PCTEL, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the PCTEL Second Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Later, we will open the call up 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 today for the PCTEL financial results conference call for the second quarter of 2015. On today’s call will be Marty Singer, Chairman and CEO; and I am John Schoen, Chief Financial Officer. Our remarks today 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 comparability of reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today’s earnings release which is available on our website. Now, I’ll turn call over to Marty.

[Marty Singer:]

Thank you, John, and good evening to all of you. Let me recap some of the non-GAAP highlights from the quarter. We achieved revenue of $27.6 million, an increase of $1.4 million over the same quarter last year. Gross margin was 35% reflecting the growth of services relative to higher margin products. Operating margin was 1%, net income was $300,000 or $0.02 per diluted share; cash investments were $41.3 million, an increase of $2.4 million from last quarter. We repurchased $380,000 common shares during the quarter for $2.8 million and we paid $929,000 in dividends. At this point, I’ll the call back over to John who will discuss our financial performance in greater detail.

[John Schoen:]

Thank you, Marty. Revenues were $27.6 million in the quarter, up $1.4 million or 6% from the same period last year. Approximately $2.2 million of the growth is from the Company’s acquisition last quarter with remaining $800,000 decrease coming from organic revenue. I will speak to the changes by reporting segment. RF Solutions revenues were $9.6 million in the quarter, up $1 million or 12% from the same period last year. The increase is a result of the recent acquisition of Nexgen in the first quarter this year, partially offset by a decline of over $1 million of standard revenue in the Asia-Pacific region. Marty will speak to the market factors driving the trend later in the call. Connected Solutions revenues were $18.1 million in the quarter, up $400,000 or 2% from the same period last year. Revenue increased from growth in the OEM sales channels, which was partially offset by the completion of a large carrier project and weakness in the oil and gas market. Gross profit margin as a percent of sales was 35% in the quarter, compared to 42% in the same period last year. RF Solutions gross profit margin as a percent of sales was 44% in the quarter, compared to 62% in the same period last year. The decline in scanning revenue was the major contributor to the gross margin eroding also the ability to rapidly reduce service cost structure after the Samsung termination was another. Connected Solutions gross profit margin as a percent of sales was 31% in the quarter, down 2% of revenue from the same period last year. Revenue was significantly higher in our OEM channel for Wi-Fi products which carries less margin percent than our GNSS products. Now let’s turn to non-GAAP operating expenses. Operating expenses were $9.4 million in the quarter, this is up $500,000 increased from the same period last year with $1 million associated with Nexgen acquisition, partially offset by $500,000 decline in organic operating costs. The $500,000 organic expense reduction is primarily attributed to R&D related to the IBflex product launch being completed in 2014. Non-GAAP other expense was $9,000 in the quarter, as the amounts are largely interest on our investments netted with miscellaneous expenses such as currency gains and losses, the number will continue to be small in the current interest rate environment. The non-GAAP income tax rate for the quarter – in advance for the rest of the year that was – is 18% and that’s unchanged from 2014. Non-GAAP earnings per share from continuing operations were – $0.02 in the quarter, compared to $0.11 in the same period last year. Approximately $0.07 is attributed to lower gross profit and $0.02 is attributed to higher operating costs. Now let’s turn to the balance sheet. Cash and investments ended the second quarter at approximately $41.3 million, about $2.4 million higher than the previous quarter. During the quarter, the company repurchased 380,000 shares or $2.8 million, paid $929,000 for the regular quarterly dividend and generated $6.1 million of cash and investment from all other sources. Cash flow from operations was $6.9 million of which $3 million related to the Nexgen acquisition settlement. Capital spending was $933,000, brings free cash flow for the quarter to $6 million. Now I would like to discuss the guidance for the third quarter of 2015. We anticipate third quarter revenue to be in a range of $27 million to $28 million, gross profit margin is expected to above 35%. Operating costs are expected to be approximately $9.2 million. For 2016, we anticipate $118 million to $124 million in revenue, which represents between a 6% and 11% growth over 2015. Approximately half of the dollar growth is expected from services and half from products and software, including data analytics. Gross profit margin as a percent of revenue for 2016 is anticipated between 37% and 39% of revenue. We view the margin profile for the second and third quarters of this year to be at a low point for scanning products in data analytics software content, which carry our highest gross profit margin. We anticipate higher scanning and data analytics content in the total long-term revenue mix. 2016 operating costs are expected to be between $36.5 million and $37.5 million. Non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in 2016 and in – is expected to also be around $18 million as it was as we exited this quarter. This concludes the financial review. I’d like to turn the call over to Marty for his summary of comments.

