Q4 2019 Earnings Call

Ladies and gentlemen, thank you for your patience. Please remain on the line while we gather additional participants again, we do appreciate your patience. Please remain on the line your conference will begin momentarily. Thank you.

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Welcome to the PCTEL fourth quarter 2019 fiscal year earnings release Conference call.

This type all participants are in listen only mode.

And at the conclusion of our prepared remarks, we will conduct a question and answer session. As a reminder, at this conference is being recorded I will now turn the call over to Kevin Mcmullen. The Companys CFO. Please go ahead.

Thank you for joining today's conference call to discuss PCTEL fourth quarter 2019 financial results with me today is David Neumann as a company CEO.

Before we begin let me remind you this call may contain forward looking statements well. These forward looking statements reflect PCTEL best current judgment, there are subject to risks and uncertainties that could cause actual results to differ materially from these forward looking projections.

Sure that could cause PCTEL actual results to materially differ from projections are discussed in the earnings press release, which was issued today and in our most recent annual report on form 10-K, what's the 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.

Yes.

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

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

Thank you Kevin.

Welcome and thank you for joining us this afternoon I will cover three topics in our call today. Our recently reported results for 2019 in the fourth quarter the risk store business associated with the Corona virus in recent product updates for the scanning receiver and antenna product lines.

For the past several years, we have invested heavily in engineering product development and sales to address Fiveg and industrial Aiotv emerging technologies. These investments and the capabilities. We developed distinguish PCTEL from our competitors and our stakeholders are realizing the benefits of these investments.

As you may have seen in our press release issued after market close our non-GAAP earnings per share increase from a negative four cents in 2018 to 47 cents in 2019, and our revenue grew by more than 9% over 2018 to 19.6 million.

The product mix with increased sales of higher margins scanning receivers and the improved gross margins on our antenna products contributed to our strong results.

In the fourth quarter 2019, we achieved a historic high for quarterly revenue generated by our test and measurement product line overall, our fourth quarter revenues were 22.9 million, we achieve 16 cents and non-GAAP earnings per share on gross margins of 50.3% of 5.2% over the third quarter adjusted.

EBITDA and non-GAAP earnings per share increased both sequentially and compared to last year as mentioned in her last call. We believe we can maintain favorable margins on both product lines through 2020.

With respect to China, we're saying for team is healthy the Corona virus presents three risks for PCTEL first we have significant employee presence in China.

Were proactive from the start of the current a virus outbreak and we're happy to report that the team has returned to work on a part time basis. Archie engine factory opened on February 26, with 50% manufacturing capacity and we received approval. This week to return to 100% capacity on March nine.

Second most of our antenna supply chain originates in China supply chain disruptions within China can limit our ability to manufacture certain antenna products. We don't believe there will be a supply chain impacting Q1 for scanning receivers. Because these products are manufactured in Maryland and have adequate inventory on hand third a global.

And I'm, a downturn may impact our customers and reduce their demand for our products. Kevin will comment later on the anticipated impact on Q1 revenue.

We continue to execute on our supply chain strategy to mitigate risk, which includes diversification of production inside and outside of China. After careful consideration of costs logistics capabilities and availability of key components, we're transitioning certain product lines from Archie engine factory to contract manufacturers.

In China, and Taiwan, the manufacturing transition will continue through 2020.

On a products front, we continue to execute on our strategy to fortress, our enterprise wireless business, which includes five you scanning receivers public safety into enterprise wide by portfolio. We recently received an enterprise wide Fi design win for embedded antenna system for a major OEM.

For Fiveg operators are in early stages of the rollout, which includes deploying infrastructure to improve coverage and increased capacity in dense user environments wireless operators use our scanning receivers globally to confirm fiveg coverage identify interference and troubleshoot RF issues across license frequency bands for operate.

There's a need to test both low and high frequency bands PCTEL recently launch an upgrade to our popular H.B. flex scanning receiver that allow simultaneous testing across all technologies and bands. This feature will make it easier for operators to test multiple bands at the benchmark competing networks.

Enterprise wide Fivefive G. Our connectivity enablers for industrial Aiotv industrial I T is all about analytics predictions and control.

Without data from remote wireless sensors, there are no analytics without reliable wireless connectivity to sensors. There is no data.

