Q2 2020 Wireless Telecom Group Inc Earnings Call
For holding we look forward to talking with you soon.
The line it will be right back with you.
[music].
Good morning, ladies and gentlemen, and welcome to the wireless Telecom Group Q2 earnings call. At this time, all participants had been placed on the listen only mode and the floor will be open for questions and comments after the presentation.
Now my pleasure to turn the floor over to your host Mike Kendall, Sir the floor is yours.
Thank you Kate good morning, everyone and thank you for joining us for a second quarter 2020 earnings call.
Before we begin I would like to remind everyone on the call that a 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.
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 2019 annual report on form 10-K, and our 2020 quarterly reports on form 10-Q 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 for adjusted measures provides additional meaningful information to investors, which reflect how management views the business.
Tailed reconciliations of non-GAAP measures to GAAP measures are set forth in a reconciliation table in our press release issued earlier today and furnished with the form 8-K filed today with the FCC.
I'll now turn the call over to Tim Whalen, Our Chief Executive Officer. Thank you, Mike Good morning, everyone and thank you for joining us.
Before we begin I'd like to once again expressed wherever you want our best wishes for continued health and safety.
Well, thank our employees for their incredible resilience and spirit.
We have returned or operations teams to full schedules from a staggered regimen.
Maintaining the increased distancing and health measures in our facilities.
Our operations teams engineers customer facing sales and sales support teams all continue to focus on our mission and values driving the business forward and taking good care of our customers.
During this incredible period of time the importance in mission criticality of wireless communication and connectivity has never been more apparent.
And our focus enabling the development testing and deployment of specialized solutions continues to hold tremendous value to our customers.
We are incredibly proud of how our employees have made the workplace adjustments needed to contribute to our mission and we're so thankful for their dedication.
Turning towards Q2 performance.
Our results reflects sequential improvements from the first quarter of this year, including revenue growth.
Gross margin improvement as well as improvements to operating margins and EBITDA.
As compared to the same quarter a year ago.
Revenues of 11.1 million reflect increases in RF component revenues increased software revenue and better than expected performance and our newly acquired holds with business, which offset the expected declines in hardware card sales.
They also beginning to reflect the benefits of our revised go to market strategy, where we are leveraging a combined sales approach to pursue improved cross selling opportunities as well as greater resource allocations towards advancing fiveg product portfolio.
Additionally, as we highlighted in the press release, we're excited about signing two new software contracts in the second quarter.
One of which is our first to fiveg customers.
NXP platform.
Together, they represent approximately 1 million of software contract value before any incremental service engagements or future royalties should there and applications and appointments reach scale over the next several years.
Our second quarter results reflect revenue recognition of approximately 600000 up the contract value of these two software contracts and the remainder is expected to be recognized over the next few quarters.
One of these contracts included our Fourg LTE software for a rail application.
In the second represents a five t. application on the NXP platform for Fiveg small cell deployments.
We're very happy with a growing funnel of potential customers focused on fiveg and leveraging our NXP collaboration and we expect we will sign additional software contracts with the other new customers before the year is out.
Our gross margins also improved in the second quarter and they improved sequentially as well as for the three months in six months ended June 30, 2020, as compared to the same periods last year.
This improvement of over 50% gross margin was driven by the inclusion of higher software revenue.
The inclusion of higher margin Holsworth revenues.
And cost reductions in our core operations, which decreased cost to sales.
Combined with lower operating expenses, we were able to show sequentially improved operating margins and EBITDA.
And Mike will go through our numbers in greater detail in a moment.
With regard to our Q2 order flow.
We realize bookings of 12.4 million in the quarter, resulting in a second consecutive quarter of increased bookings and end of quarter backlog as we head into the second half a year.
Backlog at June 30 of 6.2 million as higher by 2.4 million or 63% compared to December 31.
The bookings included early success integrating the holsworth business as well as our two new software customers.
With regard to work total addressable market expectations for the radio base band and software products.
Our Q2 success with two new customers reinforces our view this as a large and growing market.
We estimate the size this market is 750 million and growing between 12, and 18% companion animal growth rate.
Our springs continued to extend to specialize deployments for private network needs that we are starting to see greater market opportunity potentially emerge as we continue to invest in our R&D roadmap.
We are an important technology building block for current and emerging Fourg and Fiveg applications.
More exacting estimates of the size the opportunity and growth will take more time to develop into fine.
But the markets. We are focused on currently include Fourg and Fiveg applications in transportation, the military and government.
Satellite communications in certain small cell applications.
We also continue to see that coven 19 continues to create uncertainty.
And we've seen project delays and cancellations caused by inaccessible project sites.
