Wireless Telecom Group, Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Q1 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mike Kandell. Sir, the floor is yours.

[Mike Kandell:]

Thanks, Paul. Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings call. Before we begin, I would like to remind everyone on the call that our remarks today could include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. The company’s forward-looking statements are based on management’s current expectations and assumptions regarding the company’s business and performance, the economy and other future conditions and forecast of future events, circumstances and results. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. Important factors that could cause the company’s actual results to differ materially from those in its forward-looking statements include those risk factors set forth in the company’s Annual Report on Form 10-K filed with the SEC. The company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events or otherwise. Also, we want to point out that in addition to GAAP information, we will provide information relating to certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of non-GAAP measures to GAAP measures are set forth in a reconciliation table in our press release issued earlier this morning and furnished with the Form 8-K filed this morning with the SEC. I will now turn the call over to Tim Whelan, our Chief Executive Officer.

[Tim Whelan:]

Thank you, Mike. Good morning, everyone. Thank you for joining us. Our Q1 2019 results were as expected, with comparable revenues and expectation for a revenue ramp in later quarters similar to prior years. We realized a slightly lower margin as compared to last year’s first quarter, which is also as expected due to our product revenue mix and segment revenue mix. This quarter is representative of some typical quarterly fluctuations to segment revenue and product mix in our business, and we expect to see higher margin outcomes in the remaining 2019 quarters ahead and consolidated margins comparable to last year. With regard to our test and measurement Q1 revenue, we actually received customer orders in Q1 2019 which were higher than the same quarter as last year in this segment. But the volume of shipments was lower than the same quarter last year, which was reflected in the segment’s Q1 revenues. We expect to see improving revenues in test and measurement over the next few quarters. We also received higher customer orders in Network Solutions in Q1 as compared to last year, which contributed to slightly higher shipments and revenue. We are encouraged by the run rate of order flow and the sales and channel initiatives in Network Solutions, and we are hopeful we will see improved 2019 results in this segment. So the color on 2019 is that so far, the first half revenue was similar to last year’s first half, and we are expecting improvements to revenue growth and profitability in the second half across our three segments to lift the year. With respect to our gross margins, our continuous lean initiatives are expected to continue to address pricing pressures in Network Solutions, which includes a focus on lowering our material and labor costs as well as our new product initiatives, which target introducing new, higher value-added evaluated solutions which lower the customers’ PCO, while improving our gross margins. In test and measurement, we continue to see price stability and margins which reflect the unique customization and specialization of our product set and results in higher gross margin profiles in the segment as compared to our other segments. This translates to higher consolidated gross margins and quarters which include a higher percentage of test and measurement revenue in our consolidated revenue. And as far as gross margins within Embedded Solutions, we see consistent gross margins across the products in this segment, but quarters may have a varying mix of hardware and software sales, which will understandably impact the segment’s margins from time to time. In consideration of all this, we expect our consolidated gross margins in 2019 to be similar to 2018 and improve in the later years as we add volumes address costs through lean initiatives and introduce higher value solutions. Beyond the gross margin line, operating costs are being carefully monitored to ensure we continue to target improved profitability and cash flow. You will note our SG&A cost actually decreased almost 3% compared to last year while we have increased our R&D investments, especially in areas of 5G. These R&D investments target specific objectives in each segment. In Network Solutions, we are adding various frequency bandwidth conditioning solutions, which address new spectrum deployment and network densification as well as addressing new size and connection types for small cell configurations. In test and measurement, 5G means adding solutions for higher millimeter wave test requirements. And in Embedded Solutions, it means advancing our software stack and hardware cards to meet emerging 5G standards. The evidence of R&D traction and some metrics of R&D success across our segments include the following

[Mike Kandell:]