Our antenna and radio solutions enable wireless connectivity to ensure that industrial Iot T systems have reliable data for analysis of manufacturing mining rail and utility applications to name a few.

Just recently, we won three significant smart grid projects, which included our multi band and Yagi antennas for the first not network dedicated to public safety, our fourth smart grid. When included an integrated LT device in a tender for underground power transmission and monitoring.

Within our intelligent transportation market segment, we anticipate additional project wins and other major cities. This year for advanced antenna systems that support monitoring and control of traffic signals that intersections our growth in these segments and 29 team plus these wins reinforce our belief that intelligent transportation and industrial Aiotv Mark.

Segments will grow significantly over the next several years to address needs and fleet transit energy and manufacturing applications.

We also made a significant step towards broadening our industrial our t. offering beyond it tends to include industrial Aiotv radio products in Q4, we launched our industrial I O T access points and industrial Aiotv Radio module. These new products will be sold through an existing sales channels and allow us to offer more products. The same customer base. Our access point. This is.

Turning to support high throughput over ly temperature range and deliver reliable why Fi eight to 11 AC connectivity for industrial Aiotv and outdoor applications typically access points connect to many I O T modules Pctels Aiotv radio module for Wi Fi give me installed in a wide variety of products, including robotics.

We're factory in warehouse automation.

We will continue to focus on our strengths specifically, enabling wireless connectivity, we're confident that developing products to solve complex wireless challenges across our target markets will lead to sustainable growth with that I'll now turn the call over to Kevin for a closer look at our fourth quarter Kevin.

Thank you David I will address the financial results for the fourth quarter ended December 2019, and I will provide first quarter 2020 guidance revenues were 22.9 million in the fourth quarter 2019, 80% higher compared to fourth quarter 2018.

30% lower sequentially.

Revenues for test and measurement products were higher sequentially and compared to last year, while revenues for antenna products were lower both sequentially and compared to the fourth quarter last year with continued strong sales of scanning receivers with Fiveg technology in for public safety applications test and measurement product revenues were 7.8 million in the fourth quarter.

For 2019, the highest revenue quarter of the year for this product line and 2.8 million higher than last year's fourth quarter.

And tenant product revenues were 15.1 million in the fourth quarter 2019.

7% lower compared to the fourth quarter of 2018, and 8% lower sequentially fourth quarter of tenant product revenues were lower with applications related to small cells enterprise wide.

And for fleet compared to fourth quarter 2018.

Fourth quarter 2019, gross profit margin for gap improved by 9.4% to 50.3% due to the favorable product line mix of test and measurement products and higher antenna gross profit margin percentage.

The gross profit margin percentage front tenant price was 4.1% higher in the fourth quarter 2019 compared to the prior year due to a more profitable mix adjusted EBITDA was 3.7 million for the fourth quarter 2019.

Fair to 1.2 million in the fourth quarter 2018, and adjusted EBITDA margin as a percentage of revenue was 16% in the fourth quarter 2019, compared to 6% for the fourth quarter 2018.

Non-GAAP diluted earnings per share was 16 cents in the fourth quarter 2019.

Fair to three cents in the fourth quarter 2018.

The fourth quarter 2019, non-GAAP earnings per share was significantly higher compared to last year because of the higher test and measurement product revenues and higher gross profit margins for both product lines cash and investments increased by 1.6 million to 39.7 million at the end of December 2019, as free cash flow is too.

Point 4 million during the fourth quarter 2019 last quarter, we announce a $7 million share repurchase program the share repurchase program affords us the flexibility to be opportunistic and our capital allocation strategy and offers us an opportunity to reiterate to our shareholders our confidence in the strength of future growth potential.

She tells the company also continues to actively pursue acquisitions that can help us grow our business going forward.

Now, let's turn to first quarter 2020 guidance.

We expect first quarter revenues will be between 17.5, and 18.5 million. The GAAP gross profit margin percentage is projected to be in the range of 46% to 48% and the non-GAAP earnings per share is projected to be in the range of zero to three cents revenues for test and measurement products are projected to be higher compared.

The first quarter 2019, however revenues for antenna products are projected to be lower sequentially and lower compared the first quarter 2019, the revenue decline within tenant products is due to a large project ending in the fourth quarter 2019.

