Q4 2020 PCTEL Inc Earnings Call
[music].
Welcome to the PC Chao fourth quarter 2020 earnings release Conference call. At this time, all participants are in a 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.
Core to Kevin Mcgowan, the company's CFO.
Thank you for joining us on today's conference call to discuss <unk> fourth quarter 2020, and full year 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.
Upon current circumstances.
While these forward looking statements and projections reflect PC tells the best current judgment they are subject to risks and uncertainties, particularly related to the COVID-19, pandemic and global recession that could cause actual results to differ materially from these forward looking statements and projections.
Risk factors that could cause <unk> actual results to materially differ from its projections are discussed in the earnings press release, which was issued today and the company's annual report on form 10-K and subsequent filings.
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 comparability of results over different periods of.
The full reconciliation of these GAAP measures to our non-GAAP measures is included in our quarterly earnings press release that was issued earlier today.
I'm now pleased to turn the call over to David Neumann.
Thank you, Kevin and welcome and thank you for joining us this afternoon.
Although 2020 it was a challenging year, we're pleased how the company managed through the coronavirus pandemic.
We're optimistic about the companys future and our ability to thrive in a challenging environment.
Today I'd like to share the progress we've made through the second half of 2020, the more specifically in the fourth quarter and how we position the company to grow in 2021 and beyond.
Despite the global pandemic, we're able to serve our customers continue to invest in R&D initiatives and manage expenses to maintain profitability.
As you may have seen in our press release issued after the market close the Corona virus induced recession impacted both our non-GAAP earnings per share and revenue for 2020.
Non-GAAP earnings per share decreased from 47 in 2019 to 31 2020 revenue declined from $96 million in 2019 to $77 $5 million in 2020, but increase on a quarterly basis in the fourth quarter.
I am pleased to share that the fourth quarter revenue and earnings were the strongest of the year and exceeded our guidance. In fact, we set an all time record for scanning receiver revenue in the quarter. Our earnings were driven by consistent margins of both product lines and strong demand for <unk> scanning receiver solutions, even more impressive than increase Q4 revenue.
Incoming orders for both product lines in the fourth quarter for at the highest level since the second quarter of 2019. This is a strong leading indicator as we enter 2021.
As shared in our press release in Q4, we achieved $21 2 million in revenue $3 2 million in adjusted EBITDA and non-GAAP earnings per share of <unk> 12.
All sequential improvements over the third quarter, we achieved gross margins of 50% for the quarter in line with the third quarter and 1% of above the average of the year.
We are confident in our strategy to focus on <unk>, and industrial Iot and our ability to grow as the year progresses.
Specific growth initiatives include expanding our distribution channels and continued investment in <unk> tools, and Iot solutions, including our antenna and radio products.
Could you tell us the larger size relative to our competitors and broad range of products in the enterprise wireless intelligent transportation and industrial Iot create opportunities to support a broader range of distribution channels, We recently announced two new product distributors and we're evaluating others for selected antenna.
<unk>, our industrial Iot devices, and our expanding range of scanning receiver solutions.
We have also made investments in the past two years to improve our direct support for these channels to form stronger relationships with existing and new distributors alike. PCL will continue to focus on growth through developing and supporting our distributor and OEM partners to address the markets. They serve.
We will also focus on growth through increased demand for private <unk> and LTE network deployments to serve businesses and governments as they address security and an influx of data across mobile enterprises.
The <unk> is uniquely positioned to serve public and private wireless networks and the associated industrial Iot requirements through providing radio systems antennas wireless sensors and test the measurement solutions in the U S utilities cable operators in agricultural equipment manufacturers, some of which our current customers have secured.
Brs for citizens broadband radio spectrum in 2020, and will require both antenna and measurement tools the deploy those networks.
Globally five years deploy by less than 10% of the 700 plus operators across 61 countries, who currently operate LTE networks for the 260 operators are investing in <unk> networks in the form of spectrum auctions tests trials and pilots.
Europe and parts of Asia delayed spectrum auctions and <unk> deployments in 2020 due to the pandemic, we expect to benefit from of pent up demand for <unk> connectivity and the U S and globally as the economies improve through the second half of 2021.
We continue to invest in our engineering capabilities to leverage our unique ability to solve complex RF issues for both antennas and scanning receivers in fact, even in a challenging year, we increased our investment in engineering to address our longer term opportunities.
Advancements of antenna technologies now off include active components and require tighter integration with the overall systems. As an example, we integrated the active electronics to support network management functions into two of our existing Wi Fi incentives that were qualified by a large OEM.
<unk> has the expertise to address all major wireless technologies across multiple applications, including industrial Iot Smart City enterprise wireless government precision of positioning and other industry for <unk> applications.
