Q1 2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Q1 earnings Conference call. At this time, all participants have been placed on in listen only mode and we'll open the floor for your questions and comments after the presentation.

There's not much closer to translate over to your host might kendo, Sir the floor is yours.

Thank you Matthew.

Good morning, everyone.

Thank you for joining us for our first quarter 2020 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 fax a.

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 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 in its forward. Looking statements include those risk factors set forth in the company's annual report on form 10-K filed with the FCC.

The company does not undertake any obligation to update or revise any forward looking information to reflect changes in 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.

In table in our press release issued earlier today and furnished with the form 8-K filed today with the FCC.

I will now turn the call over to Tim Whalen, Our Chief Executive Officer. Thank you Mike Good morning, everyone. Thank you for joining us.

Before we begin I'd like to express to everyone. Our best wishes for your continued health and safety as well as thank our employees for their incredible spirit motivation and resilience during these uncertain times.

We're focused on taking care of our employees and customers and and they're well being and safety our top priority.

We've made a number of adjustments to how we conduct business and we're proud to be able to continue maintain operations as an essential business, serving the needs of critical communications and the defense industrial base.

These operational adjustments have included mandatory work from home arrangements for approximately 70% of our workforce.

And for those with jobs that require physical presence in our facilities. We've made a number of adjustments in accordance with state and CDC guidelines for mitigation and prevention.

Including flexible work arrangements staggered workforce schedules increase cleaning and sanitizing and spacing workstations and workflow.

We're incredibly proud of how our employees continue to demonstrate creativity and innovation adjusting to new teams, while serving our customers solving problems and contributing to our mission.

We continue to see the same high level energy positivity and enthusiasm in our workforce and we're so thankful for their contributions.

Turning to our Q1 report our Q1 2020 results were as expected with decreased revenues following lower bookings and backlog exiting 2019.

We anticipated these declines in revenues coming into the year made a number of adjustments in late 2019 in early 2020 to reduce expenses across cost of sales and operations.

Because of this we're able to show improved gross margins as compared to Q1, 2019, as well as lower GAAP Opex and non-GAAP Opex expenses.

Mike will go through our numbers in greater detail in a moment.

With regard to Q1 order flow.

We mentioned to you in 2019 year end call on March 17, we expected improved order flow in the first quarter was included some large projects originally anticipated in the previous year.

These included customer projects, we announce Raymond James Stadium, and so five stadium.

We were also pleased with sales progress of new products with initial sales of our new public safety Smart couple of solution and our designed in noise calm specialized noise sources.

Net we ended our March 31, 21, 2020 quarter with bookings of 10.4 million, which included 1.6 million of new orders from Holsworth for the three months ending March 31.

These booking results showed some modest improvements to our existing products. Excluding holds where it has compared sequentially to where Q4 sales bookings of 7.7 million.

We also saw other various covidien 19 related impacts to Q1 with respect to our funnel of opportunities, including canceled projects delayed decision dates and extended evaluation periods.

With the cancellation of a number of important trade shows. We also believe the ability to showcase our products has added new challenges in efforts for new <unk> opportunity identification.

We also realized decrease in our run rate business of smaller orders, where we typically have little visibility, which we assume had been impacted by stayed on motors.

And last we also realized delays for scheduled shipping dates for projects in backlog due to unexpected delays in the supply chain, which we believe are caused by stayed on motors.

Turning to some strategic initiatives in Q1, we successfully closed on our acquisition of Holsworth instrumentation on February seven.

We believe that Holsworth specialty phase noise analyzers and signal generators are an ideal fit with our test <unk> measurement solutions and these new products have been warmly welcome buyer sales reps and sales channels.

Holsworth products are used on the cutting edge of technology research development and production and used by Blue chip customers in research and automated test environments.

We're quite pleased with the progress were integration efforts and the 1.6 million of new bookings of Holsworth solutions and the three months ending March 31.

With respect to our longer term R&D efforts, new product introduction and other long term milestones, we're pleased with our progress since the beginning of the year.

In January we announced new Booton Wi Fi chipset characterization measurements as well as our collaboration agreement with NXP for Fiveg, New radio platforms.

We're very excited about this collaboration with NXP and believe it will increase the visibility of our software capabilities and number of opportunities in our funnel.

In February we announced our new ultra wide band RF conditioning components used for network Densification and Fiveg deployment.