Cancel sports seasons and conventions.
In project funding changes.
Additionally shifts to virtual trade shows have also challenged new opportunity identification.
We have also realized a decrease in our distributor orders and their stocking levels as they've taken a more conservative view of their balance sheets.
With that said.
We continue to see our RF component funnel replenish where we typically have less long term visibility.
And we continue to see gross and our test and measurement funnel as well as growth in the radio base band and software funnels, where there are longer cycles of evaluation and investments.
We expect to see the realization of contract wins in the second half based on funnel increases in the first half.
With regard to our strategic measurements, new product introduction and our R&D efforts, we're pleased with our progress in the first half of the year.
In the last six months, we announced seven new product releases or launches, which included two new software releases, new ultra wide band RF components for network Densification of mid band spectrum, and two new power meter advancements to address Wi Fi six and flexible form factors.
We also announced two customer project engagements, including Raymond James Stadium, and so five stadium.
We announced our partnership collaboration with NXP as well as two releases announcing a frosting solve and product leadership award as well as an announcement showcasing our capabilities, enabling fourg and Fiveg satellite communications.
In June we also announced the shift in our go to market strategy and last week, we announced we added a highly qualified industry veteran from Xilinx tore executive team as our Chief revenue Officer.
And for the three months ending June 30, we have realized or improved gross margin target of over 50% driven primarily by the inclusion of higher margin products work or in a large part due to the result of our software R&D investments and or acquisitions.
So netting it out we believe the company's long term strategic positioning has strengthened in the last six months, we are seeing traction and we're accomplishing promising milestones for revenue growth and improved profitability ahead.
We still have a lot of work to do but we remain confident in our strategic focus on long term themes of growth, including network Densification Fiveg investment and satellite communications.
This optimism is balanced by near term concerns over the on certain impact of Copel 19 on the rest of year, including the difficulty in predicting the timing and close of the funnel of opportunities and the revenue recognition process.
With that going to turn the call over to Mike to walk us through the financials.
Thank you Tim Good morning again, everyone.
Before I begin I wanted to highlight that effective June Thirtyth 2020, we are reporting as one operating segment. Our financial statements. This is the result of internal reorganizations that have occurred over the prior six months as well as an internal analysis of how key operating decisions are made by our chief operating decision maker Tim whaling.
We will continue to provide revenue and gross profit by product group as we believe these are key performance indicators for our investors. Our product groups are as follows test and measurement solutions are tnsm is comprised primarily of the boot noise common holsworth businesses RF components are RFC is comprised primarily of our micro.
A lab business.
And radio base band and software or be asked this comprised primarily of common Jody.
Consolidated revenues for the second quarter 2020 were 11.1 million, which was a decrease of 2.4 million or 17.8% from the second quarter 2019.
Revenue in our RBS product group decreased 4 million due to lower demand for our digital signal processing hardware cars. This was offset partially by sales of our higher margin LTV software licenses in the quarter.
Revenue in the TNM product group increased 1.3 million due to the contribution of 1.9 million a revenue in the second quarter from our Holsworth acquisition.
This offset declines in boot and the noise calm of 600000 from the prior year period, due primarily to the impacts of the cobot pandemic on customer spending.
Revenue in the RFC product group increased 300000 from the prior year period due to shipments of our components in the quarter related to two large projects.
Consolidated gross profit decreased 500000 on lower revenue as compared to the prior year.
Consolidated gross profit margin increased from 45.4% to 51% primarily due to the RBS product group as Q2 2020 included higher margin LT software license sales versus lower margin hardware sales in the prior year.
Gross profit margin and RFC product group increased from 43.1% to 46.2% due to cost savings initiatives, including headcount reductions and material cost savings.
TNM gross profit margin decreased from 55.6% to 52.9% due primarily to a 114000 dollar noncash purchase accounting adjustment related to marking the holsworth inventory to fair value at acquisition.
Turning to operating expenses. Our Q2 2020 operating expenses include a full quarter of Holsworth expenses, which are offset by expense reduction initiatives that we implemented at the beginning of fiscal 2020.
These included head count and benefit reductions travel and other discretionary spending reductions.
Consolidated R&D expenses increased 176000 due to the inclusion of Holsworth R&D expenses of 156000, an increase third party spend of 200000, primarily on our Fiveg product development.
This was offset by expense reductions of approximately 180000 from the prior year period.
Consolidated sales and marketing expenses decreased 366000, primarily due to reductions in headcount commissions and marketing spend which were partially offset by the inclusion of holsworth sales and marketing expenses of 300000.
And general and administrative expenses decreased 70000 as expense reductions related to professional fees intangible asset amortization expense and other discretionary spending was offset by the inclusion holsworth general and administrative expenses of 200000.
