PCTEL, Inc.
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL First Quarter 2013 Conference Call. [Operator Instructions] 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 W. Schoen:]

Thank you for joining us today, May 8, 2013, for the PCTEL Financial Results Conference Call for the First Quarter 2013. On today's call, will be Marty Singer, Chairman and CEO; and I am John Schoen, Chief Financial Officer. Before we begin, I'd like to read our Safe Harbor statement. Today's call will contain forward-looking statements within the meanings of the Federal Securities laws. Comments concerning our future financial performance, new products and features, product development, acquisition efforts, and expectations regarding the future growth of our wireless business, are forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies and obtain protection for the related intellectual property. Additional discussions of these and other factors affecting the company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today, and we disclaim any obligation to update information to reflect subsequent events. I would like to turn the conference call over to Marty Singer.

[Martin H. Singer:]

Thanks, John, and good afternoon to all of you. For those of you who have not yet had a chance to read our press release, I'd like to recap some of the non-GAAP highlights from the quarter. We achieved revenue of $25.1 million, an increase of 46% over the first quarter of 2012. Our gross profit margin was 39%. Operating margin was 5%. Net income was $1.1 million or $0.06 per diluted share. Cash and investments were $52 million. I'm going to turn the call back over to John Schoen, who will discuss our financial performance in far greater detail. But later, I'll comment on some of our business development, engineering and marketing efforts over the past quarter, as well as some of our current activities. John?

[John W. Schoen:]

Thank you, Marty. Our investors will note that the company presents non-GAAP financial information in its earnings releases. The company believes that presentation of gross profit, operating profit and net income, excluding restructuring charges and noncash-based expenses, including stock and stock option-based compensation, amortization and impairment of intangible assets and goodwill related to the company's acquisitions, gains or losses on the sale of product lines and related note receivable and noncash-based income tax expense, provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the company's core results and facilitates comparisons across reporting periods. For more information on our non-GAAP financial results and reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website at pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results. So let's turn to revenue. First quarter 2013 revenue was $25.1 million, an increase of 46% over the same period last year. Approximately 25% of the growth was contributed by site solution products acquired in 2012, with the remaining 21% contributed by our established product lines. As a reminder, the company began operating in 2 reporting segments starting January 1, 2013. Our Connected Solutions segment is comprised of our antenna and site solutions products, and our RF Solutions segment is comprised of our scanners, related Network Engineering Services and our PCTEL Secure investment. From a reporting segment perspective, Connected Solutions revenue was $19.4 million, up 47% from the same period last year. On a pro forma basis, in other words, as if the company's 2012 acquisition of site solutions took place on January 1, 2012, Connected Solutions revenue was up 17%. The segment experienced growth across both distribution and OEM channels, and across both established and acquired products. RF Solutions segment revenue was $5.8 million, up 43% from the same period last year. All growth was organic and reflects established product lines and services. Revenue was up significantly in both scanning products and Network Engineering Services. The increase in scanner revenue is attributed to carrier spending increases from a low point in 2012. The Network Engineering Services revenue growth is attributed