[Marty Singer:]

Thanks John. While PCTEL missed its financial objective this past quarter, we made significant progress in advancing our products and developing new business across our product and service offerings. Before we review that progress I’ll discuss the revenue and cost issues that incurred our results, along with actions, many already taken to address those issues. Our short fall in scanning receiver sales in China accounted for most of our revenue and gross margin miss. We generated about 20% less in scanning receiver revenue than forecasted. Administrative increase into the tender process for wireless network test equipment delayed procurement decisions and we lost one tender at China Mobile which impacted sales for the year. This decline is reflected in the guidance and the discussion that John just provided. Second, although our in-building engineering services business recovered from the dramatic drop in the first quarter, from the fourth quarter, we are staffed to generate higher revenue levels. Our funnel supports restoration to target levels by the fourth quarter. Despite these short-term issues we remain confident in our engineering services business and will continue to expand organically this operation. As you may have read, both Sprint and Verizon have announced aggressive small cell deployment programs. A third factor and again related to an already established business relates to the continued underperformance of mobile towers. The lack of demand from oil and gas and the thin margin on our suppliers transfer costs have made this business unattractive to PCTEL. As we announced last week, we’re successfully sold offer existing inventory the Northern Towers, and expect third quarter this year to be the final quarter for mobile tower revenue. This is one fast at the cost cutting measures that I will expand fun layer during this call, but you should know that we have already reduced headcount by five people. We have experienced challenges for their Nexgen acquisition, but the previously discussed shortfalls in scanning receivers, engineering services and mobile towers account for all of our revenue in non-GAAP earnings miss. With respect to our Nexgen acquisition, our costs have been higher then anticipated, but we are confident in the returns on net investment in 2016, as we secured new customers for Meridian. Let me briefly elaborate on our cost reduction actions many of which we have already taken. We have embarked on a program to lower the 2016 cost structures of the company by $3.4 million from the current annualized second quarter 2015 levels. We should realize about $500,000 of these reductions in the fourth quarter of this year. We do not want the second quarter revenue on margin and it’s to obscure the progress that made in several areas. I want to spend a few minutes on these highlights. Our antenna revenue was at its highest levels since the fourth quarter of 2012, when we had major orders for the high rejection GPS timing antennas. This past quarter our growth reflected, our increasing strength in OEM broadband applications in both WiFi and LTE. We now sold directly to Huawei, Extreme, Cisco and Aruba and we expect these sales to expand. Extreme as an established and extremely strong presence in stadium venues and our antennas are designed into most of these solutions. Our GNSS product realized growth in fleet management, positive train control and public safety though key OEMs and systems integrators. We believe that the focus on positive train control will result in additional antenna and designed business. Probably most encouraging with a relatively strong sales within China. We started shipments of our TDD small cell antennas to our major telecommunications OEM in China and we are working on a qualification of our FDD small cell antenna products. This is a market and which we have had very little momentum in the past. Our international business development and sales successes went beyond China, again shipping antennas into a major smart grid project in Mexico, this is a multi-year project that requires, multiple antenna models and a cable assemblies. Kitting, which includes our drop ship operations performed at plant. This run rate is expected to increase as we enter 2016. This excludes mobile towers. Importantly, we started shipping DAS prep kits for a major carrier in the South East region. With respect to new antenna products, we launched two new multi-band mobile antenna platforms for broadband applications at CISCO live our business development effort in the utility market for smart grid application has start to getting interaction with product qualifications with key OEMs. Let me now turn to our solutions where we had most of our challenges. Setting aside to shortfall in China scanning receiver sales were strong in other APAC regions and in the U.S. We have shipped more than 300 IBflex units in the first half of the year and our ability to download feature sets, updates and upgrades has captured new customers in engineering services we required lower ownership costs. Our super configuration option for IBflex has been popular with operators because it includes all bands and technologies which future proofs their investments. Our workshop demonstrating the integration of the IBflex scanner SeeHawk Touch and the iBwave Mobile Planner was well received in June at the DAS Congress in New Orleans. The close collaboration between PCTEL and iBwave has resulted in a unique solution which is valuable for effectively designing and testing of indoor wireless systems on a single platform. We continue to strengthen our business with Huawei in Latin America. We closed business opportunities related with the sale of several dozen of our EXflex scanning receivers that will help Huawei in projects like the one deploying a new network for a Tier-1 carrier in Mexico. We also closed scanning receiver sales in Uruguay and Peru. SeeWave is gaining traction with Tier-1 operators in the U.S. and we have built the global pipeline of more than 20 SeeWave customers including Australia, China, Mexico and Argentina. SeeWave will also be used to expand our portfolio of network engineering services offerings to perform interference hunting as a service. This is a new practice area for PCTEL. With respect to NES, our teams completed work at many marked key venues throughout the U.S. including major educational institutions such as Duke, Harvard, Clemson and many others. We are also very active in many sporting venues such as Churchill Downs, the Kentucky Speedway, the Washington Nationals Park and many others where we launched our new PIM testing services. PIM or passive intermodulation and impact network performance. We completed several projects at some of the nation’s largest transportation hubs such as the Metro Boston Transit Authority, DFW Airport and McCarran airport. As announced yesterday, we completed a large global project for Tier-1 airline that involve testing at over 200 domestic and 100 international airports incidentally that was one of our first international projects of any size. We also anticipate receiving more business with Sprint, once the network identification project launches. Since acquiring Nexgen, we have devoted considerable resources to both product and business development. Our highest development priorities include filed format compatibility from major OEM infrastructure vendors such as the type of compatibility that we have announced with Ascom. We’re also working on broad improvements to the product family. These development efforts are going well and we expect to release the updated platform in Q1, 2016. At the same time, we are developing new business. We expect to launch revenue generating pilots in the fourth quarter of this year. We are working closely with the Tier-2 operators support their network expansion project applying Meridian analytic tools with the global OEMs infrastructure this project will be devoted to network and site acceptance. So in summary, the revenue and margin shortfalls this quarter, we’re in the businesses that we understand and have successfully managed over the past several years. We have taken aggressive action to manage our costs and we anticipate that both our product and business development efforts will result in a marginally better third quarter, a stronger fourth quarter and solid momentum going into 2016. We will continue to buyback our shares. This investment along with our 2.7% dividend provides meaningful return to our shareholders, while we navigate to our recovery and the integration of Meridian and related services. We’re very confident about our future. We would remind shareholders that when we acquire the various Telworx assets. It took some integration effort and time to achieve the desired results. In the same way our acquisition of the Nexgen assets was critical and remains critical to our ability to keep pace with wireless test of measurement. We anticipate that Meridian will become an important post processing analytic tool for many types of data collection systems and that our strategic cooperation with Ascom, Enhancell, [indiscernible] and others will position us in the broad network acceptance and system analytics business. We look forward to meeting with shareholders and industry events and during non-deal road shows over the next few months. We also look forward to updating you on our progress at our next earnings release conference call. With that, we concluded our prepared remarks and set aside 30 minutes for your questions. Operator, you can take questions.

