PCTEL, Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the PCTEL First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will open up the call for 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 Mr. John Schoen, Chief Financial Officer.

[Martin Singer:]

Just to remind everybody, including the operator, this is PCTEL, not Pactel. John, would you go ahead, please?

[John Schoen:]

Yes. Thank you for joining us today for the PCTEL financial results conference call for the first quarter 2016. On today’s call will be Marty Singer, Chairman and CEO; and I am John Schoen, the Chief Financial Officer. Our remarks contain forward-looking statements and projections of future results. Please review the forward-looking statement section at the end of today’s earnings release for various factors that could cause actual results to differ materially from projections. PCTEL reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Today’s call will contain various operating results on an adjusted non-GAAP basis, which excludes items that affect the comparability of reporting results. Descriptions of these non-GAAP measures and reconciliations are included in today’s earnings release, which is available on our website. Now, I’ll turn the call over to Martin.

[Martin Singer:]

Thank you, John, and thanks all of you for joining us for our call. For those of you who have not had the opportunity to review our press release, let me recap some of the non-GAAP highlights from the quarter. We achieved revenue of $21.1 million. Gross profit margin was 35%. Operating Margin was negative 3%. Net loss was $494,000 or $0.03 per diluted share. Cash and investments were $27.9 million, a decrease of $3.9 million from last quarter. We generated approximately $700,000 in free cash flow, $1 million improvement over the same period last year. We repurchased 783,000 common shares during the quarter for $4.1 million. We paid $870,000 in dividends. At this point, I will turn the call over to John Schoen, who will discuss our financial performance in some detail. After John completes his remarks, I will discuss our new products markets and strategic direction.

[John Schoen:]

Thank you, Marty. Revenues were $21.1 million in the quarter, down 20% from the same period last year. I will speak to the changes by reporting segment. RF Solutions revenue was $6.4 million in the quarter, down $2.6 million, or 29% from the same period last year. The decline is primarily attributed to the downturn in North American cellular carriers spending and slower DAS deployment, a trend that has been well documented. Connected Solutions revenues were $14.7 million in the quarter, down $2.7 million, or 15% from the same period last year. Approximately 80% of the change is attributed to lower small cell kitting revenue in the US cellular carrier market and our exit from the mobile tower business in the third quarter of 2015. Our OEM antenna sales were strong, but were offset by lower sales to our distributors. Now, let’s turn to gross profit margin. Gross profit margin as a percent of sales was 35% in the quarter compared to 39% in the same period last year. I will speak to the changes by segment. RF Solutions’ gross profit margin as a percent of sales was 46% in the quarter compared to 53% in the same period last year. The decline in test equipment and in-building services revenue were the major contributors to the change in gross margin. Connected Solutions’ gross profit margin as a percent of sales was 30% in the quarter, down 2% of revenue from the same period last year. The change is attributed to a decline high margin kitting revenue and our antenna product mix. Now let’s turn to our non-GAAP operating expenses. Operating expenses were $8 million in the quarter. This is a $1.2 million decrease from the same last year. Transaction costs for our acquisition in the first quarter last year account for about $700,000 of the $1.2 million and the remaining $0.5 million from reductions enforced that were taken in the second half of 2015. These operating cost levels compare favorably with our cost structure as it was back in 2014. Non-GAAP income tax rate in the quarter was 18%, unchanged from the prior-year. Non-GAAP net loss per share was $0.03 compared to net income of $0.05 in the same period last year. Now let’s turn to the balance sheet. Cash and investments ended the quarter at approximately $27.9 million, about $3.9 million lower than the previous quarter. In the quarter, the company generated free cash flow of approximately $700,000, comprised of cash flow from operations $1.4 million, less capital expenditures of $700,000. Depreciation in the quarter was $792,000. During the quarter, the company paid cash dividend of $870,000 and purchased 783,000 shares of its common stock $4.1 million. The company purchased 2.7 million shares at a cost of $16 million over the last 12 months. Now I’d like to discuss guidance. For the second quarter 2016, we anticipate second quarter revenue to be between $23.5 million and $24.5 million, up about 11% to 16% sequentially. Gross margin is estimated between 38% and 38.5%, an improvement of 3% to 3.5% sequentially. Operating costs are expected to be approximately $8 million, unchanged sequentially. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the quarter is expected to be about 16.1 million shares. That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

