Wireless Telecom Group, Inc.
Q3 2018 Earnings Call Transcript

Published: 12 Nov 2018

[Operator:]

Good morning, ladies and gentlemen and welcome to the Wireless Telecom Group Q3 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 introduce your host, Mike Kandell, Chief Financial Officer. Sir, the floor is yours.

[Mike Kandell:]

Thank you, Kate. Good morning, everyone and thank you for joining us for our third 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 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 it's 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 today 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. After some prepared remarks Mike will review the financials, then we will open the line for some Q&A. To start, we are very pleased with our Q3 revenues of $14 million, which is above the high-end of our guidance and reflects 12% consolidated organic growth compared with the same quarter last year. Our financial results reflect another quarter of both, sequential and year-over-year consolidated revenue increases, and were driven by higher demand for our signal processing hardware cards. We're also pleased to report the higher revenues drove higher gross profit at $6.5 million, higher operating income of $919,000 and income of $558,000 resulting in an earnings per share of $0.03 for the quarter. In Q3 we also delivered $1.08 of non-GAAP EBITDA resulting in a consolidated non-GAAP adjusted EVA of approximately $4.4 million for the first 9 months of 2018. Mike will dive into the numbers in greater detail but we believe the last 10 quarters of results reflect the successful execution of organic and acquisition related growth initiatives and improvements to our go-to-market strategy, implementation of lean initiatives, improved profitability metrics, and improved operating cash flow generation. Across our segments, we are pleased with the continued solid results and progress on our long-term objectives. In our Network Solutions segment, we have realized performance on par with the prior year and as I said last quarter, we are pleased with these consistent results given some unpredictability of carrier spend in pricing. We see continued focus by the carriers, power companies and neutral host providers on solutions which enabled 4G densification, large venue buildout, deployment of new spectrum and multi-carrier deployments. Within the segment, we are continuing to innovate with our customers on unique RF conditioning designs, and our point-of-interface solutions which enables spectrum combination for small sale deployments with exceptional quality and favorable total cost of ownership price points. These designing consultations typically involve these large venues and accordingly larger sized purchase orders. We are pleased with the current rate of order flow, as well as the funnel of sales opportunities we are working on. The large opportunities typically require long-term design and coding, and like most funnel [ph] opportunities, there is uncertainty of funding approval, win rates and timing. As a result, these types of awards can lead to a fluctuation in order flow and project completion, and contribute to periodic increases and decreases to bookings in backlog. Going forward in Network Solutions, we expect to continue our investments in the expansion of our product capability to address 5G readiness, public safety and emerging 5G. standards. In our Test & Measurement segment, we are very pleased with the 7% year-to-date growth compared to the same period in 2017. We are seeing increasing demand in our Noisecom solutions and believe we are in the early stages of a higher spend environment in the government and military customer base which should benefit our Test & Measurement segment. As we noted last quarter, we continue to invest in other product enhancements to address emerging test requirements and higher frequencies and 5G designs in this segment, and we recently announced our new millimeter wave noise sources for over the air testing of 5G devices. We are encouraged and excited about our Test & Measurement order flow, however, we will occasionally see large customer order flow fluctuate which will contribute to consolidated quarterly fluctuations to bookings and backlog. And thinking longer term, we are excited with our multiple new products we have announced over the previous six months including our Noisecom noise sources for 5G and over the air testing, next-generation 4500C peak power unit, and connected power sensors to name a few. Our new product launches coupled with our view of a higher spend environment cause us to be optimistic for this segment. Going forward in Test & Measurement, we expect to continue evaluating emerging needs and satellite communications, autonomous vehicles and embedded systems which can be addressed by our Boonton and Noisecom solutions. And finally, in our Embedded Solutions segment; we have realized increased demand for our signal processing network cards which I mentioned earlier was the key driver to growth in this segment in the quarter. The Embedded Solutions hardware cards enable the testing of base stations and test systems, and replicate complex network performance of multiple users, multiple cells and different access technologies. The higher demand is aligned to our view of continued overall demand for network testing due to continued 4G base build and densification and 5G readiness. Embedded Solutions has successfully won and delivered large million dollar plus orders which demonstrate our ability to been-on [ph] and win significant contracts with large global enterprises for private network software and hardware expertise. These large orders also require longer term pursuit and design activities, and can contribute to fluctuations in quarterly bookings and backlog. We continue to be exceptionally pleased with the perform of our CommAgility business unit and we are very excited by the funnel of opportunities and the designs and bidding we are currently involved in which includes some large opportunities in areas of our differentiated expertise. Going forward in Embedded Solutions, we expect to continue to invest in our LTE software releases and software customization projects for private networks appointments, as well as digital signal processing embedded technology, and we are excited about this avenue of potential growth. Netting it out, our Q3 results demonstrate continued revenue growth, as well as our best quarter of GAAP operating income and non-GAAP adjusted EBITDA. The results also reflect the strength of our diversification across segments, products and customers. We consider the periodic increases and decreases to order form backlog and natural quarterly rhythm, and we are focused on improving the fundamental long-term drivers to the business. As we note in our release, we expect to operate the business with objective seeking to meaningfully grow the business over the next several years and proving both, our revenue scale and profitability metrics just as we have realized over the last 10 quarters. We intend to accomplish this through agile investments in new products and markets, aggressive go-to-market and sales strategies that expand our customer base, a discipline merger and acquisition process, and continuous lean improvements to drive operating leverage. Collectively, we are continuing to execute on our strategy, investing in and strengthening our three segments to address the demands and growth of wireless connectivity. Our segments are benefiting from long-term trends of continued investment in network densification, increased military spending, investment in private network deployment, 5G deployment and the growth of industrial IoT. These long-term trends and larger market opportunities are aligned to our core expertise across the lifecycle in developing, testing and deploying highly customized, high performance wireless communication solutions. With that, I'm going to turn the call over to Mike to walk us through the financials.