[Operator:]

[Operator Instructions] Your first question comes from Mike Crawford.

[Mike Crawford:]

Thank you. One thing – I think you’re doing Marty as China looks very ways to better utilize your engineering resources, away from just carriers is that something that could be more significant next year for you?

[Marty Singer:]

Absolutely, this project that we did for major airline shows how our engineering resources can be used to solve problems for very large enterprises and in new areas such as baggage handling. And in preparation for this meeting I talked to Rishi Bharadwaj who was General Manager of our Antenna Business. And he also pointed out there’s been recent announcement of positive trail control or somebody realize $800,000 in antenna sales will turn this out, but this year we anticipate shipping more than $2 million into positive train control opportunities. And that gives us an opportunity not just for product sales, but also for engineering services. We also believe that we can take the type of skill sets that we have in interference hunting, for example, and apply them to private networks, as well as public networks and we think that’s a market that is underserved. Finally, the transition to FirstNet [ph], the implementation of LTE and private networks, creates opportunities for our scanning receivers from Meridian for our combinatorial antennas, and so on.

[Mike Crawford:]

Okay. Thank you. And then you mentioned that switching gears that you lost a tender to China Mobile, so do you think that was a pure competitive loss or was there more of a political tinge to that or what do you think that [indiscernible]?

[Marty Singer:]

It’s absolutely political we were rated number one technically. We were rated in the top three in price. And when the words came out the scanning receiver tender was awarded to three local Chinese vendors. Now in that particular market, we are nonetheless making sales to the regions, but this took away the high volume, one time sales that you can make when you win those bits. Now we are going back after that bit. And there is going to be more trips to the plate for us. Remember that we are already well established at two other operators and we have a relationship with Huawei and others that provides us with access in there. But nonetheless that and the delay in other tenders created the biggest miss and the biggest shortfall for us this year, this quarter.

[Mike Crawford:]

Just briefly who brought you into the smart grid project in Mexico?

[Marty Singer:]

We are working with couple of system integrators.

[John Schoen:]

Yes, we can tell you that’s Rishi Bharadwaj, he just joined us and so I would really can’t mentioned the systems integrators name but we are working closely with two systems integrators in that opportunity.

[Mike Crawford:]

Okay, thank you. And I guess the last question relates to capital structure. I think we have this conversation seems every few months. I mean the company even in tough times generated some nice cash flow this quarter historically has been a strong cash flow generated. Do you continue to believe that, this is a business should have negative leverage or would you be comfortable and being more opportunistic with deploying capital to create value maybe even taken out some debt?