Overall.
Consolidated operating expenses for the second quarter of 2020 were 5.7 million, which is a decrease of approximately 300000 from the year ago period at a high level. This breaks down as follows Holsworth contributed approximately 600000 operating expenses in the quarter, which was offset by approximately 900000.
Revenues in operating expenses from the prior year period.
Interest expense increased approximately 200000 from the prior year period due to interest expense on our new term loan facility used to finance the Holsworth acquisition.
Our net loss for the quarter was 700000 as compared to net income of 200000 in the prior year period.
Decreases due to lower revenues and higher interest expense only partially offset by lower operating expenses.
Non-GAAP adjusted EBITDA for the quarter was 90 794000 as compared to 1.1 million in the prior year period.
Turning to the balance sheet consolidated cash as of June Thirtyth 2020 was 2.9 million.
Availability under our asset based revolver was 5 million and gross debt was 10.7 million.
Included in our gross debt is 2 million related to the Paycheck protection program loan, which we received on May four.
As of mid July all of the proceeds of the PPP loan have been spent on qualified expenses as defined under the PPP program.
The company expects to apply for forgiveness of alone in the fourth quarter.
At this time I'd like to turn it back over to Tim for some closing remarks. Thank you Mike.
With regard to future outlook in financial expectations. While we are very pleased with the strategic goals. We've accomplished in the first half of the year, there's still too much uncertainty to provide estimates of expectations for the year.
The impact of cope with 19 on our funnel in backlog continues to be unexpected in sporadic and the forward looking information and project timing is very fluid challenging reasonable levels of predictability.
We are highly excited about or strategic direction of future. We've built the larger company to address the mission critical needs across the development test and deployment lifecycle of wireless communication.
We have invested and focused on three important themes of long term growth and improved profitability.
We are an essential business, serving the critical needs for our customers and we are an important provider in defense industrial base. Our employees are engaged and motivated and the leadership team is energized excited and empowered to drive success.
As always our employees will being in health will be top priority and their safety will continue to guide or decisions as we continue to navigate the challenges presented by the pandemic.
Thank you when Keith 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 at this time.
We do ask that while posing your question you. Please pick up your handset listening on speaker phone to provide optimum sound quality.
Please hold for a moment, while we pull for questions.
Our first question today is coming from Michael Potter. Please announce your affiliation and pose your question.
[noise], Michael Potter monarch capital group, congratulations guys on a much improved quarter.
Ken, but just want to know if you'd give us a little bit more color on an expert on the NXP.
Agreement I guess, there's one annex piece.
Signing and then there was one outside of NXP for Fourg.
Okay.
And and I know you guys spoke quickly about <unk>, but.
600000 was recognized in the quarter was that just on the NXP side or is that the two contracts combined.
That was primarily related to the Fourg.
Application Michael.
Okay.
So nothing on the on they Fiveg NXP application no thatll be recognized a as I mentioned that over the next few quarters. The couple of milestones of development.
And deliverables and so that will be delivered over time and recognize over the next few quarters, depending on those milestone completion.
And what's the size of the NXP contract.
Our NXP relation the overall NXP relationship Michael the contract we signed the contract you signed yet it wouldn't be the remaining 400000.
Oh, sorry, okay in aggregate a million dollars was signed to correct that ive, which we recognize 600, which was for the Fourg rail application not having to do with NXP correct. That's correct, okay and so the remaining 400000, having to deal with.
NXP.
We will be based upon milestones you hit over the next couple of quarters, that's correct and there's few those Mount milestones are right at the edge.
The end of quarters, which is which makes it hard to say, it's two or three or four.
Okay, and you said it was for small cell deployments can you give us a a better example of how the end customer is gonna be looking to use our technology.
They they have not disclose completely Michael this is highly confidential and we signed a in deejays, but small the small cell deployments is effectively more of a mass market deployment, rather than a specialized applications. Although the initial five she mass market deployments.
Our are still being done in a very.
Focused environment and so the deploy those to the specific applications that we're designing for them.
And that required that that requires higher level of frequency and bandwidth in power.
And then once they get deployed to market there will be tested extensively by.
Carriers.
And if theres solution is ultimately what those carriers want it will be deployed in much greater numbers.
In the years 2023 and beyond so this is not we're not developing this for a specific and customer event next piece at this point sounds like this is for NXP to go out there and then market. This technology. No. This is this is a customer thatll be a mutual customer of NXP and ourselves so okay.
We have license our software, which enables the NXP silicon to be deployed.
In that small cell environment.
Okay.
And can we talk a little bit more about the pipeline in regards to calm agility and how much is a of that pipeline is a is direct.