to the rapid growth in in-building wireless network expansion. Now let's turn to gross profit margin. Non-GAAP gross profit margin for the first quarter was 39%, as compared to 42% in the same period in 2012. As expected, with the acquisition of Network Engineering Services in 2011, and site solution assets in July 2012, the company's gross margin profile is now in a range of 38% to 40%. Stated differently, the gross margin decline from previous years reflects scanning receiver sales comprising a smaller portion of total revenue. From a segment point of view, connected solutions gross profit margin was 31%, compared to 33% in the same period last year. The change is attributed to the acquisition of site solution products, which carry lower margins than antenna products. On a pro forma basis, as if the site solutions acquisition had taken place on January 1, 2012, the gross profit would have been unchanged. RF Solutions' gross profit margin was 63% in the current quarter, compared to 70% in the same period last year. The decline reflects the current mix of Network Engineering Services and scanning receiver sales. Now let's turn to operating expenses, which were $8.4 million in the quarter, an increase of approximately $1 million or 13% from the same period last year. Approximately $700,000 of this increase, or 10%, is attributed to ongoing operating expenses associated with the site solution business acquired in July 2012. The remainder is principally onetime higher G&A expense associated with the site solution business acquisition. Non-GAAP operating margin in the first quarter was 5%, as compared to 1% operating loss in the same period last year. The 6% increase reflects higher revenue and gross profit dollars and slower growth in operating expenses. Non-GAAP other income was $2,000 in the current quarter, as the amounts are largely interest on our investments, netted with other miscellaneous expenses, the number will continue to be small in the current interest rate environment. The non-GAAP income tax rate in the quarter and the year was 18%, unchanged from 2012. Non-GAAP net income for the first quarter was $0.06 per share, compared to a $0.01 per share in the same period last year. The increase is attributed to higher operating profit. Now let us turn to the balance sheet. Cash and investments ended the first quarter at approximately $52 million, about $800,000 higher than the previous quarter. In the quarter, the company generated approximately $1.7 million of cash flow from operations, with capital expenditures of approximately $600,000. Depreciation in the quarter was $678,000. The company paid a dividend of approximately $650,000 or $0.035 per common share. The company's historical cash flow from operations performance in the first quarter ranges between breakeven and negative. In the first quarter, PCTEL typically consumes several million in cash to pay off year-end accruals. The company excluded from its noncash results the effect of the income from the Scronce legal settlement and the expense for certain legal and forensic accounting services, as we felt that they are non-core results. Indeed, cash flow from operations would've resulted in a net use of approximately $1.1 million in the first quarter, but not for the $2.8 million net cash received from those non-core activities. Now I'd like discuss guidance for the second quarter 2013. We anticipate second quarter revenue to be in a range of $25 million to $26 million. The midpoint of guidance represents a 7% increase for established products, over the same period last year. Actual revenue growth will be 28% over last year's second quarter. If we achieve this revenue target, it will be our fourth consecutive quarter in which we generate over $25 million. We anticipate gross profit margin to be in a range of 38% to 40%. Operating costs are expected to decline to approximately $8.0 million. Other income is expected to be about $10,000 in the second quarter, and the non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the second quarter is expected to be around 18 million shares. That concludes the financial review. I would like of turn the call over to Marty for his summary comments.

