Wireless Telecom Group, Inc.
Q2 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Wireless Telecom Group Q2 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for 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:]

Thank you, Kay. Good morning, everyone. And thank you for joining us for our second quarter 2020 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 forecasts 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 the 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 2019 annual report on Form 10-K and our 2020 quarterly reports on Form 10-Q filed with the SEC. The company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events or otherwise. Also, we want to point out that in addition to GAAP information, we will provide information relating to certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of non-GAAP measures to GAAP measures are set forth in a reconciliation table in our press release issued earlier 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, and thank you for joining us. Before we begin, I'd like to once again express to everyone our best wishes for continued health and safety, as well as thank our employees for their incredible resilience and spirit. We have returned to operations teams to full schedules from a staggered regimen, while maintaining the increased distancing and health measures in our facilities. Our operations teams, engineers, customer facing sales and sales support teams all continue to focus on our mission and values, driving the business forward and taking good care of our customers. During this incredible period of time, the importance and mission criticality of wireless communication and connectivity has never been more apparent. And our focus enabling the development, testing and deployment of specialized solutions continues to hold tremendous value to our customers. We are incredibly proud of how our employees have made the workplace adjustments needed to contribute to our mission and we are so thankful for their dedication. Turning to our Q2 performance, our results reflect sequential improvement from the first quarter of this year, including revenue growth, gross margin improvement, as well as improvements to operating margins and EBITDA. As compared to the same quarter a year ago, our revenues of $11.1 million reflect increases in RF Component revenues, increased software revenue, and better than expected performance and our newly acquired Holzworth business, which offset the expected declines in hardware parts sales. They are also beginning to reflect the benefits of our revised go-to-market strategy, where we are leveraging a combined sales approach to pursue improved cross selling opportunities, as well as greater resource allocations to our advancing 5G product portfolio. Additionally, as we highlighted in the press release, we are excited about signing two new software contracts in the second quarter, one of which is our first 5G customers on the NXP platform. Together, they represent approximately $1 million of software contract value before any incremental service engagements or future royalties should their end applications and deployments reach scale over the next several years. Our second quarter results reflect revenue recognition of approximately 600,000 of the contract value of these two software contracts, and the remainder is expected to be recognized over the next few quarters. One of these contracts included our 4G LTE software for a rail application, and the second represents a 5G application on the NXP platform for 5G small cell deployments. We are very happy with a growing funnel of potential customers focused on 5G and leveraging our NXP collaboration. And we expect we will sign additional software contracts with the other new customers before the year is out. Our gross margins also improved in the second quarter, and they improved sequentially as well as for the three months and six months ended June 30, 2020, as compared to the same period of last year. This improvement to over 50% gross margin was driven by the inclusion of higher software revenue, the inclusion of higher margin Holzworth revenues, and cost reductions in our core operations, which decrease cost of sales. Combined with lower operating expenses, we were able to show sequentially improved operating margins and EBITDA and Mike will go through our numbers in greater detail in a moment. With regard to our Q2 order flow, we realize bookings of $12.4 million in the quarter, resulting in a second consecutive quarter of increased bookings and end of quarter backlog as we head into the second half of the year. Our backlog at June 30 of $6.2 million is higher by 2.4 million or 63%, compared to December 31. The bookings included early success integrating the Holzworth business, as well as our two new software customers. With regard to our total addressable market expectations for the Radio, Baseband and Software product, our Q2 success with two new customers reinforces our view this is a large and growing market. We estimate the size of this market is $750 million and growing between 12% and 18% compounded annual growth rate. Our strengths continue to extend to specialized deployments for private network needs, that we are starting to see greater market opportunity potentially emerge as we continue to invest in our R&D roadmap. We are an important technology building block for current and emerging 4G and 5G applications. More exacting estimates of the size of the opportunity and growth will take more time to develop and define, but the markets we're focused on currently include 4G and 5G applications in transportation, the military and government, satellite communications in certain small cell applications. We also continue to see that COVID-19 continues to create uncertainty. And we have seen project delays and cancellations caused by inaccessible project sites, canceled sport seasons and conventions, and project funding changes. Additionally, shifts to virtual trade shows have also challenged new opportunity identification. We have also realized a decrease in our distributor orders enter stocking levels, as they have taken a more conservative view of their balance sheets. With that said, we continue to see our RF Component funnels replenish where we typically have less long-term visibility. And we continue to see growth in our test and measurement funnel, as well as growth in the Radio, Baseband and Software funnels where there are longer cycles of evaluation and investments. We expect to see the realization of contract wins in the second half, based on funnel increases in the first half. With regard to our strategic measurements, new product introduction and our R&D efforts, we are pleased with our progress in the first half of the year. In the last six months, we announced seven new product releases or launches, which included two new software releases new ultra-wideband RF Components for network densification of mid-band spectrum, and two new power meter advancements to address WiFi 6 and flexible form factors. We also announced two customer project engagements including Raymond James Stadium and SoFi stadium. We announced our partnership collaboration with NXP, as well as two releases announcing a Frost & Sullivan Product Leadership Award, as well as an announcement showcasing our capabilities enabling 4G and 5G satellite communications. In June, we also announced the shift in our go-to-market strategy. And last week, we announced we added a highly qualified industry veteran from Xilinx to our executive team as our Chief Revenue Officer. And for the three months ending June 30, we have realized our improved gross margin target of over 50% driven primarily by the inclusion of higher margin products, which are in large part due to the result of our software R&D investments and our acquisitions. So netting it out, we believe the company's long-term strategic positioning has strengthened in the last six months. We are seeing traction and we are accomplishing promising milestones for revenue growth and improved profitability ahead. We still have a lot of work to do. But we remain confident in our strategic focus on long-term themes of growth, including network densification, 5G investment and satellite communication. This optimism is balanced by near-term concerns over the uncertain impact of COVID-19 on the rest of the year, including the difficulty in predicting the timing and close of the funnel of opportunities and the revenue recognition process. With that, I am going to turn the call over to Mike to walk us through the financials.

