in the half, down 20 basis points in the quarter and up 90 basis points in the half. Adjusted EBITDA margin as a percentage of revenue was 8% in the quarter and the half, compared to 10% in the quarter and 7% in the half last year. Non-GAAP earnings per share was $0.05 in the quarter and $0.10 in the half, up $0.02 or 25% for the half compared to last year. Free cash flow was positive $2.0 million in the quarter and $2.9 million in the half. Now I will review results for each segment. For the Connected Solutions segment, revenue in the second quarter was $16.9 million, up 7%, and $34.1 million in the half, up 12%. Gross profit was 34.0% in the quarter, up 270 basis points, and 32.6% in the half, up 220 basis points. Antennas for small cell, fleet and utility applications delivered growth in the quarter and the half. A favorable mix of higher margin products in the early stage of their life cycle contributed to higher gross profit in the quarter and the half. For the RF Solutions segment, revenue was $4.7 million in the second quarter, down 16%, and $10.4 million in the half, up 3%. Gross profit was 69.1% in the quarter, down 240 basis points, and 69.8% in the half, down 60 basis points. First half revenue is consistent with a $20 million to $22 million annual revenue run rate, which is what we have historically seen in the year between new technology deployments. First half revenue grew in North America, Asia Pacific and Central and Latin America, but was largely offset by revenue decline in Europe. Now, let's turn to guidance for the third quarter of 2017. Third quarter revenue from continuing operations is expected to be between $23 million and $23.5 million, gross profit is expected to be between 41.0% and 42.0%, and non-GAAP earnings per share are expected to be between $0.07 and $0.08 per share at that revenue range. At the midpoint of our third quarter guidance, revenue will be up 11% for the quarter and 10% through the 3 quarters ended September compared to last year. 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, both segments of PCTEL's business, Connected Solutions and RF Solutions, are in a strong position to benefit from small cell deployments, enterprise WiFi, Internet of Things and FirstNet. We are pleased with our first half results and the momentum we have going into the second half of 2017. With the sale of the services business, we are an RF products company with significant improvements in revenue trajectory and gross profit profiles. With that, John and I would like to open up the call for questions. Operator?

[Operator:]

[Operator instructions] Your first question comes from Jaeson Schmidt from Lake Street Capital Market. Your line is open.

[Jaeson Schmidt:]

Hey guys. Thanks for taking my questions. I just wanted to start first on the Q2 results. I apologize if I missed it. But just a clarification. The delta between the results and your guidance, is that entirely due to the engineering services business that you sold?

[John Schoen:]

As you recall -- may recall, during the last earnings call, we said we were going to do roughly about $0.04, but buried in that was a $0.01 loss for services. So now that $0.01 loss comes out and $0.04 becomes $0.05. So, we basically met the guidance that we had for our products.

[Jaeson Schmidt:]

Okay. And the same is true around the revenue line, I'm just looking at that 21...

[John Schoen:]

Yes. And this is, so -- this would be an in-line quarter from this guidance perspective.

[Jaeson Schmidt:]

Okay, that's helpful. And then, if you could just talk about what you're seeing in the small cell market. How traction is going with Huawei, and how visibility within that market is going?

[David Neumann:]

Well, small cell is still growing, but not growing at the same rate. So, we have seen some slowdown in China, but overall, it's still a big -- or an important part of our business. Long-term growth will be there, but it has slowed a bit in China.

[Jaeson Schmidt:]

Okay. And how should we think about OpEx trending in the rest of this year? And maybe just thinking about '18, big picturewise?

[John Schoen:]

Okay. So, the way we kind of see the second half is we're comfortable with revenue of $47 million to $47.5 million, we're comfortable with gross margin percentage -- non-GAAP gross margin percentage in that 41%, 42% range. We're comfortable with $0.14 to $0.16 non-GAAP earnings per share in the second half. 2018, because I know you would -- all the models have services still in them, without services in '18, we're looking at a $99 million to $100 million in revenue outlook at this point. Non-GAAP gross margin in the 42-point range, and somewhere in the $0.32 to $0.35 non-GAAP earnings per share.

[Jaeson Schmidt:]

Okay. That's very helpful. And then the last one for me and I'll jump back into queue, could you talk a little bit about the FirstNet opportunity? If there's been any improvement on kind of your visibility within that opportunity?

[David Neumann:]

Well, for FirstNet, we've already start selling some antennas for the fleet portion. In terms of states opting in, I think it's four or five states now. But AT&T, from the infrastructure perspective, isn't planning to roll that out until towards the end of 2017. I've seen some reports that we should start to see that in Q4. With that, we expect -- and Q4 is typically a pretty strong quarter anyways for scanning receivers and test equipment. So, we expect that to drive test equipment a bit, and then as the municipalities upgrade their fleets with antennas to support FirstNet, that should help drive some of our antennas sales as well. I think the bulk of FirstNet is going to be in 2018.

[Jaeson Schmidt:]

Okay. Thank you.

[Operator:]

[Operator instructions] Your next question comes from Aman Gulani from B. Riley & Co.

[Aman Gulani:]

Hey guys. Thanks for taking my call. Just one quick question from me. How would you characterize current demand in Asia right now?

[David Neumann:]

It's not as strong as it was. We had a very strong Q1 in Asia, both for equipment -- test and measurement equipment and for small cell. It has slowed down quite a bit. In fact, in Q2, the U.S. is probably our strongest market in both -- for both of the divisions.

[Aman Gulani:]

Okay. That's all the questions I have. I'll turn back in the queue.

[Operator:]

Your next question comes from the from Bob Meeder from UBS Financials.

[Robert Meeder:]

Hello. Thanks for taking my questions. Just a couple. Number one, it looks like G&A is up double digits. Should we expect to get more leverage on that going forward? Or is that line expected to continue to grow on pace with revenues?

[David Neumann:]

I would -- well, there is a couple of things going on there. We've -- in continuing Ops what we have is, we have -- we switched this year to an all cash short-term incentive plan. So, on a non-GAAP basis, we have probably -- there's probably $1 million rise in there, just based -- going from stock-based compensation to a cash-based compensation. But we have factored that in because that is drag on EBITDA, and yet we still absorb that with a $10 million target for the short-term plan. But that's what's driving a lot of it.

[Robert Meeder:]

So, stock base is -- so there is no more stock-based compensation? Or it's just a lower amount going forward?

[John Schoen:]

No, there is. But in our non-GAAP operating costs, we pull out stock-based compensation.

[Robert Meeder:]

Right. But stock-based compensation is still trending.

[David Neumann:]

It's still there...

[John Schoen:]

It's like -- well, it's actually trending down.

[Robert Meeder:]

It's trending down, but it's still going to be $2 million or $3 million a year, all things being equal?

[John Schoen:]

Yes.

[Robert Meeder:]

Okay. Is there any other flavor you can give us on the rollout of 5G, and when we might hope to see it in some of your numbers?

[David Neumann:]

5G. The official 5G spec won't be finished until 2019, 2020, and then the first implementation will most likely be a fixed broadcasting to replace some of the fiber-to-the-home. Mobile applications for 5G, realistically, are probably going to be 2021, 2022. That being said, there's still a lot of growth opportunities in 4G and the 4.5G, leading up to 5G. But if you're looking at purely 5G, I wouldn't expect test and measurement piece to ramp up until late 2018, mid-2019. And then the antennas will be predominantly a first fix, and that's probably going to be 2019 as well.

[Robert Meeder:]

Okay. That's all I had. Thank you.

[Operator:]

There are no further questions at this time. So, this concludes today's conference call. You may now disconnect.