[Mike Kandell:]

Thank you, Tim. Good morning again, everyone. As Tim mentioned, we are pleased with our Q3 results which were above our expectations. Consolidated revenues for the quarter of $14 million represented growth of $1.5 million or 11.6% from the year ago period. The increases in the quarter were primarily driven by the Embedded Solutions segment where we realized higher demand for our digital signal processing hardware used in network test systems. Our consolidated gross profit for the quarter was $6.5 or 46% of revenue which is comparable to $6.1 million or 49% of revenue for the same period last year. Consolidated gross profit dollars increased on higher volumes at the Embedded Solutions segment while our consolidated gross profit margin declined due to product mix at our Test & Measurement segment, and lower volumes at our Network Solutions segment resulting in lower absorption of fixed cost and overhead. On a segment level for the quarter ending September 30, 2018 as compared with the same quarter last year, Network Solutions revenues decreased slightly by $394,000 driven by lower first half bookings driven primarily by the timing of large projects. Test & Measurement revenue slightly decreased by $218,000, also driven by the timing of some large projects in 2018 as compared to 2017. And in Embedded Solutions, we realized $2.2 million of higher revenue which reflects a higher demand for our digital signal processing hardware. On a regional basis, the Americas which we define as Canada, the U.S. and South America, continues to account for the majority of our revenue. For the quarter ending September 30, 2018, Americas, EMEA and APAC revenues accounted for approximately 64%, 30% and 6% of consolidated revenues respectively. In the same quarter last year, Americas, EMEA and APAC accounted for 80%, 16% and 4% of consolidated revenues respectively. The increase in EMEA revenue and decline in the Americas revenue reflect the higher Embedded Solutions hardware sales in the UK. Across all our regions we see our businesses and channels performing well, and we are focused on continuing to drive more growth from regions outside of North America. Our Q3 2018 bookings were approximately $11.3 million which compares to $15.4 million in the prior year period. With $14 million in revenue, our book-to-bill ratio is approximately 0.81 for Q3 2018. We are exiting the third quarter with a backlog of orders of $6.1 million compared to $10.2 million in the year ago period. As we exit what is typically our highest revenue quarter, we are seeing some lumpiness in the backlog driven by the timing of placing orders for large projects by some of our biggest customers. We continue to be encouraged by the funnel of opportunities or quote activity and the interaction with our customer base, specifically with respect to design consultation on large projects. Our consolidated operating expenses were $5.5 million in Q3 2018 compared to $5.3 million in the same period a year ago. Some highlights on the operating expenses