Versus through NXP.
I think right now about a one quarter to one third of the funnel of opportunity are those that have been originated from the NXP relationships. There's another one third I would characterize as opportunities.
We have identified to bring to NXP and approximately one third of opportunities our fourg applications and so independent of NXP.
Okay.
Got it.
We brought a congratulations on the on the new hire of a Alfred I'm, hoping he is on the call.
Perhaps we can talk to some degree about the organizational changes that that he's going to bring.
I know, he's obviously very new and fresh but.
Clearly there must be a strategy around <unk> of what were looking for from him to a as far as leading the salesforce and and kind of repositioning our sales and marketing team.
Sure so he's not on the call today, Michael He just joined US last week one day after.
Exiting from Xilinx subsequent way he is a way this week.
I would expect we'll be able to speak with him in the future I do think it's early stages. If you were on the call I think would be a little early stage just one week into this to be.
Declaring any shifts or changes he's he's incredibly excited by what he's seen.
Through the process of vetting in recruitment.
He is excited to dig in.
We're excited to tap into his network of opportunities that could potentially.
Continue to grow our funnel he is incredibly adept.
At designing solutions familiarity with the Silicon solutions.
There is a common network of names at customers and.
Technology providers.
Does that are known to us in him. So we're just incredibly excited that he's he's got the right expertise and right energy.
The right network, the right connections and Hill helped drive this forward.
But I think we'll need to give him 30 days to accomplish this first 30 day mission.
There are a number of tasks that it will need to be done there and then of course, there's 100 day plan. So we'll certainly be talking more about this going forward. Michael I think it's just maybe just a little bit early right now that's fine if he's not on the call. It is is he relocating or was he living in the Tri State area. He is a he is a west coast a person in.
We do expect till we live case over a period of time.
Okay.
Or some other questions, but I'll get back into queue sure. Thank you Michael Thanks.
Thank you. Our next question today is coming from Robert Marson. Please announce your affiliation and pose your question.
Robert Larsen Penn capital Congratulations on a good quarter guys. Good morning. Thank you if we have.
Yes, the beginnings of substance substantive turnaround occurring.
The Holsworth acquisition looks as if it's.
Cost to a decent start can you give us some.
Granularity on the how revenue synergies are progressing there and and and also.
At the same time, the legacy businesses seem to have struggled a little bit or you do you have anything going there to reignite growth and those businesses. Thank you sure. Thank you Robert So first part of the question was was asking about Holsworth you may recall that that was a business that that.
Approximately 5 million revenue and in previous periods.
You will note that from the numbers might called out there they're above that in terms of the first half. If you think about that not that their businesses run rate for it. So we'll have identical revenue every quarter, but in the first half of the year, they're above that threshold to get to above 5 million, which is of course, where we set the target. So so write off.
The bad they're meeting those expectations, but the order flow.
Is well beyond our expectations.
And we believe.
That our presence has accelerated so with regards to synergy we have a bigger platform. We have more reps and we have qualified vendor approval at certain firms that was more that that they were not approve that and that's accelerated and.
Some of the flow purchase orders.
So we're we're just thrilled with how well they are doing.
Everything that we expected where customers are pleased that we're bringing on board technology solutions to them.
Our customers are pleased that they're part of the bigger platform.
Communications have been very positive and we're moving forward.
So all systems go there, we really happy with that with regard to the the slow down in some of the legacy brands. We're not concerned overly concerned about that we were seeing a growing funnel that we're very confident in terms of how we agreed that funnel, we think that will pick up in the second half and we do believe.
That there were a number of file opportunities, which slowed due to covert 19 and shutdowns enclosures, primarily in the west in in the South.
So we think will pick up and pick some of that backup in the second half.
Okay. Thank you could you.
Turning to calm agility and share with us what it's like to have.
A global.
Semiconductor and DSP producer.
As a joint venture partner and going to market with calm agility versus doing it I assume mostly on our own even win T. I was producing the dsps.
This joint venture seems to be a step up and collaboration between you and the silicon provider.
Can you just give us some granularity on the amount of resources and efforts there putting into this what it's like to have their contacts their customer base their sales force.
Helping us sell this product over the next two or three years sure.
So first in first and I think Youve I think you know this Robert but I'll just make it clear. This is not a joint venture. It is a collaboration agreement not necessarily a joint venture, but I, but I understand the you know in the expression or communication you're aware that.
Yes. So that's that's just one key point the second key point is that yes. This is it much more robust collaboration agreement then than what we've had with T. I a in the sense that the level of interest in the Fiveg applications is just is.
Just huge.
