Wireless Telecom Group, Inc.
Q2 2019 Earnings Call Transcript

Published: 13 Aug 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Q2 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation.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 second 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 anticipated 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, and thank you for joining us. Our Q2 results were as expected, and a slight improvement on the same quarter of 2018, driven by our Embedded Solutions business, where we continue to see high volumes of hardware cards. We are pleased with our first-half results which reflect higher revenues in Network Solutions and Embedded Solutions, offset by lower revenue in Test and Measurement. We expect to see improvements in Test and Measurement revenue in the second half. Our results are also very consistent with our budget plan coming into the year and consistent with our expectation that 2019 will see more revenue growth opportunity in the second half of the year. Mike will provide further color on the financials in just a bit.On a strategic and operational level, we are exceptionally pleased with our R&D and product accomplishments in the first half, which we view as drivers to future longer-term growth opportunities and you will note our increases in R&D of approximately 30% for the first half of the year as compared to last year. These R&D investments are focused on three areas. One, accelerated strategic investments in our LTE software stack to meet the 5G standards laid out by the 3GPP standards body. Two, to bring to market new, innovative, in-building network integration solutions to address network requirements for 4G densification in preparation for 5G, and for anticipated public safety requirements. And three, to address emerging 5G and millimeter wave system test requirements which are emerging just beyond the chipset companies and where we see growth opportunities with infrastructure and device companies.Now, in the first half of 2019, we realized a number of successful milestones as it relates to our R&D and product investments. We have significantly advanced our LTE software stack towards 3GPP's full set of defined 5G standards, and we have released a new CommAgility reference platform to allow our customers to accelerate their own development of mobile devices and base stations for 4G, 5G, and private LTE networks using our software and processing. We have expanded our modular point of interface solutions, or MCC products for multi-carrier, multiband solutions for outdoor small cell and D-RAN deployments, which future-proof expected in-building upgrades and reconfigurations as capacity and bandwidth requirements evolve during 4G densification and 5G build-outs.We've announced new waveguide noise sources for millimeter wave and 5G system test requirements, which will ensure accurate lab and production test results from next-generation communication systems as communication rates and operating frequencies increase for 5G applications, and we introduced our SMART Passives Systems for real-time monitoring of in-building DAS systems as we expect public safety requirements over the longer term to increase in enterprise build-outs. And with regard to market traction, we are excited that in the first half, our customers and other participants are increasingly endorsing and embracing our solutions. Some examples include, being chosen by Aricent as a partner to develop LTE eNodeB solutions for Network Equipment Providers, NEPs, which will significantly reduce the development costs and mitigate risks for the NEPs to launch LTE base station products to market.We announced a preferred OEM partnership with Ranplan Wireless for inclusion of our products in their network design software, which provides accurate design specifications for network coverage, interference, and throughput, which are needed as dense 4G networks evolve to ultra-dense 5G networks. And we announced we are supporting VIAVI solutions in their upgraded 5G TM500 network tester extending our decade-long relationship providing signal processing performance and expert support. VIAVI TM500 is a scalable test system, validating the performance of cellular networks in putting 4G and 5G across multiple cells and different radio access technologies. As the global leading supplier, nearly all 4G and 5G base stations have been validated using the VIAVI TM500.Turning to our order flow and our funnel of opportunities, we are pleased with our first-half bookings of nearly $26 million, and we expect to see improvements on that in the second half of the year. Our funnel of opportunities not only supports an improved second half of bookings and revenue, but we are seeing some strong quoting and customer bids for large projects, which extend beyond 2019 in all three segments which cause us to be cautiously optimistic about future revenue growth. So, netting it out, our first-half revenue is similar to last year's first half and we continue to remain optimistic in our expectations for improvements to revenue growth and profitability in the second half across all three segments to lift the year. While we cannot guarantee the outcome in any of these items, we are encouraged by our R&D and product plan progress, and we have confidence in our operational execution and our history of lean and go-to-market improvements over the last two years which have been a winning formula for long-term growth and profitability expansion.I will turn the call back over to Mike to walk through the financials.