[Tim Whelan:]

Thank you, Mike. In summary, we continue to remain on-track and expect a strong year of topline growth and profitability. As noted in our release, we expect the fourth quarter ending December 31, 2018 to see seasonally lower sequential revenue compared to the third quarter which is consistent with the prior year. With that, we expect to finish the year with over $52 million of revenue representing 13% revenue growth year-over-year and a second year of double-digit revenue growth including the CommAgility acquisition. Just as important, we have realized improvements to profitability including $15 million of GAAP operating income and positive GAAP net income for the 9 months ending September 30, and $4.4 million of non-GAAP adjusted EBITDA for just the 9 months of 2018. 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 tenured 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. We expect to take advantage of the anticipated long-term growth trends in wireless communication, while at the same time we are also diversified across solution sets, diversified across the stages of the wireless technology lifecycle, and diversified across customer segment addressability. Together, Wireless Telecom Group and our 3 segments represent an investment in the continued growth and evolution of wireless communication, 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. Thank you. And Kate, if you could please open the lines for questions now.

[Operator:]

[Operator Instructions] And our first question today is coming from Brace Thomas [ph].

[Unidentified Analyst:]

There has been a lot of discussion of 5G recently, could you help us understand what you're seeing in the rollout of 5G and where we are in the cycle in your opinion?

[Tim Whelan:]

Overall, we believe we're in the very early stages of 5G cycle, and a couple of points here. The 5G standards are not expected to be fully defined until 2020 according to 3G PP. It is largely believed the 5G handsets won't hit the market until 2019 and what will follow are the monetization used cases for 5G that will emerge over many years as will that investment; so that I think is the big picture. More specifically, a few points on the segments. Within Network Solutions, what we're seeing is 4G densification of previously purchased spectrum and this is leading to a growth in small cell projects which translates to product applications for us in the lower power and smaller sized solutions. Within Test & Measurement, I think I mentioned earlier we're seeing that focus on millimeter wave testing ahead of the 5G deployment, as well as the over the air testing demands which is driven by that expectation of large volumes of smaller devices expected to be deployed on 5G. And then I guess couple of points finally on Embedded Solutions; we're seeing the demand for the designs around private network solutions which have fairly unique requirements and customization. There is currently approximately 300,000 pages which defined what 5G standards are, and so most companies have to pick their spots to compete and so we're still in that very early R&D stage of applications and technology. Our focus will be on the high performance applications in transportation, military, emergency communications and satcom, just to name a few. So again, overall we believe we're still in very early stages.

[Operator:]

Our next question today is coming from Robert Marson [ph].

[Unidentified Analyst:]

Robert Marson, Penn Capital [ph]. Congratulations gentlemen on another good quarter. I know it's going to be early to ask this question but as you key-up [ph] 2019, do you think you have enough irons in the fire to generate a third consecutive year of double-digit organic revenue growth? And if so, which products sort of by division would lead you to that? I know it's a challenging telecom equipment market, many of the companies that I follow in this space are producing flat to down revenue numbers; so your double-digit revenue growth is exceptional on it's own. I assume that's the skill of the new management team taking over a formerly under-managed asset, so congratulations there. But what do we have lined up for 2019 to repeat the same feat? Thank you.