[Martin H. Singer:]

Thank you, John. As you all know, it has not been very long since our last update. Some of what I will mention this afternoon might be redundant, but we have several new product marketing and operational updates to review with you. In March, we discussed our new EXflex. We launched EXflex at the Mobile World Congress in Barcelona this past February. We have never seen a scanning receiver with such immediate appeal. You may recall that the flex gives customers unparalleled protection against obsolescence and offers the ability to download feature sets, cellular standards and adapts flexibly to different spectrum. During the first quarter, significant customers, including in North America and South America, have already bought this new model, as Ascom, Accuver, SwissQual and others adapt their test tools to the flex, we anticipate a strong order flow this quarter and throughout the remainder of the year. We are particularly enthusiastic about the new rental market that EXflex will help us develop, particularly, within engineering services companies such as RumUp [ph], Sellplan [ph], LCC [ph] and others who prefer OpEx to CapEx expenditures. It has also become clear that the deployment of LTE, TD-LTE and the strength of the South American market and in particular, Brazil, will drive additional engineering services and scanning receiver revenue in 2013. With respect to our in-building engineering services initiative, we are delighted to report that our quarterly revenues have more than tripled since we acquired this operation in October 2011. We continue to expand our capacity to provide RF surveys across the health care, education, commercial, government, hospitality, transportation and sporting vertical markets. In the first quarter alone, our engineering services team completed over 120 projects and contributed to successful number of deployments at marquee venues such as the Georgia Dome for the Final 4, the Jacob Javits Convention Center, Harvard, Northwestern and the Freedom Towers. Our customer base continues to expand and includes wireless carriers, OEMs, network integrators, neutral host firms and venue owners. We provide services to a broad spectrum of customers and distinct segments of the telecom industry, including General Motors, AT&T, American Tower, Crown Castle, Connectivity Wireless, Corning MobileAccess, CommScope, Tyco, Ericsson and Extanet. We anticipate continued growth of in-building networks and the demand for those services. Our connected solutions business continues to expand and scale. Our vertical market strategy and the focus on key antenna applications has resulted in several design wins with important OEM customers and a growing presence with key markets such as health care, transportation, fleet management, utilities and defense. Cisco has expanded their business with us and our flat-panel antenna has been an important element in several Smart Grid deployments. Our MIMO, Multiple Input, Multiple Output antennas, recently displayed at the HIMSS Health Care Conference and Exhibit, which were prominently displayed at the recent launch of the New York City subway network, have been adopted by Aruba for their outdoor access point. We are confident in our decision to focus on the growing in-building and offloading markets. We hope to report additional access point design wins with new customers. PCTEL's GPS antenna portfolio has been essential to our efforts to expand our defense-related sales. We recently shipped our multiband GPS antenna in the Defense Advanced GPS Receiver program or DAGR, D-A-G-R. We also expect strong commercial OEM applications for our GPS antennas, including small-cell projects. Finally, we expect a follow-up on our GPS defense sales with a successful MIMO antenna application for various army training programs. We have seen strong performance in the delivery of GPS kitted solutions into the railroad industry, the sale of our new mobile tower product line, along with our antennas and other ancillary RF equipment. These sales reflect the original strategic intent of the site solutions acquisition last July. These sales have been to Ericsson, Canada Towers and also, Verizon. We anticipate strong mobile tower sales into the oil and gas data network over the next several years. With respect to North Carolina, our Connected Solutions operation group has begun the integration process of Lexington production items. We have cleared out both inventory and production space in Bloomingdale, and we initiated production of certain items on May 3. Last week, we monitored initial pilot runs, as well as the production of fiber cables that were formerly produced and shipped out of Lexington. We will completely transition by the end of June and we'll move the remaining Lexington office to a 5,000 square foot facility within 6 months. We have already given notice to the current landlord. We expect to save approximately $150,000 per year over the next 4 years with this new facility plan. We have been extremely active at various industry trade shows and conferences. In January, we exhibited at Cisco Live U.K. in London. We also supported booths at the TPSC Transit Expo in New York City, at AUSA's Winter Symposium, and just recently, we're at HIMSS, which is a health care information and management system society show in New Orleans. We have attended IWCE, the Aruba partner summit and the DAS Congress in Las Vegas. We saw some of you at ENTELEC in Houston, LTE Latin America in Rio de Janeiro, and the PTC World Congress in Orlando. Consistent with our vertical market focus, we have concentrated on smaller exhibits with targeted markets. We no longer attend Mobile World Congress and CKA [ph] with a booth staff and presence. The first quarter and early second quarter have been eventful in other areas. As you know, we accepted a settlement offer from Tim and Brenda Scronce related to accounting irregularities. We also successfully divested PCTEL Secure and our ProsettaCore product to an engineering and distribution team that maintains a military and top-secret focus. That deal contemplates royalties on the sale of any products utilizing ProsettaCore. We continue to look for top end acquisitions that are compatible with our engineering strengths, distribution channel and that can expand upon our vertical market and in-building strategy. While we are committed to 10% to 12% organic growth, we'd like to continue to add 3% to 8% revenue growth through strategically and financially sound acquisitions. We hope to see many of you at the Jefferies Investment conference tomorrow in New York City, as well as the B. Riley conference later this month. We recently, in fact, just yesterday, presented at the Baird conference. And the management team will make every effort to reach out to our institutional investors throughout the rest of the year. Finally, we look forward to seeing you at our Annual Shareholders Meeting in June. With that, we've concluded our prepared remarks and have set aside 30 minutes for your questions. Operator?

[Operator:]

[Operator Instructions] Your first question will come from the line of Matt Robison with Wunderlich Securities.

