Q4 2019 Earnings Call
On the line and well be back in a moment.
[music].
Good morning, ladies and gentlemen, and welcome to the Q4 earnings Conference call. At this time, all participants have been placed on listen only mode on the so we'll be open for your questions and comments after the presentation.
My pleasure to turn it over to your host my kinda, Sir the floor is yours.
Good morning, everyone and thank you for joining us for our fourth quarter 2019 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 that they do not relate strictly to historical or current facts.
These forward looking statements are based on management's current expectations and assumptions regarding the company's business in performance the economy and other future conditions and forecasts of future events circumstances and results.
Forward looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results.
Important factors that could cause the company's actual results to differ materially from those and its forward. Looking statements include those risk factors set forth in the company's annual report on form 10-K filed with the FCC.
Company does not undertake any obligation to update or revise any forward looking information to reflect changes in assumptions the occurrence I meant unanticipated events or otherwise.
Also we want to point out that in addition, the GAAP information.
I will provide information related 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 this morning and furnished with the form 8-K filed this morning with the FCC.
I'll now turn the call over to Tim Whalen, Our Chief Executive Officer. Thank you Mike.
I think everyone. Thank you for joining us.
As you know 2019 proved to be more challenging year than expected.
We realized unexpected disruption and delays to watch projects in network solutions due to uncertainty over the T mobile merger.
[noise].
So orders from the Navy for bid awards in.
[noise].
Yes.
[music].
Well, we're than expected hardware car demand from our largest customer and embedded solutions.
We have taken actions to reduce our expenses in light of these declines and Mike will discuss more that later.
The good news is that we are seeing Q1 order flow for the large then you projects we were expecting last year.
And we're seeing projects then driven by T. Mobile also begin to shake lose.
These are encouraging signs that the network solutions pull back in 2019 was more of a timing issue.
Further in Q1 of this year, we realized a new customer win and success with our smart passes public safety solutions, which were launched in the first quarter of 2019.
This product lease underscores our strategy.
Of watching specialized product sets aligned to our core capabilities for new customers and new applications.
This win also represents the successful close of a six month pursued.
Projects, where our new Smart Cup, where solution was specifically designed to reach new customers for public safety applications in the in building wireless markets.
We continue to see this is one of our growth opportunities going forward as these are new products new customers in new applications.
With respect to test and measurement.
Our 2020 expectations are modest.
Okay.
For Peos being placed under the Navy orders awarded in 2018.
But our persistence and attention toward channels and customers.
In 2019 have unlocked other opportunities, which we believe will lead us to an approved first half order flow in 2020 and good indicators for growth in this segment this year.
Our design in initiatives for our noise comps solutions, we announced throughout 2019 are also expected yield growth.
Opportunity in 2020.
Okay.
We expect repeat orders.
[laughter].
Twice in the noise sources.
From a.
And that's where our design noise solutions.
[noise].
Our embedded.
Into their.
[laughter].
With regard to hardware shipments in our largest customer embedded solutions.
[noise].
Okay.
Forecast, which changed our outlook.
Great.
Expectation is that this segment will see a decline in hardware card volumes in 2000.
[noise].
James This is not a terminated contract.
Nor the end of our relationship.
We are working closely with our customer to understand the changes to their product offerings and demand drivers.
[noise].
So what her to serve their needs in the year ahead.
[laughter].
And we remain cautiously optimistic.
Continued order flow.
[music].
Financially conservative in our assumptions.
[laughter].
A strategic and operational level.
We've made considerable progress throughout 2019.
In which we.
By foundations for growth going forward.
First.
Increases in R&D spend in 2019.
Got or Fiveg software stack, which we released in October.
In parallel.
[music].
Executing on our.
Our strategy to expand our five.
[laughter].
Working with and.
Actually semiconductor throughout the year and announcing our NXP development partnership in January this year.
This allows us to go to market together to provide specialized solutions for fiveg and private.
Deployments and we are collaboratively speaking.
Potential customers today.
About solutions, which will include our Fiveg software.
Acting on NXP chips.
As we noted in our beliefs. This has already led to an increase in the number of funnel opportunities and an increase in the size of the total opportunity ahead.
Well the solution sales can take a long time to come to decision and delivery the relationships and revenue opportunity are equally long term and meaningful.
