Wireless Telecom Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 13 Mar 2018

[Operator:]

Good afternoon, ladies and gentlemen. And welcome to the Wireless Telecom Group 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, Mike Kandell. Sir, the floor is yours.

[Mike Kandell:]

Thank you, Catherine. Good afternoon, everyone. And thank you for joining us for our fourth quarter and year-end 2017 earnings call. Before we begin, I would like to remind everyone on the call that our remarks today could include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact they do not relate strictly to historical or current facts. The Company's forward-looking statements are based on management's current expectations and assumptions regarding the Company's business and performance, the economy and other future conditions and forecast of future events, circumstances and results. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. Important factors that could cause the Company's actual results to differ materially from those in its forward-looking statements include those risk factors set forth in the Company's annual report on Form 10-K filed with the SEC. The Company does not undertake any obligation to update or revise any forward-looking information to reflect changes and assumptions, the occurrence of unanticipated events or otherwise. Also, we want to point out that in addition to GAAP information, we will provide information relating to certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of non-GAAP measures to GAAP measures are set forth in a reconciliation table in our press release issued earlier 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 include 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 earnings calls, we have given you an update on the company, our segments and our go to market strategy and we’ll continue to do that today. We’ll start with some comments on the financial results and then I will update you on the direction of the business and some expectations and direction for 2018. In the quarter ending December 31, 2017, we reported $12 million of revenue, which is our fourth consecutive quarter of the year-over-year quarterly growth and our best fourth quarter in over three years. We also reported GAAP income before taxes of $193,000 and a GAAP net loss of $2.5 million, which is inclusive of $2.7 million fourth quarter tax provision, which reflects the impact of the new tax law. We also reported non-GAAP EBITDA for the three months ending December 31, 2017 of $830,000, which represents four consecutive quarters of non-GAAP adjusted EBITDA profitability. For the year ended December 31, 2017, our consolidated revenues were $46.1 million, reflecting growth of $14.8 million or 47% over 2016 revenues. $9.6 million of this 2017 revenue growth is attributable to our acquisition of CommAgility and the remaining $5.2 million of 2017 revenue growth represents nearly 16% organic growth across our existing Network Solutions and Test and Measurement segments, both of which contributed. And Mike will give you more details on the segments in a minute. Our non-GAAP adjusted EBITDA for the year ended December 31, 2017 was $3.6 million, which compares to an approximately breakeven non-GAAP adjusted EBITDA for year ended 2016. The improved non-GAAP adjusted EBITDA is a result of the increasing revenues coupled with our efforts to drive operating leverage and a focus on driving profitability and operating cash flow. GAAP net losses for the year-ended December 31, 2017 were $4.5 million, which included $1.2 million of net tax expense, which was inclusive of $2.5 million of deferred tax expenses from revaluing deferred tax assets to reflect the new U.S. corporate tax rate. As we grow and scale in size on the top-line, we expect our profitability profile to improve with greater operational leverage, which will also drive improve non-GAAP adjusted EBITDA margins and higher operating capital generation. With regard to our booking accomplishments during the fourth quarter. We realized 11.9 million in bookings or new customer orders and we are exiting the year with a backlog of orders of $9.9 million, which includes approximately $4 million of backlog attributable to Embedded Solutions. As a reminder, we define bookings as customer’s contractual commitments and we define backlog as the accumulation of yet to be completed and undelivered order commitments at the end of the quarter, which have not been recognized as revenue yet. Our backlog is typically delivered within the following 12 months with a majority of that delivery over one to two quarters. We are very pleased with our December 31, 2017 backlog of $9.9 million, which includes higher backlog in Network Solution and Test and Measurement along with the inclusion of Embedded Solutions. The December 31, 2017 backlog is $5.9 million higher entering 2018 as compared to the $4 million of backlog entering 2017. And reflecting on our improved revenues order flow and backlog, we attribute this success to our product portfolio investments, improvements to channel and strategic account management, as well as generally improved spend environment with our telecom, defense and government customer segments. Our top-line growth accomplishments were also driven by our investments in R&D and our product roadmaps combined with our efforts to energize our sales channels and improve our customer facing disciplines across all of our segments, which collectively resulted in strong quarterly sequential and year-over-year improvements to revenue growth and profitability. Over the course of the fourth quarter, we continue to make progress advancing our vision for enabling wireless feature and advancing our mission of enabling the development, testing and deployment of wireless communication. Our Network Solution segment, which is involved in the design and manufacturing of Radio Frequency Conditioning Solutions, has been successfully aligning our product set to address new spectrum requirements, multi-carrier deployments, small-cell build outs and carrier densification initiatives. This leadership and quality, and solution customization is evident in our announced 2017 deployments to U.S. Bank Stadium and Copenhagen Royal Arena. In 2017, the Network Solution segment has also successfully launched the family of active RF solutions including digital GPS signal repeaters and splitters, which address new more demanding requirements for network timing required by LTE Advanced and 5G networks. Our Test and Measurement segment continues to expand its 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. We’re also very proud of the recognition by Frost and Sullivan for our product leadership in this segment. And in our Embedded Solutions segment, the CommAgility team has won a number of LTE software and software customization projects for private network applications and digital signal processing embedded technology, including our announced project with Lockheed Martin. The Embedded Solutions’ product leadership also includes the announced selection of our technology in small-cell development initiatives and 5G research projects. As we look forward and into 2018, we expect to continue to execute on strategic growth plans, which were focused on organic growth opportunity, driven by executing on new products, capturing expected industry spend increases and driving market share expansion. We will also consider acquisition opportunity where it makes sense with targets aligned to our existing segments and align for core expertise in developing, testing and deploying highly customized high-performance wireless communication solutions. In summary, we have accomplished a number of important objectives over the last 12 months and our financial results reflect the improvements and changes we have made to the business. Together with the CommAgility acquisition, we are strategically positioning the company and our product solution set towards longer-term growth trends and large market opportunities. We have more work to do but we are encouraged we are better positioned now in early 2018 than we were one year ago today to capture this growth. 