PCTEL, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the PCTEL Third Quarter 2015 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 would now turn the call over to Carolyn Dolezal, Chief Marketing and Information Officer.

[Carolyn Dolezal:]

Thank you for joining us today for the PCTEL financial results conference call for the third quarter 2015. On today’s call will be Marty Singer, Chairman and CEO; and John Schoen, Chief Financial Officer. I am Carolyn Dolezal, Chief Marketing and Information 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 reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today’s earnings release, which is available on our website. Let me now recap some of the Non-GAAP highlights from the quarter. We achieved revenue of $26.5 million. Gross profit margin was 33%. Operating Margin was 0.5%. Net income was $108,000 or $0.01 per diluted share. Cash and investments were $34.3 million, a decrease of $6.9 million from last quarter. We repurchased 1,114,000 common shares during the quarter for $6.9 million, and we paid $911,000 in dividends. At this point, I will turn the call over to John Schoen, who will discuss our financial performance in some detail.

[John Schoen:]

Thanks, Carolyn. I’ll start with revenue. Revenues were $26.5 million in the quarter, down $1.4 million or 5% from the same period last year. I will speak to the changes by reporting segment. RF Solutions revenues were $9.1 million in the quarter, down $200,000, or 2% from the same period last year. Declines in revenue for scanners and in-building engineering services were largely offset by the revenue generated from the Nexgen acquisition. Connected Solutions revenues were $17.5 million in the quarter, down $1.2 million, 7% from the same period last year. The third quarter last year included a large kitting project for a Tier 1 U.S. cellular carrier that ended during the first quarter of this year. Now, let’s turn to gross profit. Gross profit margin as a percent of sales was 33% in the quarter compared to 41% in the same period last year. RF Solutions gross profit margin as a percent of sales was 44% in the quarter compared to 61% in the same period last year. The decline in scanning receiver and in-building services revenue was the major contributor to the gross margin erosion. We are seeing higher bookings in Q4 for in-building services, which should contribute an additional four points of margin compared with the quarter just ended. Connected Solutions gross profit margin as a percent of sales was 28% in the quarter, down 3% of revenue from the same period last year. About half of the variation is attributed to the mobile tower product line, which we exited at the end of the quarter. Additionally, revenue was significantly higher in our OEM channel for Wi-Fi products, which carries a lower margin percent than our GNSS products. The Company expects fourth quarter margins to be about three points higher than the quarter just ended, because we exited the mobile tower business and will benefit from the cost reduction program we announced last quarter. Now, let’s turn to non-GAAP operating expenses. Operating expenses were $8.8 million in the quarter. This is a $500,000 increase from the same period last year, with $1.0 million associated with the Nexgen acquisition, partially offset by a $500,000 decline in organic operating costs. About half the organic decline is attributed to R&D related to the IBflex product launch being completed in 2014 and the other half to lower corporate costs. Non-GAAP income tax rate in the quarter and the year was 18%, unchanged from 2014. Non-GAAP earnings per share were $0.01 in the quarter, compared to $0.16 in the same period last year. Approximately $0.14 is attributed to lower gross profit associated with the decline in scanning receiver and in-building network services, and $0.02 is attributed to higher operating costs associated with the Nexgen acquisition. Now, let’s turn to the balance sheet. Cash and investments ended the second quarter at approximately $34.3 million; about $6.9 million lower than the previous quarter. Free cash flow in the quarter was $408,000, comprised of $694,000 in cash flow from operations and $286,000 of capital spending. During the quarter the Company repurchased 1,114,000 shares for $6.9 million and paid $911,000 for the regular quarterly dividend. Depreciation in the quarter was $782,000. Now, I would like to discuss guidance for the fourth quarter 2015. We expect to provide 2016 guidance after our board meeting in two weeks with an updated presentation posted to the company’s website. We anticipate fourth quarter revenue to be similar to this quarter. Gross profit margin is expected to be about 37%, and operating costs should be approximately $8.7 million. The Non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the fourth quarter is expected to be about 17.2 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. And thank you, Carolyn, for the introduction. Our investments in SeeHawk Analytics, formerly referred to as Meridian, and the continued pressure on our engineering services business impacted both earnings and revenue in the past quarter. On the other hand, September was quite strong and we entered the fourth quarter with momentum