Wireless Telecom Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Wireless Telecom Group's Third Quarter 2017 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. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mike Kandell, Chief Financial Officer; and Tim Whelan, Chief Executive Officer. Sir, the floor is yours.

[Mike Kandell:]

Good afternoon, everyone, and thank you for joining us for our third quarter 2017 earnings call. Before we begin, I'd like to remind everyone on the call that our remarks today could include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact they do not relate strictly to historical or current facts. The company's forward-looking statements are based on management's current expectations and assumptions regarding the company's business and performance, the economy and other future conditions and forecast of future events, circumstances and results. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. Important factors that could cause the company's actual results to differ materially from those in its forward-looking statements include those risk factors set forth in the company's annual report on Form 10-K filed with the SEC. The company does not undertake any obligation to update or revise any forward-looking information to reflect changes and assumptions, the occurrence of unanticipated events or otherwise. Also we want to point out that in addition to GAAP information, we will provide information relating to certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of non-GAAP measures to GAAP measures are set forth in a reconciliation table in our press release issued earlier 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 afternoon everyone, and thank you for joining us. Our agenda will follow the same outline as in the past, with some prepared remarks followed by Mike’s review of the financials, and then we will open the line for some Q&A. In our previous two earnings calls, we have given you a detailed overview of the company, our segments and our go to market strategy. We will continue to update that in a more condensed version today, and I will continue to highlight changes and improvements. Over the course of the third quarter, we have made continued progress advancing our vision for enabling the wireless future, and we have refined our mission and objectives around enabling the development, testing and deployment of wireless communication. Through our product roadmaps and investments in R&D and customer solutions, we have continued to demonstrate our expertise and niche in solving some of the most demanding wireless challenges using specialization of design and agile innovation. We have refined and advanced our core values and how we approach our customer and market segments, which include customer responsiveness, which drives a flexible entrepreneurial problem-solving approach. Growth orientation, driving all of our employees towards top line revenue and profit growth, as well as personal growth and accountability; and peak performance, which underscores our passionate drive for innovative, technical excellence and the mission-critical high-quality performance in our solutions. Across all three segments, our Network Solutions segment, our Test and Measurement segment, and our Embedded Solutions segment we have aligned ourselves to this mission and these values. We have invested our efforts and our cash to execute on this vision, and we are managing the business with these values in mind, and it is beginning to pay off. In the third quarter ending September 30, 2017 we have reported $12.6 million of revenue, which is our sixth sequential quarter of growth and our best quarter in over three years. At a segment level, we have realized improved performance in all three of our segments versus the same quarter in 2016, with Network Solutions revenue increasing 16.7%, Test and Measurement revenue increasing 37.5%, and Embedded Solutions, our newest segment, representing the acquisition of CommAgility on February 17, 2017 contributing $2.2 million of revenue. Netting it out, we have realized revenue growth of $11.7 million, or 53% in the nine months ending September 30, 2017 compared to the same period last year. And this growth is driven by both organic and acquired revenue, broken down as follows. We realized $5.5 million or 25% organic growth in our existing segments, Network Solutions and Test and Measurement for the nine months ended September 30, compared to the same period last year. And we realized $6.2 million of revenue growth from our acquisition of CommAgility in the nine months ending September 30, 2017. Just as important as the revenue growth in the quarter, we have returned to profitability. And for the quarter ending September 30, 2017 we reported improving gross margins of 48.7%, net income of 653,000 and non-GAAP adjusted EBITDA of 1.5 million, our best performance in 12 quarters. Moving on to our booking accomplishments during the quarter, we realized some equally exciting progress resulting in an increased backlog of customer orders at September 30. As a reminder, we define bookings as customers placing contractual commitments, and we define backlog as the accumulation of incomplete or undelivered bookings, which have not been recognized as revenue yet. Our backlog is typically delivered over the following two quarters. Our consolidated bookings in the quarter ending September 30 were $15.4 million as compared to $11.1 million in the same period last year, a $4.3 million or 39% increase period to period. These bookings breakdown as follows. Our Network Solutions segment, which is involved in the design and manufacturing of radio frequency conditioning solutions, booked $5.9 million in Q3, and over $18 million for the nine months ended September 30, 2017 and is on track to exceed last year's bookings of $21 million for the entire year 2016. We attribute the higher order flow in 2017 to our investments in our customer forum, improvements to strategic account management and inside sales, launching new products, new distributors, as well as the generally improved spend environment with carriers and their densification efforts. Bookings in our Test and Measurement segment was $4.6 million in Q3, which is typically the highest quarter in the calendar year as it represents the government fiscal year end. The Test and Measurement segment operates under the Boonton and Noisecom trade names and is involved in providing noise generation devices for military and communications applications, as well as power meters and sensors for radar and other wireless communication. The third-quarter bookings includes the award from the FAA for nearly $1.6 million, which we discussed with you on our last call, where we noted the expected strength of bookings at that time. This FAA order was for our flagship complex RF signal power sensor, which underscores the inherent value of our specialty solutions, our brand history and the installed base of customers with repeat orders. Our Test and Measurement segment has booked $11.5 million for the nine months ending September 30, 2017, which compares to $12.2 million for the entire year 2016. So we are on track to exceed last year's results in this segment as well. In addition to the strong Boonton bookings, we're also very proud of the Boonton product award recognition, which was recently announced by Frost and Sullivan for our leadership in RF power meters. This recognition underscores our product specialization and expertise, and positions us for the growth opportunity to address new WiFi and LTE signals, as well as higher power ranges and frequencies. This release also underscores how our new USB form factors provide industry-leading capabilities increasing in popularity in the market. My expectations for our newly appointed CTO, Dan Monopoli, is to continue our success in this regard to invest and find ways to drive new products for market expansion and top line growth across all of our segments. Customer bookings in our Embedded Solutions third segment, which was formed with acquisition of CommAgility on February 17, 2017, and a business unit which is involved in providing LTE software and software customization for private network applications, and digital signal processing embedded technology. Those bookings were $4.9 million in Q3 reflecting a number of long-term successful pursuits of follow on software modification work, and hardware orders on previous period software sales. We remain extremely excited about our acquisition of CommAgility and the promise of growth in private LTE network deployment, specifically in commercial use. Our customer wins have also validated our expertise in avionic and satellite private LTE network deployments. The Embedded Solutions bookings in the quarters were exceptional, but I would describe this segment as lumpy in terms of order flow and delivery and while we would not expect every quarter to have a similar booking profile over the longer-term we expect to see steady growth in this segment. While we are excited about the future for Embedded Solutions, we remain conservative and cautious as it relates to the accounting for call-back and earnouts, and Mike will go through more of that in just a bit. Our integration process continues with the Embedded Solutions team, and our corporate integration activities are expected to be completed by year-end. Longer-term, we are focused on leveraging sales channels, leveraging technical and engineering expertise for product roadmap development and top line growth opportunities. In summary, we have accomplished a number of important objectives over the last 9 to 12 months, and our financial results are beginning to reflect the growth in revenue and profits. We have more work to do, but we are encouraged we are better positioned now to take advantage of growth opportunity in our end markets. Together with the other changes and improvements in the business, along with the CommAgility acquisition we are strategically positioning the company and our product solutions set towards longer-term growth trends and larger market opportunities. With that, I'm going to turn the call back over to Mike to walk us through the financials.

