Wireless Telecom Group, Inc.
Q4 2018 Earnings Call Transcript

Published: 12 Mar 2019

[Operator:]

Good morning, ladies and gentlemen and welcome to the Q4 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 for today, Mike Kandell, Chief Financial Officer. Sir, the floor is yours.

[Mike Kandell:]

Thank you. Good morning, everyone and thank you for joining us for our fourth quarter and year-end 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 today 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 today 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 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. We are very pleased to report our 2018 year-end results which reflect the second consecutive year of revenue growth and improved profitability. Our full year 2018 revenue of $52.8 million represents growth of 14.6% over 2017 and 69% growth over 2016 revenues of $31.3 million, inclusive of our CommAgility transaction 2017; so, we have come a long way in just two years. Additionally, for the year-end 2018, we've reported solid gross margins of 45.8%, improved operating income of $780,000, a small net income number of $35,000 versus a net loss from prior years, as well as nearly $4 million of net cash provided by operating activities. Across the board, 2018 was a year of continued revenue growth and profitability improvements. As usual, Mike will address the numbers in greater detail but our results reflect the strategy and plan launched two years ago to invest and innovate on our vision of enabling the development, testing and deployment of wireless technology, and to drive improved growth and profitability into our results. This included our investments and efforts in our companywide lean initiatives, investments and changes to improve our go-to-market strategy which included new people, new products and customer facing technology and our continued investment in CommAgility and the 5G product roadmap for private LTE networks. Since January 2018, we have issued press releases on nine important product initiatives and new product releases, as well as three important customer engagements which deliver upon our commitment to innovation and customer responsiveness across all of our segments. So, while we are proud of the last two years of results, we are also operating the company with a longerterm vision of continued success and we have positioned the company for an expectation of continued top line growth and profitability improvements in the years to come. We continue to work on our aspirational vision to grow the company revenues significantly over the next several years, organically and through acquisition. While future organic revenue growth may not be at the same levels realized over each of the last two years, we will be working hard to focus equally on growth, improved profitability and cash flow, and we will continue to evaluate accretive acquisitions aligned to our vision and expertise.Across our segments, we are also pleased with the continued strong results and progress on our longer-term objectives. In our Network Solution segment, we realized revenue performance slightly below the prior year at $22.3 million versus $23.1 million, a 3% decline. While we expected a better outcome, we are pleased with our progress in 2018 as it relates to innovative new solution designs to address continued carrier densification and spectrum deployment. In just the last four months of 2018, we've announced two new important product initiatives; our modular point of interface solution or MCC product family, and our smart passive systems for real-time monitoring of Public Safety DAS [ph]. Our new point of interface solutions enable multi-carrier spectrum deployment with exceptional quality and we are excited about the Q4 order flow and opportunities in our funnel.Our smart passive systems also received an overwhelmingly positive response at the IWCETrade Show last week and the team is very excited about the year ahead. These new Q4 products are expected to have a much greater impact on 2019 which gives us reason for optimism.This segment will always have it's challenges from price pressures to shifting spend focus by carriers, and project timing uncertainty for larger venue opportunities; all of this will periodically lead to potentially lumpy quarterly results of order flow and project completion. However, this is such a large dynamic market that as long as we continue to innovate and collaborate with our customers to address design challenges, we will continue to find opportunity as the carriers densify 4G ahead of the expected long-term 5G rollouts, invest in 5G use cases, deploy more small sells, deploy the spectrum they have and prepare for even more spectrum expected to be auctioned off into the market in the years ahead. Going forward in network solutions; our responsiveness to customer needs and continued product design and innovation is expected to help drive growth opportunity which we believe will outweigh the challenges. In our Test & Measurement segment, we are very pleased with the 2018 results which reflect 6.2% growth compared to 2017,and also a second year of revenue growth in the segment. 