PCTEL, Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the PCTEL Fourth Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for queuing up will be provided at that time. 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 fourth quarter and full-year 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 is also available on our website 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; non-GAAP earnings per share, adjusted EBITDA and free cash flow. We believe these non-GAAP measures facilitate comparability results over different periods. A full reconciliation of these non-GAAP measures to our GAAP basis measures is included in our quarterly 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, and welcome to our call. I will make a few comments about our business then John will discuss our financial results. We are very pleased with our 2017 performance. The Company closed out 2017 fiscal year with improvements over 2016 in our revenue, gross profit, EBITDA margin, and non-GAAP earnings per share. More importantly, we have built a solid foundation for the future. Connected Solutions had strong growth in our fleet and industrial IoT antenna vertical markets, reaffirming that companies want to connect things wirelessly to increase efficiency and productivity. We remain confident in the long-term growth prospects of small cells to support 4G capacity requirements, new 5G Networks and Wi-Fi. In 2017, the Connected Solutions segment had several design wins with our important small cell OEMs in the U.S. and China. The success of our small cell and Wi-Fi vertical markets was driven by large projects with carriers and end user customers. 2017 was also a particularly strong year for sales in the fleet and industrial vertical markets with both growing more than 30% year-over-year. Wireless operators have commercially launched more than 40 mobile IoT Networks globally and we expect these networks to scale in 2018. To support the rollout of these networks, our RF Solutions segment launched the narrow band IoT testing capability in December, which customers can order as an upgrade to their existing PCTEL scanning receivers. In 2017, RF Solutions benefited from tighter coordination and increased sales from our global OEMs. In addition, reorganization and one of our largest customers created an opportunity to offer the new group with PCTEL scanning receivers, enabling them to test deployments of mobile IoT in early 5G Networks. Before I hand this back to John, I would like to make a few comments on investment activities in our new design center in Akron, Ohio. PCTEL’s known for solving complex RF challenges and we focused on developing and protecting our proprietary technology. In 2017, we invested heavily in our engineering teams in both segments. In Connected Solutions, we added embedded in radio system design talent and established our wireless system performance lab for testing and optimizing access points and industrial IoT devices. Our Akron RF design center will officially open in April. The team in Akron will focus on advanced radio integration, device optimization, and embedded antenna design for next generation Wi-Fi standards. In addition, we expanded our Beijing design center early in 2017 to address global customer requirements. In RF Solutions, the team added senior engineering talent to create 5G testing algorithms and to develop our unique public safety application for testing in building networks. To test 5G at higher frequencies, the team also developed a down converter capability that shifts millimeter wave lengths to a lower frequency to leverage the measurement functionality of PCTEL’s current scanning receivers. We announced this new capability a few weeks ago at Mobile World Congress. These investments in talent and facilities are important for PCTEL to support evolving mobile IoT and vertical market applications. With that, I will now turn the call over to John Schoen for a closer look at our fourth quarter and annual financial results, as well as first quarter 2018 guidance. John?

[John Schoen:]

Thanks David. I will be addressing the results from continuing operations for the fourth quarter and the full-year ended December 31, 2017, comparing them to the same period last year. Revenue was $23.3 million in the quarter and $91.4 million for the year, down 1% in the quarter and up 8% for the year. Gross profit margin was 44% in the quarter and 42.4% for the year, up 265 basis points in the quarter and 200 basis points for the year. Adjusted EBITDA margin as a percent of revenue was 10% in the quarter and 9% for the year, up 55 basis points in the quarter and up 95 basis points for the year. Diluted non-GAAP earnings per share was $0.08 in the quarter and $0.28 for the year, unchanged in the quarter and up $0.08 or 42% for the year. Free cash flow was a positive $2.1 million in the quarter and $7.1 million for the year at 8% of revenue, free cash flow was at the high-end of the 7% to 8% of revenue that the Company targets. Now I’ll review the results for each segment. For the Connected Solutions segment, revenue in the quarter was $16.5 million, down 9% and $68.6 million for the year, up 4%. Gross profit was 31.3% in the quarter and 32.7% for the year, unchanged in the quarter and up 120 basis points for the year. The growth leaders in the quarter and the year were antennas for fleet and utilities applications. Gross margin improvement came from a revenue shift to products earlier in their lifecycle as well as achievement of supply chain efficiencies. For the RF Solutions segment revenue was $6.9 million in the quarter, up 25% in the quarter and 19% for the year. Gross profit was 74% in the quarter, down slightly 15 basis points and 71% for the year, up 55 basis points. The increased revenue was driven by carrier spending in the U.S. market. Overall margin was higher for the year, as the increased revenue allow the leveraging of fixed cost of goods sold. Now let's turn to guidance for the first quarter 2018. First quarter revenue is expected to be between $21.5 million and $22 million. Gross profit is expected to be between 37.5% and 38.5% and non-GAAP diluted earnings per share from continuing operations are expected to be between a $0.01 loss and breakeven at that revenue range. The revenue and earnings guidance reflect the uneven nature of our business when looking at it on a quarterly basis. It has higher antenna revenue, but lower scanner revenue with its higher gross margin than the first quarter last year. The largest scanner market for the Company is North America. Several North American carriers delayed releasing their 2018 test tool budgets to the regional markets, which is resulted in a lag in initial spending. While the first quarter will be down from last year as a result, we still believe the full-year revenue in the Company will be between $100 million to $102 million and non-GAAP EPS in the $0.34 to $0.36 range. Before we take questions, I'd like to turn the call over to David to make a few closing remarks.