[Mike Kandell:]

Thank you, Tim. Good morning again, everyone. Before I begin, I wanted to highlight that effective June 30, 2020. We are reporting as one operating segment in our financial statements. This was the result of internal reorganizations that have occurred over the prior six months, as well as an internal analysis of how key operating decisions are made by our Chief Operating decision maker Tim Whalen. We will continue to provide revenue and gross profit by product group, as we believe these are key performance indicators for our investors. Our product groups are as follows

[Tim Whelan:]

Thank you, Mike. With regard to future outlook and financial expectations, while we are very pleased with the strategic goals we have accomplished in the first half of the year, there is still too much uncertainty to provide estimates of expectations for the year. The impact of COVID-19 on our funnel and backlog continues to be unexpected and sporadic. And the forward-looking information and project timing is very fluid, challenging reasonable levels of predictability. We are highly excited about our strategic direction and future. We've built the larger company to address the mission critical needs across the development, test and deployment lifecycle of wireless communication. We have invested and focused on three important themes of long-term growth and improved profitability. We are an essential business serving the critical needs of our customers and we are an important provider in the defense industrial base. Our employees are engaged and motivated, and the leadership team is energized, excited and empowered to drive success. As always, our employees were being in health will be a top priority. And their safety will continue to guide our decisions as we continue to navigate the challenges presented by the pandemic. Thank you and Kate, if you could please open the lines for questions.

[Operator:]

[Operator Instructions] Our first question today is coming from Michael Potter. Please announce your affiliation, then pose your question.

[Michael Potter:]

Michael Potter, Monarch Capital Group, congratulations, guys on a much improved quarter. Tim I just wanted to know if you can give us a little bit more color on the NXP agreement. I guess there was one NXP signing and then there was one outside of NXP for 4G.

[Tim Whelan:]

Yes correct.

[Michael Potter:]

And I know you guys spoke quickly about it, but $600,000 was recognized in the quarter was that just on the NXP side or was that the two contracts combined?

[Tim Whelan:]

That was primarily related to the 4G application Michael.

[Michael Potter:]

Okay. So nothing on the 5G NXP application?

[Tim Whelan:]

No, that'll be recognized as I mentioned over the next few quarters. The couple milestones of development and deliverables and so that will be delivered over time and recognized over the next few quarters depending on those milestone completion.

[Michael Potter:]

And what's the size of the NXP contract?

[Tim Whelan:]

Our NXP - the overall NXP relationship Michael or the contract we've signed.