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. As a reminder, our fourth quarter 2017 results include CommAgility, which will affect all of the year-over-year comparisons. In our press release and in our 10-K, we have broken out this impact and I will highlight some of that here as well. Q4 2017 results reflect the following; consolidated revenues of 12 million, representing growth of $3 million or 34% from a year ago; consolidated gross profit of 45.5%; a consolidated net loss of $2.5 million, which includes a tax provision of $2.7 million, which reflects the impact of new Tax Cuts and Jobs Act; and non-GAAP adjusted EBITDA of approximately $830,000 compared to a non-GAAP adjusted EBITDA loss of $278,000 in the year ago period. These results were slightly above the high-end of the range of expectations announced in our last earnings call. Our full year 2017 financial results include consolidated gross profit of 41.8% compared to 42% in 2016; cash flow from operations of $1.4 million compared to $624,000 in 2016; a net loss of $4.5 million, which includes $1.2 million tax provision, reflecting the impact of the new Tax Cuts and Jobs Act compared to a net loss of $1.8 million in 2016; and non-GAAP adjusted EBITDA of $3.6 million versus $78,000 in 2016. On a segment level, for the full year ending December 31, 2017, we realized a Network Solutions revenue increased of $2.8 million or 14.1%; a Test and Measurement revenue increased of $2.3 million or 20.2%; and Embedded Solutions, our newest segment, contributing $9.6 million of revenue since the acquisition of CommAgility on February 17, 2017. On a regional basis, the Americas, which we define as Canada, North America and South America, continues to account for the majority of our revenue. For the full year 2017, Americas’ revenue represented 72% of our revenue or $33.4 million, which compares to 77% in the 2016 or $24.2 million. On a regional basis, we were pleased that revenues increased across all regions in the year. We see our businesses and channels performing well and we are focused on continue to drive more growth from the regions outside of Americas in the future. Our bookings were strong over the course of the year. We recorded approximately $52 million of new customer orders, which represents 1.13 book-to-bill ratio and results in an ending backlog of $9.9 million or nearly $6 million higher than the beginning of 2017. The higher backlog gives us a good start to 2018. Our consolidated gross profit in Q4 2017 was $5.5 million, or 45.5% of revenue, an increase from last year’s Q4 gross profit of 36.4%. The increased margin was driven by a few factors, which include at the higher sales volume in both Network Solutions and Test and Measurement, the inclusion of the Embedded Solutions segment in the fourth quarter of 2017 and lower inventory obsolescence reserves in the fourth quarter of 2017 as compared to the year ago period. By segment, we realized improvements in both the Network Solutions and Test and Measurement segments due to factors mentioned previously. Network Solutions gross profit was 44.4% in the quarter compared to 32.9% in the same period a year ago and Test and Measurement gross profit was 48.7% compared to 40.9% in the same period a year ago. In our Embedded Solutions segment, gross profit was 44.1% in Q4 2017 as compared to 43.3% in Q3 2017. Embedded Solutions gross profit is impacted primarily by the mix of software and hardware revenue. Our operating expenses were $5.2 million in Q4 2017 compared to $4.8 million in the same period a year ago. Operating expenses for the year ended December 31, 2017 were $22.2 million as compared to $15.7 million in the same period a year ago. Consolidated operating expenses increased by $6.5 million year-over-year due to the following factors. We added $4.1 million of operating expenses related to our new Embedded Solutions segment, which includes $900,000 of amortization expense related to purchase intangibles. We incurred $900,000 of restructuring costs, primarily related to severance charges for executive departures. Commission’s expense increased $700,000 due to higher revenues year-over-year; sales, marketing and G&A expenses increased by $1 million, primarily from investments in our strategic account management and channels; and M&A and integration expenses increased $600,000 due to CommAgility acquisition. These higher expenses were offset by a decrease in research and development expense of $400,000 and the inclusion of the $300,000 gain on the change in the contingent consideration liability in Q4 related to the CommAgility earn out. Our GAAP net loss for the fourth quarter was $2.5 million as compared to a net loss of $1.2 million for the year ago period. Our net loss in this year's fourth quarter included a tax provision of $2.7 million, which reflected the impact of the new Tax Cuts and Jobs Act enacted in December 2017, the effects of which included a reduction in the U.S. corporate tax rate to 21% and resulted in a reduction in our U.S. net deferred tax assets. Our non-GAAP adjusted EBITDA for the fourth quarter was $830,000 compared to a non-GAAP adjusted EBITDA loss of $278,000 in the same period a year ago. For the full year ended December 31, 2017, our consolidated non-GAAP adjusted EBITDA is $3.6 million compared to $78,000 for the full year ended December 31, 2016. This improvement to non-GAAP adjusted EBITDA was driven by profitable revenue growth in our Network Solutions and Test and Measurement segments and the inclusion of the Embedded Solutions segment. With respect to the CommAgility acquisition, the purchase price provided for several incremental earn-out payments, as well as reductions of the equity component of the purchase price for the purpose of providing an alignment of interest between the company and shareholders and the former owners of CommAgility. As a result of these provisions, there will be no earn out payments in 2018 for 2017 performance and approximately 2.1 million shares will be forfeited in the first quarter of 2018 in accordance with the equity call back provisions of the purchase agreement. 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 gross profit and non-GAAP adjusted EBITDA. With regard to cash flow and liquidity, we are also very pleased with the positive cash flow from operations of $1.4 million for the year ended December 31, 2017, an improvement from $624,000 in the same period a year ago. We reduced our bank debt outstanding in the quarter and continue to have additional borrowing capacity under our asset based revolver. Furthermore, we have zero net debt as of December 31, 2017. As a reminder, our credit facility provides for a term loan, which has a principal balance outstanding of 646,000 as of December 31 2017 and an asset based revolving loan up to a maximum of $9 million subject to borrowing base availability. We remain confident in our expectations for generating operating cash flow in 2018. We have manageable CapEx needs, which we consider to be 50% driven by maintenance needs and 50% driven by investment. We also have a low cash tax burden due to federal and state NOLs in the U.S. and an R&D tax deduction in the UK. And lastly, we have modest principal and interest payments. At this time, I’d like to turn it back over to Tim for some closing remarks.