[David Neumann:]

Thanks John. We're pleased with our performance in 2017 as a Company and in each segment. We believe our investments will drive growth in our targeted vertical markets and provide long-term returns. To summarize, our focus on technical innovation and solving difficult RF problems differentiates PCTEL and positions us well for the future. The scanning receiver business and RFS was strong in the fourth quarter and for the year, fleet and industrial IoT sales grew substantially and we expect this trend to continue, we are confident that small cell and enterprise Wi-Fi are long-term growth drivers. And although RFS is starting slow, we expect to have a successful 2018 and to continue to increase revenue earnings in market penetration. And finally, I would like to thank the team here PCTEL for their continued efforts and contribution to our success. With that, John and I are available to answer questions. Operator?

[Operator:]

[Operator Instructions] And we do have a question from Jaeson Schmidt.

[Jaeson Schmidt:]

Hey guys. Thanks for taking my questions. I just want to start with kind of the full-year outlook. I mean I know it seems like you're starting in a whole for Q1, but given your full-year outlook, it seems like you expect a pretty sizable or ramp throughout the year. Should we expect a ramp starting in Q2 or is this going to be more back half weighted in 2018?

[David Neumann:]

Well, Jaeson to address the first portion of your question, yes, we are going to start a whole – being in a whole in Q1 and in most of that because of these delayed budgets, I'm happy to say that some of the budgets have been released and we're starting to see some of those orders, but it's going to be a challenge to close those and delivering on those orders in the next two weeks. So it's not that we’ve lost that business, but it’s going to shift into Q2 and later quarters. As far as predicting if it’s going to be second half event or are we going to reequip this on Q2, that’s really hard to say. Our business is mostly project oriented, especially in RFS. So we’re very comfortable for the year that the market drivers for PCTEL aren’t changing, industrial IoT and fleet is going to be a driver and now that we have the narrow band IoT for RFS. We will be able to upgrade those scanning receiver. So we should see some business there. Small cells are still a major driver for the Company in total for both RFS and Connected Solutions. We are starting to see some of the regulations loosen up. I believe Minnesota and Indiana now have legislation in place to make it easier to deploy small cells. That's important for us. Third point would be FirstNet in public safety. We were at IWCE last week, which is the International Wireless Communications Expo and it's a show really focused on next-generation public safety technologies. So it's a great show for our antenna business, but it's also one of the first shows we've been to where scanning receivers are being considered to be used to evaluate coverage and buildings for first responders. And as I mentioned earlier, we released a new software version that can be an upgrade to the current scanning receiver, so that's a good driver. And lastly, and it's probably more a long-term, but 5G is going to be important. We're not going to see a lot of 5G activity this year. We'll see some. It's really an investment here by 5G, but if you go out a year or 18 months that's when 5G really start to pick up. So if there's anything that's going to help us in the second half, it will be 5G. But it's difficult to predict when we will make up the revenue; of course, we're going to start as soon as we can.

[Jaeson Schmidt:]

Okay. Thank you for that. That's very helpful. And then looking at the Connected Solutions segment, any way you can help us think about what end markets really going to be the driver if you had to rank order kind of small cell, enterprise Wi-Fi, fleet and industrial and public safety. How should we think about the major drivers in 2018?