PC sales expertise and RF antenna design and radios becomes more valuable of systems to become even more integrated and complex.
<unk> has created opportunities for both of our antenna and test and measurement businesses.
<unk> networks require high performance timing antennas for both commercial and private network deployments are sales of these antennas increased throughout 2020, and we expect demand to remain steady through 2021.
As I mentioned Q4 was a record setting quarter for <unk> and five day test and measurement revenue.
Despite network deployment delays of some regions, including Europe, and Southeast Asia revenue was stable throughout 2020.
The <unk> scanning receiver revenue was driven by the need to test both for <unk> and <unk> networks using frequencies from 100 megahertz to millimeter wave bands.
Scanning receivers are complemented by a range of software tools for data collection, and our recently launched millimeter wave transmitter which supports in building modeling for <unk> deployments and larger venues transportation hubs and retail locations.
I believe 2021 will be another strong year for our scanning receiver products.
We recently assisted of leading <unk> network equipment manufacturer and measuring dual polarized signals that are unique to their <unk> deployments.
As a result of having both <unk> antenna in scanner measurement expertise, we were the only test and measurement of company that could quickly design and build a customized antenna for this application. We believe our dual capability will give us the advantage globally with this network equipment manufacturer.
We're also proud of the success of our <unk> scanner solution for public safety applications. These measurement systems and share the quality of the in building wireless communications for first responders. We recently improved our public safety tools by adding uplink measurements to provide users of holistic view of the RF environment.
These measurement tools collect the significant amount of data that needs to be managed and analyzed.
We are developing software applications to help our customers more efficiently collect store and analyze the data on the cloud based platform or.
Of our solutions are in a leading position in the U S market, but by addressing the <unk> five LMR DMR and Tetra technologies, we will expand our addressable market globally and we believe these products will contribute meaningfully to revenue in 2021.
I would also like to provide an update on our product development and release cycles. We mentioned in our last call that we saw reduced demand for some of our antenna products in mid 2020.
Due to temporary slowdowns of customer demand.
As customers have now adapted to working in this business environment, we're seeing a recovery in demand for antenna and Iot device products.
With respect to industrial Iot devices are wireless sensor platform designed for Ruggedized applications and rail and utilities are in trials and our industrial Wi Fi access points and interface cards are in the final stages of FCC certification. These products began shipping last quarter to customers for trial integration of testing we expect to.
Receipt of orders and production to begin once the devices are certified.
As we stated previously we are confident that these products will contribute meaningfully to revenue to support long term growth.
Our M&A activities are also an important component of the long term growth for the company.
As the pandemic continues we believe there will be opportunities to evaluate and pursue acquisitions to grow PC sales through adding complementary products and markets and new regions.
With that I'll now turn the call over to Kevin for a closer look at our fourth quarter and a discussion of our financials Kevin.
Thank you David.
I'll review the financial results for the fourth quarter ended December 31, 2020, and I will provide the first quarter 2021 guidance.
As David mentioned 2020, where the challenging year, but we managed to generate solid earnings despite the lower revenues the <unk>.
Fourth quarter was our best quarter in 2020 for revenue and earnings.
Revenues of $21 2 million in the fourth quarter 2020, we're seven 5% lower compared to the fourth quarter 2019.
But increased sequentially by $2 3 million.
By product line revenues for test and measurement products increased sequentially by $1 7 million to a record $8 6 million.
The fourth quarter of 2020 revenues for test and measurement products were nine 5% better than last year.
Cause of a very strong quarter for products with <unk> technologies.
Antenna product revenues increased sequentially by a half of million to $12 8 million, but were 15% lower compared to the fourth quarter last year due to lower revenues of antennas for intelligent transportation projects and for public safety applications.
But the fourth quarter of 2020 gross profit margin on the GAAP basis was 51% lower than the fourth quarter of 2019 by <unk>, 2%.
The higher mix of higher margin test and measurement products offset lower gross profit margin percentages for both product lines compared to last year.
The gross profit margin percentage for antenna products was three 1% lower than the fourth quarter of 2020 compared to the prior year due to lower volume and less favorable product mix the.
The gross profit margin percentage for test and measurement products was two 6% lower in the fourth quarter 2020 compared to the prior year, primarily due to less favorable customer and product mix.
While the quarterly gross profit.
Operating expenses on a non-GAAP basis were $8 2 million in the fourth quarter 2020 higher.
Higher by approximately 200000 compared to the third quarter 2020.
But lower by approximately 500000 compared to the fourth quarter of 2019.
Expenses were lower in the fourth quarter 2020, compared to the prior year, primarily due to lower travel expenses and lower expenses related to our variable compensation plans.
Net other income and expense was negative 110000 in the fourth quarter of 2020 compared to positive 108000 in the fourth quarter 2019.