[Martin Singer:]

Thank you, John. Although this is our first non-GAAP loss in 11 years and we had a revenue shortfall in the network engineering group, we anticipate, John already summarized, significant revenue growth in the second quarter and a return to profitability. We see sequential quarterly growth in all of our core product lines, traction in our subject matter expert, the SME staffing business and a recovery in our in-building engineering services. At the same time, we now have a cost structure, a return to 2014 OpEx levels that positions PCTEL to benefit fully from what we expect to be a $2.5 million to $3.5 million increase in quarterly revenue. Our projected growth reflects the progress that we have made in developing non-US customers, and in launching new products consistent with market direction. Let me first discuss our current cost structure, $8 million in quarterly operating costs reflects elimination of underutilized engineering resources, the consolidation of operational functions, a reduction in our physical locations and continued reduction of G&A expenses. The cost reductions leave with a healthy engineering and sales organization and we are in a good position to benefit from growth in markets such as utilities, fleet, public safety, Internet of Things and small cell deployment. More broadly, we expect to benefit from the growth of the wireless mobile Internet. Going forward, we anticipate some additional facility consolidation, but our major cost cutting efforts are behind us. Last quarter, we were active in new product launches and business development. We want to use our time with you today to review those activities and explain how they position the company for a strong second half. John and I are joined today by the General Managers of our two operations, David Neumann and Rishi Bharadwaj. At the end of our review, we encourage you to ask them directly about the state of their businesses. Let me begin with our RF Solutions. David Newman and his team have worked hard to integrate our analytics and SME staffing business into the RF Solutions operation. They have made good progress. We also launched four new products. The first that I will mention are, the SeeHawk Engage, a hand-held data acquisition tool SeeHawk Analytics, our cloud based data analysis tool. The release of Engage and the corresponding release of SeeHawk Analytics allow users to immediately visualize data and generate custom reports. We are pleased to report that we made our first sale of Engage just last week. As we stated last year, when we acquired the analytics and service operation, the test and measurement business is migrating to a crowd-based, cloud-based management system. Both SeeHawk Engage and SeeHawk Analytics provide critical elements to our long-term strategy in this market. Our other two product launches leverage our core flex platform, the Signal Analyzer, which we announced a few weeks ago, is a straightforward application, an add-on to the IBflex platform. Instead of investing in a single-purpose tool, any IBflex customer can add on the Signal Analyzer function to the IBflex platform. It will reduce the capital investment required by engineering firms. The ability to leverage the flex platform also extends to the MX series. This past quarter, we added 4x4 MIMO capability on the MX platform. This product competes at the upper end of the scanning receiver market. Our optimism about second half RF Solutions revenue also reflects positive developments with engineering services customers. We began 3.5 gigahertz engineering and survey work with a national account and hope to secure meaningful scanning receiver and analytic work with that same customer. We landed a national drive test project, initiated SME staffing business with an iDEN network that will transition to LTE and we won a major university campus engineering project. In our scanning receiver business, we had our strongest quarter with Huawei with particular strength outside of China in APEC. RF Solutions has been active at various industry events and we are going to have a major presence at the DAS and Small Cells Congress later this month in Las Vegas. We will be formally launching the SeeHawk Engage product line and our Signal Analyzer option for the IBflex. We will also be demonstrating the SeeHawk Analytics real-time reporting capabilities using data from Engage and our flex scanning platforms. In addition to the DAS Congress workshop on assembling, installing, and testing act of DAS, we participate in the LTE Latin America Panel on Small Cells and LTE Unlicensed Deployment and the Nedas [indiscernible] on Digitizing arenas. Investors and analysts can learn about the IoT impact on DAS and small cell technology innovation on our TIA webinar. Let me now turn to our connected solutions operation. Again Rishi Bharadwaj is on the call with us today. As we have mentioned in our investor presentation and on previous earnings release conference calls, our two businesses come together in the in-building and small cell markets. Our RFS group delivers engineering services and provides IBflex and other sophisticated tools. In parallel, our connected solutions group designs, manufactures and sells performance-critical antennas to the major small cell infrastructure OEMs such as Nokia, Huawei and Ericsson. In the first quarter alone for example, our antenna sales to Huawei nearly matched our entire 2015 revenue with them. In addition to our progress in APEC, we established relationship with LANCOM Systems in Germany and launched initial sales for three of our leading antenna SKUs. We also secured SAR, specific absorption certification in Europe with our ultra-low PIM LTE antennas for indoor applications. We are seeing strength in three of our key vertical markets, utilities, fleet and public safety. For each of these markets, we address market applications with new and existing products and we are active in the relevant trade shows such as Entelec, UTC, DistribuTECH, IWCE and the key rail show RSSI. In the utility vertical, we were selected for a high performance, dual polarized yagi antennas for smart grid applications. These shipments which we anticipated in Q1 have begun this quarter. Similarly, we recently commenced shipping high volumes of our new utility pole mount on the antenna for power line monitoring. These shipments are primarily to Midwestern utilities. As part of the smart grid rollout, utilities are now focusing doubly on enhancing remote monitoring, fault detection and optimization of power distribution networks. This includes deployment of sensors on power lines, and switching equipment in substation stations. Sensor data from these networks are used to more precisely calibrate power production and as a result, they eliminate enormous energy waste. PCTEL is working with several OEMs and directly with the utilities. Public safety is undergoing some resurgence largely because of multiple technology shifts. The FirstNet initiative will transition public safety to 4G technology. FirstNet creates demand for complex antennas and complex antenna farms on top of public safety vehicles. Many public safety entities are deploying multiple PCTEL antennas, legacy and new for antenna farm kits on first responder vehicles. Our new Trooper product line is ideal for complex configurations. Trooper provides optimized MIMO, Wi-Fi and LTE coverage along with high rejection GPS for voice, data and asset tracking applications in a single unit. This simplifies installation and avoids energy waste in shipping and deployment. We began our qualification process with an agricultural vehicle manufacturer to deploy our rugged, low profile, multi-band antenna. This antenna provides the right profile, high performance and out-of-band rejection required for precision applications that require LTE, Wi-Fi, and GPS capabilities. Finally, PCTEL’s new custom designed antennas were selected by a major sports league through an OEM. These antennas are deployed on wearable devices, enabling interference-free audio communications for personnel on the sidelines and on the field. This new product extends our venue portfolio which provides superior wireless network capacity in stadiums, transit hubs, concert venues and other crowded areas. We encourage you to take a look at our updated website which augments our sales distribution channel. We also created an international online presence with micro sites in Spanish, Chinese and German. In the second quarter, PCTEL will migrate all of its websites to a next generation platform to enable future improvements to the website. We look forward to seeing you at the DAS and Small Cells World Congress in Las Vegas. We encourage you to visit us at our booth number 202/204. I will also be in New York the week of June 13 and hope to see some of our investors at that time. With that, I would like to open up the call for questions from today’s participants. Operator?