Delays with taking inventory with a few of our larger Oems and due to disruption to the demand for products and in our supply chain as a result of the Corona virus outbreak.

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 we take questions I'd like to share a few closing thoughts and the investments that we made in the past few years have positioned PCTEL well for the rollout of Fiveg and the implementation of wireless industrial Iot applications, we expected demand for Fiveg public safety scanning receivers to remain consistent through the year antenna and radio product.

Deliveries are more susceptible to disruptions caused by the Corona virus, but we believe there continues to be a need for quality antenna and radio products that will drive growth and increase shareholder value over the long term with that Kevin and I are available to take questions operator.

Thank you so far is now open for questions.

I would like to ask your question. Please press star one on your telephone keypad at any time to join us.

And if you're using speakerphone, please pick up your handset to provide that back sound quality.

I'll now take our first question from James Jason Smith with Lake Street. Please go ahead.

Thanks for taking my questions I, just wanted to start with the Q1 guidance I'm, obviously, the Corona virus situation is more than fluid, but hoping you can help us understand or maybe quantified the impact from that you're seeing in the early the impact on Q1.

Yeah, it's difficult Jason to quantify we do know that it's a component of the antenna revenue decline, but not the only reason.

There has been a meaningful impact with our factory being down for a month RCM is being down for several weeks.

And from a customer demand, but we'll have a better estimate of the impact more report Q1 in may.

And adjacent another important point to is really to understand the make up all the different revenue streams and yes. The corona virus is having some impact but.

We have a set of Oems large distributors that.

I really long term high running.

Customers.

And we build and manufacturer to their inventory needs.

So coming in the Q4, he even somewhat in Q4 and then into Q1.

Two of our larger Oems I had a reduction in need offer some specific antennas, which affected us directly we've talked to both customers their outlook for for 2020 is as strong as it was before so we think those are temporary but that also went.

Back to Q4 and to some extent Q1.

Couple of other points on Q1, historically Q1 is typically a lighter revenue quarter us.

Looking at it from a seasonal perspective.

And.

In addition, with last year PCTEL being restricted to sell from one of our largest Chinese Oems we were able to cover a good portion of that with some project wins towards the end of 29 team.

But they're a significantly lower coming into Q1 this year than they were last year.

Scanning receiver business is I think more predictable that's more transactional short term and really driven by the the rollout of the Fiveg network. So don't see any any concerns there, but I think the major component for Q1 is as some slowness was with some of the Oems that they expect to.

To recover later in the year.

Okay.

Very helpful.

And then shifting gears to the intelligent traffic control system seems like some really nice traction. There can you just walk us through why you're seeing such success in that market and why you're winning these projects.

I think part of it is our general approach to to some of these projects in the intelligent transportation traffic signal.

Product specifically had some pretty.

RF requirements and then also mechanical requirements. So it wasn't an antenna that was off the shelf that they can use.

We spent probably close to a year designing the electronics and then putting it into an a closure that was pretty much indestructible. So they could put it at the corner of intersections accessible to the general public. So one once you put that time in and you get a approved by the.

In customer it creates some stickiness some barriers to entry for us.

We have relatively large deployment I think you'll remember that specific project was our largest single antenna sale ever at PCTEL and that was won a major city. So we're looking forward to doing trials and additional cities in the U.S. and we think that could contribute in 2020.

Okay and the last one for me and I'll jump back into you I know the into market can always be a pretty competitive from a pricing standpoint, but are you seeing anything out of the ordinary just given the current macro backdrop.

No. We're not I think it goes back to the most of our incentives are more or less custom designed for a specific application and then they become a high runner for general distribution.

So as long as you stay away from the commodity antennas you 10.

Not to have as much price pressure.

And you're not than we ever want to lose in the count, but there was quite a bit more pressure on pricing in China.

And now that that's a smaller portion of our business is actually helps a product mix in terms of margins.

Okay.

Thanks, a lot.

Thank you thanks.

Our next question comes from Markel Weisenberger with B. Riley <unk> yeah.

Yep. Thank you very nice gross margin expansion, both on a year over year in quarter over quarter basis, and a the test and measurement could you elaborate I guess, specifically what primary factors drove the sequential improvement what changed kinda from Threeq to Fourq, you or how should we think about going forward and then maybe the.

