PCTEL, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Welcome to the PCTEL Third 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 like to turn the call over to John Schoen, the company's CFO. You may begin.

[John Schoen:]

Thank you for joining us on today's conference call to discuss PCTEL's third 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 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. 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; non-GAAP earnings per share, 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. Third quarter and year-to-date revenue, gross profit, EBITDA margin and non-GAAP earnings per share all improved when compared to the same period last year. We confirm our annual revenue targets for antenna and scanning receiver products. John will discuss our financial results later in the call. Industrial IoT, small cells and the migration to 5G are all significant long-term growth drivers for PCTEL. We have a strong and growing position in our core antenna verticals, including fleet industrial, small cells and enterprise WiFi. Our antenna solutions solve complex RF problems and that applies to our test and measurement group as well. PCTEL is recognized as a leading provider of RF scanning receivers that pinpoint coverage and interference issues across multiple technologies including P25 for public safety, narrow band IoT, and 4G 5G LTE. In Connected Solutions fleet and industrial IoT were strong this quarter including shipments to a major public safety OEM for their new radio, deliveries of our rugged multi-band antenna for precision agriculture and increase shipments of our high-precision multi band GNSS antenna to support specialized fleet applications. We believe global small cell growth will be a significant driver for antennas and test equipment over the long-term as networks become dancer but there may be some variance one quarter to the next. Small cells play a role in 4G today and their use will be expanded in 5G especially in the millimeter wave bands which travel shorter distances. We won a new small cell project from one of the largest OEMs and small cell projects are starting to ramp up in the U.S. Infrastructure deployments in the quarter also drove sales of our precision GPS timing antennas. Last week, we announced the opening of our wireless system performance lab in Bloomingdale. Our new lab enhances our RF design capabilities to optimize WiFi antenna solutions and it allows us to offer precertification over the over the year testing and integration of systems to our customers who are building wireless products. Within RF solutions, we're optimistic about the business for several reasons. Two new OEM partners were added in the U.S. and we captured significant scanning receiver business at one of the largest U.S. operators. Our IBflex scanning receiver running with our latest SeeHawk Touch software continues to show its versatility beyond coverage verification and interference mitigation. Our newest public safety application includes features that significantly decrease the time to test wireless systems that are critical for first responders. We continue to make investments in our scanning receiver technology to support 5G networks. Our MXflex is the only standalone scanning receiver on the market that supports 4x4 MIMO. And with our new down converter options, it is an ideal solution to support higher frequencies planned for 5G to support our industrial IoT and small cell strategies. We join the MulteFire lines in September. MulteFire is an LTE based technology for small cells operating in unlicensed or shared spectrum that will have the simplicity of WiFi like deployments. It is expected that MulteFire trials could start as early as the first half of 2018 and our products support MulteFire frequencies today. We are well positioned in both divisions to serve the industrial IoT, small cell and 5G market segments. I would like to note that John and I will be attending the Southwest Ideas Investor Conference on November 16 in Dallas. We look forward to meeting with investors at the conference next week. With that, I will now turn the call over to John Schoen for a closer look at our third quarter and September year-to-date financial results as well as fourth quarter 2017 guidance. John?

[John Schoen:]

Thanks David. I will be addressing the 2017 results from continuing operations for the third quarter and the three quarters ended September comparing them to the same period last year. Revenue was $23.7 million in the quarter and $68.1 million year-to-date an increase of 13% percent in the quarter and 11% year-to-date. Gross profit margin was 42.9% in the quarter and 41.9% year-to-date up 340 basis points in the quarter and 170 basis points year-to-day. Adjusted EBITDA margin as a percent of revenue was 11% in the quarter and 9% to-day up 270 basis points in the quarter and 110 basis points year-to-date. Non-GAAP diluted earnings per share was $0.09 in the quarter and $0.19 year-to-date up $0.06 or 54% year-to-date. Free cash flow was positive $2.1 million in the quarter and $5 million year-to-date. Now I will review the results for each segment. For the Connected Solutions segment revenue in the quarter was $18 million up 5% $52.1 million year-to-date up 9%. Gross profit was 34.2% in the quarter up 50 basis points and 33.2% year-to-date up 160 basis points. The growth leaders in the quarter and year-to-date continue to be antennas for fleet and utilities applications. Gross margin improved in the quarter and year-to-date from a continuing revenue shift to products earlier in their life cycle as well as achievement of supply chain efficiencies. For the RF Solutions segment revenue was $5.7 million in the quarter up 50% and $16.2 million year-to-date up 16%. Gross profit was 69.8% in the quarter up 430 basis points and 69.8% year-to-date up 70 basis points. The increased revenue is being driven by the US market; margins were higher in the quarter and year-to-date on increased revenue leveraging fixed cost of goods sold. Now let's turn to guidance for the fourth quarter 2017. Fourth quarter revenue is expected to be between $23.5 million and $24 million. Gross profit is expected to be between 42.5% and 43% and non-GAAP diluted earnings per share from continuing operations are expected to be $0.08 or $0.09 per share at that revenue range. At the midpoint of our fourth quarter guidance, revenue will be up 8% for the year. Before we take questions, I would like to turn the call over to David to make a few closing remarks.