[Matthew S. Robison:]

We have seen a couple of companies report some interruption in the momentum in the WiFi space. And wondered if you could comment on how -- what you're seeing there and if you've had to temper your plan a little bit in light of market conditions lately?

[Martin H. Singer:]

We have not really seen a disruption. In fact, we think, Matt, that we're seeing some increased success at achieving design wins at major OEM providers of WiFi-base stations. And we're getting a lot of exposure to new indoor programs, offloading as well as combinations with DAS and programs that are being supported by a variety of neutral host vendors. We think there is some real opportunity for us to repeat our New York City Subway transit experience in other cities. And indeed, just to expand network such as the New York City Subway transit wireless network, that we're already involved in. I'll also mention that I think it's been helpful that we acquired this engineering services business. It serves, in some respects, not only as a source of revenue and insight into the problems related to in-building coverage, but it also serves as a search engine for new opportunities. And that's been helpful to us.

[Matthew S. Robison:]

So basically, it sounds like you're -- you think you're taking some market share that is offsetting whatever is ailing the other companies?

[Martin H. Singer:]

We do, we do. And aside from market share, I think that, as I said, this engineering services business sort of changes the demographics of the market by exposing us to different customer sets.

[Matthew S. Robison:]

But do you think we're going to see the scanning receiver business or rather, the RF Solutions business be able to sustain a flat or better comparison this quarter? I know seasonally, it's normally better than the first quarter, but you had a little bit of catch up there this time around. How should we be looking at that?

[Martin H. Singer:]

Well, last year, as you know, we were quite low on scanning receivers. And this year, organically, we had pretty significant growth on a year-over-year basis in the first quarter. We're seeing a sequential improvement. There's a major program that I can't discuss right now, but involves us replacing a competitive scanner. And it could mean significant business in the second and third quarter for us. We're also seeing some improved activity from 2 of our stalwart OEM vendors, Ascom and Anite, particularly Ascom. And despite the acquisition of SwissQual by Rohde & Schwarz, we are still seeing very loyal customers to the PCTEL scanner. And let me mention one other element. John and I were recently looking at some data on the success of the MX. It was just 2 years ago that we introduced the MX. And the first year, it had modest sales. But last year, it started to turn into our flagship product and accounted for approximately 1/3 of all sales and that MX has very nice revenue associated with it, strong gross margin. We expect to repeat that experience with the new flex and believe strongly that we're going to see the emergence of a market that simply didn't exist for us before, which is this rental market, because we're making the product available on a per use basis. You're going to be able to buy, in essence, a blank EX base scanning receiver and then enhance it or change it as you need to for different applications. So we have high expectations for that product line.

[Matthew S. Robison:]

So this competitive displacement you've achieved, I guess, it's obvious that would be with one of your OEM channels and that could happen by the end of June?

[Martin H. Singer:]

We're going to see some benefits in the second and third quarter.

[Operator:]

[Operator Instructions] Your next question will come from the line of Mike Crawford with B. Riley & Co.

[Michael Crawford:]

Do you think the transition to more of a lease model would take longer than the ramp you saw in the MX or do you think EXflex could be 1/3 of your scanning receiver sales as soon as next year?

[Martin H. Singer:]

No, it won't happen that quickly. I think lease will be a smaller percentage than that next year. But there's 2 ways that we're approaching customers with this, that give them flexibility with the flex. One is outright rental. But it's also going to be extremely attractive to our largest customers to be able to invest in obsolete-proof product. So as you know, we've never been able to predict with the type of accuracy that we have in our antenna business, what our scanning receiver sales are going to be. And we think that if customers can now buy a base and then choose what to add to that as they go forward and are able to download feature sets as they need it, we're not going only open up a rental market, Mike, but we're also going to be able to open up a razor blade type of sales model with this product. So the EXflex may become, in total, 1/3 of our sales, but it will only be a portion of that, that is rental.

