Q3 2019 Earnings Call

Welcome.

So third quarter 2019 findings from this conference call.

At this time.

This is a wonderful.

At the conclusion.

Remarks, we'll conduct a question answer session.

As a reminder, this conference is being recorded.

I'll now turn the call this is Kevin.

Companies see your phone.

Before we begin let me remind you that this call may contain forward looking statements.

These forward looking statements reflect pctels basket judgment.

They are subject to risks and uncertainties that could cause actual results to differ materially from these forward looking projections.

Risk factors that could cause pctels actual results to materially differ from its projections.

Discussed in the earnings press release, which was issued today.

And in our most recent annual report on Form 10-K , both of which are available on our website.

Additionally, our commentary will include reference to the following non-GAAP measures non-GAAP earnings per share and adjusted EBITDA.

We believe these non-GAAP measures facilitate compare ability of results over different periods.

Full reconciliation of these non-GAAP measures to our GAAP measures is included in our quarterly earnings press release that was issued earlier today.

With that it's now my pleasure the turn call over to David Neumann.

Thank you Kevin.

Welcome and thank you for joining us. This afternoon, we're pleased with another strong quarter, driven by sequential revenue and non-GAAP earnings per share improvement.

Third quarter revenue adjusted EBITDA and non-GAAP earnings per share all increased both sequentially and compared to last year.

This makes our fourth consecutive quarter of solid results driven by the demand for Fiveg scanning receivers in a tender project wins for Aiotv applications.

We issued a press release after market close announcing our results for the third quarter ended September 32019.

Our revenues were 23.6 million, we achieved 14 cents and non-GAAP earnings per share for the third quarter.

Gross margins of 45.1%.

8.6% over last year.

Our focus on higher margin antenna solutions for intelligent transportation and industrial Aiotv, coupled with steady demand for Fiveg scanning receivers contributed significantly to increase margins for the quarter.

As we mentioned in our last call we expect to maintain these margins through 2019.

Supported in part by customers end of your budget spend test and measurement tools.

Looking forward to 2020, we believe we can maintain comparable margins on these product lines.

We expect revenue for Fiveg scanning receivers to remain strong through 2020 within 10 or product revenue accelerating later in the year as weeks execute on the industrial Io T. initiatives.

The five largesse operators in the U.S. and for the top five operators in Canada.

Use pctels five you scanning receiver solutions.

Interestingly, we have begun selling or five you scanning receivers in South Korea, which historically has not you scanning receivers to deploy wireless networks.

We believe broad Fiveg network Rollouts are in in the early phases to date, approximately 40 countries have completed fiveg spectrum allocations or licensing.

And another 40 countries plants alky frequencies between now and the end of 2021.

We'll take many years to completely rollout five GE to support advanced applications are required increased capacity flow legacy to support a Thomas systems and massive connections for industrial Aiotv solutions.

So NAMIC spectrum sharing or DSS allows operators to use both fourg and Fiveg access technologies within the same spectrum allocations.

Give the operators flexibility to allocate existing spectrum is needed to fiveg for higher throughput applications, and then revert back to Fourg, we're not needed.

[noise] Pctels Ibflex, an h. reflects scanning receiver support the DSS feature you can simultaneously tests, both fourg LTE in fiveg signals across the same spectrum, which helps operators transition to fiveg without having to use additional dedicated spectrum.

[noise] ultimately fiveg will be in enabling technology to support advanced industrial Aiotv mission critical applications that require high throughput with low latency.

Our three targeted market segments enterprise wireless intelligent transportation and industrial <unk> T. C. Enterprise wireless segment currently generates a majority of our revenue which is derived from Fiveg scanners enterprise wide by in public safety.

Within public safety P. still has been able to leverage the strong relationships develop sports antenna solutions to promote itself scanning receivers in the same markets.

Our largest distributors for antenna solutions in public safety are now offering or scanning receiver solutions.

And we have served by more than 17 engineering service companies in the U.S.P.T. tells public safety tools.

[noise] the engineering service companies tests the buildings on behalf of the local jurisdictions to determine if first responders can communicate in buildings during emergencies.

Also we received a wife I embedded antenna design win in the quarter from a leading global access point manufacturer and we expect a wife I radio products, where I have two applications to do well.

Although enterprise wireless is more a strongest market segment, we anticipate that are intelligent transportation.

An industrial out T. market segments will grow faster over the next several years to address needs and fleet transit energy and industrial I would see applications.

We announced a new innovative antenna for both of these market segments that combines precision location support high performance LTV, Fiveg, Bluetooth and Wi Fi connectivity.

The coach to antennas designed to provide greater precision and reliability for advanced real positive train control systems and the supports a variety of fleet public safety and industrial I O T applications.

PC, telling tenants have become a critical component of systems.

Wireless networks become more complex to complement our industrial I would see at Turner portfolio.

He tells leveraging our RF and radio expertise to expand our product offering to include Ruggedized Aiotv radio solutions.