[Tim Whelan:]

Yes, it is early to points specifically to any of the growth drivers or growth within the segments for '19 and we're still preparing for that, and I think the fourth quarter some of the pursuits that will emerge in our success and those pursuits will help us define what that year looks like. Obviously, we're working hard to generate another quarter -- I'm sorry, another year of growth, it's hard to say or put a number on that at this time but we're very optimistic with where we've placed our investments over the last year and even two years. We think the markets are very favorable in terms of the overall big picture trends, we have to find our spots within some very large markets, we've invested in products, we've announced some of that; we've invested in some partnerships, I think we've announced some of that; we've announced some of the large customer orders which we have received, as well as the new venues. So that will be a continued pattern as we look into next year; more strategic deals, a greater expansion, and a more aggressive strategy as we think about the customer base to continue to diversify ourselves. And so -- yes, I would underscore one key point you made is, as we're diversified across multiple customer segments with multiple product offerings and a greater geographical reach we're fairly optimistic about next year but it's hard for us to give you anything with greater precision at this time.

[Unidentified Analyst:]

Next year only starts in 7 weeks; so I hope you guys have more in the planning stages than you're willing to share with us. On another topic, what about bolt-on transactions you've clearly succeeded with your last acquisition? It's very late in the economic cycle and I don't think many shareholders want you taking on a boat load of debt because that would pose a risk to the balance sheet, and then obviously the income statement as well. So with where the balance sheet looks today from the cash position, and in my opinion, the inability to use equity at these hardly low valuations; where do we stand with the ability to find accretive deals and pay for them without jeopardizing the balance sheet?

[Tim Whelan:]

We've remained committed to growth through the use of mergers and acquisitions as part of our strategy and we stated that publicly multiple times. We remain committed as a management team and spend a significant amount of time looking at those strategic options and we do that in a very disciplined fashion. We are not short of targets out there as it relates to smaller sized private companies where there is a generational change at the company, and they need to seek some form of succession planning. Our ability to find the right companies in a disciplined manner, as well as have a disciplined approach to purchase price points are key ingredients to that, but again, we spend a significant amount of time as a management team and remain committed to that as a growth path. As we think about our capital structure, we very carefully look at the use of debt, the use of equity, the use of cash -- the free cash flow generation, and then ultimately a structure which also places a great responsibility upon the sellers to remain with the business and generate the kind of results that they're putting forth to us. And I think the architecture of the CommAgility deal is evidence of that in the sense that there is a callback mechanisms, there is earn out mechanisms, there is deferred payment mechanisms; so those are all structures which help us think about the financing but I would agree that we're not about to go into an M&A market without looking very carefully at the use of equity, the dilution effect, as well as the debt on the balance sheet. We're quite pleased with the net debt position we have now, we're quite pleased with the available borrowings that we have and quite pleased with the financing capability that we continue to see on our balance sheet. So it's -- we're committed to that growth path and I understand the point you're making, and I think we're going to going to do this in a continued responsible fashion, the way we did in terms of executing on the CommAgility transaction.

[Unidentified Analyst:]

It would be nice to see some of that working capital convert at the cash or the cash put the work in bolt-on smaller transactions at this point of the cycle and our opinion of the shareholders.

[Tim Whelan:]

Agreed and we're very focused on that.

[Operator:]

[Operator Instructions] Our next question today is coming from Jen [ph].

[Unidentified Analyst:]

Hi, good morning. It's [indiscernible]. I had a question regarding the Embedded Solutions segment; it's clearly -- it's a growing portion of sales or it was in the quarter. And I'm just wondering how we should think about that going forward in terms of revenue composition?

[Tim Whelan:]

Clearly, this was a terrific quarter for Embedded Solutions. We don't give guidance on the segments and we're hopeful this success continues but we also take a conservative view in terms of planning and expenses and how we think about that. So we're working closely with the customer and planning conservatively for the future. With regard to the revenue composition of all three segments; I think you'll see the segments results have had some fluctuations quarter-to-quarter which we see is very much a natural rhythm to our bookings and backlog. Over a longer term, we would expect the revenue composition to be fairly consistent with what you would see if you look at the past five or six quarters as we think that's probably a good way to think about the business in terms of how we think about the revenue composition of segments going forward.