[Michael Potter:]

The contract you signed.

[Tim Whelan:]

Yes, it would be the remaining $400,000.

[Michael Potter:]

Okay. In aggregate $1 million was signed?

[Tim Whelan:]

Correct.

[Michael Potter:]

Of which we recognized 600 which was for the 4G rail application, not having to do with NXP?

[Tim Whelan:]

Correct, that's correct.

[Michael Potter:]

Okay. And so the remaining 400,000 having to do with NXP will be based upon milestones you hit over the next couple of quarters?

[Tim Whelan:]

That's correct. And there's - few of those milestones are right at the edge of the end of quarters, which is - which makes it hard to say two or three or four.

[Michael Potter:]

Okay. And you said it was for small cell deployment, can you give us a better example of how the end customer is going to be looking to use our technology?

[Tim Whelan:]

They have not disclosed completely Michael, this is highly confidential and we've signed NDAs, but the small cell deployment is effectively more of a mass market deployment rather than a specialized application. Although the initial 5G mass market deployments are still being done in a very focused environment and so they'll deploy those to the specific applications that we're designing for them. And that requires higher level of frequency and bandwidth and power. And then once they get deployed to market they'll be tested extensively by carriers. And if their solution is ultimately what those carriers want it will be deployed in much greater numbers in the years 2023 and beyond.

[Michael Potter:]

So this is not - we're not developing this for a specific end customers NXP at this point. It sounds like this is for NXP to go out there and then market this technology?

[Tim Whelan:]

No, this is a customer that will be a mutual customer of NXP and ourselves. So we have licensed our software, which enables the NXP silicon to be deployed in that small cell environment.

[Michael Potter:]

Okay. And can we talk a little bit more about the pipeline in regards to CommAgility and how much of that pipeline is direct versus through NXP?

[Tim Whelan:]

I think right now about one quarter to one-third of the funnel of opportunity are those that have been originated from the NXP relationships. There is another one-third I would characterize as opportunities we have identified to bring to NXP approximately one-third of opportunities, our 4G applications and so independent of NXP.

[Michael Potter:]

Okay, got it. Well, we want to congratulations on the new hire of Alfred. I'm hoping he is on the call. Perhaps we can talk to some degree about the organizational changes that he is going to bring. I know he is obviously very new and fresh, but clearly there must be a strategy around of what we're looking from him to as far as leading the sales force and kind of repositioning our sales and marketing team?

[Tim Whelan:]

Sure. So he is not on the call today, Michael, he just joined us last week one day after exiting from Xilinx.

[Michael Potter:]

Okay.

[Tim Whelan:]

So he is away this week. I would expect we'll be able to speak with him in the future. I do think it's early stages, if he were on the call, I think would be a little early stage just one week into this to be declaring any shifts or changes. He is incredibly excited by what he has seen through the process of betting in recruitment. He is excited to dig in. We're excited to tap into his network of opportunities that could potentially continue to grow our funnel. He is incredibly adept at designing solutions, familiarity with the silicon solutions. There is a common network of names at customers and the technology providers that are known to us and him. So we're just incredibly excited that he has got the right expertise, the right energy, the right network, the right connections, and he'll help drive this forward. But I think we'll need to give him 30 days to accomplish this first 30-day mission. There are a number of tasks that will need to be done there. And then of course, there is 100-day plan. So we'll certainly be talking more about this going forward, Michael, I think it should maybe just a little bit early right now.

[Michael Potter:]

That's fine if he is not on a call. Is he relocating or was he living in the [indiscernible] area?

[Tim Whelan:]

He is a West Coast person and we do expect he'll relocate over a period of time.

[Operator:]

Our next question today is coming from Robert Morrison. Please announce your affiliation, then pose your question.

[Robert Morrison:]

Robert Morrison, [Blinc Capital]. Congratulations on a good quarter guys. I think we have at least the beginnings of a substantive turnaround occurring. The Holzworth acquisition looks as if it's off to a decent start. Can you give us some granularity on how revenue synergies are progressing there? And also at the same time, the legacy businesses seem to have struggled a little bit do you have anything going there to reignite growth in those businesses? Thank you.

