Q2 2020 PCTEL Inc Earnings Call
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[noise] welcome to the peace see tell second quarter 2020 earnings release conference call. At this time, all participants are any listen only mode.
At the conclusion of our prepared remarks, we will conduct a question and answer session.
As a reminder, this conference is being recorded.
I will now turn the call over to Kevin Mcgowan, the Companys CFO. Thank.
Thank you for joining us on today's conference call to discuss PCTEL second quarter 2020 financial results with me today is David Neumann the company's CEO.
Before we begin let me remind you that this call may contain forward looking statements and projections based upon current circumstances.
Well these forward looking statements and projections reflect pctels best current judgment.
They are subject to risks and uncertainties, particularly related to covert 19 pandemic. It could cause actual results to differ materially from these forward looking statements and projections.
Chris factors that could cause pctels actual results to materially differ from its projections are discussed in the earnings press release, which was issued today and the company's most recently filed periodic report on form 10-K, and subsequent filings, including their report on form 10-Q second quarter 2020.
The company assumes no obligation to update any forward looking statements or information, which speak as of the respective dates.
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.
A full reconciliation of these GAAP measures to our non-GAAP measures is included in our quarterly earnings press release that was issued earlier today we.
With that it's now my pleasure to turn the call over to human.
Thank you Kevin welcome and thank you for joining us this afternoon.
I'm pleased with how our team has addressed the challenges of the coven pandemic, while providing excellent service to our customers.
We were able to grow revenue sequentially and exceed our earnings guidance for the quarter.
All our production facilities remain open while most of the professional staff continue to work productively from home.
Supply chains are operating reasonably well and were able to meet customer delivery requirements, we remain profitable, but the strong balance sheet were able to make a necessary investments in R&D in our operations.
And I believe both our antenna and scanning receiver businesses are well positioned for long term growth.
Q2 revenue performance was within our guidance and we exceeded our earnings estimates as a result of strong gross margins in a disciplined approach to controlling expenses.
As you may have seen in our press release issued after the market close we achieved 19.8 million in revenue and non-GAAP earnings per share of 11 cents, both sequential improvements over Q1.
We also achieved gross margins of 48% for the quarter up 2.5% over the second quarter last year.
We will continue to prioritize the safety and health of our employees as we work through this pandemic. We've made numerous upgrades at our facilities to keep our employee safe and we continue to invest in engineering sales and operations, including hiring additional talent and restoring employee wages.
We have improved a number of internal processes to streamline operations and how we interact with customers suppliers partners and investors. We're optimistic that we can operate effectively and profitably in this coven 19 environment.
The second quarter was a first full fiscal quarter impacted by the covert pandemic and the related recession, we felt the impact primarily in the reduced demand for some of our antenna products and the resulting reduction revenue.
In general the highly engineered products and a project oriented nature of our antenna business create a lengthier sales process and for consumer oriented products. So the impact of commitment on demand on our antenna products may extend through the balance of the year.
Despite the delays and temporary weaker demand we believe that overall, we have not lost market share and we have actually gained share in some of the antenna market segments. We continue to add strategic distribution partners and recently entered into a master distributor agreement with well attack to expand our reach in Europe, The Middle East Africa.
I am pleased in particular with their continued strength of our test and measurement revenue and our ability to maintain a high level performance relative to our strong start in the first quarter revenue for our Fiveg scanning receivers has been consistent through the first half of the year and has potential to improve as fiveg infrastructure deployment to accelerate into 2020.
One.
We are in the early phases of Fiveg and there is ample room for growth Ericsson estimates Fiveg will cover approximately 30% of global subscriber base by 2025.
According to the global model supplier Association Rgs say of the nearly 800 operators that have deployed LTE today, only 84 operators in 36 countries have deployed fiveg commercially.
In the U.S., and northeast Asia, including China, Japan, and Korea deployments are robust.
Gee deployments in Europe will accelerate as region comes out of locked down and spectrum is allocated the number of deployments is expected to grow as fast as spectrum auction and operators upgrade their networks to support the latest Fiveg technology standards, the new Fiveg standards referred to as releases 16, and 17 are scheduled for the end of 20.
20, and 2022, respectively. These fiveg releases support improved feature sets for Aiotv vehicular private networks and eventually satellite deployments.
Although testing on public safety systems within buildings has slowed due to the inability to access properties. We continue to train and certify engineering service companies to use our test and measurement solutions. We have certified over 70 organizations and the use of our network testing solutions that help ensure proper operation of emergency communications.
And buildings, we also see more demand to test both cellular and public safety systems. During a single walk test to support testing cellular LT Fiveg and public safety network technologies, such as Pete 25, DMR and Tetra. We recently added a popular single quick reporting feature that autumn.
Actually creates a printable summary of the drive Norwalk tests.
These automated reports include key performance indicators and maps and can save hours or even days of post processing the collected test data.
Engineers can now collects process and report on all wireless technologies from Fiveg LTE to public safety during one walk test.