These solutions will increase our product portfolio for OEM customers to include Ruggedized access points device interface cards in attendance.

First of several Wi Fi radio product releases for OEM integration will be announced later this month.

We believe these solutions will begin to generate revenue in the second half of 2020.

With respect to China were encouraged to trade discussions are progressing and further tariff increases are on hold.

However, the uncertainty relations with China restrictions on trading with certain Chinese entities in the current tariffs present, some risks to our business.

Our plans to increase or manufacturing flexibility that have not changed we're making progress with the transition to contract manufacturing, which reduces our exposure in Tianjin.

Manufacturing trends this transition will continue through 2020.

Longer term.

I believe China. The U.S., we'll work through these issues in China will continue to be an important market in operating area for PCTEL.

Even with the challenges in China. We're pleased that this is our fourth consecutive quarter with improved sequential results.

We expect to finish the year strong doing what we do best delivering products to solve complex RF problems.

With that I'll now turn the call over to Kevin for a closer look or third quarter, Kevin. Thank you David.

I will address the financial results for the third quarter ended September 2019, and I will provide fourth quarter 2019 guidance.

Revenues were 23.6 million in the third quarter up 28% compared to the third quarter 2018.

Revenues were 1% higher sequentially because of higher antenna product revenues.

In both test and measurement revenues and antenna product revenues were higher compared to the third quarter last year.

With the strong sales of five de scanning receivers test and measurement revenues were 7.2 million in the third quarter 2019, 3.7 million higher than last year's third quarter.

Antenna product revenues were 16.5 million in the third quarter 2019, 11% higher compared to third quarter, 2018, and 3% higher sequentially.

Third quarter and tenant product revenues were higher per antennas for intelligent transportation and fleet applications offsetting declines for small cell antennas.

The third quarter 2019, gross profit margin for gap improved by 8.6% to 45.1% due to the favorable product mix.

Test and measurement products improved gross margin percentage for antennas.

The gross margin percentage for antenna products was 4.4% higher in the third quarter 2019 compared to the prior year, primarily due to a more profitable mix within the product line, but also the favorable impact of foreign currency changes and because of the cost reduction actions taken in 2018.

Adjusted EBITDA was 3.1 million for the third quarter 2019, compared to a loss of <unk> point 6 million in the third quarter 2018.

Adjusted EBITDA margin as a percentage of revenue was 13% in the third quarter 2019, compared to negative 3% <unk> third quarter 2018.

non-GAAP diluted earnings per share was 14 cents third quarter 2019, compared to negative six cents in the third quarter 2018.

non-GAAP earnings per share was higher compared to last year because of higher revenues and gross profit and higher gross profit margins.

Our GAAP results included.

Point 3 million for restructuring expense related to the company's transition plan for China manufacturing.

Cash and investments increased by 1.3 million to 38.1 million at the end of the third quarter 2019 as free cash flow was 2.1 million during the third quarter 2019.

We also recognized that our strong balance sheet allows us the opportunity to repurchase our shares.

Our board of directors approved the share repurchase program pursuant to which PCTEL may repurchase up to $7 million of shares of its common stock.

Repurchase program, maybe made from time to time in the open market and negotiated purchases effective immediately through the end of 2020.

This share repurchase program affords us the flexibility to be opportunistic and our capital allocation strategy and this program offers an opportunity for us to reiterate our confidence in the strength and future growth potential PCTEL to our shareholders.

With that.

Uh huh.

They rusty you need to back it up a bit.

Gotcha go ahead.

Yeah go in respect to now.

Now, let's turn to fourth quarter 2019 guidance.

We expect fourth quarter revenues will be between 23 and 24 million.

The GAAP gross profit gross margin percentage is projected to be in the range of 44% to 46% and then non-GAAP earnings per share is projected to be in the range of 11 to 12 cents.

Before we take questions I would like to turn the call over to David to make a few closing remarks.

Thank you all for joining us before take questions I'd like to share a few closing thoughts.

I'm pleased with our performance year to date in 2019 or company is well positioned to grow over the next several years.

Well the dominant position in providing tools for fiveg deployments for enterprise wireless business is strong.

Growing global market for us to address intelligent transportation and the number of industrial <unk> T opportunities continue to increase.

Customers have and will continue to come to PCTEL to solve their difficult RF challenges, which enables us to drive growth and increase shareholder value.

Kevin and I look forward to attending and meeting with investors at the southwest ideas Investor Conference in Dallas on November Twentyth.

Kevin and I are available to answer questions.

Operator.

Yeah.

[noise].

Ladies and gentlemen, if you have questions at this time. Please press Star then the number one.

If a question has been answered or we seem to be self from the Q breast.

Good question. Please press star one now.

Yeah. My first question on the line.

Jason Smith from Lake Street.

Thanks for taking my questions I just wanted to start with your comment on a new embedded why five when is that within existing customer or is that a new customer.