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 defense and military customer base which should benefit the segment. We continue to expand our portfolio with new power sensors and noise generation devices for military and commercial communications applications. Recent product introductions are focused on the challenging demands of high speed, high throughput manufacturing tests of next-generation wireless devices. New technology product developments are also underway to address emerging test requirements in millimeter wave and 5G designs. And our recently announced new millimeter wave noise sources for over the air testing of 5G devices is one example of this trend. We're encouraged and excited about our Test & Measurement order flow and we expect higher demands for our solutions driven by increased military spending growth in wireless used cases. We have announced new products and solutions over the past year including our noise sources for 5G and over-the-air testing, the next-generation 4500C [ph] peak power unit and connected power sensors which we hope to capture some of the expected increased vent. Going forward in Test & Measurement, we will continue evaluating emerging needs in military and defense, satellite communications, emerging 5G wireless used cases, autonomous vehicles and embedded modules which can be addressed by a Boonton and Noisecom solutions. Our new product launches coupled with a view of higher spend cause us to be optimistic for the segment. And finally, in Embedded Solutions, we continue to realize increased demand for our signal processing network cards which have been key driver to growth for the company in 2018. The Embedded Solutions hardware cards enable the testing of base stations and test systems,they replicate complex network performance from multiple users and multiple cells. The higher demand is aligned to our view of continued overall demand for network testing due to continued4G base build and 5G readiness. As I mentioned on past calls, Embedded Solutions has successfully won and delivered large million-dollar orders which demonstrates our ability to bid and win large global enterprises for private network software and hardware expertise. These large orders also require longerterm pursuit and design and contribute to fluctuations and consolidated quarterly bookings and backlog. We continue to be exceptionally pleased with the performance of the CommAgility business unit and we are very excited by the funnel of opportunities and the designs in bidding we are currently involved in. Going forward in Embedded Solutions, we continue to continue to invest in our LTE software releases and software customization projects for private network deployments, as well as digital signal processing embedded technology, and we are excited about this avenue for potential growth. With regard to our booking and backlog accomplishments during the fourth quarter, we realized $14.3 million of bookings or new customer orders, which is our strongest quarter of bookings over the last five quarters and our second-best quarter over the last eight quarters. Q4 bookings also reflects a $2.6 million increase compared to the same quarter of bookings a year ago and almost a $3 million increase in bookings compared sequentially to our September 30, 2018 quarter. We are exiting the year with a backlog of customer orders of $8.2 million which is an increase of over $2 million from our September 30, 2018 quarter end backlog. Netting it out, 2018 was our second consecutive year of double-digit organic revenue growth and improve profitability. 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. We intend to accomplish revenue growth for agile investments in new products and markets, aggressive go to market and sales strategies that expand our customer base and a discipline merger and acquisition process. Our lean manufacturing initiatives first launched in 2017 continue as enterprise wide lean implementation projects and as the key driver to operational leverage and profitability. Our core expertise across the life cycle in developing, testing and deploying highly customized high performance wireless communication solutions are aligned to exciting trends of growth and investment in the market and we are optimistic about our future. With that, I'm going to turn the call over to Mike to walks us through the financials.