[Tim Whelan:]

Sure. Thank you, Robert. So first part of the question was asking about Holzworth, you may recall that that was a business that had approximately $5 million of revenue in previous periods. You will note that from the numbers might call it out there, they're above that in terms of the first half, if you think about that, not that their businesses run rate or it's a - we'll have identical revenue every quarter. But in the first half of the year, they're above that threshold to get to above $5 million, which is of course where we set the targets. So right off the bat, they're meeting those expectations, but the order flow is well beyond our expectations and we believe that our presence has accelerated. So with regards to synergy, we have a bigger platform. We have more reps, and we have qualified vendor approval at certain firms that was more that they were not approved that and that's accelerated improved some of the flow of purchase orders. So we're just thrilled with how well they are doing everything that we expected, where our customers are pleased that we're bringing more technology solutions to them. Their customers are pleased that they're part of the bigger platform. The communications have been very positive, and we're moving forward. So all systems go there, we're really happy with that. With regard to the slowdown in some of the legacy brands, we're not concerned overly concerned about that, we were seeing a growing funnel that we're very confident in terms of how we grade that funnel. We think that will pick up in the second half and we do believe that there were a number of funnel opportunities, which slowed due to COVID-19 and shut down and closures primarily in the West and in the South. So we think we'll pick up and pick some of that backup in the second half.

[Robert Morrison:]

Okay, thank you. Could you turn to CommAgility and share with us what it's like to have a global semiconductor and DSP producer, as a joint venture partner and going to market with CommAgility versus doing it, I assume mostly on our own even when TI was producing the DSPs. This joint venture seems to be a step up in collaboration between you and the silicon provider. Can you just give us some granularity on the amount of resources and efforts they're putting into this? What it's like to have their contacts, their customer base, their sales force, helping us sell this product over the next two or three years?

[Tim Whelan:]

Sure. So first and I think you know this, Robert, but I'll just make it clear. This is not a joint venture. It is a collaboration agreement, not necessarily joint venture. But I understand, in the expression of communication, you're aware of that.

[Robert Morrison:]

Yes.

[Tim Whelan:]

So that's just one key point. The second key point is that yes, this is a much more robust collaboration agreement than what we've had with TI in the sense that the level of interest in the 5G applications is just huge. And so I don't have exact numbers for you as to how many salespeople, it's a multiple above, our sales teams going to market, and it goes beyond just the sales team. It's really a design any type of highly engineered solution with highly technical people on the front end. And so in each of the last few months, every week there are typically joint calls between where both NXP and ourselves are on the line talking to customers interested in finding out more about what this technology to bring the bear as they think about their end applications to their customers.

[Robert Morrison:]

By the way, just for our own purposes, what does CommAgility bring, I realize this is not an exclusive relationship, but what does the software do? What's its secret sauce that makes such a global powerhouse as NXP want to do business with a very small company from Parsippany?

[Tim Whelan:]

Sure as you think about the technology solution, there are typically seven stacks of software and on those stacks. They're categorized into three layers, a five layer, which typically referred to as layer one, medial layers, which are referred to as layer two and three, and then host layers. And that's based upon a standard architecture. We bring the five-layer to bear. And so, that distinguishes us from others. We have other layers of software. So we have other modules, but the five-layer is where we play the strongest. The silicon providers are most, most highly tied to the five-layer for performance. And then after that there's these protocol layers and application layers that others will then come in and specialize on. So the silicon providers typically most tied to the five-layer. And then there are other software providers that can bring applications depending on what the end application is. The other benefit we bring to it is the hardware expertise for the radio equipment. And this hardware expertise helps build the boards with the chips that are ready for that software integration. Therefore the partnering, the collaboration, the interoperability are critical and standards compliance can be can be key, but it's not always required.

[Robert Morrison:]

Okay, thank you. That's very helpful by the way.

[Tim Whelan:]

Great, thank you, Robert.

[Robert Morrison:]

And as you look down the road 2, 3, 4 years if this 5G opportunity does take off if you have a $750 million TAM which appears to be considerably larger than the 4G LTE TAM at any point in CommAgility’s history, and CommAgility peaked out I think between $16 million, $17 million in revenue? One would hope that our peak revenue year in the 5G private network build out would be multiples, a few are many multiples of $15 million or $16 million or $17 million, is that an insane guess?