And so I don't have exact numbers for you as to how many salespeople. It's a it's a multiple above our sales teams going to market.
And it goes beyond just the sales team, it's really a design and type of highly engineered solution with highly technical people on the front end and so in each of the last.
Few months every week or there are typically joint calls between.
Where both NXP.
And ourselves or on the line talking to customers interested in finding out more about what this technology to bring to bear as they think about their end applications to their customers.
Okay. Thank you.
By the way just.
For our own purposes, what what does common Chile bring.
Realize this is not exclusive relationship, but what does the software do what's its secret sauce that makes sure such a global powerhouses annex do you want to do business with a very small company from parsippany.
Sure well the as you think about the the technology solution.
There are there are typically seven stacks of software.
And on those stacks that they are categorized into three layers, a five layer, which typically referred to as layer one media layers, which are referred to as we layer two and three and then host layers and that's based upon a standard architecture, we bring the five layer two to bear and so that distinguishes us.
From others, we have other layers of of software.
So we have other modules, but the file layers, where we we play the strongest the silicon providers are most most highly tied to the file layer for performance and then after that there's these protocol layers and application layers that others will then come in specialize on so the silicon providers tip.
Lastly, most tied to the file there and then there other software providers that can bring applications, depending on what the end application as the other benefit we bring to it is is the hardware expertise for the radio equipment and this hardware expertise helps build the boards with the chips.
That are ready for that software integration. Therefore, the partnering the collaboration the inter operability are critical and standards compliant can be can be key but it's not always required.
Okay. Thank you.
That's very helpful by the way great. Thank you, Robert and and as you look down the road 234 years. If this fiveg opportunity does take off if you have a $750 million Tam, which appears to be considerably larger than the fourg.
LTE U Tam.
Any point in column agility history, and calm agility peaked out I think between 16 17 million in revenue one would hope that our peak.
Revenue year, and the Fiveg private network build out would be multiples.
A few or many multiples of 15 or 16 or 17 million is that and insane guess.
I would not call it and insane guess, our focus in order to get to that point is to make sure. We're six successful over each of the next three years.
We can do that then those successful installations and applications and partnerships.
Should yield returns in further our our our our success in the probability of getting to those types of numbers.
Keep in mind, there's a lot of variables to solve as you go to market.
The top the top.
Challenges to face and driving this technology includes frequency, whether it's a license or unlicensed band power, which includes distance and sell size number of units and users the uplink and downlink capacity the customization for the high velocity or the low latency cases, all of those have to be solved and so.
While others are concentrating on this mass market enhanced mobile broadband.
What we're looking to do is addressing these non threats the terrestrial and low latency application. So again much like the strategy on the rest of the company. We're finding a specialized niche that we can excel in exceed in and then successful build upon success, but your numbers aren't and seen but I'm focused on driving success.
Each year over the next three years in order to get to those types of numbers.
Thank you.
[noise]. Thank you. Our next question today is coming from Michael Kaufman. Please announce your affiliation and pose your question.
Oh hi.
Oh, Okay investments.
I think for team did a very good job.
For a very difficult.
Time with coal that hopefully.
Yes goes away and you could resume your growth.
The question I have is.
The other Gore radio.
Based software.
Uh huh.
3% on revenue.
Million over half.
On the gross profit.
That really is a lost one yes.
Cash.
Holsworth looks like it's doing well, but you may have.
Uh huh.
A road with further put pressure on cash. So the question is how what's the opportunity to get that radio base.
Software revenue back to at least where it used today.
Because that million that have solved the gross margin would be a solid in either the to gets you back to a equilibrium in terms of cash flow.
Yeah, Michael it's it's Mike. Thanks for the question, yes, so that the decline was related to the the lower demand for our hardware cards.
Which we had talked about and disclosure back in February we were expecting that and planning for it and.
Really what you know Tim has been talking about is we're looking at growth on the software license and services side of common guilty.
<unk> is at a much higher margin than than the hardware cards. So as we grow the software and services business, we should see improved margins and improved.
EBITDA margins related related to common guilty, which will help with here with the cash flow.
But do you ever see that caused the sonic to get back I mean, what well they bleeding out inventories on the child I'll, Let me just one follow up.
This thing will start to come back or does that are going up the a much lower levels than it used to be for a long time.
Yeah, our conversations with our large customer from the prior year.
Who is driving the decline of the purchase of our hardware cards was resulting from a shift in technology from their their fourg test system to a five feet test system, which they architected to be more software based.
And so while we were collaborating with this customer and we're aware of this the projections of declines happened dad at a.
A different slope over a period of many years.
They found is a fairly fast shift in the market in a position where they had more cards are them what they could use they are bleeding them off we've seen those numbers each and every quarter.
