Wireless Telecom Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Wireless Telecom Group Q1 Earnings 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, CFO. Sir, the floor is yours.

[Mike Kandell:]

Thank you, Keith. Good morning, everyone. And thank you for joining us for our first quarter 2018 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 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 and 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 afternoon everyone, and thank you for joining us. Our agenda will include some prepared remarks followed by Mike's review of the financials, and then we will open the line for some Q&A. First, we are very pleased with our Q1 revenues of $13.2 million, it reflects both sequential and the year-over-year consolidated revenue increases, as well as for all contributions from each of our three segments. Our results continue to reflect successful traction in our top line growth strategy to invest in our existing businesses to drive organic growth and add complementary and synergistic businesses through acquisition. Just as importantly, we are very happy that higher revenues delivered improved gross profit and improved operating income and improved net income. On a non-GAAP adjusted EBITDA basis, we delivered $1.6 million of non-GAAP adjusted EBITDA which is the highest adjusted EBITDA quarter in over three years. As we look beyond revenue in the quarter, our Q1 2018 booking were approximately $14 million and resulted in a positive 1 to 1.05 book-to-bill ratio, reflecting continued strength in customer order flow. We are exiting the first quarter with the backlog of orders of $10.6 million, which represents an increase in backlog of approximately $700,000 from December 31, 2017. Across our segments, we've also continued to make progress. Our Network Solution segment continues to evolve its product platform to address new spectrum requirements, multi-carrier deployments, small-cell build outs and carrier densification initiatives, all initiatives connected with 5G readiness and deployment. We are also seeing an environment of increase price sensitivity in this segment. And our lean manufacturing initiatives are allowing us to be responsive to our customer needs for improving their total cost of ownership while also producing efficiencies which help support competitive pricing at levels which do not sacrifice quality and peak performance in the networks. We work with our customers to add our expertise in RF conditioning and add value to the design stage which offers optimal delivery at an attractive and decreasing cost profile. We believe the cost for field services and repair and replace work for underperforming network equipment by our customers, is far more costly than the price of higher performance solutions and premium quality. In our Test and Measurement segment, we continue continues to expand our product portfolio with next-generation power sensors and noise generation devices for military and commercial communications applications. Our recent launch of our next-generation peak power management product, the 4500 C is focused on the challenging demands of high-speed, high-throughput manufacturing tests of next-generation wireless devices. And I'm proud to announce today, we are actively selling this new product in to the market which replaces our older 4500 B product. New technology product developments are also underway to address emerging test requirements in millimeter wave and 5G designs. And in our Embedded Solutions segment, we've realized increase demand for our network cards, which help enable to testing of base stations and test systems for replicating complex network performance of multiple users, multiple cells and different access technologies. This network testing is aligned to continue 4G base build and 5G early deployment. We’re also very proud of the CommAgility team performance in LTE software and software customization projects for private network applications and digital signal processing embedded technology, including our announced selection by Lockheed Martin for an innovative satellite communications project. Overall, as we grow in scale and size on the top line, we expect our profitability profile to improve with greater operational leverage which we expect will also drive and approved non-GAAP adjusted EBITDA margins and higher operating cash flow generation. In summary, we've accomplished a number of important objectives in Q1, and our financial results reflect the improvements and changes we've made to the business over the last year. We are continuing to execute on our strategy, strengthening our three segments to address the demands and growth of wireless connectivity. Our segments are benefiting from investment in carrier densification, increased military spending, private network deployment, 5G investment and industrial IoT. Our strategic focus on wireless connectivity growth will also continue to guide interactions and decisions for both organic and the M&A growth opportunity to position our product solution set towards long-term growth trends and larger market opportunities aligned to our core expertise and development, testing and deploying highly customized, high performance wireless communication solutions. With that, I'm going to turn the call back over to Mike to walk us through the financials.

[Mike Kandell:]