Thank you, Tim. Good morning again, everyone. Overall, our Q1 2019 results were in line with our expectations and the guidance that we published with our year end earnings release in March. Consolidated revenues for the first quarter 2019 were $13 million, which was down approximately 2% from the year-ago period. Embedded Solutions revenue increased 6.4% on increased shipments of our digital signal processing hardware. Network Solutions revenue increased 4.5% on increased shipments of large venue product and customized solutions. Test and measurement revenue decreased approximately 20% on lower government shipments. This was primarily due to project timing and accordingly, we expect shipments to increase over the coming quarters. Our consolidated gross profit for the first quarter was $5.7 million or 44% of revenue as compared to $6.3 million or 47% of revenue for the same period last year. Breaking this down by segment, Embedded Solutions gross profit decreased as compared to Q1 of 2018 from 50% to 42% as Q1 2018 included higher margin software and services sales whereas in Q1 2019, the mix was primarily hardware. In Q1 2018, software and services revenue was approximately 27% of Embedded Solutions total revenue. While in Q1 2019, software and services revenue made up less than 5% of Embedded Solutions total revenue. This segment’s gross profit is heavily influenced by mix of hardware to software and services revenue. Furthermore, recognition of software and services arrangements tend to be lumpy as compared to hardware revenue and closing of these large dollar software and services contracts tends to be longer. In 2017 and 2018, software and services revenue comprised 39% and 22% of total Embedded Solutions revenue, respectively. Network Solutions gross profit decreased from 44% to 42% due to the impact of pricing pressure that we along with our competition are seeing. And finally, test and measurement segment gross profit dollars decreased $276,000 from Q1 2018 on lower volumes, but the gross profit margin increased from 49% in the year-ago period to 52% on a favorable product mix in the quarter. As I mentioned, we expect shipments in the segment to increase over the coming quarters. On a regional basis, the Americas, which we define as Canada, the U.S. and South America, accounted for 55% of our consolidated revenue, while EMEA and APAC accounted for 39% and 6% of consolidated revenues, respectively. This compares to approximately 61%, 28% and 11% of consolidated revenues for Americas, EMEA and APAC, respectively, in the prior year period. The increase in EMEA revenue reflects the higher Embedded Solutions hardware sales in the U.K. Our consolidated operating expenses were $6.1 million in Q1 2019 compared to $5.7 million in Q1 2018. R&D expenses increased on investments in 5G road map, particularly in our Embedded Solutions segment for private networks. Sales and marketing expenses were flat year-over-year. And G&A expenses declined about 6% on lower bonus and warranty expenses as well as favorable foreign exchange. Other income increased from an expense of $46,000 to income of $31,000 primarily on foreign exchange gains in the quarter. Interest expense increased $23,000 on accretion expense recorded on the CommAgility contingent consideration liability that was paid on March 31 of this year. Overall, net loss before taxes was $482,000 as compared to net income before taxes of $430,000 in the year-ago period. The decrease was primarily attributable to the gross profit declines in our segments. Turning to the balance sheet, consolidated cash decreased $2.6 million, while debt increased $2 million on revolver borrowings from year-end December 31, 2018. This was due to working capital investment, specifically accounts receivable, which increased $3.5 million, which is consistent with our seasonal pattern of working capital increases in the first half of our fiscal year as well as the final purchase price payments for CommAgility during the quarter in the amount of approximately $2 million. This is comprised of the final deferred purchase price payment of $426,000 and the contingent consideration payment of $1.5 million, which was based on CommAgility’s 2018 financial results. These were the final purchase price payments for the CommAgility acquisition, bringing the final purchase consideration to $14.6 million. Given the seasonality as well as the CommAgility payments behind us, we are positioned to drive improved cash flow. Our balance sheet remains strong with $10.5 million in working capital. At this time, I’d like to turn it back over to Tim for some closing remarks.

[Tim Whelan:]

Thank you, Mike. In addition to our 2019 guidance, we are also announcing our long-term operating targets. These include $100 million of revenue by 2023 based on 10% to 12% organic growth and inclusive of acquisitions. Gross margin improving to 47% to 49% based on product and segment revenue mix, lean initiatives and higher margin product offerings and improving adjusted EBITDA margins up to approximately 15%. Additionally, we are aware of our current trading ranges and we are determined to take those steps necessary to continue to improve revenue growth, operating leverage and improved profitability to drive the underlying valuation metrics. We are equally determined to communicate our vision and value proposition to wider audience and we’ll be participating in conferences in the coming quarters starting with the B. Riley Conference on May 22. The management team and the Board are aligned to shareholders on these common goals. We are committed to the execution of the strategic and operational plans now in place and we believe we are well positioned for successful achievement of our targets. Thank you. And Paul, if you could please open the lines now for questions.

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question is coming from Bryce Thomas. Bryce, your line is live. Please announce your affiliation then pose your question.

[Bryce Thomas:]

Good morning. I’m with North Grove Asset Management. Could you just provide a little more color as to where you think we are in the 5G cycle and more specifically, where WTT fits in?

[Tim Whelan:]

Sure. Thank you, Bryce. Right now, we believe we’re in some very early cycles of 5G. Our view is that this investment cycle will be a 7-year to 10-year investment cycle just as prior 4G was also almost a 10-year investment cycle. The segments that benefit in the early to mid-stages in our side includes Network Solutions. And Network Solutions will benefit during network densification of the underlying 4G networks ahead of 5G, and this includes the investments in large venues and in-building systems. And Test and Measurement is going to benefit because there are going to be more devices under test and more accuracy is required of 5G, both in terms of the front-end R&D testing, as well as the back-end production testing. Embedded Solutions is likely to have benefits throughout the lifecycle of 5G. The early stage opportunity is going to be two-fold. That includes licensing of software for R&D and other research purposes, but we also include early silicon providers from niche solutions, where we have opportunity for licensing our software of our 5G stack on their chips. In the later stages, the Embedded Solutions should be able to participate in full deployment of private LTE networks offering both our hardware, the customization on top of that and the hardware that’s used to deploy to the base stations and the end devices.