We do expect them to continue purchasing hardware cards from us potentially in the second half of the year, but they will be at levels much lower than previous periods. So we've maintained a good relationship with the customer we do expect them to purchase cards it'll be at a much lower level and we expect potentially orders in the.
The second half for the year for delivery in the first half of 2021.
Thank you very much appreciate it good luck. Thank you make your thank for joining us.
Thank you.
Once again, ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please press star one on your phone at this time.
Our next question today is coming from Nick Coughing. Please announce your affiliation and pose your question.
Oh, good morning, Nicole Richie Cope which capital management.
Good morning, Tim and Mike I'm Reading the press release, and you have long term goals and here.
Annual double digit organic revenue growth.
50% gross margins.
<unk> percent adjusted EBITDA margins by 2024 first question is what is the base year.
Or.
The double digit organic revenue growth.
<unk> com agility, there hasn't really been much revenue growth it WT over the years. So I'm wondering what the base year is it nics. So we are we've had these goals and in place we've refreshed.
I think the best way to think about it as we we request the strategy and spoke to our investors about it at our annual shareholder meeting.
On June four and we reiterated those comments and so I think the 2019 period.
Is the way to think about it of course.
Our largest customer pull back on those hardware cards, but we're still striving to drive these types of growth by 2024.
Okay.
As you look to 2024 and you have these three targets what are the.
See the five most important.
Targets or issues that you have to hit to achieve these three metrics.
So number one is the NXP partnership success I'm. The continued collaboration there and number two would be the.
Continued.
Hi, good execution of software contracts.
On those.
And then number three would be the extension beyond software contracts to get that the the customization services that that can come with those.
As those users tried to to apply to specialize solutions.
So those those I think are the top three I think I think the fourth is continue to drive growth through new product introductions into our test and measurement business and to leverage leverage the holsworth platform to drive growth there.
And then the last is to drive growth in RF components by continuing to focus on non Commoditized solutions continuing to focus on non telecom.
Customers and continuing to focus on those solutions that are required by the advancing development. So what the carrier five feet Densification strategies are.
And if we do those those five things right I think we've got a fair shot.
We feel good about it but theres a lot of work to do.
Okay. If you hit those metrics, what's the reasonable range of earnings expectations for 2024 of the company might generate if you're capable of achieving these targets.
I don't have that the model when front I mean, Nick.
But I think in terms of the earnings I think we stated there in terms of adjusted EBITDA margins in terms of.
Earnings translating into EBITDA.
Our your bonuses tied management's bonuses tied to achieving these three targets are bonuses are certainly tied to annual profitability metrics a number one number two the equity performance awards are the most recent award or also directly tied to.
To achieving these targets yes.
And I guess the last question, Tim you've been at the company now a little over four years your mid Fiftys whats the legacy that you want to leave it WT too.
A great company that's position for continued growth.
This is a company that was about two thirds the size of on people and it was approximately 30 million when I took over.
We're closer to $50 million company today with two acquisitions that bring technology aligned to trends of growth going forward. So what I'd like to leave in the in the hands of those.
Behind me in terms of our shareholders our board of directors in our employees is a thriving company position for continued growth with a great management team and people who continue to drive this company forward with or without me.
Great well. Thank you good luck in your endeavors and I appreciate it. Thank you. Thank you Nick I appreciate it.
Thank you. Our next question today is coming from Fernando Canto. Please announce your affiliation and pose your question.
Hi, This is fernando kind to a private investor.
Team on my congratulation on a much better quarter space and they achieved in north of 50% on the gross margin.
Great. Thank how fleet how strong how strongly you paid about breaking even on maybe coming up with is a profit on the so quarter to September quarter.
Yeah, I think Fernando that's going to rely heavily on the growth and commonality software revenue.
But what the margins at the software and services revenue brings I think that that we could we couldn't be profitable before taxes. The tax provision this year, maybe a little tricky.
Because it's the P.P.P. loan is forgiven.
Those expenses are not deductible.
Which means we're gonna have to.
Record a tax provision on on those expenses now that that won't translate into any cash taxes because of our bar and I'll wells, we have such a high and are well positioned we won't be paying any tax any cash taxes. This year, but that that fact could drive us into a higher tax provision then than what we would expect.
Well, then youre PPP would be tactics right.
The the expenses are not deductible, so with that would impact our tax accounting.
But he told me earlier than expected.
Yes, correct before given just okay, alright, congratulations again, and keep probably who would work.
Great. Thank you. Thank you Fernando.
Thank you.
A follow up question from Michael Potter Mr. Potter Your line is lives.