And the software element of future sales is expected to increase our margins offsetting declines in lower margin hardware card revenues.
We also closed the holds where the acquisition, which was announced in November.
Holsworth solutions include specialty phase noise analyzers and signal generators used on the cutting edge of high technology research development and production in government commercial academic environments and used in blue chip customers in research and automated test environments.
This is an adjacent technology to many of our test and measurement products with common customers and common channel partners.
They are perfect complement to our specialty noise generation and higher performance radio frequency power measurement solutions.
The Holsworth acquisition is aligned we're focused on the growth of test and measurement solutions, which will enable the future of wireless technology and radar satellite communications Fiveg and beyond.
This acquisition is expected to drive future growth and accretive margins in our test and measurement segment.
We are encouraged by customer bookings quarter to date and extremely excited by the feedback received from both customers and channel partners alike.
With that going to turn the call over to Mike to walk us through the financials.
Thank you Tim Good morning again, everyone.
Consolidated revenues for the fourth quarter 2019 were 11.6 million, which was a decrease of approximately 4.3% from the fourth quarter 2018.
Network solutions and test and measurement revenue increase from the prior year period, 4.3% and 34.6% respectively. As we experienced a surge of bookings and shipments that historically occurred in the third quarter of each fiscal year.
This was offset however by $1.9 million or 49.3% decrease in embedded solutions revenue, which was due to lower shipments of our digital signal processing hardware cards and lower sales of LT software licenses and services consolidated gross profit for the fourth quarter 2019 was 5.6 million or 48.
0.4% of revenue compared to 5.3 million or 43.5% of revenue in the 2018 fourth quarter.
Increasing gross profit margin was driven by our test and measurement segment, which had a gross profit margin of 57% in the fourth quarter due to favorable product mix and higher volumes, which drove better absorption of fixed labor and overhead costs network solutions and embedded solutions gross profit margins were flat with a year ago period.
Consolidated operating expenses for the fourth quarter 2019 were 6.2 million as compared to 6 million in the prior year period fourth quarter 2019 General and administrative expenses include certain nonrecurring expenses, including approximately 800000 of expenses related to acquisitions at approximately 127000 infrastructure.
During expenses, our non-GAAP operating expenses decreased in the fourth quarter of 2019 from the prior year period by 180000, as we're starting to see the benefit of some expense reduction actions, we initiated in the third quarter of 2019.
Net income was 200000 for the fourth quarter 2019, as compared to a net loss in the fourth quarter of 2018 of 700000. The fourth quarter 2019, net income includes a $1.1 million tax benefit primarily for a tax deduction in the UK related to our LT and Fiveg research and development activities.
That calm agility.
Non-GAAP adjusted EBITDA for the fourth quarter 2019 was approximately 900000, an increase of approximately 500000 from the fourth quarter 2018.
Due to the improvement in gross profit margin and a reduction in some of it in some of our operating expenses.
Now turning to the full year results consolidated revenues for the year ended 2019 were 48.9 million a decrease of approximately 3.9 billion EUR, 7.3% from the prior year.
Breaking this down by segment embedded solutions 2019 revenue decreased 2.8 million or 17% compared to the prior year due to lower sales of Ltd software licenses and services, which were only partially offset by increased sales of digital signal processing hardware to our largest customer.
We believe the decrease in Ltd software and services sales was due to the fact that we earn a transition period away from Fourg and many potential customers are now considering fiveg for their private network projects.
Test and measurement revenue for the year decreased 600000, or 4.5% from 2018 due to fewer government orders and large projects network solutions 2019 revenue decreased 400000, or 2% from 2018 due to fewer large projects in a highly competitive pricing environment, which is impacting entire industry.
Consolidated gross profit was 22.3 million or 45.6% of revenue in 2019, as compared to 24.2 million or 45.8% of revenue in 2018.
Embedded solutions gross profit decreased 1.6 million from the prior year down from 45.4% of revenue in 2018% to 42.5% of revenue in 2019.
Bedded solutions gross profit margin declined on product mix has higher margins software and services sales declined year over year as well as lower volumes, resulting in lower absorption of fixed labor and overhead charges.
Test and measurement gross profit increased 300000 from the prior period on lower revenues gross profit margin increased from 49.4% in 2018% to 54% in 2019.