[Mike Kandell:]

Thank you, Tim. Good morning again, everyone. As Tim mentioned, we're very pleased with the results for the year ended 2018. I'll walk through our full year financials, but first let me comment on Q4. Our Q4 results were in line with our expectations.Consolidated revenues for the fourth quarter were $12.1 million, which was flat from the year ago period. On a segment level for the quarter, Embedded Solution's revenue increased 10% from $3.4 million to 3.8 million on higher sales of our digital signal processing hardware. Test & Measurement revenue increase 3% from $3.1 million to $3.2 million. Network Solutions revenue decreased 7% from $5.5 million to $5.1 million on reduced demand for certain RF components in a highly competitive pricing environment. Our consolidated gross profit for the fourth quarter was $5.3 million or 44% of revenue as compared to $5.5 million or 46% of revenue for the same period last year. Gross profit was negatively impacted in the quarter due to product mix at the Test & Measurement and Embedded Solution segments and lower volumes at the Network Solutions segment. Turning to the full year 2018; consolidated revenues grew 15% from $46.1 million in 2017 to $52.8 million in 2018. Breaking this down by segment, the Embedded Solutions segment which is comprised of CommAgility grew $6.7 million or 69% due to a full year of operations in 2018 as compared to 10 and a half months in 2017 as well as increased sales of our digital signal processing hardware. The Test & Measurement segment revenue grew $800,000 or 6.2% in 2018 due to higher sales of noise sources and components specifically into the satellite communication and optical research industries. And Network Solutions revenue declined 3% from 2018 due to decreases in certain passive RF component demand which were only slightly offset by increased sales of our integrated solutions. Consolidated gross profit was $24.2 million or 46% of revenue in 2018 as compared to $19.3 million or 41.8% of revenue in 2017. The increase over 2017 reflects inventory impairment charges recorded in 2017 of $1.2 million in the Network Solutions segment and R$700,000 and Test and Measurement segment. 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 year ended December 31, 2018 Americas, EMEA and APAC revenues accounted for approximately 62%, 31% and 7% of consolidated revenues respectively. In the prior year, Americas, EMEA and APAC accounted for 73%, 19% and 8% 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. Our consolidated operating expenses were $23.4 million in 2018 as compared to $22.1 million in 2017. As a reminder, 2018 includes a full year of CommAgility operating expenses as compared to 10.5 months in 2017. Additionally, R&D expenses were driven higher on 5G investments, particularly in our Embedded Solution segment. Sales and marketing expenses were higher due to investments in sales headcount, particularly in the U.S. and G&A expenses decreased overall on lower M&A and integration expenses associated with the CommAgility acquisition and lower restructuring costs in 2018. We also recorded a $578,000 loss on a change in fair value of CommAgility contingent consideration as compared to a gain of $250,000 in 2017. Per the CommAgility purchase agreement, additional purchase prices owed to the CommAgility founders if certain financial metrics were achieved in fiscal 2018, CommAgility results in 2018 exceeded our original estimates that were established at the time of acquisition and an increase to the liability was recorded in 2018. We also recorded interest expense related to the contingent consideration liability in 2018 in the amount of approximately $281,000. The adjustment and interest expense related to the contingent consideration liability impacted our 2018 income statement by approximately $860,000. Overall, we realized $83,000 of consolidated income before taxes in 2018 as compared to a consolidated loss before taxes of $3.2 million in 2017. Our consolidated net income for 2018 is $35,000 as compared to a consolidated net loss of $4.5 million in 2017. Non-GAAP adjusted EBITDA increased from $3.6 million or 8% of revenue in 2017 to $4.8 million or 9% of revenue in 2018. Consolidated cash flow from operations was $3.9 million for 2018 as compared to $1.4 million in 2017 due primarily to consolidate it increase in sales and gross profit. We paid approximately $41,000 in cash taxes in 2018 which primarily represent local taxes in one of our foreign jurisdictions. Our low cash tax rate is the result of our federal and state NOLs which expire in 2029. Before I turn it back over to Tim, I just want to make a comment about our bookings and backlog. Our Q4 2018 consolidated bookings were approximately $14.3 million representing a book to bill ratio of $1.2 which increased our backlog sequentially from Q3 2018 by $2 million to $8.2 million. In addition to the strong bookings quarter in Q4, we continue to be encouraged by the funnel of opportunities, our quote activity and the interaction with our customer base. At this time, I'd like to turn it back over to Tim for some closing remarks.