that will carry through to 2016. That momentum, coupled with the aggressive cost reductions that I will discuss, should lead to stronger results in 2016. Let me begin with a summary of our business development and operational highlights over the past two to three months. This past quarter, we successfully exited the mobile tower business, as John has already discussed. As we mentioned last quarter, the downturn in oil and gas demand and the narrow gross margin made this business untenable for PCTEL. With its elimination, we reduced the staff in our Site Solutions operation, which contains the mobile tower business. Our profitable kitting and sourcing business will generate approximately $10 million to $12 million in revenue with eight to nine full-time employees. The revenue range reflects the unpredictability of carrier demands for micro and macro cell site kits, offset by the more predictable orders for GNSS Timing Kits and Positive Train Control. In addition to the elimination of mobile tower costs, we explored other opportunities to reduce our annualized expenses and accelerate earnings growth. We launched a platform re-use program that will drive efficiencies in our scanning receiver product design and we have streamlined operations in Connected Solutions. Let me be more explicit. Today, actually this morning, we eliminated over 20 positions in Bloomingdale, largely in manufacturing. In all, we have eliminated 30 permanent positions in the company and 15 contractors over the past three months. And we have reduced costs by $5.4 million in 2016, compared to our 2015 Q2 OpEx run rate. Our goal is to return to our 2014 OpEx, prior to our latest acquisition. Our long-term success, however, depends upon revenue growth. Our revenue has grown marginally since 2014. During this period, public safety spending has declined by 6% to 7% percent and carrier capital spending in the U.S. has remained flat or declined; the reduction at AT&T impacting all aspects of our business in 2015. Recently, Sprint announced a $2.5 billion reduction in spending. As mentioned earlier, the downturn in oil and gas impacted the buildout of SCADA networks. There have also been well-documented challenges in China. That said, we made progress on several fronts that will fuel growth in 2016. Our in-building engineering services business, which has declined from a run-rate of over $3 million a quarter to an average of $2.3 million a quarter, is recovering. We have diversified our in-building market with significant, long-term customer acquisitions. We are beginning to dominate the neutral host market for in-building and outdoor DAS. Leading neutral host providers depend on our in-building benchmarking and commissioning services. We have now tested over 300 locations for an international airline carrier, the application being baggage handling. And we have been selected for major projects in Reno and Seattle, including properties for high technology companies. This past quarter, we added 45 new customers and have begun to expand our drive test engineering business for major OEM infrastructure vendors such as Nokia. These new customers will benefit from the launch of new important services such as interference detection and location, PIM sweep and fiber testing. We will also receive 100% of Black Friday design work for key customers in the U.S. These new services are consistent with our strategy of focusing on value-added engineering services which command higher margins. Scanning receiver revenue, which approached a $20 million run-rate in Q3, reflected the continued growth of our IBflex scanning receiver. This product has now displaced a key competitor at a major U.S. carrier and, more importantly, has been integrated by JDSU which is now known as Viavi. Our Germantown team has taken the product to new levels. IBflex announced support for eMBMS, Multimedia Broadcast Multimedia Services or more commonly, Multicast. Multicast is now offered by Verizon in several markets. The service, which enables applications such as mobile TV service has been designed to operate over LTE cellular networks. In addition to its support for this new service, the IBflex scanning receiver will also support TD-LTE in several regional applications for a carrier in China. All operators in France now use our flex product line and we made significant progress in the Republic of South Africa, shipping 25 scanning receivers into that market through our global OEM, Ascom. We have strengthened our relationship with Corning and iBwave. Many of you may have seen announcement for the in-building design webinar that PCTEL and iBwave are jointly sponsoring. PCTEL’s IBflex scanning receiver can be supported directly by iBwave’s Mobile planner without the need for an external third-party drive test system. iBwave, who maintains the industry standard in-building planning and optimization tool, has teamed with PCTEL to create a two part DAS webinar that I just discussed. The companies will be jointly presenting this workshop on DAS at the DAS and Small Cell Congress in Europe this December in Munich. With respect to our antenna business, we were very excited to launch our new VenU Stadium products, our SkyLink and our new PIM160 series. PCTEL’s VenU antenna products enable high data