The increase was due to favorable product mix as the company sold higher margin noise Cognoids generation devices and moving power sensors.
Network solutions 2019, gross profit decreased 500000 from the prior year gross profit margin decreased from 43.8% to 42.2% due to the highly competitive pricing environment impacting entire industry as well as lower volumes, resulting in lower absorption of fixed labor and overhead.
Consolidated operating expenses in 2019 were 23.8 million as compared to 23.4 million in 2018, an increase of approximately 400000.
Research and development expenses increased 1 million due primarily to embedded solutions head count deployment on product roadmap initiatives, specifically the fiveg roadmap.
Sales and marketing expenses increased slightly on increased headcount in network solutions and test and measurement, but that was offset by lower commissions expense in the embedded solutions segment due to lower volumes.
General and mix and administrative expenses for the full year decreased 100000 from the prior year due to lower bonus expense legal and stock compensation expense, which was offset by acquisition expenses.
Other expenses decreased 100000 from the prior year period on lower foreign exchange unrealized and realized losses interest expense in 2019 decreased 300000 from the prior year because of the accretion expense recorded in 2018 on the calm agility contingent consideration liability that was paid on March 30 Onest of this.
Here.
We recorded a tax benefit at 1.4 million in 2019, due primarily to the research and development deduction, we receive in the UK.
This compares to tax expense of 48000 in the prior year.
Overall, we recorded a net loss of 400020 19 as compared to net income of 35000 2018.
The decrease year over year was due to lower consolidated gross profit and higher operating expenses, which were only partially offset by lower interest expense and the recognition of a tax benefit.
Non-GAAP adjusted EBITDA for 2019 was 2.5 million compared to 4.8 million in 2018 and is attributable to the decline in revenue and gross profit.
Turning to the balance sheet as of December 30, Onest 2019, we had net cash of 1.5 million, which compares to net cash of 3 million as of December 30, Onest 2018.
The decrease in net Cas is net cash is attributable to our net loss in 2019 in the payment of deferred purchase price and earn outs related to the comparability Act acquisition.
Offset partially by lower Capex.
As noted in our subsequent event footnote in the 10-K the company completed the acquisition of holds Holsworth instrumentation Inc. in February of this year.
The results of Holsworth will be included in our Q1 2020 financials from the date of acquisition.
The Holsworth acquisition was financed by our new 8.4 million dollar term loan with mucin Hvdc.
Additionally in February we extended the maturity of our asset based revolver with Bank of America to March 30, Onest 2023, and we added commonality in Holsworth as borrowers under the agreement, which will allow us to utilize the accounts receivable both subsidiaries in our borrowing base calculation.
I would also like to note that in early 2020, we initiated restructuring actions and cost and expense reductions across all of our segments.
These actions are expected to reduce cost of revenues and operating expenses, approximately 1.5 million as compared to fiscal 2019 and include head count reductions third party costs and other discretionary spend areas.
At this time I'd like to turn it over to Tim for some closing remarks. Thank you Mike.
Noted in the press release, the company's currently evaluating the impact of the Corona virus outbreak on our operations and outlook.
With that said a few key points on what we're seeing.
As of today, we have not seen any significant reduction as a result due to the Corona virus outbreak on the company supply chain.
No impact on our us or UK based operations and no impact unexpected purchase flows from customers.
Looking into 2020, we believe our cost reduction actions will positively impact margins and lower operating expenses.
We are seeing quarter.
Quarter to date healthy order flow from customers and expect bookings in network solutions and test and measurement segments in Q1 to exceed that as compared to Q1 2019.
And.
We are seeing increasing interest in our fourg and Fiveg software offerings and embedded solutions and we are encouraged by the feedback and customer discussions.
As you know from what is unfolding daily.
Situation related to the Corona virus outbreak as volatile.
The situation could change as developments unfold.
The company expects to provide additional information regarding its financial outlook once the impact of the Corona virus outbreak is better understood.
Situation stabilizes.
The management team and the board are aligned with shareholders on our common goals for growth and improved profitability.
We are committed to the execution of the strategic and operational plans now in place and we believe we're well positioned for successful achievement over a long term goals.