[Marty Singer:]

We have historically been willing to take execution risk, but not typically financial risk that’s just nature of our company culture, however your question is a valid one and the board is going to continue to look at opportunities to deploy its stock and the way that we’ll increase the value of our shares and get greater return to our shareholders.

[Mike Crawford:]

Okay. Thank you very much.

[Marty Singer:]

Sure, thanks.

[Operator:]

[Operator Instructions]. Your next question comes from Matt Robison.

[Matt Robison:]

Hey, good afternoon and thanks for taking the question.

[Marty Singer:]

Sure.

[Matt Robison:]

So Marty, you mentioned the services versus products and software. Are we going to looking at a new segment model for 2016 based on that kind of commentary?

[Marty Singer:]

No, we are still going to leave – we’re still going to continue to hold the services within RFS both types of services. But on any yes, which has focused on in building and has more penetration into private wireless networks has higher margin, then the new macro engineering services that we acquired with Nexgen. Now, one element that changes that dramatically. This one we are selling on software is a service. And when the macro engineering services are sold along with Meridian storage and Meridian analytics of data that’s collected, data that has to be optimized, data has to be benchmarked. And those margins will apply, and we expect to see those margins going in the direction of NES margins are next year and we are confident that our gross margins will start decline in the direction of 40%. The other element there clearly is the recovery of scanning receivers. But I will tell you that gross margins and scanning receivers and gross margins in our antenna product portfolio continue to be quite strong.

[Matt Robison:]

Hey John, do you think you’re going to be able to generate cash again this quarter or did you pretty much extract value through the working capital.

[John Schoen:]

I think I got most of our – that I’m going to get out of working capital. I would think free cash flow in somewhere between $1.5 million and $3 million for the rest of the years probably about right.

[Matt Robison:]

Okay.

[John Schoen:]

That’s what we were able to get most of our headway this quarter and winding down….

[Matt Robison:]

And you should mention the some of the cash flow came from the restructuring of the Nexgen deal.

[John Schoen:]

Yes, we have been mentioned in the script $3 million, but the other $3 million came from pulling out receivables and getting very aggressive of the cash collections. And so there still should be a little bit more of that to go.

[Matt Robison:]

Okay. And what if I getting out of the mobile tower businesses, what’s the revenue impact of that?

[Marty Singer:]

Well, let me give you the revenue impact versus our forecast and the revenue impact in reality. We had initially anticipated this year that mobile antennas would run at or near $1 million a quarter and that just never materialize we are running at less than $500,000 a quarter. So that I would say the realistic revenue impact for the remainder of the year is less than $500,000 because we are going to be able to sell off all of the inventory we already have appeal for that most of that will occur in the third quarter. Well, nothing in the fourth quarter, but and if you look at the TowerWorx assets. We had reduced headcount from 49 to approximately 19 people. And eight of those people were in the mobile tower business. So the revenue that remains and is related to next – related to the TowerWorx assets is going to be generated by about 1,100 people. So as we come up pretty efficient organization and…

[Matt Robison:]

So three months ago, that we think we are going to do $2 million with that in the back half of the year.

[Marty Singer:]

Yes, yes.

[Matt Robison:]

Okay. Now are you going to be able to you mentioned these local vendors – one of these vendors with China mobile. Do you expect that you would be able to sell through those guys or did they actually have products that work?

[Marty Singer:]

We think going to be – we’re going to be able to sell. We think our products will perform other products won’t. And we also believe that we have to develop new relationships that are more effective in the tender process.

[Matt Robison:]

Okay. Thanks a lot.

[Marty Singer:]

Thanks.

[Operator:]

[Operator Instructions] Your next question comes from [indiscernible].

[Unidentified Analyst:]

Yes. I’m sorry guys. I just joined the call and I didn’t hear very much, but I was wondering if those any – kind of projections made for the next quarter or for the year.

[Marty Singer:]

We didn’t provide guidance. You want to repeat that John.

[John Schoen:]

Yes. So we – let me quick repeat it. And it’s also it will be, the scripts will be posted right after the call on our website.

[Unidentified Analyst:]

Okay.

[John Schoen:]

We forecasted – revenue between $27 million and $28 million for third quarter, gross margin at about 35% and about $9.2 million in operating costs.

[Marty Singer:]

And we do not offer guidance on earnings as – has been our practice.

[Unidentified Analyst:]

Okay. That’s why I ask you about. Thanks very much.

[John Schoen:]

Thank you, Lewis [ph].

[Operator:]

We’re showing no further questions at this time. I will now turn the call over to Marty Singer for closing comments.

[Marty Singer:]

Thank you and we appreciate your attendance at our earnings conference call. And we look forward to updating you on – at our next call and showing some momentum in all of our business areas. Thank you.

[Operator:]

This concludes today’s conference call. You may not disconnect.