In March we showcased our end to end solution test for satellite communications, which demonstrated the power of our integrated solutions across all of our brands.

And more recently here in Q2, we announced our release of our Fiveg Rep chain software to enable fiveg small cell development.

And just the last few weeks, we assigned and new customer for a Fourg software transportation application.

This win underscores the value of the investments in our common equity Fourg and Fiveg software Roadmaps as well as the continued value of Fourg LTE software solutions as we expect customers we'd be at different stages of readiness and adoption for fourg and fiveg applications and investment.

So netting it out we believe the company's strategic positioning over the longer term has a brighter outlook as compared to the environment. We're in today with the uncertainty around coping 19.

And we remain confident in our strategic focus on long term themes of growth, including network Densification Fiveg investments and growth of test and measurement solutions, enabling the future of wireless technology.

We have some concerns over the uncertain impact of cobot 19 on the near term, including the difficulty in predicting timing and close of the funnel of opportunities and we will continue to keep monitoring the impact than our supply chain and customers and make adjustments as needed.

As always our employees, well being and health will be our top priority and their safety will continue to guide or decisions.

With that going to turn the call back over to Mike The walk us through the financials.

Thank you Tim Good morning again, everyone.

Before I begin as a reminder, our first quarter financial statements include the results of our newest acquisition Holsworth instrumentation and from the date of acquisition, which was February 7th Holsworth results are included in our test and measurement segment.

Consolidated revenues for the first quarter of 2020 were 9.4 million, which was a decrease of approximately 28% from the first quarter of 2019.

Embedded solutions revenue decreased 2.8 million or 67% from the prior year.

As we disclosed in February demand from our largest customer for our digital signal processing hardware cards has significantly declined from prior years and this was the cause of the embedded solutions revenue declined in Q1.

Network solutions revenue declined 1.5 million or 26% from the prior year due to lower our passive components demand and partially due to covert 19 pandemic, which impacted our international supply chain for this segment.

Test and measurement revenue increased 700000, or 24% due to the inclusion of approximately 970000 of Holsworth revenue, which offset declines in our noise source products and components, which declined year over year.

We believe that test and measurement revenue was also impacted by the Cove at 19 pandemic as order flow from our international test and measurement customers declined significantly in the second half of the quarter.

Consolidated gross profit declined 1.3 million from the prior year due to the overall decline in revenues.

Gross profit margin increased year over year from 43.9% to 47% due to favorable product mix that network solutions and cost savings initiatives, which we implemented entering fiscal year 2020.

Turning to operating expenses consolidated R&D expenses decreased 136000, or 8% lower headcount, primarily at network solutions and test and measurement due to cost reduction actions in early 2020.

This was only partially offset by higher third party R&D costs, specifically related to our Fiveg product initiative embedded solutions and the addition of Holsworth R&D expenses from the date of acquisition.

Sales and marketing expenses decreased 220000, or 11% due primarily to cost reduction actions offset by the addition of Holsworth sales and marketing expenses from the date of acquisition.

And general and administrative expenses were flat from the prior year period as reductions due to cost savings actions were offset by the addition of Holsworth general and administrative expenses and certain nonrecurring acquisition costs.

Overall consolidated operating expenses for the first quarter of 2020 were 5.8 million, which has a decrease of approximately 343000 from the year ago period.

At a high level. This breaks down as follows Holsworth contributed approximately 400000 and operating expenses from the date of acquisition.

This was offset by an approximately 700000 dollar reduction in operating expenses from last year for the base business, which was primarily the result of our cost and expense reduction activities entering 2020.

Other income increased 200000 from the prior year period due to foreign exchange transactional gains that calm agility and interest expense increased approximately 110000 from the prior year due to interest expense on our new term loan facility used to finance the Holsworth acquisition.

Our net loss for the quarter was 1.1 million as compared to 300000 in the prior year.

Non-GAAP adjusted EBITDA for the quarter was a loss of approximately 300000 as compared to earnings at 353000 in the prior year period.

Turning to the balance sheet consolidated cash as of March 30, Onest 2020 was 3.2 million and short term debt was 2 million.

In February we financed the Holsworth acquisition by entering into a new term loan facility in the amount of $8.4 million with music, which BDC.

We also granted warrants to music, which for the purchase of 367000 shares of common stock at an exercise price of approximately 1.39 per share.