Thank you and Paul if you could please open the lines for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you ask any questions or comments. Please press star one on your phone at this time, we asked a lot pulls in your question you. Please pick up your handset listening on speaker phone to provide optimum sound quality.
Please hold while we pull for questions.
Once again, ladies and gentlemen is there any questions from the lines. Please press star one on your phone after side.
We didn't have a couple of questions come in at first question is coming from Michael Potter Michael Please announce your affiliation and pose your question.
Hi, monarch capital group.
Tim Mike.
Hoping you could answer a couple of questions for me.
I know, we had merger and acquisition expenses of $845000.
If you can break that out for me at appreciate it.
Good morning, Michael Thanks for joining us today.
I would say that most of that amount our professional fees related to.
Both the attorneys engaged.
As well as those professionals that are engaged for quality of earnings and tax assessments.
Okay.
Can you break it out specifically please.
I don't have specific breakout right now Michael.
You don't have a specific breakout on $845000 of expenses on on an M&A of a small acquisition I would say almost 90% of those professional fees, Michael and and two thirds of that 90% or legal.
Okay.
And the next question is coming from Sunrise, Sam Rebotsky, Samuel and the slides. Please announce your affiliation and pose your question.
Yes, I see our asset management.
No no you're.
Could you sort of the whole what worth acquisition, what kind of sales they produce last year I know you're not.
To give us.
Our expectations for the current year, but what was their sales and profitability life.
Yeah, we actually can talk a little bit about our expectations, we expect that they'll generate approximately 5 million of revenues and gross margins are.
Greater than 60%.
Well that sounds very good.
The.
The right now.
Our view because of the Corona virus, sorry, you closed their new locations or.
I know Youd, we don't know when they might open but are you closed at all we're not closed at all we are exercising work from home policies.
Measuring that I believe we're highly effective and our measurements of the people who are working from home.
And that's an older locations around the world.
In the the Parsippany in Boulder operations, we do have people coming in on site.
Exercising the the caution in the guidelines being directed by the state, but we are.
Fully operational shipping and receiving and are those who can work from home are working from home.
And the reduction in the backlog is that significant in the sense.
Are you bidding on more work because I know you spoke previously of expectation of 100 million revenue.
In a certain period of time, so what about the backlog and the work ability or you were working wouldn't full shift you need to work more I know you're bidding on a lot of project and what are your expectations with your backlog having been reduced.
Yes.
Our backlog reduction is principally related to the drop in demand for the hardware cards.
We are working we are working one shift we periodically will exercise overtime on that when there's a surge in the backlog. So we have that capacity and our funnel is full and active and as I mentioned, we expect two of our three segments network solutions and test and measurement to have stronger.
Q1 bookings in 2020 as compared to Q1 of last year and potentially greater than Q4, as well so sequentially and year over year were quite encouraged by the funnel of activity in the quarterly bookings to date.
Do we expect profitability in the current year and the 100 billion dollar plan that you had I think within two years do expect to achieve that with with acquisitions with growth or what your expectation.
I think right now we're going to be assessing in terms of the current year and just the volatility.
That could occur with with Corona virus I believe we need new another couple of weeks or potentially a couple of months just like the rest of the world to fully understand how that's going to impact our full year expectations.
With regard to our vision to accomplishing a 100 million that is still our vision and that is still our aspiration will targets.
We will have to evaluate the returned to organic growth.
As well as carefully manage the debt we have in place and the acquisition, we've just completed and determine at that point, whether or not the $100 million is accomplishable with or without M&A.
We're very respectful right now in terms of managing the acquisition, we've completed and making sure that we grow that successfully and profitably and and look to de lever.
Prior to.
I would say a more robust M&A environment.
And there is our capital sufficient to go forward.
Thirdly, we don't need to raise capital at this time.
We do not we are obviously given the current environment with the Corona virus looking out or liquidity daily and managing it very closely and applying a very disciplined approach given what's going on in the world today.
Alright, good luck going forward and.
Wireless had been very very successful over a period of time hopefully to achieve the success as you want add good luck very good afternoon. Thank you for joining us.
Thank you and we had a follow up coming from Michael Potter Michael Your line is less.
Hi, guys I think we must have gotten cut off.
So if I do the math correctly on the 845, that's $500000 and legal fees is that correct.