[Operator:]

[Operator Instructions] And your first question comes from the line of Matt Robinson.

[Matthew Robinson:]

Hi, good afternoon. What are you – are you – what are you still thinking about for revenue this year.

[Martin Singer:]

In the $100 range.

[Matthew Robinson:]

What factors are you thinking are going to – are most incremental?

[Martin Singer:]

We will have a pretty good recovery in our engineering services, it was unusually low this quarter. And we are already seeing strengthening in that area. Second, we are seeing a very solid beginning to the quarter APEC scanning receiver sales, which is encouraging, as you know, we are quite disappointed by that last year. Third, we have done a lot of business development, and as you probably noticed, we took almost everbody’s name as a customer out of our script today. But we have major projects in the antenna space in the verticals that we mentioned and added to that is this growth with Huawei which we did mention. We believe that Huawei could be a $6 million plus customer in antennas and surprisingly, Matt, Huawei is likely to be $10 million customer for us overall across the business. So, those are really strong drivers. And then, I mentioned that David has done a nice job in integrating our acquisition from last year and as you know, we just got plastered when Samsung terminated our project with them, with Sprint. And I am pleased to say that we are seeing almost a week by week growth in our staffing business. And we expect to get that up to pretty credible levels by the end of the year. Finally, we expect to have some SeeHawk Analytics sales along with the success of this Engage product. It’s encouraging to us that so soon, after the introduction of that product, we already have sales of Engage. So, all of those things are quite positive for the rest of the year.