Thank you, Tim. Good morning again everyone. So as you see in the press release and 10-Q we filed this morning, we delivered Q1 results which were in line with our revenue expectations and slightly ahead of our margin expectations. Consolidated revenues of $13.2 million, represented growth of $3.7 million or 39% from the year ago period and included approximately $4 million of revenue from embedded solutions in Q1 2018 versus approximately $1 million in Q1 of 2017. The $3 million increase in embedded solutions, revenue reflects a full quarter of ownership in Q1 of 2018 versus an ownership period of approximately 43 days in Q1, 2017. The remaining increase in Q1, 2018, revenue reflects growth contributions in our Test and Measurement segment. Our consolidated gross profit increased $1.9 million from $4.3 million in Q1 2017 to $6.3 million in Q1 2018. Consolidated gross margin increased from 45.4% in Q1 2017 to 47.3% in Q1 2018 due primarily to a favorable product mix in our Test and Measurement segment and higher revenue volumes in Embedded Solutions. On a segment level, for the quarter ending March 31, 2018, Network Solutions revenues and margins were inline and consistent with the same quarter last year. Test and Measurement revenue increased 24% or $700,000 driven by higher backlog existing 2017 and higher U.S. government sales. Test and Measurement gross margin improved from approximately 44% to 49% due to favorable product mix. And in Embedded Solutions, as I mentioned previously, we realized almost $3 million of higher revenue in Q1, 2018 compared to Q1 of 2017 which reflects both the full quarter of ownership of CommAgility as well as higher demand for our hardware cards used in Network Test Solutions. Our Embedded Solutions gross margin decreased in Q1 2018 to approximately 50% of revenue from 54% in Q1 2017, because of the higher hardware revenue mix in 2018. On a regional basis, the Americas which we've define as Canada, the U.S. and South America continues to account for the majority of our revenue. For the quarter ending March 31, 2018, the Americas, EMEA and APAC revenues accounted for approximately 61%, 28% and 11% of our consolidated revenues respective. In the same quarter, the Americas, EMEA and APAC accounted for 73%, 16% and 11% of our consolidated revenues. The increase in EMEA revenue reflects the higher Embedded Solutions hardware sales to a customer in the UK. Across all of regions we see our businesses and channels performing well and we are focused on continuing to drive more growth for regions outside of the North America. As Tim noted, our bookings continued to be strong in Q1 at approximately $14 million and we had another positive book-to-bill ratio in the quarter. While we don't expect this to happen every quarter this year, we are encouraged with the strong start to 2018, and we are working for a positive ratio at the end of the each fiscal year on a cumulative basis. The Q1 booking contributes to an ending backlog at March 31, 2018 of $10.6 million or nearly $700,000 higher than backlog at December 31, 2017. The higher backlog gives us a good start to our second quarter and sets up nicely for our revenue expectation of approximately $25 million for the first half of 2018. As a reminder, our backlog is typically delivered within the following 12 months with the majority of that delivery over the following one to two quarters. Our consolidated operating expenses were $5.7 million in Q1 2018 compared to $6 million in the same period a year ago. Some highlights on the operating expenses, R&D expenses were comparable Q1 2018 to Q1 2017 with R&D increases in Embedded Solutions which reflect the full quarter of ownership in 2018 offset by some decreases in Network Solutions. Sales and marketing expense increased Q1 2018 as compared to Q1 2017 due to the full quarter of ownership of CommAgility as well as from increased sales headcount in the U.S. And G&A expenses increased Q1 2018 as compared to Q1 2017 because of lower M&A and integration expenses related to the CommAgility acquisition. Netting it all out we've realized the operating income before taxes of $430,000 and net income of $374,000 for the quarter. And taking a look at our non-GAAP adjusted EBITDA, we delivered $1.6 million in Q1 2018 compared to a non-GAAP adjusted EBITDA of $447,000 in the same period a year ago. This improvement to non-GAAP adjusted EBITDA for the first quarter of 2018 was largely driven by revenue growth, improved gross margins, and a careful control of operating expenses balanced against investments for future growth. As mentioned in our last earnings call, approximately 2.1 million shares of our common stock that we're issued in connection with the CommAgility acquisition, were forfeited in Q1 2018. This forfeiture is now reflected in our financial statements as of and for the three months ended March 31, 2018. With regard to cash flow and liquidity, our net income and non-GAAP adjusted EBITDA was offset by increases in working capital during the quarter. We remain optimistic about our ability to generate cash flow from operations during 2018. At this time, I'd like to turn it back over to Tim for some closing remarks.

[Tim Whelan:]

Thank you, Mike. So overall, we are very pleased with the strong start in 2018 and our Q1 results. Looking into the second quarter of 2018 ending June 30, we expect Q2 revenues in the range of $12.25 million to $12.75 million, we expect gross margin of approximately 45% to 46% and we expect non-GAAP operating expenses to be between $5.4 million and $5.6 million. In summary, Wireless Telecom Group has a deep level of expertise in RF wireless communication. We have known and well recognized brand names with long tenure history and we have a large installed base of products and customers. We are an approved and trusted vendor with carriers, the military and government agencies. Together, Wireless Telecom Group and our three segments represents an investment in the continued growth and evolution of wireless communications and a company collectively centered and focused on a unified mission across three lifecycle areas enabling the development, testing and deployment of wireless communications technology. We expect to take advantage of the anticipated long-term growth trends in wireless communication, while at the same time we're also diversified across solution sets, diversified across the stages of the wireless technology lifecycle and diversified across customer segment addressability. Thank you. And Kate, if you could please open the lines for questions now.

[Operator:]

Thank you. Ladies and gentlemen, the floor is now open for questions [Operator Instructions] Thank you. Our first question today is coming from Fernando Canto. Please announce your affiliation then post your question.

[Unidentified Analyst:]

Good morning Tim and Mike congratulation on a good quarter. At what percentage of capacity are you running now? Hello.

[Tim Whelan:]

Yes, in terms of percentage of capacity, as I think about manufacturing operations, I think we clearly have room to grow and the lean manufacturing initiative would allow us approximately 10% to 20% improvement prior to adding additional cost -- meaningful additional cost structure. As I think about the sales go-to-market strategy, we're going to continue to look for opportunity to increase coverage with our customers as we see front-end design of partnerships resulting in good results in terms of win rates. So I think of it a little bit differently as sales go-to-market versus the operations and manufacturing.

[Unidentified Analyst:]

Okay. Is there any reason us to why the guidance is lower than the total revenue for the first quarter?

[Tim Whelan:]

Well, we are project based business and so the timing and delivery of certain projects happens on a basis that can be lumpy of times. And so while there is a portion of the business that is call it a run rate business, there is another portion which is a project based and it has a more significant and careful revenue recognition whereby the revenue recognition is only upon the completion acceptance of the project by the customer.

[Unidentified Analyst:]

Okay. All right. Well, thank you very much and again congratulation on a very good quarter.

[Tim Whelan:]

Thank you, Fernando.

[Mike Kandell:]

Thank you.

[Operator:]

[Operator Instructions] We have no further questions in queue at this time. Do you have any closing comment you would like to finish with.

[Tim Whelan:]

Thank you Keith. Thank you everyone for joining our call today. And we look forward to speaking with you all again in the future.

[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.