Approximately Michael.
Okay.
Got it.
It seems awfully high but I'm sure the board will look into that hopefully anyway.
Can you be more specific theres no my club, it's important though.
M&A advisory fees are necessary for the for the transaction we did have a.
Advisory.
Fees and bankers, giving us advice on the debt.
But there were no banker fees on the the acquisition.
This is a small acquisition.
That you know of this wasn't brought to buy a banker.
Correct.
Okay. I mean, so would have been silly to go out there and pay a banker if a bank or wasn't needed for the transaction right I'm, just making the point that we were able to do that and save on that.
Okay, but the half a million dollars of legal fees seems except that to me.
The nine I think it you mentioned that you had nine projects that were pushed out from 29 team.
We didn't lose them.
But they were just pushed out in 2019 that we're hoping to.
They will move forward and 2020 can you give us the status on those projects.
We are I mentioned that we're taking orders on a number of them Michael it's very very fluid.
The ability to track nine.
We're not tracking nine anymore.
But we are tracking a number of large projects and these these are changing.
The reason I say that is because there are some quotes that we take where there are individual locations.
In each of those locations are identified as a project.
And then ultimately when that water comes through each coming through distribution and it's more difficult for us to track. When these orders are aggregated through a distributor and the equipment is staged it's much more difficult for us to understand which locations.
So we're moving towards where we're optimistic that the order flow has started to come our way, we're measuring those and dollars right now.
Okay. So so it's not.
We can see on a granular level at this 0.2, which project.
The orders are coming from no we'll be able to give you much more detailed I think as we close out Q1 in terms of how we think about the order flow that that's come in in Q1 again. The situation is very fluid in the environment quotes come through at times those quotes come through for a particular bill of material location.
And then over a period of many many months as designs and Redesigns are done those quotes can be aggregated into individual orders coming through distributors and being stage there.
So we know that the end application for that equipment are the projects that we originally quoted but it's hard for us than to break that down and understand which of those locations are actually being completed and which are not.
Okay.
The the backlog as it currently stands or are you able to break that down by division.
We have not we have not done that in the past Michael we do do that internally.
Okay.
So you will you break it down by Division.
We have a number of things that will need to consider for that but certainly it take away and that's something we'll we'll we'll.
Through.
All right.
Embedded solutions can you give us a little bit more detail on the turnaround plan as it I'm assuming.
We have a more detailed turnaround plan rather than waiting for our largest customer too.
Have a fiveg.
<unk>.
Product available.
Right. So remember, it's not a filling product, Mike, let's not a failing product or failing execution. The hardware sales declined because of the significant customer concentration declined unexpectedly.
We have been working now over two years on the Fiveg roadmap.
We've been working for the better part of the year on the NXP relationship.
Those two coming together has created quite a bit of traction within our funnel and customers interested in our five p. solution.
That said, we still have customers that are interested in the fourg solution, which is a T Texas instruments based solution.
Some of the pause in 2019, and where the software sales and embedded solutions did not overcome were offset decrease in hardware sales I believe is because of that inflection point in the in the industry, where fiveg is becoming more real and being released their considering that.
And reconsidering, where they had fourg plans.
So I believe it was a pause really within the industry. We're quite encouraged now that both some of the fourg pursuits as well as the Fiveg pursuits on the NXP platform.
Our moving forward, but these are large solution sales and complex and take a long period of time.
Okay and.
In regards to being cash flow positive will you be cash flow positive and in Q1.
We haven't provided that forward guidance Michael.
We are we're encouraged and optimistic with all of our liquidity and cash flow metrics.
Quite confident coming into the year and as Mike noted, where we're just keeping an extra eye on that as we we go through the impact of this corona buyers, but to date, we havent seen any impact that we haven't seen a softening of demand from our customers. We haven't seen impact on our employees, we haven't seen an impact on operations.
Carefully monitoring the supply chain.
All of our offshore vendors are open and shipping.
So.
Right now we feel good about our revenue profitability cash flow liquidity.
Okay I'll get back in queue. Thanks, good Thank you Michael.
Thank you and there were no more questions from the lines at this time.
Great. Thank you everyone for joining us we look forward to speaking with you again soon.
Thank you ladies and gentlemen, this does conclude todays conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.