That is with an existing long term customer.

But as you know when most of 'em you know what most of our customers have multiple programs New program. So this was a a new access point that we bid on develop the product and then and then eventually won a won the bid.

Okay. That's helpful.

And can you just talk a little bit about your visibility into the first half of next year Erie, if you've seen visibility improve over the last three months here.

Ah with visibility the two products segments or are very different.

So when you look at the scanning receiver business and test and measurement in general that the the visibility is relatively short.

So when we do our forecasts indoor estimates, it's really based on other rates of deployment.

For Fourg and Fiveg networks, so that there really hasn't changed.

Within the antenna space there are several customers that we have long standing up supply agreements to too.

A manufacturer antennas for for specific product lines and then we also have.

A number of stocking distributors, which are relatively consistent.

And their sales so we have some visibility there.

But I would say, we're still reliant quite a bit on on project based business.

So as some projects roll off and finish it's up to the business development team and sales team to replace those with with additional projects.

Okay that makes sense and the final one from me and I'll jump back into queue.

No you mentioned selling scanners in South Korea, how should we think about that potential opportunity for you guys.

Well I think the bulk of those scanners have already been sold so.

There will be some some incremental sales I don't think it's necessarily going to be large enough that would would change any of our forecasts or expectations for Asia.

But it's just interesting that for the Fiveg technology.

The Korean market see the value of collecting RF information independent of abuse.

And I think it's important to because the Korea once they deployed five GE. They saw I think it three times uptake in the amount of data on the network.

So it's one of the early adopters for Fiveg, and so I think that bodes well for us selling scanners across the rest of the world has isn't networks are deployed.

Okay. Thanks, a lot guys.

Thanks, Jason.

Next question from George Berman from B. Riley Your line is open.

Thank you following them for Mark today have you been able to gain traction with any additional government agencies for your Dennis for the first net related purposes similar to what you did for New York City.

So the New York City deal of who is more of an industrial Aiotv intelligent transportation systems.

It's related to first not in that it's it's because the infrastructures consider mission critical but it wasn't necessarily an antenna sale specifically for firstnet.

Now with the a and and why do you T opportunity in that in that deployment.

We're excited about it because for one it was relatively large deployment I think we had mentioned before was it was one of our largest if not largest.

Antenna sale.

And it's the first one so there.

Going to be other opportunities I would say even in the in New York area for the other boroughs and then across the Wes.

As a municipality see the benefit of linking the the traffic signals to rock traffic to clear ways for emergency vehicles.

And to help to support their mission critical infrastructure.

Great. Thanks, and then you also mentioned smelt, China transition expense this quarter or how should we think about the financial impact of this.

That transition moving forward.

[noise] proves it previously disclosed about a million dollars as the total expense, which we will incur probably about half of it will incurred this year and predominately most of the costs are for employee separation costs.

Got it. Thanks and then my last question is we're starting to hear some discussion about private Fiveg networks can you talk about what you're seeing in the marketplace some potential impacts for your business.

Yeah private Fiveg I think is interesting for us because it opens up another market. So we're not just selling into the carriers I think one of the examples I read recently that the Volkswagen in Germany is going to put in a private fiveg network across.

Across their facilities.

And with no within the manufacturing space, specifically Fiveg is interesting because one of the main benefits of Fiveg is a low latency, which means you can have the robotics and the improvement in automation, which you really can't get or it's more difficult to get today with wildfire.

<unk> even fourg.

So it did for sure expands our markets gives us an opportunity to sell that the scanning receivers.

Into a wider set of customers.

I think it's still in the early stages. If you think about Fiveg Theres really three drivers of first is the enhance bandwidth which allow the operators are deploying now just to offload some of that.

A pressure off a fourg.

Next.

Set of major enhancements will include the low latency. So none I think it becomes more of a factor for factories in the warehouses et cetera, and then the third phase is the massive aiotv capabilities.

So for US most of our sales for the for the scanning receivers are going into the operators, it's still early deployments.

But I would say at a later stage as a private sector deploys fiveg it'll be another opportunity for peasquito.

Great I appreciate that I'll hand, it over.

That's it.

Ladies and gentlemen, they've got questions at this time.

Bar, but the number one on the telephone keypad again, but star one that's a question.

There are no further questions.

I would like to start to calls.

Human for closing remarks.

Well I guess you can tell that we recorded the call today.

So set better control over that and a better experience I apologize on behalf of our service provider for that.

In closing comments, we are very pleased with the performance over the last year.

As we finished the year and get into 2020, I believe the company's in Sarnia position, both from a strategic standpoint and a in execution.

To grow and provide the returns investors expect.

I of course, who like to especially thank our employees for their dedication and hard work and our partners and investors for their continued support.

We look forward to updating you on the next call. Thank you and have a great afternoon.

Thank you for joining us today for Pctels third quarter 2018, starting school you may now disconnect your lines.