[Mike Kandell:]

Thank you, Tim. Good afternoon again everyone. Our third quarter 2017 results include CommAgility, also referred to as our Embedded Solutions segment, which will affect all of the quarter-to-quarter comparisons. In our press release and in our 10-Q, we have broken out this impact and I will highlight some of that here as well. We are very pleased with the results of the third quarter, most notably revenues of $12.6 million, representing growth from the prior year of $4.2 million or 50.5%, consolidated gross profit of 48.7%, income before taxes of $710,000 and net income of $653,000. These results were slightly above the high-end of the range of expectations announced in our last earnings call, and resulted in non-GAAP adjusted EBITDA of approximately 1.5 million. The revenue increase from the prior period included $2.2 million of revenue from our Embedded Solutions segment, organic growth in both our Network Solutions and Test and Measurement segments. Network Solutions revenue increased $920,000 or 16.7% from the prior year period, and Test and Measurement revenue increased $1.1 million or 37.5% from the prior year period. As Tim noted, this quarter was the highest revenue quarter for the company in over three years. The revenue increases reflect improved spending by our wireless carrier, government and military end customers, increased project wins, the launch of our customer portal and other product and customer facing improvements. On a regional basis, the Americas, which we define as Canada, North America and South America continue to account for the majority of our revenue. For the first nine months of 2017, Americas revenue represented 74% of our revenue, or $25.3 million, which compares to 77% in the same period in 2016. On a regional basis, we were pleased net revenues increased across all regions for both the three and nine months ending September 30, 2017. We see our businesses and channels performing well in every region, and we are focused on driving more growth from the regions outside of the Americas in the future. Our bookings were strong in Q3 with a book to bill ratio of 1.2 to 1. Overall we are encouraged by our bookings trajectory. We typically see some seasonality in our business, so we expect both bookings and revenues to be slightly down sequentially next quarter. Our consolidated gross profit in Q3 was $6.1 million, or 48.7% of revenue, an increase from last year's Q3 gross profit of 45.8%. The increased margin was driven by two factors; first, the higher sales volume in both Network Solutions and Test and Measurement segments created some operational leverage around our current manufacturing and operation spend, and second, we have an above-average mix of higher margin products that shipped in the quarter. With regard to our inventory, we continue to monitor our inventory levels. And we work aggressively to find the appropriate disposition for fully reserved inventory. By segment, we realized improvement in gross profit in both Network Solutions and Test and Measurement. Network Solutions gross profit was 46.4% in the quarter compared to 45.6% in the same period a year ago, and Test and Measurement was 55.5% compared to 46.2% in the same period a year ago. In our Embedded Solutions segment, gross profit was 43.3% in Q3 2017 as compared to 44.3% last quarter and 54% in that same period Q1 2017. Embedded Solutions gross profits are impacted primarily by the mix of software and hardware revenue. Our operating expenses were $5.3 million in Q3 compared to $3.5 million in the same period a year ago, and compared to $5.6 million in Q2. Operating expenses during 2017 as compared to prior periods reflect the inclusion of the CommAgility business, along with restructuring costs, amortization of purchased intangibles and integration costs. Our GAAP net income for the quarter was $653,000 as compared to $122,000 for the year ago period. Our non-GAAP adjusted EBITDA for the third quarter was $1.5 million compared to $652,000 in the same period a year ago. For the nine months ended September 30, our non-GAAP adjusted EBITDA was $2.8 million compared to $178,000 in the same period a year ago. This improvement to non-GAAP adjusted EBITDA was driven by profitable revenue growth in our Network and Test and Measurement segments and the inclusion of the Embedded Solutions segment. Turning to the CommAgility acquisition. The company completed the acquisition accounting and opening balance sheet valuation under US GAAP in the third quarter as disclosed in footnote three to our financial statements. As a result, we revised our initial estimates of intangible assets and the estimated contingent consideration related to potential earnout payments. We also increased our estimate of the contingent asset related to the potential call back of equity consideration granted to the sellers. We now estimate that the