[David Neumann:]

Well the major driver in 2017 for Connected Solutions was industrial IoT and fleet. And I think we're going to see that continue through this year. FirstNet will help that a bit because the fleets will upgrade their systems on the vehicles, which is good for PCTEL. And with industrial IoT, anytime you can increase efficiency or productivity in a process by connecting a remote sensors. Sensors are going to be connected wirelessly and that’s a sweet spot for PCTEL. Small cells is still I think mostly driven international, but we'll see more and more activity in the U.S., you see announcements by all four operators that they're deploying a small cells, but the numbers are still relatively small. So as the regulations for deployment loosen, I think small cells will become a more important market for us. The last one is Wi-Fi enterprise. We are making a lot of investments. I mentioned the new design center in Akron, Ohio. We have a crack staff there in designing antennas and antenna systems for the next-generation Wi-Fi systems and Wi-Fi access points. So I think we're in a great position with enterprise Wi-Fi as well.

[Jaeson Schmidt:]

Okay. And then the last one for me and I'll jump back into queue. How should I think about OpEx ramping this year? With all these opportunities are you guys going to have to make significant investments on that line?

[John Schoen:]

Right now we had modeled in our plan of $100 million to $102 million or roughly $35 million in change in operating costs and that already has ramps in there for Connected Solutions engineering and our embedded in radio design center and it has the first year of our push for 5G in RFS. That's already loaded in those numbers.

[Jaeson Schmidt:]

Okay. Thanks a lot guys.

[David Neumann:]

Thanks Jaeson.

[Operator:]

And your next question comes from the line of Mike Crawford.

[Michael Crawford:]

Thanks. Just maybe continue that thought. So the investment with the scientists in Ohio this year for the next generation Wi-Fi access points. Is that something where the products that are being tested and developed today turn to revenues assumed as 2019 and we could see a pop there along with the growth in 5G or is it longer term and even that?

[David Neumann:]

I would say in some cases it’s shorter term Mike because in addition to doing the designs for the next generation Wi-Fi, we're getting more and more involved in bids for embedded antennas and that’s also an area that the Akron team is working on. So they're working on active projects now that we're bidding on. So it should contribute revenue in 2018 as well.

[Michael Crawford:]

Okay. And then while North America is your biggest market, can you comment on what if any changes you are seeing in Europe and then also in Asia? How things are going with Huawei and others?

[David Neumann:]

Yes. China in general the CapEx estimates that I've seen are flat to slightly down for this year. I think the operators there really preparing and starting to put in some of the 5G infrastructure. I read recently they are going to have 10,000 5G base stations by 2020. So 5G is really the push. That will help us with our – in our test measurement business especially with the down converter that we can do the higher millimeter wave. The measurements with current scanning receivers and it should help us as well in small cells. You're right; the U.S. is our biggest market. I think we will have strongest growth here. We're not anticipating a strong growth in China, but it should be a decline. I’d think it's going to be flat, it’s slightly growing. Now looking at Europe, that’s an area where we have the products, but we don't necessarily have a strong distribution in sales channels and we've added sales talent in both groups over the last six months. So we'll be working hard in Europe, especially in the industrial IoT and fleet space because we do have proven products and we think that this is applicable in Europe.

[Michael Crawford:]

Okay. Thanks. And then the last question is more strategic in nature. In the past, the Company has thought about external growth in this new organic growth to get to a higher revenue scale to be more relevant in the stock market that does not reward MicroCap’s. And there were some hits and misses on the engineering services side, but what is your current thought process around M&A?

[David Neumann:]

Our current thought process is to identify specific gaps and then try to fill those gaps. So as an example, I just mentioned that the Europe we see there's a lot of opportunity, but we don't have the distribution channels. If we were to come across even a small company in Europe than a great connections in relationships it would definitely be a candidate. We're not looking to do any large acquisitions. We're not going to take on debt to do an acquisition, but we are actively looking at tuck-in opportunities that might fill distribution gap, product gap. Even within industrial IoT, we’re very strong, but it's a large market. So if we were to come across and find other antenna companies that could help us in specific verticals or had the relationships, we’d definitely be interested.

[Michael Crawford:]

Great. Thank you.

[Operator:]

[Operator Instructions] End of Q&A

[David Neumann:]

Okay. If there are no other questions, I’d like to thank everyone for joining us this afternoon, and we'll talk soon. Thank you.

[Operator:]

And this does conclude today's conference call. You may now disconnect.