Within our define intelligent transportation market segment, we continue to in projects and additional cities for traffic management antenna solution in the us and we want sizable orders for our mobile multiband antenna products for applications and sanitation and mass transit fleets.
Other recent industrial design wins and significant projects include customize antennas for commercial kitchen applications and LTE antenna solution with integrated electronics to monitor underground power lines and several high potential antenna programs for military applications.
Within our enterprise wireless vertical market, we believe Wi Fi will continue to be one of the most prevalent unlicensed broadband technologies for cellular offload wireless Lan connectivity and industrial Iot applications.
We recently delivered our first industrial grade why Fi Aito to 11 AC access points and Aiotv interface cards to select Oems for integration into their products are recognized access points support custom software applications to support a wide range of Aiotv applications.
Release of these new Aiotv products is another step towards PCTEL, becoming the RF vendor of choice for industrial Aiotv antennas sensors and test and measurement.
Note that in addition to making the necessary investments to drive innovation and organic growth. We continue to pursue our inorganic growth initiatives and take advantage of our solid balance sheet, particularly with respect to complimentary product lines for enterprise wireless intelligent transportation and industrial Iot applications.
With that I'll now turn the call over to Kevin for a closer look at our second quarter and a discussion of our financials Kevin.
Thank you David.
I will address the financial results for the second quarter ended June 2020, and I will provide third quarter 2020 guidance. We felt the a full effects of the cobot 19 pandemic in the second quarter and it primarily impacted the timing of customer purchase orders and revenues in the quarter for both our internet and test and measurement product lines.
However, the steps, we took to reduce our expenses and conserve cash positively impacted the second quarter results.
We reduced operating expenses through temporary reductions in salaries director fees travel and other discretionary spending we also reduced or delayed capital expenditures without differing strategic initiatives.
Revenues were 19.8 million in a second quarter 2020, an increase of 2.3 million sequentially, but 16% lower compared to the second quarter 2019.
Looking at the revenue by product line revenues for test and measurement products were approximately the same as the first quarter at 6.1 million, but 19% lower compared with the second quarter last year, primarily attributable to lower revenues for products with other than Fiveg technologies.
Antenna product revenues increased sequentially by 2.5 million to $13.9 million, but declined 13% compared to the second quarter last year.
Antenna revenues for fleet public safety and small cells were lower compared to the second quarter 2019.
The second quarter 2020, gross profit margin on a GAAP basis improved by 2.5%.
To 48% due to higher gross profit margin percentages for both antenna products and test and measurement products compared to the second quarter last year.
The gross profit margin percentage for antenna products was 1% higher in the second quarter 2020 compared to the prior year due to a more profitable product line mix and cost reductions in our China operations.
The growth gross profit margin percentage for test and measurement products was 7.4% higher in the second quarter 2020 compare to the prior year as a result of more profitable customer and product mix lower costs related to inventory reserves and having no intangible amortization expense and cost of sales because all intangible.
Assets were fully amortized in the first quarter of this year.
Operating expenses on a non-GAAP basis were 7.5 million in the second quarter 2020, lower by 1.2 million compared to the second quarter 2019.
The favorable impact of the temporary cost reductions and lower expenses for our variable compensation plans contributed to the decrease in operating expenses.
The reduction in operating expenses and higher gross margin percentages offset the impact on gross margin from lower revenues.
Adjusted EBITDA was 2.9 million for the second quarter 2020, compared to 3 million in the second quarter 2019.
Adjusted EBITDA margin as a percentage of revenues, 14% in the second quarter 2020.
Compared to 13% for the second quarter 2019.
Non-GAAP diluted earnings per share improved sequentially from one sent to 11 cents in the second quarter 2020, compared to 13 cents in the second quarter 2019.
Pctels balance here remains very strong with its significant cash investments and no debt.
Cash and investments increased during the second quarter by 1.3 million 39.6 million.
In the second quarter of 2020 free cash flow was 1.9 million as we generated cash from operations of 2.8 million.
We also match to generate cash flow from working capital because we maintain strong accounts receivable collections during the pandemic.
On July 20, Threerd, we declared a regular quarterly dividend of 5.5 cents per share on our common stock. This dividend will be payable on August 17th 2020 to shareholders of record at the close of business on August 7th 2020.
Due to uncertainties as a result of the cobot 19, pandemic and the potential financial impact related to disruptions in our operations supply chain and customer demand it is difficult to forecast financial results.
We would however, like to provide our investors with insight about our expectations for the third quarter.
Based upon current information, which or we are forecasting revenues between 18 in the half and 20 million for the third quarter.
We project, our GAAP gross profit margin percentage to be in the range of 47% to 48%.
And the non-GAAP earnings per share to be in the range of seven to 10 cents.
Again, we're making these projections based upon current information and circumstances, which could change possibly significantly.
We will continue to manage our costs and our working capital to protect and strengthen our solid financial position.