[David Neumann:]

We're pleased with our performance in each of our target verticals. PCTEL is in a strong position as we approach 2018. To summarize, we had a strong quarter for scanning receivers and antennas sold in a fleet and industrial IoT. We continue to make investments in equipment, staff, and facilities to support 5G and the associate applications. And we're pleased with our results through the first three quarters and the momentum we've generated to finish the year. With that, John and I are available to answer questions. Operator?

[Operator:]

Your first question comes from the line of Jaeson Schmidt.

[Jaeson Schmidt:]

Hi guys, thanks for taking my questions. Just want to dig in on that new small cell win. Is that with an existing customer or a new customer and is there any way you can help us size the potential opportunity there?

[David Neumann:]

The small cell win is with an existing customer and I think we've talked in the investor presentations there's really three vendors and two of those are pretty strong in Nokia and Huawei, so it was with one of those two existing customers. Small cell business as I've said in our comments it's really a long-term play with 5G and the shorter wavelength you really need to have the sites closer together. Now we have some challenges in the US mostly around getting the permits and the permission to build. Build up small cells, I think I've read recently there's probably less than 50,000 small cells deployed in the US. But they really need hundreds of thousands of the sites to support 5G. Once the permitting and the application process is a bit more streamlined, I think we'll see even more business in the US. And of course, China is a big market for small cells as they bring their technology and then their wireless infrastructure up to the current standards.

[Jaeson Schmidt:]

Okay. That's helpful. And then looking at the FirstNet opportunity, I know you guys have talked about that being more of an 18, 19 type of story. Any update on your thinking as part of timeline goes and any interaction you are seeing in that market.

[David Neumann:]

Well, I think with first step, there is really two opportunities. One; is with infrastructure as AT&T deploys infrastructure to support FirstNet, that's going to be I think a smaller opportunity and probably more long term. And the reason is AT&T has pretty good coverage over most of the US already. So once FirstNet is implemented, they'll be able to give priority to the first responders on the existing network and they'll really need to build out rural areas 23%, 24% of the US that they don't have covered. So, I don't think that's going to happen until probably mid next year or later. The other interesting component of FirstNet from PCTEL is that the fleet is a large market for us. So as the municipalities upgrade their vehicles to support LTE and multiband GPS and WiFi, we'll have an opportunity to sell into those markets.

[Jaeson Schmidt:]

Okay. And then the last one from me and I'll jump back in the queue. Gross margin was really strong in the quarter and just I know part of that due to the recent sale of the RF Engineering Services business. But how should we think about gross margin trending longer-term?

[John Schoen:]

First you have to think of the two segments separately. So, what we've got on a GAAP basis is somewhere in the 70 points range for GAAP is a consistent gross margin that we model for scanners on a non-GAAP basis it's about 73% to 74%. So, I know you do a non-GAAP model. As far as the antennas go, it's a little different because think of a large stack of antennas skews that are in different ages of their life cycle stacked on top of each other in a common [ph] and its higher at the front end as we get specked in and then as the supply chain of our customer costs reduce over the life cycle it tends to lower. And so, we long-term are modeling on a non-GAAP base call it 33.5 points long-term for antennas. This quarter happened to be a little stronger just based on the age cycle but as the business is lumpy, the age cycle of what ships in a particular quarter ebbs and flows. But 33.5 in 73 points for non-GAAP is how you should be thinking long-term about gross margins for the two different segments.

[Jaeson Schmidt:]

Okay. That makes sense. Thanks a lot guys.

[Operator:]

Your next question comes from the line of Mike Wasserman [ph].

[Unidentified Analyst:]

Yes, hi. I think you partially answered my question earlier. But everything I'm hearing suggests 5G is still quite a long way away in the US. Are you mostly focusing on overseas business you may be getting perhaps near term and 5G?

[David Neumann:]

5G standard is really a global standard. So, it's not necessarily international versus US issue. With 5G the official specs will be out 2020 I think for the fixed version 2022 for mobile. But there are interim, we call them 4.5G or 4.9G that Verizon and other carriers want to implement to take advantage of some of the capabilities of the new radio within 5G and to address some of the applications as an example for the fixed wireless sending a beam to the homes versus lining fiber For PCTEL, 5G even though it's a little bit further down the road and we need to make some investments now and in 2018 to support it. It's really the densification of a network that drives our business. So, with 5G at the higher frequencies the cell size has to be much closer together. So, for us small cells are an important market for us and that means more small cells deployed globally. And it also means that you're going to have more RF in the area at different frequencies on top of the 4G frequencies, which makes it a little bit more complicated and you need to test the measurement tools that we provide from RFS. So, although 5G is not officially going to be launched for several years I think you'll see some of the 5G applications running now. And it'll be in interim versions until they get to the official release. Now 5G in the small cell play for PCTEL is really driving our infrastructure business. So, small cell antennas are put on the towers or on light poles we're really not in the consumer space. So, we don't have -- we're not manufacturing antennas for TV's or set top boxes. The 5G opportunity for PCTEL is really with infrastructure.

[Unidentified Analyst:]

Okay, got it. Thank you.

[Operator:]

And there are no further questions at this time. I would now like to turn the call back to David Neumann for closing remarks.

[David Neumann:]

Well, we'd like to thank you all for joining the call. And John and I hope we see some of you next weekend in Dallas. John and I are available for calls, if you want to give us a call after the conference. And have a great afternoon thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.