[Matthew Robinson:]

So, the public safety and the fleet, utilities, you talked about stuff is further into the future?

[Martin Singer:]

No. We are seeing – I think you will see some benefit of our public safety, and utilities and fleet in the second quarter for antennas. What’s further into the future is David and Rishi are cooperating to leverage some of our higher level relationships on the antenna side to secure some services work. So, just as we’ve been strong on in-building and on the private side, there’s some pretty good opportunity for us to do some engineering services work as public safety migrates to LTE.

[Matthew Robinson:]

John, what are you thinking for OpEx this year?

[John Schoen:]

$32 million, $8 million a quarter.

[Matthew Robinson:]

Okay. Thanks, gentlemen.

[Operator:]

The next question comes from Mike Crawford with B. Riley & Company.

[Michael Crawford:]

Thanks. So, that’s nice that you are seeing strengthening in the network engineering group, but the slowdown you attribute that to just North American carriers dragging their feet, or what was the culprit?

[Martin Singer:]

I think there is three things and it is all North America, because that’s the only place where we do – we bought that business Envision that we refer to as network engineering services, 100% of our work is in North America. And in there, we’ve had three headwinds to face. The first and the one that’s been described ad nauseam is the downturn in carrier spending. There is just an announcement today about Sprint, going down to $3 billion or below, off $2 billion from their high a couple of years ago. And that certainly was a factor with AT&T last year and continues – that continued to be a factor. The second is that small cell deployment in particular had a slowdown. Now, we are seeing that start to pick up again. But independent of carrier spending, small cell in and of itself had a slowdown. And the third factor with engineering services and I think this is one that is perhaps not external, it’s something that we need to pay attention to. We have to constantly work to deliver services with higher value. And some of the things that we did for example, as – there was a DAS explosion, had become better understood by some of our customers and they are able to perform some of that work. And so, we had been redefining some of our services, so they incorporate some value that is harder for those customers to really perform on their own. So, those I think are the three factors in that business.

[Michael Crawford:]

And just go, wouldn’t you, a bit further detail on the second one. So, okay, small cell deployment slowed, we know that. But why, right? That we should be at the early stages of what should be a long-term trend given the benefits of that architecture?

[Martin Singer:]

Well, perhaps, because small cell deployment is an expression of carrier spending and it was relatively new. I think the carriers tended to slow down those things that were least familiar and I also think the carriers are in a spot where they have to assess what return they are getting on their investment and I think that you are starting to see a recovery in small cell, because capacity is becoming of an issue and because small cell deployment is now shifting a little bit to the responsibility of the enterprise.

[Michael Crawford:]

Okay. And then as --

[Martin Singer:]

You know, Mike, let me just comment on that a little bit. I think if you looked at some of the neutral hosts like Mobility Extranet and Boingo, I think you’ll see that in their business plans as well that more of their focus has gone to addressing growth in the enterprise and becoming somewhat less dependent on carrier budgets.

[Michael Crawford:]

Okay. All right. Thanks for that. And then, Marty, as your what used to be scanning receiver business now migrates to more integrated and maybe deeper analytics, include, let’s say, a crowd-sourced activity, right, with SeeHawk Engage and SeeHawk Analytics, it sounds like that’s a great way to extend the value you can provide to carriers and other people designing networks, but does that change you think the addressable market where you used to do a certain of scanning receiver revenues a year maybe in the low $20 million range or something like that, but is that something that you think might change going forward given the way things migrated?