[Mike Kandell:]

Thank you, Tim, good morning again everyone. Overall, our Q2 2019 results were in line with our expectations and the guidance that we published with our first quarter earnings release in May. Consolidated revenues for the second quarter of 2019 were $13.5 million which was an increase of approximately 1% from the year ago period. Embedded solutions revenue increased 11.7% on increased shipments of our digital signal processing hardware. Network solutions revenue was nearly flat with the year ago period, decreasing 61,000 or 1.1%.Test and measurement revenue decreased 9.7% on lower government shipments. This was primarily due to project timing, and accordingly we expect government shipments to increase in the second half of the year. Our consolidated gross profit for the second quarter was $6.1 million or 45% of revenue as compared to $6.2 million or 46% of revenue for the same period last year.Breaking this down by segment, embedded solutions gross profit decreased as compared to Q2 of 2018 from 45% to 41% as Q2 2018 included higher margin software and services revenues whereas in Q2 2019 the mix was primarily hardware. In Q2 2018, software and services revenue was approximately 16% of the embedded solutions total revenue, while in Q2 2019 software and services revenue made up approximately 3% of the embedded solutions total revenue. This segment’s gross profit is heavily influenced by the 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 larger dollar software and services contracts tends to be longer.Network solutions gross profit was nearly flat decreasing from 43.8% in Q2 2018 to 43.1% in the current year period. And finally, test and measurement segment gross profit dollars decreased $40,000 from Q2 2018 on lower volumes, but the gross profit margin increased from 51% in the year ago period to 56% in Q2 2019 on a favorable product mix in the quarter as well as various cost reduction initiatives related to overhead. As I've mentioned, we expect government shipments in this segment to increase in the second half of the year. On a regional basis, the Americas, which we define as Canada, the U.S., and South America accounted for 54% of our consolidated revenue, while EMEA and APAC accounted for 43% and 3% of consolidated revenues respectively.This compares to approximately 60%, 33%, and 7% of consolidated revenues for the Americas, EMEA, and APAC respectively in the prior year period. The increase in EMEA revenue reflects the higher embedded solutions hardware sales in the UK. Our consolidated operating expenses decreased approximately $100,000 from $6.1 million in Q2 2018 to $6 million in Q2 2019.The decrease was driven by the contingent consideration charge of $200,000 recorded in Q2 2018 as well as reduced G&A expenses on lower bonus expense and favorable foreign exchange impact related to the British pound. This was offset by increased sales and marketing expense and increased R&D expenses primarily related to 5G roadmap development other income increased $100,000 from the prior year period on foreign exchange gains, interest expense decreased $68,000 from the prior year due to accretion expense recorded in 2018 on the CommAgility contingent consideration and liability that was paid on March 31 of this year. Overall, we recorded $208,000 of income before taxes as compared to a net loss before of $75,000 in the year ago period, the increase was the result of the lower operating expenses, interest expense and higher other income.Turning to the balance sheet, consolidated cash decreased $600,000 while debt increased $900,000 on revolver borrowings from yearend December 31, 2018. This was due to working capital investments as well as the final purchase price payments for CommAgility in the amount of approximately $2 million. As disclosed in footnote 13 to the financial statements filed on Form-Q this morning, we received the request for arbitration from Harris Corporation on June 5, claiming that CommAgility breached an agreement entered into in 2014.As we stated in the 10-Q, we believe this claim has no merit and intend to defend ourselves against all claims. We incurred approximately $124,000 in legal fees related to this matter in the quarter and have excluded that amount from our capital calculation of non-GAAP adjusted EBITDA as a non-recurring special item. We do expect the portion of the legal cost and monetary damages, if any, to be covered by our insurance.At this time, I would like to turn it over back to Tim for some closing remarks.