[Tim Whelan:]

Thanks, Mike. Overall, we are very pleased with our accomplishments over the last two years. As a recap, we grew our top line revenues from $31 million to $52 million over the last two years. We've returned the company to net income profitability, improved operating income and increased adjusted EBITDA as a percentage of revenue. We launched new product offerings and invested in improves sales channels to sharpen our go-to market strategy. We completed our first major acquisition in 2017 successfully integrating CommAgility and successfully realizing organic growth after the acquisition and we've increased our cash position. As we look forward into 2019, we expect Q1 2019 revenues to be approximately the same as Q1 of 2018 and Q1 2019 gross margins to be slightly less due to the revenue mix and over software revenue. We're also expecting full-year 2019 revenues to increase and the low to mid-single-digit percentage points and have a similar gross margin outcome of 46%. Longer-term, we expect to manage the company as follows. We expect our growth strategy to include organic and acquisition growth. While we did not complete any acquisitions in 2018, we were excited about the opportunities evaluated and continue to have active M&A discussions. We will focus our R&D efforts on continued innovation and collaboration with our customers. We will manage the business with an eye on objectives for growth as well as targeting operational leverage from proofed profitability and cash flow. We expect this continuously focused on the current trends of customer investments. This concludes carrier densification increasing defense bend and the impact of 5G on carrier network deployment, Test & Measurement use cases and private network deployment. Summing it up, Wireless Telecom Group is better positioned now in early 2019 than we were one year ago today. Together, Wireless Telecom Group and our three segments represents an investment and the continued growth and evolution of wireless communication and accompany 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 Catherine, if you could please open the lines for questions at this time.

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Brice Thomas [ph], your line is live.

[Unidentified Analyst:]

Good morning. Assuming you're able to grow low to single-digits organically this year, you mentioned that we should see some leverage in the model. Can you provide more specifics?

[Tim Whelan:]

Sure. So, we don't provide the guidance on expectations for operational leverage, but we will make a couple reference points. First, we got stable gross margins at 46%. And the way we think about this is that our lean initiatives have a success. We've been able to offset the pricing pressures that we referenced within Network Solution segment. Second, we're very happy with the way we've controlled the operating expenses and SG&A, and if you note some of the points that Mike made about the charges that were included in our operation expenses this year related to CommAgility, we see that ability to contain that OpEx going forward. So, the last point is that in the current year, well, we grow revenues almost 15% with almost a 30% EBITDA margin growth. So, that's almost a two times multiplier. That kind of multiplier is going to be hard to accomplish on a lower revenue growth, but obviously we're driving towards higher profitability improvements as a percentage as we think about the revenue increase. So, I hope those reference points' help.

[Operator:]

Your next question is coming from Jennifer Wolfords [ph]. Your line is live.

[Unidentified Analyst:]

Hi, good morning. Could you talk to us a little bit about where you think we are in the cycle for 5G rollout and how WTT is positioned to benefit I guess probably from the media to the longer-term from the 5G rollout?

[Tim Whelan:]

Sure. I think the short answer is that we're in the early stages of 5G. And if you follow any of the reports coming out of Mobile World Congress or the analyst following the carriers, most of those will say that 5G will start to show up and late 2019. But, uh, any of the meaningful investment will be 2020. And so, that's a starting point. A second point to make is that the handsets are really just starting to come out in 2019 and so the 5G use cases for the applications would advance in the years after that. So, the point in all of that is that we believe are at the very front edge of 5G. With that, what we are benefiting from today is network execution ahead of 5G. And this means the network densification of the 4G platform, it means spectrum deployments from the auctions over the last few years and it means small cell deployments to add capacity. So this also contributes to current day projects for the carriers, the neutral host providers and the tower companies to expand the wireless capacity today, including large venues and stadiums, event destinations like theme parks. So we are seeing activity today in terms of the advanced build out and densification of the 4G network. We believe the 5G deployments will be in the years ahead and that will continue to promote opportunity amongst multiple segments for us.

[Operator:]

There are no further questions in queue at this time.

[Tim Whelan:]

Very good. Thank you everyone for joining us today and we look forward to speaking with you again soon.

[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.