What kind of.

Traction are you seeing with the customers doing software upgrades for for the H.B. flux.

Mark Yeah with the margin expansion for test and measurement in Q4 that was what you alluded to it's with.

Well, a higher percentage of the of the revenues were five GE software upgrades. So these are the upgrades for the scanning receivers used to test the Fiveg technologies, that's been deployed at the lower frequencies and that the millimeter wave.

That was a higher percentage in Q4 looking forward you know again, we can we can see visibility in Q1 at school it looks like it's going to be again favorable mix wise with that with upgrades.

And in terms of upgrades markets really driven by the frequency bands so for the.

Scanner installed base that we have in the field for a fourg thats using six gigahertz or less.

Those are predominantly ibflex scanning receivers and they will support five G. As long as the end customers using a those frequency bands that are the lower frequency bands.

For three of the operators and U.S. are using millimeter wave they bought the H.B. flex.

Keep in mind to that millimeter wave is popular in the U.S. a couple other countries, but globally I'm most of the Fiveg deployments are at the sub six gigahertz Ranger frequency bands. So we think there are opportunities to do software upgrades for those units.

Also keep in mind, though that outside the U.S. I think they're still almost 40 countries that have not.

Auctioned off spectrum, yet for Fiveg. So there's still some some runway, but I'm just going to take some time for those those countries auction the spectrum and then start deployments.

Understood. Thank you could you talk about the uptick in sales and marketing.

How we should think about that going forward and and maybe where that was allocated and how that should help the business going forward.

In Q4, Mark the predominantly was higher commission expenses and some sales meeting costs.

Let's just traditionally a little bit higher in Q4.

It should even out our normalized starting in Q1.

Got it.

I guess.

The situation is evolving a neat and you do have some visibility the how should we think about linearity throughout the course of the year.

Are you envisioning the 2020 to be a more back half weighted story.

And maybe some dynamics that we should think about from a quarterly perspective.

Well looking at 2020 as I think one of the wildcard is Corona virus and then what that does eventually to to market demand globally I've seen some reports that are saying worst case could you go global recession 2020, which.

And help us at all.

From a quarterly perspective, historically Q2, or three Q2 is usually a pretty good quarter, a both for antennas and for test and measurement business.

Q3 falls off a bit of mostly from the scanner business and vacations in Europe, and then Q4 as is typically a strong quarter for us as well so from a seasonality perspective, I don't see that changing.

If theres going to be.

Additional revenue in the second half that will come from our radio products. So we launched a the access point and the radio module in November of of 19.

The.

Radio module will be a ready for delivery to end customers in the second half of this year. So that could provide some increase in revenue, but from a scanning receiver perspective, I think it's going to follow historical trends.

And then a as I said, the wildcard with the Corona virus and given that we do quite a bit of manufacturing in China. The we have a couple of risks are there one is supply chain, which is all over the news.

Two is having our our staff in the factory and as we said earlier.

We expect next week that will be 100% staff and then the third component is really the demand for products globally.

So some of the estimates I've seen.

Anticipate is turning around in Q2 with China of supply chain of ramping up relatively quickly, but the wildcard really is where are these hot spots globally and what does that that what does that due to two demand.

Korea as an issue, Italy is an issue we don't necessarily do a lot of business in those countries today.

But still that starts to resolve itself, it's really hard to predict how fast the mark is going to recover the feedback that we get from our customers I imagine with it the two large Oems other they're not changing their view, we take what will catch up there.

But this a this whole virus kinda throws a wildcard in there.

Sure understood.

You talked about transitioning to contract manufacturers in China and Taiwan.

Has your thinking on that evolved during this kind of outbreak and maybe if you could give us a breakdown of what percentage you're going to keep in China and maybe what.

Proportions going I mean moved to Taiwan.

I can tell you that well I think you know two we started this process to de risk our China exposure on more than a year ago.

And we have now.

Move.

One or more product lines out of the factory into a C.M. with it which is still in China, but gives us a little bit more flexibility and then we've also selected a C M in Taiwan.

It's going to take us probably through 2020 to finish that migration.

And.

Well, we initially set this plan we obviously didn't know if this were have this issue that the corrado virus. So that's definitely.

What we're thinking about that now.

But even if we were too but take more.