[Tim Whelan:]

Thank you, Mike. With respect to 2019, we are reaffirming our guidance which includes full-year 2019 revenue growth in the low to mid single digits comparable gross margins to 2018 and improved operating profitability. Also in addition to our 2019 guidance, we are also reaffirming our long-term operating targets which include $100 million in revenue by 2023 inclusive of acquisitions and based on 10% to 12% annual organic growth driven by new product introductions, channel expansion, and operational excellence.We expect gross margins improving to 47% to 49% based on product and segment revenue mix, lean initiatives, and higher margin product offerings. And we expect to see improving adjusted EBITDA margins of approximately 15%. Last, our strategy will continue to remain focused on market trends of growth including network densification and 5G deployment, private LTE network expansion, and increased military and defense sector spend. 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, could you 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 and pose your question.

[Bryce Thomas:]

Yes, Bryce Thomas with North Grove. Just, if you provide some color or your opinion on where we stand on the 5G upgrade or that cycle, and how you are best positioned to benefit from it?

[Tim Whelan:]

Sure. Thank you, Bryce. We believe that the 5G is in the earliest of stages right now. The previous cycles of 3G and 4G each lasted over seven to ten period, so we think we are just at the front end of a 10-year investment curve. Each of the segments will benefit, will benefit somewhat differently, CommAgility is currently seeing opportunities for software used in research and reference platforms.Longer-term, we see that the combination of our hardware and software, and our ability to customize plays right into the private LTE network deployment. Within network solutions, right now we are currently benefiting from the network densification, which we expect to continue ahead of 5G deployment. And then, 5G deployment will include different use and application cases that again will extend that investment cycle.And then finally in Test and Measurement, it's the new emerging standards which require very specific noise sources for Noisecom, and we are also seeing a touch on increasing military and defense spend, so higher millimeter wave testing requirements. So across all three segments, we think there is both an immediate benefit as well as a longer-term benefit, and this cycle should last over a seven to ten year period.

[Bryce Thomas:]

Thank you. That's helpful.

[Operator:]

Thank you. And the next question is coming from Barry Sine. Barry, your line is live. Please mention your affiliation and pose your question.

[Barry Sine:]

Good morning, gentlemen. First of all, you talked about the Harris’ request for arbitration. On that, have they asked for a dollar amount? And then secondly, I am not sure what the venue is, but is there any timeline associated with that arbitration process that we can expect?

[Tim Whelan:]

Good morning, Barry. Yes, so the claim itself didn't have a specific dollar amount, although it did indicate that they expect the damages to be less than $250,000. In terms of the timeline and the venue, we're still in the early stages of working all that out, so we don't have a definitive timeline or jurisdiction for where it's going to be arbitrated.

[Barry Sine:]

Is that the American Arbitration Association or is it not specified?

[Tim Whelan:]

It is not specified at this time.

[Barry Sine:]

Okay. And then on the earnings release, I guess it's the third paragraph, you talked about specific projects in the sales funnel. Could you call out some of those projects, just describe what they might be and the rough sizes of some of the projects that are in the sales funnel that you're looking at bidding on?

[Mike Kandell:]

Yes, we don't get into too much. Thank, you Barry. We don't get into too much details in the funnel in terms of specifics. We're excited because the projects which attract more carefully in the funnel than the run rate, we are seeing multiple venue-type projects in terms of the build-out of the wireless in-building infrastructure even that may be an outdoor venue. So, we're seeing both the number of projects and the size of those projects increase over what we saw two years ago, and that's specific to network solutions. Within the Test and Measurement segment, we're seeing some very exciting opportunities for the military which are current customers, but we're seeing different branches of the military that are repeat customers.So, not recurring revenues, but they repeat every other year or every third year and we're seeing a nice cluster of those. And then within the Embedded Solutions or the CommAgility, we're seeing some good traction in North America as we bring those solutions to markets specifically into the Test and Measurement sales channel as it relates to mill, defense, and some research. And so, we're seeing some good traction in terms of kinds of quality conversations, the in-depth design qualifications, and the funded projects that we can go after. We're hopeful we can discuss more of this in the current calendar year as we hope we can bring some of these to conclusion within the current calendar year. So hope that helps?