[Tim Whelan:]

I would not call it insane guess. Our focus in order to get to that point is to make sure we're successful over each of the next three years. And if we can do that, then those successful installations and applications and partnerships should yield returns and further our success and the probability of getting to those types of numbers. Keep in mind there is a lot of variables to solve as you go to market. The top challenges to face in driving this technology includes frequency whether it's a license or unlicensed band power, which includes distance and cell size number of users. The uplink and downlink capacity the customization for the high velocity or the low latency cases all have to be solved. And so, while others are concentrating on this mass market, the enhanced mobile broadband, what we're looking to do is addressing these non-terrestrial and low latency applications. So again, much like the strategy on the rest of the company, we're finding a specialized niche that we can excel in and exceed in. And then success will build upon success. But your numbers aren't insane. But I'm focused on driving success each year over the next three years in order to get to those types of numbers.

[Operator:]

Our next question today is coming from Michael Kaufman. Please announce your affiliation, then pose your question.

[Michael Kaufman:]

Michael Kaufman, MK Investments. I think the team did a very good job coming through a very difficult time with COVID. Hopefully, this goes away and you could resume your growth. The question I have is your category radio, baseband, software was down 83% in revenue and $1.5 million in gross profit that really is a loss when you stand on cash? And Holzworth looks like it's doing well, but you may have a payout down the road which would further put pressure on cash. So the question is - what's the opportunity to get that radio, baseband, software revenue back to at least where it used to be, because that $1.5 million of gross margin would be sorely needed to equilibrium in terms of cash flow?

[Mike Kandell:]

Yes and Michael, it's Mike. Thanks for the question. Yes, so the decline was related to the lower demand for our hardware cards, which we had talked about in a disclosure back in February. We were expecting that and planning for it. And really what Tim has been talking about is we're looking at growth on the software license and services side of CommAgility, which is at a much higher margin than the hardware cards. So as we grow the software and services business we should see improved margins and improved EBITDA margins related to CommAgility which will help with the cash flow.

[Michael Kaufman:]

But do you ever see that COGS business starting to get back I mean, were they bleeding out inventories on the channel and they just want silent and this thing will start to come back again or is that going to be much lower levels than it used to be for a long time?

[Tim Whelan:]

Yes conversations with our large customer from the prior year who was driving the decline of the purchase of our hardware cards was resulting from a shift in technology from their 4G test system to a 5G test system, which they architected to be more software-based. And so, while we were collaborating with this customer, and we're aware of this, the projections of declines happened at a different slope over a period of many years. What they found is a fairly fast shift in the market in a position where they had more cards than what they could use. They are bleeding them off. We've seen those numbers each and every quarter. We do expect them to continue purchasing hardware cards from us potentially in the second half of the year, but they will be at levels much lower than previous periods. So we've maintained a good relationship with the customer, we do expect them to purchase cards. It'll be at a much lower level and we expect potentially orders in the second half of the year for delivery in the first half of 2021.

[Operator:]

[Operator Instructions] Our next question today is coming from Nick Kovich. Please announce your affiliation. Then pose your question.

[Nick Kovich:]

Nick Kovich, Kovich Capital Management. Tim and Mike I'm reading the press release and you have long-term goals in here of annual double-digit organic revenue growth and 50% gross margins and 15% adjusted EBITDA margins by 2024. First question is, what is the base year for the double-digit organic revenue growth because ex CommAgility there hasn't really been much revenue growth at WTT over the years. So I'm wondering what the base year is?

[Tim Whelan:]

Yes Nick so we've had these goals in place when we've refreshed. I think the best way to think about it is as we refreshed a strategy and spoke to our investors about it at our annual shareholder meeting on June 4 and we reiterated those comments. And so, I think the 2019 period is the way to think about it. Of course, our largest customer pulled back on those hardware cards, but we're still striving to drive these types of growth by 2024.

[Nick Kovich:]

As you look at 2024, and you have these three targets, what are the, say the five most important targets or issues that you have to hit to achieve these three metrics?