[Michael Crawford:]

Okay. Switching gears a little bit. With Transit Wireless, is the revenue you're generating there, is it mostly the sale of MIMO antennas or is it also more of a -- do you get much of a consultative payment for the engineering services?

[Martin H. Singer:]

Unfortunately, we were not the engineering services company involved in that particular application. 100% of our revenues come from antennas, connectors and cables. There are other instances where we're doing the RF design.

[Michael Crawford:]

Okay. And you're bidding with them or they're bidding on several other deployments, San Francisco, Los Angeles, I believe.

[Martin H. Singer:]

Transit Wireless has asked be somewhat reserved on our comments about that. But our plan is to participate with them in a variety of bids.

[Michael Crawford:]

Okay. And then, I hate to be a dead horse on TelWorx, but it's great that you've settled with the Scronce's, however you pronounce their name...

[Martin H. Singer:]

Scronce. And still, Mike, you get the award for the best use of Scronce in a headline.

[Michael Crawford:]

Yes. Well, it's a verb I'd rather forget. But -- so now you've got this last year against this Mize character who is searching for how to delete stuff on his hard drive the day you fired him back in January. And then he shows up at the Scronce's other company the next month. So what are you looking for from that guy, is it mostly just to get him out of the market or you might get some [indiscernible] on that guy as well.

[Martin H. Singer:]

Well, there's a couple of things. First, let me correct something that you offered on the facts there. The company that Mark Mize went to, TelExpress, is not a company owned by the Scronce's. It's totally independent, doesn't have anything to do with either Tim or Brenda Scronce. So what Mark Mize -- what we alleged that Mark Mize did, and we have a fair amount of evidence, is that he copied a lot of files that we believe are proprietary to PCTEL, and took those with him to a company that competes. We're interested in 3 things. One, the protection of our intellectual property, which is not only patents but of course, customer and product information. Two, we are absolutely committed to the enforcement of our employment agreements, which stipulate behavior post-employment with PCTEL, and we are always going to vigorously defend our rights under that agreement. And the third, in so far as there have been damages, we will seek compensation. I will -- I hate to spend so much time on this, Mike, I don't believe that we are going to -- you're going to see the type of expenses in this effort that you saw on the original matter with resolving the accounting and regularity issues with Scronce. Basically, it's a -- we filed a set of pleadings that applied to both the employee who left us and the new company, and they're all about the proper disposition of our proprietary information.

[Michael Crawford:]

Okay. And then just the last question, maybe a bit more technical. But on -- when you look at your MIMO opportunity, in particular, is that something that's really correlated with the proliferation of LTE networks? Is that worth -- is that something that's really driving more demand for that but...

[Martin H. Singer:]

It absolutely is correlated with LTE because what you want to do to get the maximum throughput for this, is you want to be able to combine different channels and you always want to select the signal with the greatest strength or availability. Think about this, think about driving in your dad's car when you were younger and you had an a.m. radio and you pull up to an intersection and you sort of lose the reception, and you edge up a little more and you get the reception. And you can solve that problem if you put an antenna at the front of the vehicle and the back of the vehicle. And you can then have the radio rely upon, which ever antenna has the strongest signal. MIMO essentially does the same thing. It's always selecting the path of best performance and it also is able to combine bandwidth. So in LTE, where your varying power levels and so on, it is essential to have MIMO to get full benefit from an LTE structure. But interestingly, MIMO is also quite important to WiFi. So while it is true that we will see expansion of our MIMO antenna business correlated with LTE, we also expect significant application into our existing WiFi markets. Another way of stating this, Mike, it is a great, great indoor play.

[Operator:]

And there are currently no further questions. Mr. Singer, I will turn it over to you for closing remarks.

[Martin H. Singer:]

Thank you, all, for participating in our earnings call. We look forward to updating you again at our next one. And I look forward to seeing many of you at the upcoming B. Riley conference and on non-deal roadshows with both Wunderlich and B. Riley. Thank you very much.

[Operator:]

This does conclude today's conference call. Thank you for your participation. You may disconnect at this time.