[Barry Sine:]

Yes, let me take one more stab, as you can answer this way, are these projects that would be in the tens of thousands of dollars or hundreds of thousands of dollars or the millions of dollars if you win some of these projects?

[Tim Whelan:]

Yes, so we think a projects as above $100,000 of size, and we think of mega projects of over $500,000 in size, and so as we think about the projects in the funnel, these are over that mega category. There's the $500,000 plus and even some which are multi-million.

[Barry Sine:]

Very enthusiastic, great. Thank you.

[Mike Kandell:]

And Barry this is Mike again. I just want to clarify my answer. The arbitration is going to be before the American Arbitration Association. What hasn't been worked out yet is the jurisdiction.

[Barry Sine:]

Great. Thank you.

[Operator:]

Thank you. And the next question is coming from Robert Marcin. Robert, your line is live. Please announce your affiliation and pose your question.

[Robert Marcin:]

Robert Marcin, Penn Capital. Thank you for taking my call. Hey, guys. Are you seeing any kind of traction with the international business or any sales synergies with CommAgility and what was before the acquisition in the core company?

[Mike Kandell:]

Yes, the answer is yes, we've had specific opportunities overseas that the actual application and deployment is overseas but it's come through a U.S. defense contractor, but our ability to extend our channels, our relationships, our presence overseas being an international company is certainly helpful to us in that regard.

[Robert Marcin:]

And when the 5G global build-out really gets cooking, is there any opportunity for company’s 5G related business to ramp and more than just in the United States or is there opportunities for South America, other parts of North America, or Europe. I assume we're not going to be selling into China or much or Japan at all because of the nature of those markets, but I'm just trying to figure out if there's an opportunity to take the value-added products now that we're creating with that nice R&D budget, the innovative products and ship them abroad into the foreign telecom companies as well.

[Mike Kandell:]

Sure. So the answer is unequivocally yes. Our funnel of opportunities represents international names and international opportunities. 5G will be, we'll have an international impact though that will impact different geographies at different levels in terms of how much they invest. It's our belief that Europe is generally behind on 4G densification. They need to do more of that for to catch up to where the current 4G LTE structure is in the U.S. as we think about telecom, but we're seeing some very interesting use cases as we think about that industrial IoT or private LTE networks and how large corporations can use that, the utility space in mining, in factory and production in any environment where you have thousands of connected wireless users and that's where we think we'll compete very well. When you have an end count of millions of devices, you'll typically see the larger chipset companies go after it. But they may not be so interested in that customization requirement for unique industrial type of deployment where there are thousands of wireless devices that need to be connected and have specific requirements. And so that is a market that we believe as the 5G infrastructure takes off will be more and more use cases than application cases that emerge from that 5G infrastructure.We see and it's generally public knowledge that there is an emphasis in the U.S. to continue to push for 5G leadership. We believe that the markets are favorably inclined to the Sprint, T-Mobile merger which will result in more spectrum deployment and an acceleration of investment because of the commitments that T-Mobile made to Congress and others in order to get that transaction approved. So we're excited about that. We're excited about what we see is as a healthy investment period over three to five to seven to 10 years.

[Robert Marcin:]

All right. I just did it two or three years if this 5G build-out ramps build-out ramps. Do you foresee any mix in international business versus domestic as a percent of revenue or is it going to be early stages led by the U.S.?

[Tim Whelan:]

Yes, that's hard to guess now what that mix will be. But we do believe that the investment in the U.S. is the most likely to ramp more quickly.

[Robert Marcin:]

All right, thank you.

[Tim Whelan:]

Sure.

[Operator:]

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

[Tim Whelan:]

Very good. Thank you, Paul. Thank you everyone for joining us today and have a great day and we'll speak to you soon. Thank you.

[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.