[Tim Whelan:]

So number one is the NXP partnership success, the continued collaboration there, number two would be the continued execution of software contracts on those. And then number three would be the extension beyond software contracts to get the customization services that that can come with those as those users try to apply to specialized solutions. So those I think are the top three I think the fourth is continue to drive growth through new product introductions into our test and measurement business and to leverage the Holzworth platform to drive growth there. And then the last is to drive growth in our components by continuing to focus on non-commoditized solutions, continuing to focus on non-telecom customers, and continuing to focus on those solutions that are required by the advancing developments of what the carrier 5G densification strategies are. And if we do those five things right, I think we've got a fair shot. We feel good about it, but there's a lot of work to do.

[Nick Kovich:]

Okay. If you hit those metrics, what's the reasonable range of earnings expectations for 2020 for the company might generate if you're capable of achieving these targets?

[Mike Kandell:]

I don't have that - the model in front of me, Nick. But I think in terms of the earnings I think we stated there in terms of the adjusted EBITDA margins, in terms of earnings translating into EBITDA.

[Nick Kovich:]

Okay. Are your bonuses tied, management's bonuses tied to achieving these three targets?

[Mike Kandell:]

Our bonuses are certainly tied to annual profitability metrics, number one. Number two, the equity performance awards the most recent awards are also directly tied to achieving these targets, yes.

[Nick Kovich:]

And I guess the last question Tim, you've been at the company now a little over four years, your mid 50s. What's the legacy that you want to leave at WTT?

[Tim Whelan:]

A great company that's positioned for continued growth. This is a company that was about two-thirds the size - on people when it was approximately $30 million when I took over. We're closer to a $50 million company today with two acquisitions that bring technology aligned to trends of growth going forward. So what I'd like to leave in the hands of those behind me in terms of our shareholders. Our Board of Directors and our employees, is a thriving company positioned for continued growth with a great management team and people who continue to drive this company forward with or without me.

[Operator:]

Our next question today is coming from Fernando Kanto. Please note your affiliation. And tell us your question.

[Unidentified Analyst:]

Hi this is Fernando Kanto, a Private Investor. Tim and Mike congratulations on a much better quarter especially achieving north of 50% on the gross margin?

[Tim Whelan:]

Great, thank you Fernando.

[Unidentified Analyst:]

How strong do you feel about breaking even or maybe coming up with a profit on the third quarter, the September quarter?

[Mike Kandell:]

Yes, I think Fernando that's going rely heavily on the growth and CommAgility software revenue. With the margins that the software and services revenue brings I think that that we could be profitable before taxes. The tax provision this year may be a little tricky, because if the PPP loan is forgiven, those expenses are not deductible, which means we're going to have to record a tax provision on those expenses. Now that won't translate into any cash taxes because of our lower NOLs. We have such a high NOL position. We won't be paying any tax, any cash taxes this year. But that fact could drive us into a higher tax provision than what we would expect.

[Unidentified Analyst:]

Then your PPP would be tax exempt right?

[Mike Kandell:]

The expenses are not deductible, so that would impact our tax accounting.

[Unidentified Analyst:]

But the $2 million is tax exempt?

[Mike Kandell:]

Yes, correct.

[Unidentified Analyst:]

It’s forgiven, okay. All right congratulations again and keep up the good work.

[Operator:]

We do have a follow up question from Michael Potter. Mr. Potter, your line is live.

[Michael Potter:]

Just to I guess go back to Michael Kaufman’s question on CommAgility and a large customer from last year in the year before. Have they made the shift already from 4G to 5G? Are they are back in the market with their 5G solution?

[Tim Whelan:]

Their 5G solution is in the market Michael from what we understand. They've had a spotty record of accurately predicting the market acceptance. And what they described to me was that as they brought their 5G technology to market and price it. And if you think about an index of a price of 100 for the 4G solution, and they brought out a product that they said, here's the new 5G product, and the index of pricing on that new one is 100. Their customer base and why are you forcing me to upgrade, I just invested a significant sum of money for the 5G layer of testing. I don't want to have to buy an entirely new test device and that was a challenge that they encountered bringing it to market. And that was the challenge that created quite a bit of confusion within their demand curve which translated into their projections to us. They've gone through a number of product shifts in terms of how they try and address their customer demands. And as they're working through it, they are burning off cards and we expect them, again to place an order with us in the second half of this year for delivery in the first half of next year. And then we should see, although at smaller levels, a more predictable routine level of buying because they are still - they still expect 4G systems, not only to be sold, but they also expect the 4G systems into their installed base to have to be serviced. And so that should deliver some continued revenue stream. It's very, very difficult to predict that right now, but by the year and we should have some visibility in some eyes on what they've ordered from us, and how to think about 2021.