[Bryce Thomas:]

Okay, got it. Thank you.

[Tim Whelan:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Jen Wolfords. Jen, your line is live. Please announce your affiliation then pose your question.

[Jen Wolfords:]

Hi, good morning. Jen Wolfords at Comstock Partners. Nice job bringing down the G&A, and I’m just wondering if you can give us a little color in terms of how we can look at G&A going forward?

[Mike Kandell:]

Yes, hi, Jen. Thanks. Yes, I mean, we have a strict focus on G&A operating expenses. We have been and we’re going to continue to be very disciplined in the investments we make during the year, and we’re going to continue to invest in R&D especially in the area of 5G roadmap. But our focus for 2019 is to ensure that profitability grows at a faster rate than our revenue growth.

[Jen Wolfords:]

Alright, thank you.

[Operator:]

Thank you. [Operator Instructions] The next question is coming from Michael Potter. Michael, your line is live. Please announce your affiliation then pose your question.

[Michael Potter:]

Good morning, guys. This is Michael Potter with Monarch Capital Group.

[Tim Whelan:]

Hi, Michael.

[Michael Potter:]

With – in regards to the R&D budget for 2019, are we going to continue at this approximate run rate on a quarterly basis?

[Tim Whelan:]

We are going to continue – right now, we believe our R&D investments will be consistent throughout the rest of the year, Michael, yes. We are excited about the opportunity that we have in 5G. We’re excited about the feedback that we got at Mobile World Congress specifically within Embedded Solutions. So, right now, we are, yes, still planning on investing R&D at the same level for the Embedded Solutions team. Those investments will provide benefits that are longer term in nature. But as we think about the segments within test and measurement and Network Solutions, those have more of an immediate return in the sense that our customers are working with us to fill a gap or design to a spec that we believe the investments in one quarter will yield benefits and potentially the following quarter or a second quarter thereafter. So, part of R&D is very long-term in nature, thinking out beyond the current year, and other parts of R&D is very, very responsive to the customer demands and design. So, right now, we’re excited those investments are yielding revenue growth and profitability opportunity, and I would say, yes, we plan to keep those investments at a consistent level.

[Michael Potter:]

Alright, terrific. And in regards, I mean, you answered really my first question earlier in the call in the script in regards to more detail on the new product development and launches over the past 6 months. You guys have been very busy and it seems like it’s an exciting time to see the ramp on some of these products that have already gone to market and some of these products that are in – that are being field-tested right now. So hopefully we’ll get more information as the company progresses with these product launches?

[Tim Whelan:]

Very good. Thank you for that, Michael. We’re excited about that.

[Michael Potter:]

Yes, yes. A question, the – you are at 2.7% EBITDA margin for the quarter. Are we – is that the bottom for the year, do you anticipate? Are we troughing out?

[Tim Whelan:]

It’s hard for me to say it’s the bottom only because of the – if you look in the quarter, you can see the mix of segment and the mix of revenue had a fairly big impact on the profitability, as well as the R&D investments. So, I know what we’re going to be doing in the R&D investments. It’s a little less certain about the timing of some of the software pursuits we’re having and so that creates the challenge in trying to say right now whether we are bottomed out or not. Obviously, our goal is to improve profitability each and every quarter. Our goal in looking back would hopefully look at Q1 as the lowest profitability quarter, but because of the timing of certain of the segment revenue forecast, as well as the product revenue within that, it’s a little bit more challenging for me to say.

[Michael Potter:]

Okay. And then just one more question. On the CommAgility, you have the earnout and you guys – I think you said you made the payment in March.

[Tim Whelan:]

That’s correct, March 31.

[Michael Potter:]

March 31, okay. Is there any additional earnout owed to the prior owners of CommAgility?

[Tim Whelan:]

No. We’re 100% complete with all of the purchase payments for CommAgility.

[Michael Potter:]

Terrific. Thanks, guys. I’ll get back into queue.

[Tim Whelan:]

Great. Thank you, Michael.

[Mike Kandell:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] And there were no other questions from the lines.

[Tim Whelan:]

Thank you, Paul. Thank you everyone for joining us today and we look forward to speaking with you again very soon. Have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.