The net expense was due to lower interest income and foreign exchange losses in the fourth quarter of 2020.
Adjusted EBITDA was $3 2 million for the fourth quarter 2020, compared to $3 7 million in the fourth quarter 2019 and.
And adjusted EBITDA margin as a percentage of revenue was 15% in the fourth quarter 2020, compared to 16% for the fourth quarter 2019.
Non-GAAP diluted earnings per share was <unk> 12 in the fourth quarter 2020, compared to 16 in the fourth quarter of 2019.
The <unk> balance sheet remains very strong with our significant cash and investments and no debt cash.
Cash and investments, including long term investments were $41 million at December 31, 2020.
Cash and investments declined by just under 300000 compared to the end of the third quarter.
Although we generated positive free cash flow we.
We used cash to repurchase our common stock.
We announced the share repurchase program on November 10, 2020.
Pursuant to which the company may repurchase up to $5 million of its common stock through the end of 2021.
During the fourth quarter 2020, we used $1 $8 million of cash to repurchase approximately 289000 shares.
Free cash flow was $2 1 million in the quarter as we generated cash from operations of $2 8 million.
We continue to be subject to uncertainties with the global recovery from the pandemic.
But as we did throughout the pandemic last year, we would like to provide our investors with insight about our expectations for the first quarter 2021. The first quarter is historically, our lowest revenue quarter largely due to the operating operator budget release schedules.
With the seasonality of the first quarter and a slow recovery with antenna revenues, we are forecasting revenues between $17 five and $18 5 million for the first quarter of 2021.
We project, our GAAP gross profit margin percentage to be in the range of $45 to 47% and the non-GAAP earnings per share be in the range of negative <unk> <unk> to breakeven.
The sequential decline in gross margin percentage is primarily due to a lower mix of test and measurement revenues in the first quarter 2021.
We are making these projections based upon current information and circumstances, which could change.
As mentioned earlier, we believe the second half of the year will be stronger as the global economy recovers.
We will continue to manage our costs and our working capital.
Through the year 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.
Yes.
Thank you all for joining us before we take questions like to share a few closing thoughts I am pleased that we saw improvements in our operating results as we finish 2020, I'm very proud of our employees and I appreciate their dedication flexibility and willingness to make changes to address the immediate challenges of the pandemic and more importantly, their focus on improving processes.
And adopting changes that will benefit the company in the long term.
There are still unknowns with respect to the coronavirus and its potential impact as we progress through 2021.
I have confidence that our business will recover as well or better than the overall economy. This year.
PC sales, our strong financial position, we have loyal customers and we serve attractive growing markets testing wireless infrastructure supporting industrial Iot the enabling wireless connectivity will continue to be important as the world increasingly relies on remote access and the ability to work and monitor systems for them almost anywhere.
With that Kevin and I are available to take questions.
Operator.
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 asked about posing your question you. Please pickup your handset for listening on speaker phone to provide optimum sand quality. Once again. Please press star one if you have any questions.
And the first question is coming from Mark Weisenberg of Mark. Your line is live please announce your affiliation and pose your question.
Thank you good afternoon, Mark reason Burger from B Riley Securities.
Congratulations on a pretty good quarter, gentlemen, bouncing back from March maybe tougher times earlier in the year I'm wondering if you could talk about maybe within the the test and measurement segment.
What percentage of sales of orders, maybe coming from software and how should we think about that going forward.
Yes, Mark probably the software content is somewhere in the range of of <unk>.
15% of the total revenues and that tenant.
Product line.
We expect that percentage to be in a similar range.
Going into Q1 next year.
Understood great.
Look the here, maybe about how the order book sort of evolving over the next few quarters specifically.
For industrial Iot intelligent transportation and enterprise wireless.
Sure I can take that mark.
The Iot business, especially with devices.
<unk> started releasing those products for customers, who do integration into their systems.
We've talked about this before that.
Some of the products specifically the the access point.
The customers have the ability to load of their own customized software into the unit for their application. So the.
The Ruggedized unit has some customization.
Capabilities, so that takes the customers a bit of time to develop that and then on our end, even though we have the products ready we still needed to go through FCC certification.
So we've we're.
We're in that process now for both the access point.
In the interface card.
<unk> two.
Finish the certification I would say in the next month or two and then we can start taking orders.
So there is definite interest by a few of our large existing customers.
They are buying antennas for the Iot applications.
So I would expect orders probably starting in the second quarter in the Q3 for the for those devices.
The of wireless.
Wireless sensor modules are.
Ready now and they're being.
Evaluated by customers as well, others, probably three opportunities on that front.
It won't necessarily be as large as.
The access points interface cards, but there are some opportunities.