As of March 30, Onest, the long term portion of the term loan as reflected on our balance sheet net debt issuance costs of approximately 830000 and the fair value of the stock warrants of approximately 150000.

Additionally, our balance sheet reflects the preliminary purchase price allocation for the Holsworth acquisition, including the addition of approximately 4 million of goodwill 3.5 million and intangible assets and accruals for deferred purchase price payments and the fair value of estimated earn out payments totaling approximately 2.4 million.

Lastly.

As previously reported and as noted in our form 10-Q filed this morning with the SEC on May 4th the company received alone in the amount of approximately 2 million under the Paycheck protection program of the 20, Tony 2020, Corona virus aid relief and economic Security Act administered by the small business Association.

The loan has a 1% interest rate and at term of 24 months and maybe forgivable under the terms provided under the Paycheck protection program.

The company intends to use the proceeds of this loan for the purposes outlined under the program.

We intend to apply for forgiveness evolved alone, but we can provide no assurance that the alone won't be forgiven in whole or in part.

At this time I'd like to turn it back over to 10 for some closing remarks. Thank you Mike.

With regard to future outlook in financial expectations, while we feel better about the coming quarters as compared to Q1 for revenue outlook. There is still too much uncertainty to provide estimates of expectations. The impact of cobot 19 on our funnel in backlog has been unexpected and sporadic and the volatility but.

Changing information and project timing has clattered, our ability to provide reasonable predictability.

Longer term basis, we are highly excited about our strategic direction and future. We've built a larger company to address the mission critical and specialized needs across the development test and deployment lifecycle of wireless communication.

We have invested and focused on three important themes of growth and continue to build a company. We believe will be resilient enough to withstand coated 19 uncertainty while aligned to future growth and improved profitability.

Wireless Telecom group is an essential business, serving the critical needs of our customers and we are an important provider in the defense industrial base.

Employees are highly engaged and motivated and the leadership team is energized excited and empowered to drive success.

Thank you and operator, if you could please open the lines for questions.

Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do asphalt posing a question. Please pick up your headset Nicholas Speakerphone.

And then sound quality.

It's again.

We have any questions or comments. Please press star one on your phone at this time.

Please hold while with poll for questions.

Your first question is coming from Fernando Cantor Your line is live.

Money, Mike and theme.

Morning wondering sonata.

No in idea what was the revenue lost because of the call. It a 19 in the first quarter.

It's hard to exactly identify that because in certainly a number of instances we understand projects were pushed out and in a few instances supply chain was delayed.

In many other instances, we don't get the exact explanations for the delay of supply chain shipments or why customers move timing. So it's difficult to pinpoint the exact number of the impact.

But you would consider doing material right.

I believe our X are our Q1 results were materially in line with our expectations correct.

Okay have the backlog increase as of today versus the 4 million that you reported for this next quarter.

Our backlog today is fairly consistent with how we think about at the end of March 31.

Thank you very much thank you Fernando Fernando.

Thank you.

Your next question is coming from Michael Potter from Monarch Capital Group. Your line is live.

Hey, guys.

Good morning, Good morning, let everybody is doing.

Doing well and being safe.

Just a couple of questions.

The pipeline, we had a couple of good wins in the I guess.

First four months of this year.

And most of those were from the pipeline.

2019, which I think we had nine.

Orders of over $1 million.

Which got all got pushed out.

Can you give us kind of a status of.

We are that current pipeline is how which changed.

To some degree.

And how does it have we added more customers see that pipeline sure.

So our pipeline today.

If anything is slightly more robust on a consolidated level and certainly much more robust as we think about embedded solutions income agility, and that's where we're most excited Michael.

The large projects that were within the network solutions have moved around considerably and I think I've called this out previously they've moved around because of changing designs and changing carrier participation and so in large part those projects have declined in total size.

And the channels by which they are being order through.

Has made it more difficult. So the design of the project has changed the project is ordered through distribution and distribution does not always identify the project. So it's more difficult for us today to pinpoint exactly the characteristics characterization of those projects.

I feel most of those have advanced.

Most of those.

Have decisions have been made.

But at the same time, our pipeline of opportunities in total for the network solutions business is consistent our total pipeline of opportunities for the consolidated company is larger and the most significant increase of the pipeline.