rate connectivity and improve wireless network capacity in stadiums, transportation hubs, and other crowded areas. These new compact VenU antennas solve installation and aesthetic challenges without sacrificing data throughput. The PIM160 portfolio reduces interference created by intermodulation. For example, DAS networks that serve crowded venues and high-rises contain many components such as cables, connectors, splitters and antennas that can generate interference. Our PIM160 antennas filter that out. We shipped antennas and cable kits for smart metering applications in Mexico and we believe that we can double this business in 2016. We also designed and began shipping antennas that were specially designed for utility power line poles. All of these new products advance the concept of 4.0 Networks, those networks that support the machine-to-machine, Internet of Things, and vertical applications that collectively support the Industry 4.0 transition. Two weeks ago, we announced our new SkyLink GNSS antennas for mobile and base station timing applications. PCTEL’s SkyLink high rejection technology now applies to global navigation satellite systems. The SkyLink antennas support Galileo, GLONASS, and GPS in dense RF traffic environments. The new SkyLink portfolio includes mobile antennas for fleet management and asset tracking applications, and base station antennas for timing and synchronization of LTE cellular networks. We continue to advance our position in the Fleet Management vertical market. This includes rail, trucking, and agriculture. Recently, a major agricultural OEM selected PCTEL as the GNSS antenna vendor, displacing the incumbent supplier. During the same quarter, a national integrator for mass transit and transportation selected PCTEL’s dual LTE, GPS multiband platforms. Fleet will be one of our top two vertical markets in 2016. With the mobile tower business now in our rear view mirror, our focus is on advancing the kitting business within our Connected Solutions operation. In addition to using our high rejection GPS antenna kits, where PCTEL has been specified as the sole source, some U.S. carriers will also be upgrading to Cloud Radio Access Networks, or C-RAN technology. This upgrade will require the equipment configuration currently supplied by PCTEL. As we have discussed on earlier calls, our kitting activities also extend into private wireless networks for applications related to rail and other markets. For example, our orders for wayside products for a major railroad should double over the next two quarters. Other railroad carriers have engaged us to develop new antenna farms on passenger or coach cars. These applications require high-quality, custom-designed antennas that endure harsh environments. Let me now turn to SeeHawk Analytics. Again, this is our rebranding Meridian, which we acquired from Nexgen, and our business development efforts to develop a strong customer base for our newly acquired product. PCTEL is working with prospective clients including wireless service providers, affiliates and equipment vendors in the U.S. and internationally. Some of the key areas of interest have been customer experience management and end-to-end wireless network configuration management. In the areas of network planning and optimization, PCTEL has successfully completed a proof of concept for a Tier 1 U.S. Carrier to showcase SeeHawk Analytics’ RAN and CORE network configuration management capabilities and is working towards next steps. PCTEL is also collaborating with an OEM to automate some of the planning activities of small cells and macro site LTE deployments, using the SeeHawk Analytics platform. By automating these tasks, vendors are able to provide cost effective, reliable and timely support to their clients’ large scale network deployment needs. Ultimately, SeeHawk Analytics will be provided as a cloud-based processing and analytic engine for any product utilizing the IBflex platform. This includes SeeWave, SeeHawk Touch, and systems associated with the flex platform. In that context, we continue to explore relationships with various test and measurement companies that can provide us with UE, User Element based systems that will complement our scanning receiver and SeeHawk Analytics products. Let me just briefly discuss marketing and PR Events. During November, we will visit several of our institutional investors and offer demonstrations of our SeeHawk Analytics tool, and will be detailing our development roadmap and business development activities. In addition to the Smart Rail Industry Show that we just attended in Charlotte, we will be at the COMCAS Trade Show in Tel Aviv and the LTE Africa Industry Conference in Cape Town. As already mentioned, we will be presenting at the DAS and Small Cell Congress in Munich at the end of the year. Our attendance at these events is one facet of our plan to expand our presence outside the United States. We have set aside 30 minutes for your questions. Before going to the questions, so I just wanted to clarify one comment that I made, I’ve said that we have reducing costs by $5.4 million in 2016 compared to our 2015. Q2 OpEx it really should be Q2 costs, these costs apply to of both operating expenses and COGS. I just wanted to clarify that. Thank you.