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.
We are now more than four months into this covered pandemic that may very well last into 2021.
This reinforces the importance of keeping our employees safe healthy and productive.
We'll continue to take measures protect them from the pandemic and do our best to maintain a full employment, while serving our customers to divest of our ability.
PCTEL remains in a strong financial position, where profitable and we will continue to make investments for the long term.
As I've said before protecting our employees managing our cash position and prioritizing R&D investments benefits all stakeholders.
We believe the demand for our precision engineered solutions will only increase in a world that relies on wireless connectivity. We're confident that we have enough capacity to serve our current customers and we'll be in a position to rapidly expand as conditions improve.
I'd also like to note that for those who would like to learn more about PCTEL, Kevin and I will be attending to virtual investor conferences.
The ideas Midwest Investor Conference on August 26, and the Sidoti Fall 2020, Investor Conference on September 23rd or 24th.
With that Kevin and I are available to take questions operator.
At this time, if you'd like to ask a question. Please press the star and one on your Touchtone telephone that is star one on your Touchtone telephone.
We'll take a question from Jason Schmidt of Lake Street. Your line is open.
Hey, guys. Thanks.
My questions. Just curious if you could comment on the order patterns in the linear you sign Q2 is it fair to assume it was sort of that April.
Better in May and even better in June I guess related Lee could you talk about how.
What you've seen from an order standpoint.
Through this quarter so far.
Yes to address.
The order question and.
Customer I think there's really two components.
So in some cases there are some markets that are slowing down as an example aviation, which we don't do a lot of business in.
But that portion of antenna sales, a slowing down and that may not come back for for some time.
The majority of the slowdown that we saw in Q2 and I think will continue through through Q3.
Is really part of it is everyone's working from home. So you just have these these natural delays and the decision to place orders to eventually placed the orders. So there's some delay there.
And that effects, probably I would say most of our antenna products because they're off the shelf, we're going through through distributors and then for the antenna products that are.
A more customized that were engineered for a specific customer.
That process is typically theres, a lot of iterations going back and forth from design.
Prototypes pilot builds to evaluations and when you introduce a little the delay in each one of those steps the whole process gets delayed so I would say even starting probably the end of Q1, we started to see that and then through Q2 that there is.
Just a general lengthening of the entire process and similar revenue that we thought was at the beginning of Q2 is going to come and by the end of Q2, just got pushed into Q3.
Now in terms of cycling in cycles and a trough.
Specifics month to month I don't have.
And idea really if a change much I think it changed at the end of Q1 accelerate a bit through Q2 in terms of delays and.
There's still a lot about unknowns with this pandemic, we don't think it's going to get any worse right I think we're at the trough and so to be conservative.
To go into Q3.
We're trying to be conservative on the revenue, but I do think were were towards the bottom of above that cycle.
And I'm, sorry, Jason I don't remember years your second question.
No that's really helpful color and I guess kind of piggybacking off your comments I mean, how much do you think.
Headwinds are related to just general delays do for you from everyone working at home and getting used to.
New normal and how much of it is related to potentially budget constraints are customers concerned on budget spending.
Yes, I think there is a component across the board for antennas and thus the scanning receivers just in general processes from the work from home I don't think Thats, a huge component, but definitely delays.
In terms.
Reduced budgets.
I think with antennas some of that does come into play, especially with some of our stocking the larger stocking distributors are they're carrying inventory if they see their customer slowing down or budgets reduced obviously, they're not going to carry as much inventory for PCTEL. So we see that as well, but we believe it.
Yes, it's short term at some point those budgets are going to come back if anything has pandemics reinforce the need for both wireless connectivity and the need for Aiotv applications, where you want to remotely monitor.
Equipment or fleets et cetera. So I think the long term drivers are still there and then and on the scanner business is probably one other factor and that is.
Europe, I think is a bit slow they're starting to come out of locked down and then you still have quite a few fiveg or operators I want to move to Fiveg that haven't had their spectrum allocations. So there is theres quite a bit of I think pent up demand and thats more of a factor of jus ending the locked down.
Getting people back into work the general economy, improving coming out of this recession, and then I think you're going to see.
The significant increase in demand for deploying Fiveg networks, and and then the associate test and measurement equipment from from PCTEL.
Okay really appreciate it thanks guys.
Thanks, Jason.
Once again to ask a question. Please press star one on your own.
Once again press star one to ask your question.
And it appears that there are no further questions at this time I'd be happy to return the call to Mr., David Neumann for any closing remarks.
Thank you all for joining us. This afternoon I know this unusual covert period has been challenging professionally and personally for for all of our employees.
I would like to thank them for their dedication.
Especially for taking care of our customers and probably most importantly for taking care of each other.
During these sometimes stressful times.
We look forward to updating everyone on the next call.
Thank you.
Thank you. Thank you for joining us today for Pctels second quarter 2020 earnings call. You may now disconnect your lines.
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