[Unidentified Analyst:]

And then just to a little follow-on on that; regarding the pipeline and the custom orders, can you give a little color just around what the longer term pipeline is looking like and what the composition is?

[Tim Whelan:]

Sure. We don't provide the metrics on old guidance on funnel, just given that fluidity and uncertainty but we are today very happy with the flow of quotes and more importantly, that design collaboration we're finding with our customers. On a segment basis, network is seeing this continued trend of small cell deployments and large venue build outs, as well as the emergence now of neutral host providers for the enterprise space; so we're very excited and encourage about that in terms of potentially new dollars of spend that we can capture. We are seeing less active debt [ph] solutions in the funnel and more CRAND and DRAND solutions which actually favor the parts of RF solutions we have in the Micro Lab brand. In Test & Measurement, I think the color on the sales funnel is that higher demand for the noise sources in solutions which are driven primarily by the defense and the military. And as we understand it, this is for optical research and weapons applications, and understandably, in the space we're not always told what the final solution is but we know it is being driven by defense and military. And we're also seeing now more of a deliberate spend approach. Now that we have defense budget in place, which has increased significantly the contacts and customers are more confident that those funds will be in place with these increased budgets. And then last within Embedded Solutions, I think the color on the pipeline is the -- are these long-term projects which include both 5G advancement along with the evaluation of future proofing to 5G standards. And so that's where we see we're in the -- we're just at the front end of the stage of 5G, and they want 4G LTE but they want a future proof to 5G. And so this tip we acquire additional customization of the LTE for software and it's also hardware for -- it's not for the super high volume solutions which a larger chip companies will pursue; these are for smaller sized customization so as we think about the market, our pipeline, our color this market opportunity would be to find is -- and sync at the terms of fleets of ships, trains, aircrafts, industrial vehicles and industrial park. This is where the units and customization is measured in dozens and hundreds of units rather than in millions; and think of solutions which are unique to an industrial loyalty solution on a common 5G communication platform; so we're very excited about this niche and the opportunities emerging there but these are longer term in nature.

[Operator:]

Our next question today is coming from Fernando Canto [ph].

[Unidentified Analyst:]

I have seen that for the last three quarters you Embedded the rabbit guidance by about $0.5 million to 750,000, would that tend to indicate that you guys are very conservative on some of your guidance or that you're getting guidance revenue during [indiscernible]?

[Tim Whelan:]

I think it's -- during the quarter. I don't have a measurement for you. We are careful in terms of how we compile our metrics. Over the last two years the company has done a wonderful job of reorganizing and reenergizing a database approach to KPI management and that translates into how we predict and forecast the business. There will always be an uncertainty of the timing of the larger size deals, both in terms of timing of capture and timing of delivery. And so that kind of uncertainty we would like to be careful about but there is also a run rate portion of the business that shows up in the third month of every quarter and we're modeling that carefully as well. So I don't think it's entirely one of the other, I think it's a little bit of balance.

[Unidentified Analyst:]

The fourth quarter is always your weakest quarter, right?

[Tim Whelan:]

It is typically and seasonally yes, decline from the third quarter. Well, thank you very much and congratulations again.

[Operator:]

Our next question today is coming from John Sturgis [ph], please announce your filiation then post your questions.

[Unidentified Analyst:]

Yes, John Sturgis [ph] from Oppenheimer & Company. Nice execution. I'm curious about capital allocation decisions one versus the need for greater capacity so I'm some curious what do you have enough then too expected capacity versus allocating capital acquisitions, could you -- just provide some general color on that question?