[Martin Singer:]

I think it changes in a positive way. So, if you look at our scanning receiver business, we look at it, our total available market as the attach rate to bigger systems. So, for example, if we looked at Ascom, NAI, Accuware – and so on, we ask ourselves what percentage of those big systems can we attach a scanning receiver and it’s a pretty low percentage by the way, in the 20% , 25% range. Now, you take something like Engage, which is a hand-held device and can capture user experience, either for a single network or for multiple networks, because we have this configuration that allows you to have multiple handsets. You are right that the attach rate could go down. It could go down to – well, with these deployments, we only won a scanning receiver 5% of the time, but the number of hand-held devices that will go out there is going to increase exponentially. So, particularly when you consider the form factor of our IBflex and how compact it is, it plus a subscriber-based tool that capture user experience is going to be and is very attractive. So, I would predict lower attach rate, but much higher available market. David, you have anything you want to comment on that?

[David Neumann:]

Yes, Mike, I think it also provides a competitive advantage for our services group, because our services group now has a great reputation not only collecting the data, but turning reports around in two to five days. Because now we’ll have some control over the post processing, we are looking for ways to provide that data in near real-time. So, because we control the tools, we can control the experience for engineering services and we think it will be competitive advantage there.

[Martin Singer:]

So, one of the things I wanted to talk about, Mike, at your conference and hope to give a demo on this is that, you take Engage and a scanning receiver, real-time now, we move the network data collected by the scanning receiver and the user experience data captured by the handset and it immediately goes to the cloud. And so, the network engineering services group can turn around the report in real-time or offer a portal to the end user. So, for example, let’s say, you add a major contract with a national sporting organization that had events every Sunday and a spectacular event once a year, okay. The nirvana would be to test in real-time what was going on with that network, both when the stadiums are filled and when they are empty. And so, that’s the vision we have of combining our scanning receiver with a user device that provides real-time user experience and an analytics tool.

[Michael Crawford:]

Okay. Yes, great. I mean, if you can show us that in our conference in a weeks that will be than a few years ago when you were running the still pictures off of our phones.

[Martin Singer:]

Why, they are still pictures off of your phone. But go ahead.

[Michael Crawford:]

All right. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from Peter Warendorf from Wunderlich Securities.

[Peter Warendorf:]

What do you expect the strongest and weakest market segments to be for antennas in second and third quarter coming up?

[Martin Singer:]

I think the strongest will be our – Rishi, do you have an access to an open line?

[Rishi Bharadwaj:]

Yes, Marty.

[Martin Singer:]

So, why don’t you answer? What do you think the strongest markets will be for antennas in the second, third and fourth quarter and where do you think we’ll see pressure?

[Rishi Bharadwaj:]

I think certainly the fleet market and the utilities are where we are seeing pretty good traction with both OEM customers, as well as large end users, whether it’s utilities or large carriers. We continue to see growth in our broadband access OEM market as well. There are a couple of big players [indiscernible] and they continue to launch new product lines. We are working with them on many fronts, and Marty talked about Huawei as well. Public safety is a market that has struggled for a period time, but we are seeing pockets of growth with FirstNet in there. So, that’s the outlook that we see right now.

[Peter Warendorf:]

Okay.

[Martin Singer:]

I would say – I would add to that, Peter, that I still think that we faced some pressure in the non-private wireless market, specifically the carriers. We’ve had historical strength in selling GPS timing antennas that has not been a strong of late because of carrier spending. And so, I think in the second and third quarter, we are still going to see pressure in the carrier market for our antennas.

[Rishi Bharadwaj:]

And the other market where we still see pressure is oil and gas, it has been slow for a while and we don’t see any recovery anytime soon.

[Martin Singer:]

I think Peter dropped off, it looks like. Meya, are you on? It says current questioner Matt. Operator, can you tell us who is trying to ask a question or if there’s anybody left?

[Matthew Robinson:]

Hi, it’s Matt. I’m up here now. Can you hear me now?

[Martin Singer:]

Yes.

[Matthew Robinson:]

Yes. You mentioned something – I think, John, you mentioned something about distributors having some headwinds, what do you mean by that?