[Tim Whelan:]

Thank you, Mike. So overall, we are very pleased with our accomplishments in 2017. As a recap, we’ve upgraded our executive team; we completed and successfully integrated the CommAgility acquisition; we refreshed product offerings; we’ve re-sharpened our go to market strategy; and we invested in our sales channels for expected future growth trends. Collectively, this resulted in 47% revenue growth, which include 16% organic revenue growth. We generated $1.6 million of cash flow from operations and our balance sheet reflects zero net debt. Looking into our first quarter of 2018, we expect Q1 revenues in the range of $13 million to $13.5 million; we expect gross margins of approximately 46%; and we expect Non-GAAP operating expenses to be between $5.2 million and $5.4 million. While we are not prepared to provide full year guidance for 2018, we have some thematic expectations and remain positive on growth expectations, driven by the following

[Operator:]

Ladies and gentlemen, the floor is now open for questions [Operator Instructions]. Your first question is coming from Mike Crawford. Sir your line is live.

[Mike Crawford:]

Mike Crawford from B. Riley FBR, and thanks for providing that Q1 guidance. The question is regarding split between DoD and carrier/commercial business, maybe given -- if you could give a breakout in terms of your overall backlog, how much is military today and how that might translate to what percent of the overall revenue in 2018 you think would be from the military that’d be quite helpful?