[Operator:]

[Operator Instruction] Your first question comes from the line of Matt Robison with Wunderlich.

[Matthew Robison:]

Hey, thanks, John. First of all, John. What did you say about fourth quarter OpEx?

[John Schoen:]

About $8.7 million.

[Matthew Robison:]

Okay. What the - you guys, I think, you had on your website $118 million to $124 million for 2016. I know you mentioned you’re going to update it. How should we think that should be changing?

[Martin Singer:]

Well, again, we said we’re going to review this. We’re doing our annual business plan approval by the board in two weeks. And we will update you on that revenue target after that review.

[Matthew Robison:]

Marty, I think you mentioned there was some, this whole process going over in China where they were - the government was doing things up. There was a shift towards the local vendor. What’s your outlook there in China in terms of recovering that business?

[Martin Singer:]

Our outlook is positive. In fact, I don’t want to mention that carrier by name. But in that particular case, our sales guys have actually been pretty effective going region-by-region. And we’re seeing a pretty good take up at the scanning receiver. I mean, there was one tranche of scanning receiver sales that we missed because of that. There are new bids next year. We’ll be active in all of them. And I think - I really believe that IBflex has been well established with many of these customers. And some of our traditional OEMs who use our product are now active in the bid process which is actually can give us more advance in those bid situations. I also would mention this, Matt. I was really pleased with some of the activities of our APAC sales-force. And in the phase of that loss, they really started to work a little bit harder at other opportunities in APAC outside of China. And I think we’re going to see some results from them in 2016.

[Matthew Robison:]

I know it’s probably way earlier to get into this topic, but I like think - I like to hear what your thinking is in terms of LTE unlicensed.

[Martin Singer:]

Yes, you know the…

[Matthew Robison:]

And whether you’ve got any signals from carriers about this sort of thing yet?

[Martin Singer:]

Let me tell you three things about that. First, FirstNet will happen and there is lot of bidding going on. And we think probably the greatest opportunity for us there is with our antennas as opposed to near-term opportunity for scanning receiver. The second thing is, if you talk to the players in this area about LTE going to unlicensed, they’ll tell you that there are not a lot of announced networks doing this. But at the same time, if you go into an individual police car, Matt, you will see an LTE antenna on the police car, because they’re already using LTE for a certain amount of their data traffic and their voice traffic. So, the transition to LTE is happening. I think it’s going to be more though of a patchwork quilt than wholesale transitions across the board. You will see parts of public safety networks moving to LTE while other parts stay in LMR. The third thing I will tell you is this. You can’t go to any conference on machine-to-machine or Internet of Things where LMR radios are not being replaced by LTE radios with SIM cards. And basically, you can go to any show in the world now and you’ll see SIM cards inserted into whatever the device that they’re communicating. And I think that, probably, the movement that is going to most impact LTE is for Internet of Things and machine-to-machine. And you’re talking about 25 billion connected things by 2020. And that’s not going over LMR unlicensed. That will be going over LTE licensed or unlicensed.

[Matthew Robison:]

Okay. Thanks, Marty.

[Martin Singer:]

Thank you.

[Operator:]

[Operator Instructions] At this time, there are no further questions. I will turn the call over to Marty.

[Martin Singer:]

Thank you very much for your attendance at this call. We will update you soon after the approval of our 2016 business plan by the Board of Directors, either posting our new guidance to the web or actually having a separate call. And I look forward to seeing a lot of you during this quarter. Thanks so much.

[Operator:]

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