Hi, guys just to Oh, I guess go back to micro Kaufman's question on.
On comparability on our.
A large customer from last year in the year before.
Have they made the shift or ready from Fourg to fiveg or they are they back in the market with their fiveg solution. There Fiveg solution is in the market Michael from what we understand.
They've had a spotty record of accurately predicting the on the market acceptance and what they described to me was that as they brought their fiveg technology to market.
In priced it and Ah if you think about an index of a price of 100 for the Fourg solution and they brought out a product that they said here's the new five new product and the index of pricing on that new one is 100.
Their customer base and why you, forcing me to upgrade I just invested a significant sum of money for the for the five GE layer of testing I don't want to have to buy an entirely new.
Test device and that was a challenge that they encountered bringing it to market and that was the challenge that created quite a bit of confusion within their demand curve, which translated into their projections to us.
They've gone through a number of products shifts in terms of how they trying to address their customer demands and as they are working through it. They are burning off cards, and we expect them again to place an order with us in the second half of this year for delivery in the first half of next year and then we should see.
Although its smaller levels, a more predictable routine level of buying because they are still they still expect 40 systems not only to be sold.
But they also expect the 40 systems and when they are installed base to have to be serviced.
And so that should car that should deliver some continued revenue stream, it's very very difficult to predict that.
Right now, but by the year end, we should have some visibility in some eyes on what they've ordered from us and how to think about 2021.
Okay. So the their shift if you will it's not really a 2020 event for us it's really a 2021, it's really going into 2021.
No. There ship I think is taking place now which is why we haven't received any orders at all.
Over the course of the year.
We delivered in Q1, the remaining backlog they were committed to take from purchase orders coming out of 19. So I do think that they're shift I would define as.
The fourth quarter of 19 through this year and then at that point, we should be back towards some level of purchases, but but for a product which is now not the leading product, but a second tier product as well as for the maintenance.
Okay.
Okay, and then I guess, they're just an end customer.
As compared to NXP, which is Oh collaborator if you will correct in regard to the technology and going to market, but NXP. We do there's no exclusivity with NXP I mean, I'm, assuming we are talking to other joint venture collaboration partners.
About a you know going to market with are combining technologies in order to go to market. So yes. So we have a collaboration agreement in place with T. I. That's that's not expired. That's that's still in place. We also have a collaboration agreement in place with Xilinx. So we do have other partners.
They are not exclusive to us they have to other providers, but they have.
They have communicated to west they think that that we're doing the best and where the most distinguished for some of the specialized opportunities in front of them.
And I think we also have an advantage in terms of being a U.S. based company for for U.S. based opportunity.
So I think those those are very positive signs of the how fruitful. This this relationship can be.
Do you anticipate that you know that that that we will generate some sort of activity or some sort of revenue from xilinx for T.I.
On or Fiveg application for this year I don't think no I don't think it'll be revenue from the two of them, but if a an end customer requires.
What are what what their solutions with their designing solutions bring.
That that could then result in revenue to us specifically, if it's a fourg solution I think most of the activity we've seen for Fiveg as NXP based.
And I think the markets have seen NXP.
Advanced significantly as they think about five you roadmaps.
So the revenue wouldn't come from Xilinx or T. I, if theres a collaboration with them on on a customary would come from that ultimate customer that would drive sales to both of those two providers as well as us so they're not out there it doesn't sound like they are out there aggressively pursuing the market at this point.
They have a solution enough.
Customer comes in over the transom.
They have something to sell them yeah, Yeah, I would say that the aggressive sales go to market activity is centered mostly on NXP.
Okay.
Just to go back to test and measurement. The Holsworth acquisition is it seems like to working out very well, obviously, there's concern with our legacy business I know you touched upon it that you anticipate it's a timing issue and not to turn around in the second half of the year have we integrated our salesforce at this point have we is there.
Great go to market strategy, where where we are now offering an entire I guess a test <unk> measurement solution, yes, yes. So so the the Salesforce is integrated.
Our sales teams are promoting the hold for the products, we've been through a number of rounds of training and webinars through to our channels and our manufacturer Rep partners. They are also getting excited and they're also positioning holsworth.
Their customer bases so.
We are we are fully integrate at this point, we've got work to do on the web sites that will take place I believe next quarter.
That will start to roll out.
And that will be the final element, but otherwise the up the sales teams have come together sales teams have been cross trained the rest been cross trained and we continue to put out demand generation activities and marketing that covers the full suite of products.
Why why do you think Holzworth has been so strong for the first half the year, but our legacy business has a a you know how has had difficulty a in this market.
That's hard to say, Michael I think that they were positioned a with a few large opportunities that are combination help them get over the line would be one point of reflection on your question.