[Michael Potter:]

Okay, so their shift, if you will it's not really a 2020 event for us. It's really going into 2021?

[Tim Whelan:]

No, their shift I think is taking place now, which is why we haven't received any orders at all over the course of the year. We delivered in Q1 the remaining backlog they were committed to take from purchase orders coming out of 2019. So I do think that their shift I would define as the fourth quarter of 2019 through this year. And then at that point, we should be back towards some level of purchases, but for a product, which is now not the leading product, but a second tier product, and as well as for the maintenance.

[Michael Potter:]

Okay, okay. And then they're just an end customer as compared to NXP, which is a collaborator, if you will?

[Tim Whelan:]

Correct.

[Michael Potter:]

In regard to the technology and going to market, but NXP there's no exclusivity with NXP. I mean, I'm assuming we are talking to other joint venture collaboration partners about going to market with or combining technologies in order to go to market?

[Tim Whelan:]

So yes, so we have a collaboration agreement in place with TI that's not expired that's still in place. We also have a collaboration agreement in place with Xilinx. So we do have other partners. They are not exclusive to us. They have two other providers, but they have communicated to us, but they think that we are doing the best. And we're the most distinguished for some of the specialized opportunities in front of them. And I think we also have an advantage in terms of being a U.S. based company for U.S. based opportunity. So I think those are very positive signs of the - how fruitful this relationship can be.

[Michael Potter:]

Do you anticipate that we will generate some sort of activity or some sort of revenue from Xilinx for TI on a 5G application this year?

[Tim Whelan:]

Yes, I don't think no, I don't It'll be revenue from the two of them. But if an end customer requires, what their solutions, what their design and solutions bring that that could then result in revenue to us specifically if it’s a 4G solution. I think most of the activity we've seen for 5G is NXP based and I think the markets have seen NXP advanced significantly as they think about 5G roadmaps. So the revenue wouldn't come from Xilinx or TI if there is a collaboration with them on a customer, it would come from that ultimate customer that would drive sales to both of those two providers as well as us.

[Michael Potter:]

So they're not out there. It doesn't sound like they're out there aggressively pursuing the market at this point. They have a solution and if a customer comes in over the [indiscernible] you know they have something to sell them?

[Tim Whelan:]

Yes, I would say that the aggressive sales go-to-market activities centered mostly on NXP?

[Michael Potter:]

Okay. Just go back to test and measurement. The Holzworth acquisition seems like it's working out very well. Obviously, there is concern with our legacy business. I know you touched upon it that you anticipate it's a timing issue enough to turn around in the second half of the year. Have we integrated our sales force at this point? Have we - is there a go-to-market strategy where we are now offering an entire I guess, test and measurement solution?

[Tim Whelan:]

Yes, so the salesforce is integrated. Our sales teams are promoting the Holzworth products. We've been through a number of rounds of training and webinars through our channels and our manufacturer rep partners. They are also getting excited and they're also positioning Holzworth at third customer basis. So we are fully integrated at this point. We've got work to do on the websites that will take place I believe next quarter, that will start to roll out. And that will be the final element. But otherwise the sales teams have come together, sales teams have been cross trained, the rest have been cross trained, and we continue to put out demand generation activities and marketing that covers the full suite of products.

[Michael Potter:]

Why do you think Holzworth has been so strong for the first half of the year, but our legacy business has had difficulty in this market?

[Tim Whelan:]

That's hard to say, Michael, I think that they were positioned with a few larger opportunities that our combination helped them get over the line would be one point of reflection on your question. A second point of reflection on your question is that they are they're focused on some lab, some 80 upgrades at semiconductors, those large semiconductors are located all over the world. So they're less impacted by a regional lab, which is where we saw Boonton get impacted by. And I think they're also aligned to quantum computing. And some other trends of focus in the industry that are Boonton products are less or not at all line too. So I've pointed those three things as being differentiators. And for the size of the difference, Michael, you know, two or three deals swing each of those two brands into a surge or a decline. So, we're also not talking about a massive shift. We're talking about deals that can be identified on one hand that if they all come over the line, it creates a search for one brand. And if a handful of deals get slowed, it creates with the client for the other.