[Tim Whelan:]

On the first question capacity; I think you'll note, if you look at the financials that we have increased our capital expenditures over the last 18 to 24 months. We also announced and spoke about lean initiatives, and so those two in particular, were designed to improve the level of automation and robotics in the firm that will increase and improve not just our capacity but improves the quality metrics and standards, and allowed us to accomplish the different ISO certifications that we also have announced in terms of those audit and certifications; so we have built capacity into the system to create operating leverage. I don't have a number for you at that time but that is the direction we're headed, and that is what those investments are expected and have been able to allow us in terms of ROI. In terms of capital allocations for acquisitions, we look at the balance sheet in terms of availability of the credit facility we have, the available borrowing base. The cash generation and expected cash generation; we look at the cash generation of the targets, and that our acquisition strategy is intended to target accretive businesses and not ones that are requiring a turnaround situation. And we look at acquisitions using a balance of cash, debt, seller financing and equity, as well as earn out mechanisms that allow us to think about that financing over a period of time. So we don't have any more finite measurements about how much we have allocated for M&A, other than -- again, we're very committed. We think there is some good opportunity but we're also very careful, we conduct very careful due diligence, and we're working hard to make sure we find the right target for the company.

[Unidentified Analyst:]

Understood. Thank you for covering that territory for me.

[Operator:]

Our next question today is a follow-up from Robert Marson [ph].

[Unidentified Analyst:]

Are you guys happy with the productivity of your R&D? I know you revamped it with some new people and some new efforts, and you don't really end the day this with new product announcements. So I'm wondering if the shareholders should be happy with 10% of revenue we spend on R&D in the business, and whether we're getting the productivity out of it that you guys would like us to get.

[Tim Whelan:]

To answer your question, quickly, I am very pleased with the productivity. We had announcements just through the nine months ending. In February, we announced our new platform cards on CommAgility which is supporting Obed's [ph] and LTE advanced functionality. Following that we named the new 4500 Boonton peak power measurement in April. In August, we announced new products for public safety networks; and in September, we announced this new modular point of interface solution which I spoke about in the call. And so just dose four alone, as well as there are others that are unannounced, but you can imagine the announcement -- the full traction of the new product is not necessarily embedded in the current year financial statements, but this is the type of collaboration, these products are typically born out of the collaboration with customers and customer's unique needs that we feel that we can -- if we capture that in the appropriate design, we can bring to market and replicate that success beyond just the customer that we worked with on that design. So yes, we're very pleased with productivity, we measure returns on each new product, we will not add 1000 on every product, I can't guarantee 100% success in every business case but we do look at the products and drive towards a success on every one of them, and we're very pleased with what we've announced so far, as well as what we have in the works.

[Unidentified Analyst:]

Do you try to measure the -- some companies measure percentage of sales from new products on a rolling basis since every few years there would be the time period launched in that few year period. Do you guys try to measure at all how the effects of the new product introductions are contributing to revenue versus historical levels and making sure that that number is rising?

[Mike Kandell:]

Yes. So, we're measuring that internally, we are not -- we have not announced it publicly, but we are measuring it internally. One of the -- I think one of the elements of measurement is ensuring that we measure a product modification versus a new product introduction; and so the products that we have today in the passive RF conditioning space are very much different than what was done two years ago, and the reason for that is that there are different power and different spectrum, and they have different connection points, and that's just continued kind of design flow necessary to be successful in that space. So some would say it's not necessarily a new product but it is very much changes to a product that we -- if we had not made, we would not have captured the current order flow because a small cell design is much different than what was happening in building two years ago. And so we had to change how we invest in terms of how agile we are, and how quickly we bring things to market; so we're pleased with both the new product introduction, as well as the product modification to continue the importance and relevance of our product set and this new dynamic in 4G densification.

[Unidentified Analyst:]

Telecom costumers are sort of cheap these days, always have been; so the only way to get paid is through innovation and we need to keep up the innovation.

[Tim Whelan:]

That's right. And in innovation and design, and custom designs, there is typically an improved margin.

[Operator:]

Thank you. We have no further questions in the queue.

[Tim Whelan:]

Okay. Thank you everyone for joining us today. We're looking forward to speaking with you after year-end again. Have a great 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.