[Tim Whelan:]

We don’t have an exact break-up Mike, but I’ll try to answer the question here. The Network Solutions segment is primarily oriented towards the carrier spend while the Test and Measurement, while not entirely, I would estimate approximately three quarters of that is for DoD and military government.

[Mike Crawford:]

And the government we know is in yet another continuing resolution another couple of weeks left to run. Is the outcome of that does that affect -- how does that affect Wireless Telecom Group whether we’re going to have a real budget for government fiscal ‘18 or not?

[Tim Whelan:]

It’s a little bit more difficult for us to say with over $500 billion base and $300 billion expected increase on a business of our size doing in the low teens in revenue, it’s hard to understand in fact trickle down impact of that. We appreciate the tone and the pacing of our bookings. We’re exiting with higher backlogs and we’re excited about 2018. But I can’t give you a more quantified analysis of how -- what’s happening at that level will actually trickle down to the order flow expectations that we have.

[Mike Crawford:]

My question was more if there was any delays, because of the CR that would be accrued up once there was actual budget in place, but it sounds like that’s not the case.

[Tim Whelan:]

Yes, we have not seen delays in the expectations of Q1 order flow.

[Mike Crawford:]

And then last question relates to DAS build out. Are you seeing any change in pace of that opportunity for WTT?

[Tim Whelan:]

We’re still seeing and building wireless spend, it’s not always DAS architecture. In some cases it is. We are seeing C-RAND higher level C-RAND D-RAND deployments. We are seeing a move away from active DAS deployments and we are seeing a move towards increased spend on small cell requirements. Those are the trends right now that I would say are contained within the order flow and order flow expectations.

[Operator:]

Your next question is coming from Bob Mueller. Sir, your line is live.

[Unidentified Analyst:]

[Rob Mueller], UBS. Mike and Tim a question on -- could you answer why the Test and Measurement fell off in the fourth quarter almost $1 million, any reason for that?

[Tim Whelan:]

Yes, I think what we saw in ’16 was a delay in some order flow in the first half of the year Rob and then it caught up in the second half of the year whereas things evened out in ’17. I mean overall, test and measurement revenue was up 20% year-over-year. So it was a timing of order flow in 2016 that’s impacting the year-over-year quarter comparison.

[Unidentified Analyst:]

So you think that’s behind you obviously?

[Tim Whelan:]

Yes.

[Operator:]

Your next question is coming from Fernando Canto. Sir, your line is live.

[Unidentified Analyst:]

Tim and Mike, I want to congratulation on a good quarter and a very good year. And also Tim congratulations on being an award winning the biggest conference.

[Tim Whelan:]

Thank you, Fernando.

[Unidentified Analyst:]

How deep are you going be 5G going forward?

[Tim Whelan:]

We are happy that each of our segments are seeing the trends of 5G impact of business in terms of new requirements and new product specifications. So we’re happy that we’re aligned and indexed to that growth curve. We see that is that we’re at the front end. You’ll see everything that’s been discussed in a public level with the carrier going out markets by two markets. Those are early market rollouts. The technologist would argue that that’s more of a marketing announcement than the real engineering requirements, because 5G is yet to be fully defined. It’s expected to be fully defined somewhere in the 2020 period by the 3GTP standards body. So I think we’re in the very, very early innings for 5G but we’re quite pleased that we’re seeing a relevance to each of our three segments and opportunity as customers talk to us about what their futures needs are.

[Unidentified Analyst:]

And the other thing is how well is the Boonton analyzer is going with the Navy?

[Tim Whelan:]

We’re quite pleased with our order flow from the Navy, some of that publicly available. But we’re quite pleased with the order flow from the government and the Navy and we’ve announced some of that.

[Operator:]

Your next question is coming from Mark Robinson. Sir, your line is live.

[Mark Robinson:]

So just wondering if you could just tell me the call back? Is that already reflected in shares outstanding or will they decrease in the first quarter?

[Tim Whelan:]

The shares outstanding will decrease in the first quarter when we execute call back by about 2.1 million. What will not the impacted however is the EPS calculation on the face of the income statement, because the EPS calculation under GAAP excludes any contingently issuable shares.

[Operator:]

There are no further questions in queue.

[Tim Whelan:]

Well, thank you everyone for joining us. And have a good evening. Thank you.

[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. Thank you for your participation.