Aggressive action to move out of China, It would be difficult to do any faster than than the timeline that we have now.

It's also important to note too that some of the products it makes sense keeping them and the PCTEL factory.

They're not necessarily I runners to other than they are not set up to particularly you see yams well there seems usually want high running a products that are automated site.

I think it's difficult right now to say that we would not have some type of factory in China.

But the to give you a percentage of what business is going to be in our factory and what business is going to be it seems we just can't do I mean is even more of a fluid situation now that we're monitoring day to day.

Speaking with our customers and our supplied suppliers on a daily basis, we need to get through this this issue first.

And then we'll we'll continue with with either the plant and we had in place.

We'll take is probably through 2020.

Sure that was very helpful. Thank you just two quick two more quick ones for me.

You talked about intelligent transportation wins.

This year can you kind of give us a timeline on when we might be able to expect.

Hearing about those.

And when you would get them.

When we will get them.

The lot of intelligent transportation us systems and products are.

End up going through municipalities. So, it's I would say difficult to pick a month or a quarter one that when they're going to close because some of this is is driven by funding at the city level and then also keep in mind to that we're supplying the antenna component of a larger system.

So there a larger OEM vendors that are really driving the sale.

I don't think we're in a position now to say that we're going to close specific deals on a specific date, but we know that we're the only antenna approved for for this type of systems that are two major.

You as operators that are pushing this as far as their aiotv initiative to cities across the U.S. So we're we're comfortable that weren't in a good position.

But I don't have enough information to give you a date on what do we think these will close.

Sure, Okay and final one for me I you guys are frequently talked about looking for some small maybe tuck in strategic acquisitions.

With the volatility in prices coming down in the public and I now turn private markets.

Are you seeing anything that you would be interested on acting on.

And then in the near term that.

That's changed with the market volatility.

Well so for the tuck in acquisitions. These are typically private companies. So the volatility in the market I don't necessarily think it changes the owners necessarily changes the owners mindset that they need to sell for lower price.

The biggest challenge and we've talked about this quite a bit is working with private companies and getting a fair valuation.

Doing some type of purchase agreement with an earn out that.

Really.

Provide some upside for the company that we're we're buying and then also de risks.

Going for these smaller companies for PCTEL. So I don't know, we've not necessarily seen any changes and valuation I could tell you that we've looked at many companies. We have an active program in place. We're looking at specifically in the Aiotv space antenna companies preferably in Europe.

Are we could.

Bring their products in the U.S. and build their business and then also provide some of our products through through their sales channels in Europe.

There are ongoing conversations on on a regular basis, but we're not in any position that's a really to go in any more detail.

As soon as we know we will let you know.

Great. Thank you very much appreciate it.

Thank you Mark.

And as a reminder, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad.

So we have a question from Tim O'connell chain of Kelly. Please go ahead.

Hi, guys.

Yes. So my question is already answered.

But just one kind of a clarification on this Q1.

Revenue guidance.

So it's attributed to Oems, reducing their inventory of your antennas.

But.

Did I hear right in that they're not seen and demand changes for this year, though for those products.

I don't know if we necessary said demand changes they so they don't see a difference and the outlook for their year.

So we get okay that to be demand, but yes, they don't see necessarily weakness for the product lines that they're buying from from PCTEL.

And what the antenna products, it's it can be.

There can be some volatility between quarters and quarter to quarter, especially with some of the larger Oems, which there are managing their supply chain as well.

So yes that was one component and then a part of it too is US there is some I would say supply chain risk.

Getting products out of getting products out of China.

Okay.

Regarding the share buyback that was authorized to assume there's hasn't been anything done with it yet I Didnt look at the 10-K to this point.

Is that still.

I kinda like Kevin addresses, but weve the buyback was approved by the board. It's in place, we do not buyback a shares in Q4.

We'll report on Q1 activity.

Our next call.

Okay. Thanks that was it for me.

Thank you Tim.

And that does conclude our question and answer session for today, So I'll turn back over to David Neumann for any closing remarks.

Thank you and thank you for joining us this afternoon.

Also thanks to the team and our partners for contributions in 2019 and of course, the hard work that they are putting into 2020.

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

Thank you for joining us for today's PCTEL fourth quarter 2019 earnings call. You may now disconnect your lines.

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