That is within the embedded solutions segment. So hopefully that's helpful color.

Okay is there a number doesn't give us.

We typically don't quantify because it's so fluid.

And especially now with coded 19, it's it's changing every week last week. We received notice that one project was put on hold because the and customer was a government customer and they diverted funding to what they simply called health related matters and and.

In the last three days. They said it was turned back on so we do not quantify those pipelines and thats a very fluid measurement.

Okay.

A couple of additional questions the restructuring.

Looks like we had about $700000 of cost reductions in the quarter not include not including the Holzworth acquisition on her thoughts on Opex. It also address correct, yes, okay. So can we annualize that.

No and the reason we did.

It's primarily due to our customer cost reduction initiatives, but we also had some reductions because of.

The pandemic.

Cut back on travel and.

I will trade shows certain marketing activities. So not all of the 700000 was related to the to the cost savings plan that we put in place.

Okay. So the cost savings plan.

Yes, I'm, assuming it's been fully implement implement that at this point.

That's correct.

Given given the current situation, where we're continuing to monitor our costs and expenses tightly and our discretionary spend as well as our capex.

So fully implemented what can we expect for on an annualized basis and cost reduction. So we had disclosed in the 10-K roughly about 1.5 million for the year.

Okay, thats directly related to costs, our cost reduction plan.

Okay.

And if we move to.

Tom agility you'd mentioned that.

This month, we received.

An order for.

Our fourg application.

That's correct.

Okay.

Well, we will you.

Be making an announcement will be it will be able to get more more color on this.

On this transaction can this order yet we hope to in the future Michael the customers Theres, a few projects that our government related and confidential nature and I know right now we will not be able to give much color other than and trying to describe it and somewhat generically, but as we did.

Liver and perform on those contracts, we are working with customers to not only describe it at a high level, but to actually identify the customer and get a quote from them.

So you will see that we have increased the communication flow.

And we'll continue to continue to press forward on that and try and give very good color as to what projects, we're winning what the applications are where possible.

Who the customer is and.

So so yes, we hope to do more of that going forward.

Okay, and then in regards to Fiveg and I guess.

We're.

Where do we currently stand on on Fiveg orders.

We are.

As I mentioned, we have active.

Customer conversations funnel.

Very excited about the increase of opportunity here.

Which is attributable both to the milestone releases of our products that we've announced as well as the NXP collaboration. So we have very active conversations and I would hope over the next one or two quarters were able to talk more about wins in that in that area.

What's the process.

Can you take us through the process and can you better describe to us.

NXP partnership.

It's a collaboration agreement for our software to be working on their layer scape product platform. So it's that it's that.

As a semiconductor provider. It's it's it's that device that our software is working with.

It's a standard based approach highly customized highly customizable and easily integratable and that's our approach to market as Ns AG NXP thinks about.

Competing with the larger likes of Qualcomm.

They have also selected the markets below what I would characterize as a million units and characterizing a market where there is high customization and as a result, you provide a three GPP standard based platform, which is your basic find stack level software.

That works on the NXP device and then collaborative we work together with that customer for all of the protocol layers, which are customize to that unique base station technology and this is where customers in the sat com wireless test military designs and private network designs each have their own requirements.

But they want to work with a standard based platform a foundation.

This allows them to jumpstart their own development it lowers that it costs and shortens the time to market so whether the Andy.

And devices are robotic instruments or sat com stations or military we at least provide that foundation and building block for the communication.

And is it NXP that is doing a sales and marketing.

We are.

Yes to the end customer we bear responsibility. We know we worked collaboratively collaboratively with them. So we will we will be on joint sales calls with them.

Teaming up as a as a single team.

And.

Do you anticipate.

The will generate revenue from this collaboration in 2020.

Yes.

Okay.

Well I'll get back into queue. Thanks, guys, great. Thank you Michael.

Thank you. Your next question is coming from Fernando Cantor Your line.

Hi, Yes team will be a window be open for management to be able to buy some shares in the market.

Our policy is second trading day after the release of earnings.

Alright, okay.

That would be on.

Thirdly, alright, thank you very much how nic.

Thank you there are no further questions in the Q.

[music].

Great.

Thank you everyone for joining us today. Thank you for your continued confidence in faith in our direction. We wish all view continued good health and we look forward speaking with you again soon have great day. Thank you. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.