CommAgility 2017 EBITDA target as defined in the purchase agreement will not be met, which will result in the forfeiture of approximately 2.1 million shares in accordance with the equity call back provisions of the deal. The forfeiture of these shares will not take place until the final audited results of 2017 are finalized for CommAgility, but it is our expectation that this will happen. This exercise in purchase price adjustment was contemplated in our acquisition agreement with the sellers. The intent of the purchase structure of the CommAgility acquisition aligned the interest of shareholders and sellers through an adjustment mechanism to accommodate various possible outcomes. This included equity lockup provisions and the call back provisions based on minimum EBITDA performance of the business over the next two fiscal years. This structure also included an earnout provision to reward the sellers for improving performance. As Tim noted, we remain very excited about the growth opportunity in this segment and in our original investment thesis, which included enhancing our value proposition with higher value LTE software, and embedded digital signal processing solutions, aligning the company more closely to the expected long-term expansion and growth of 5G deployment in private networks, enhancing our scale and profitability, adding a deep layer of engineering expertise, and lastly, adding an immediate accretion to adjusted EBITDA. With regard to cash flow and liquidity, we are also very pleased with the positive cash flow from operations for the nine months ended September 30, 2017 of $450,000, which reflects an approximate $1.2 million improvement from the same period a year ago. The cash flow from operations for the nine months ended September 30 of 2017 includes two non-recurring items; approximately $1.3 million in acquisition expenses and an approximately $500,000 of restructuring payments. We reduced our bank debt outstanding in the quarter and continue to have additional borrowing capacity under our asset based revolver. Specifically we have $2 million of outstanding bank debt as of September 30, a reduction of $250,000 from the previous quarter and we had over $3 million of availability under our asset based revolver. As a reminder, our revolver availability is subject to a borrowing base calculation. Looking forward, we feel very good about our ability to maintain a healthy level of cash flow from operations. Additionally, we have manageable Capex needs, which we consider to be 50% driven by maintenance Capex and 50% driven by investment Capex. We also have a very low cash tax burden due to federal and state NOLs in the US and an R&D tax credit in the UK. At this time, I'd like to turn the call back over to Tim for some closing remarks.

[Tim Whelan:]

Thanks, Mike. So, overall, we are very pleased with our accomplishments and the growth generated over the first nine months. Looking into our fourth quarter of the year at this time, we expect Q4 revenues in the $11.5 million to $12 million range. We expect margins in Q4 between 46% and 47%, reflecting the expected lower Q4 volumes and margins mix on large projects, and we expect non-GAAP operating expenses to be between $4.8 million and $5 million. Q4 operating expenses are typically higher driven by commission and bonus accomplishments in the second half of the year. In summary, our business has a deep level of expertise in RF wireless communication. We have known and well recognized brand names with a 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. Together, Wireless Telecom Group and our three segments represent an investment in the continued growth and evolution of wireless communication in a company collectively centered and focused on a unified mission across three lifecycle areas enabling the development, testing and deployment of wireless communications technology. We expect to take advantage of the 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 segment addressability. Now thank you and Catherine, if you could please open the lines for questions.

[Operator:]

[Operator Instructions] Your first question is coming from Fernando Canto. Please announce your affiliation and pose your question. Your line is live.

[Fernando Canto:]

Yes. This is Fernando Canto, private investor. Just want to congratulate Timothy and Michael for the tremendous good quarter. Thank you very much, and let us hope fourth quarter and going forward we will get good surprises.

[Mike Kandell:]

Very good. Thank you Fernando.

[Operator:]

[Operator Instructions] You have no further questions in queue.

[Tim Whelan:]

Very good. Thank you everyone again for joining us. We're looking forward to the quarter and the year ahead, and we will certainly be in touch with more information going forward. Thank you. Have a good evening.

[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.