[Martin Singer:]

Yes, Rishi is on phone. The distributors that we were referencing there have to do with our incentives. Rishi, do you want to comment.

[Rishi Bharadwaj:]

Sure. Matt, distributors typically in the past have addressed the oil and gas and public safety markets and they are slowly trying to make the changeover to fleet and the utility segment and that’s where we have seen the public safety, the traditional LMR public safety and the oil and gas there, things have slowed down as where we have seen an impact in our distribution sales.

[Martin Singer:]

So –

[Matthew Robinson:]

What do you expect?

[Martin Singer:]

Matt, if we look at what our business was like when we acquired MAXRAD, we were about 75% distribution and 25% OEM. Now, it’s completely flipped. We are 75% OEM and 25% distribution, part of that is by design. We’ve really tried to develop close relationships with large OEMs, we try to develop close relationships with large OEMs who deliver Wi-Fi base stations, deliver specialty tools or precision agricultures, but part of that is that, as Rishi said, the traditional businesses for some of those distributors have slowed considerably.

[Matthew Robinson:]

But what do you think – you expect to see business, some of this new direct business scanning receivers to be impactful to revenue?

[Martin Singer:]

When you say direct, you mean selling direct to carriers or selling direct to –?

[Matthew Robinson:]

Yes.

[Martin Singer:]

Go ahead, David.

[David Neumann:]

Some of the carriers we already sell direct to, for example, Verizon has their own in-house data collection tool. So, all of our scanning receivers go direct to Verizon. As far as additional direct sales, with the addition of Engage and the Analytics platform, we will have an opportunity to sell a complete system. I think, as Marty said, we’ve taken our first order already for Engage and we see that growing especially for in-building. And one of the benefits of selling direct for the scanning receivers and the software products is, we’ll get a higher margin on those products as well.

[Matthew Robinson:]

What was the biggest change in your outlook? When you are talking not long ago you are talking about, I think, $102 million to $105 million revenue this year?

[Martin Singer:]

Yes. We don’t get down below the segment, but I can tell you that the only we are seeing a shortfall is in engineering services, not the staffing, the staffing is outperforming. But we had a really significant shortfall this quarter, this first quarter, that just put us behind the [indiscernible] And I will tell you that the plan that we had for that area is going to be at about 60% or 70% of our initial plan. So, it is 100% in that arena. Every other area is performing nicely.

[Matthew Robinson:]

So, John, do you think you can make it up on gross margin?

[John Schoen:]

Yes. And as you remember from the guidance I gave, we are going to have a 3% to 3.5% uplift sequentially in margin…

[Matthew Robinson:]

Right.

[John Schoen:]

…going into the second quarter and it’s probably where it will stay at that $24 million, $23 million, $24 million, $25 million a quarter level.

[Matthew Robinson:]

Great. Thanks a lot.

[Martin Singer:]

Operator, I don’t know what happened to Peter. If he is still available, we are eager to answer his questions.

[Operator:]

Okay. Would like for us to ask him if he would like to ask a question, because we’re not sure what’s going on with his line?

[Martin Singer:]

It looks like he just passed on. So –

[Operator:]

Okay. Hold on, let me see if I can get him in. Okay. Peter Warendorf, yes.

[Martin Singer:]

Peter, are you on?

[Peter Warendorf:]

Hi, I am in.

[Martin Singer:]

I don’t know what happened to you. It’s like you disappeared before.

[Operator:]

Okay. Mr. Warendorf has dropped off again. And Mr. Robinson is back in.

[Martin Singer:]

Matt, are you back on?

[Matthew Robinson:]

Yes. Peter works with me Marty. I didn’t think I was going to make it on the call, so I gave him some questions to ask. So, that’s all. We are covered. Thanks a lot.

[Martin Singer:]

Okay. Thanks a lot. Operator, if there’s nobody else, I think – well, you can ask if there are any other questions.

[Operator:]

Okay. [Operator Instructions]

[Martin Singer:]

Okay. Well, I want to thank all of you for joining our conference call today. I look forward to seeing many of you at various industry events and we’ll update you at the next earnings call. Thank you.

[Operator:]

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