[Operator:]

Our next question today is coming from Robert Morrison. Your line is live.

[Robert Morrison:]

Thanks for the follow up opportunity. Can you talk about the cash flow and the ability to pay down debt from the Holzworth deal over the next year or so? I noticed the accounts receivable would be boosted, I assume price some of theirs. And I'm just trying to find out if you think there is an ability to pay down debt from that transaction, because I think you've stated that as a goal for this year and what type of debt pay down, you might be able to achieve from both operating cash flow and working down the non-cash current assets? Thank you.

[Tim Whelan:]

Yes, Robert so part of our debt agreement, as we do have an excess cash flow calculation at the end of each calendar year. So the pay - ultimate pay down will be determined based upon that excess cash flow calculation. AR has increased primarily due to Holzworth also just some timing. We had a lot of shipments at the very end of the quarter. I think for the year, our cash flow again is going to be dependent on our performance in the second half of the year, specifically at CommAgility. We also have some CapEx needs in the second half. We really pulled back in CapEx in the first half of the year, but with some of the 5G development, we're going to have to spend some additional dollars on CapEx, which should you know, drive down some of the cash flow in the second half of the year.

[Robert Morrison:]

R&D is still reasonably elevated as a line item on expenses. Is that something that is going to continue? I assume some of that was CommAgility push, as some more of it must have been obviously in the Holzworth transaction, but is there a low sort of normalized ratio of R&D to revenue that the company wants to achieve when its steady state of 50% gross margins and 15% EBITDA margins, and where are we compared to that today?

[Tim Whelan:]

So we have made cost reductions in R&D. We've been very selective in what we've taken out of R&D, and that's helped offset some third party spend that we've had to do for specifically our 5G product developments. So you'll see that we had an increase year-over-year in third party spend for the quarter of about 200,000 and for the year up about 300,000. You know, because of the specifically the 5G product development, and I would expect that trend to continue in the second half of the year. I think in terms and we haven't set out a specific target or any guidance. But if you look back to '18 and '17, I think we would want to be back at that percentage of revenue going forward, but in the short-term, we're going to continue to have some third party spend specifically as it relates to 5G roadmap.

[Robert Morrison:]

Okay. And on R&D productivity, I think I asked this question a couple of years ago and unfortunately the boss Tim said he was pleased with it. I don't see a lot of pleasure in the new product introduction results for the past couple of years. So I'm going to ask the question again, were we going to get any product - a non-software related productivity out of the R&D budget that we seem to have not enjoyed from the boosts that happened in '17 and '18.

[Tim Whelan:]

Keep in mind, Robert that the R&D is refreshing some older legacy product lines, and so the productivity, I translate that into the revenue growth opportunity, and we measure each of the new products success in the market. So yes, I would expect that our R&D will result in revenue growth, and we're going to try and drive that revenue growth greater than that of the declines of those legacy products. But that's why the R&D will continue to be within that 10% to 15% of revenue range, and probably getting closer to or maintaining at that 15% as we just evaluate our entire suite of products, and ensure that they're positioned for the trends of growth that we are aligned to.

[Robert Morrison:]

I just haven't seen a lot of success with new product introductions Tim in the last few years. So that's why I'm questioning the productivity of the R&D.

[Tim Whelan:]

Yes.

[Robert Morrison:]

I'm not referring to refresh the pulling that new knob on a test of measurement device?

[Tim Whelan:]

Yes, our SMART Coupler has been successful. Our DCC and MCC products have been successful. We've seen some good traction with our GPS product. Our noise, smart noise sources have been successful. We're very excited on getting very good feedback on the new PMX, which is a digital display of a bench top device that hangs off of the USB power measurement devices. We are thrilled with the software releases. So the tractions there, and it's offsetting the declines in those legacy products. So that'll be the engine of growth as we think about the next three years. And so I think that's going to be the proof to be able to hit those growth targets that we set for ourselves.

[Operator:]

Thank you. We have no further questions in queue at this time.

[Tim Whelan:]

Very good. Thank you again, everyone for joining us. Stay safe and healthy and look forward to speaking you again in the near 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.