Second point of reflection on your question is that they are.
They're focused on some lab some 80 upgrades at semiconductors.
That those large semiconductors are located all over the world. So they're not they're less impacted by a regional lab, which is where we saw.
And get impacted by.
And I think there are also aligned to quantum computing and some other trends of focusing the interest industry that.
Our boot and products, our <unk> are less or not at all line too. So I'd point, those three things as being Differentiators.
And for the size of difference Michael if you know two or three deals swing swing each of those two brands into a surge or a decline. So we're also not talking about you know a massive shift we're talking about deals that can be identified on one hand that that if they all come over the line.
Creates a search for one brand and if a handful of deals get slowed it creates a declined for the other.
Thank you. Our next question today is coming from Robert Morrison.
Your line is life.
Thanks for the follow up opportunity.
Can you talk about the cash flow and the the ability to pay down debt from the Holsworth deal over the next year. So I.
I noticed accounts receivable would be would be boosted I assumed by some of theirs and I'm just trying to find out if you think there's an ability to pay down debt from that transaction. Because I think you stated that as a goal for this year and what type of debt pay down you might be able.
To achieve from both operating cash flow and working down.
The noncash current assets. Thank you.
Yeah, Robert So part of our debt agreement as we do have an excess cash flow calculation at the end of each each calendar year. So the pay that ultimate pay down will be determined based upon that excess cash flow.
Calculation.
Hey, our has increased primarily due the holsworth also just some timing we had a lot of shipments at the very end to the quarter.
I think for the year.
Our cash well again is gonna be dependent on our performance and the second half of the year specifically.
Specifically at column agility, we also have some some capex needs in the second half, we've really pulled back and capex in the first half of the year, but with some of the Fiveg development. We're gonna have to spend some additional dollars on on Capex, which should drive down some of the cash flow.
In the second half of the year.
Okay.
R&D is.
Still reasonably elevated as a line item on expenses is that something that is going to continue I assume some of that was the calm agility push.
As some more of it must have been.
Obviously, and the Holsworth transaction, but.
Is there a little able to sort of normalized.
Ratio of R&D to revenue that the company wants to achieve when it's in its steady state of 50% gross margins of 15% EBITDA margins and where are we compare to that today.
So so we have made cost reductions and R&D, we've been very selective and what we've we've taken out of R&D and that's helped offset some third party spend that we we've had to do.
For specifically, our five Gi product development. So you'll see that we had an increase year over year in third party spend for the quarter of about 200000 and for the year for about 300000.
Because of the specifically the Fiveg product product development and I would expect that trend to continue in the second half of second half of the year I think in terms I mean, we haven't set out a specific target or any guidance, but if you look back to 18.
And 17, I think we would want to be back at that percentage of revenue I'm going forward.
But in the short term you know we're going to continue to have some third party spend specifically as it relates to Fiveg Fiveg Road map.
Okay and on R&D productivity I think I asked this question a couple of years ago and Unfortunately, the boss them said he was pleased with it but I don't see a lot of pleasure in the new product introduction results for the past couple of years solvent asked the question again.
Well, we gonna get any productivity a non software related productivity out of the R&D budget that we seem to have not enjoy from the boost that happened in 17 and 18.
Keep keep in mind, Robert that that the R&D is refreshing some older legacy product lines and so the productivity I translate that into the revenue growth opportunity.
And we measure each of the new products success and the market. So yes, I would expect that our R&D will result in and revenue growth and.
We're going to try and drive that revenue growth greater than that of the declines of those legacy products, but that's why the R&D will continue to be you know within that 10% to 15% of revenue range, and probably getting closer to or maintaining at that 15%.
As we just evaluate our entire suite of products and ensure that their position for the that that the trends of growth that we're line too.
I just haven't seen a lot of success with new product introductions to him in the last few years. So that's why I'm questioning the productivity of the R&D I'm not referring to are not referring to refresh the putting a new novel on the test and measurement device yeah, no our smart our smart coupler has been successful our.
DCC and MCC products have been successful we've seen some good traction with our GPS product.
Our noise smart noise sources have been successful, we're very excited and getting very good feedback on the new pmax.
Which is a digital display of a bench top device that that hangs off of a.
The U.S. be power management devices.
We're thrilled with the software releases, so so the tractions, there and its offsetting the declines and of those legacy products. So.
That'll be the engine of growth as we think about the next three years and so I think thats going to be the proved to be able to hit those growth targets that we set for ourselves.
Thank you we have no further questions. Thank you at this time.
Very good.
Thank you again, everyone for joining us.
Stay safe and healthy and we look forward to speaking you again in the near future.
[noise]. 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.