With respect to the enterprise wireless and within enterprise wireless who we are the <unk>.
Test and measurement equipment, so the <unk> <unk> kind of a separate component altogether.
But within the enterprise wireless is also the Wi Fi business.
So were continually developing new antennas.
For the specifications of some of the larger Wi Fi manufacturers typically a longer process to go through.
Approval and to be quite Frank the margin profile on those antennas can be can be somewhat challenging.
The I think you had mentioned the transportation as well probably referencing the traffic management system that we deploy in New York.
Most of.
The opportunities are still being managed by the the larger operators.
We did close a few smaller deals last year, but there's still plenty of opportunity and in fact I was <unk>.
Leading in one of the <unk>.
<unk> about the importance of traffic management, and so I think what's interesting for <unk> for the two leading operators are promoting that solution of both of those specced in PC sales antenna.
So I think of our decent shape, but were really waiting for them to close those deals.
Great. That's a lot of helpful color I appreciate that.
Yeah.
Can you talk about.
Well I guess.
Is it would you agree that recently a lot of the investments we've seen have been around the kind of the the macro layer.
And maybe less so with metro cell deployments.
And I guess as we get a little bit more activity around millimeter wave and kind of more densification.
I guess are you expecting that to accelerate and.
And what are the implications for for PC Taylor as that kind of investment transition does happen.
And so I think millimeter wave is important but long term millimeter wave will be for urban dense environments.
It's just not economically viable to deploy them in rural areas.
And I think that's one of the reasons too you saw the I'm sure you saw the the C band auction in the operator's spending I think it was over $80 billion.
For for spectrum in mid band because with the mid band spectrum, you get kind of a good mix of good coverage and good throughput. So from <unk> perspective, we have the antennas for for <unk>, we of timing antennas, which will be.
<unk> for the systems, whether they're macro or micro.
And then on the the scanning receiver.
The products.
The IV flex are already designed for in building applications. So the very good for for in building dense areas very easy to use in the backpack.
The HB flex will do both of <unk>. So that's a plus but I think longer term. What's most interesting for US is that you have and again as an example of the C band auction, where its new frequencies of deployed in the same area and you had asked Kevin about the percentage of software.
Our upgrades and.
Once the C band starts rolling out and even CVR S. A lot of the product that we have in the market, especially for the scanning receivers can be upgraded via software.
So we've talked in the past that you can upgrade of <unk> scanner, the <unk> scanner through software.
But you can do the same for frequency bands. So for all of the spectrum of of course, it's going to take time to clear it I think yes.
Yes.
Some of the reports are indicating towards the end of the year first batch of frequencies will be available for all of those customers that are using the <unk>.
<unk> scanners in the U S and we of relatively dominant position.
And there'll be able to upgrade those units at a very good price for them and the.
Upgrades of great margin for us.
I do think there are opportunities for software upgrades there.
Okay. That's great can you talk about any supply chain constraints.
Potential impacts on gross margins, if at all and I guess, what kind of visibility do you have over the next few quarters in terms of your input costs.
For Q1.
Mainly it would affect antennas test and measurement not really of an impact on the inputs.
We are modeling slightly lower year over year percentages.
A lot of variables there between currency freight costs.
And.
Tariffs and we're expecting a little bit.
Still challenging environment for freight and.
Logistics from China.
We've seen it.
The strengthening of the Chinese currency, which is a bit of a challenge for us. So those are some of the impacts that we'll see in Q1.
If a much much like working with our customers. We are staying in close contact with the supply chain of our suppliers. So of course there is some.
Periodic challenges that come up we just have to work through them and I don't think anything thats a very material.
Understood and then one.
The final one for me is there any way that you could quantify the drag Covid has had it related to kind of delays and may be limited access.
To sum either.
Areas for test and measurement or for.
The design wins and things like that.
Yes, I've got a relatively long list mark.
So on the antenna side I think it's more straightforward the biggest issue that we had with Covid and delays is just the the iterative nature of designing a complex antenna with the electronics for a customer.
So we do of design customer reviews of it we do prototypes customer reviews. Those they do testing we do modifications. So it goes back and forth.
So we I think we really felt that early in 2020 because.
Some of the.
Revenue that we had forecasted it was just delay just because of the sales cycle the guts.
Of the lengthened.
For the test and measurement portion of it in the scanning receivers I think it's more of at a macro level.
So we've talked about how small of the five G. The footprint there is today.
Say less than 10% of things closer to 8% of the LTE networks.
But for operators really to take advantage and deploy <unk> they.
They need to do this spectrum auctions in many cases.
Europe's been locked down for through Covid delay.
Delays doing spectrum auctions, there we saw the spectrum auction delays in the southeast Asia, where we had the product.
We anticipated to sell last year, and just got pushed into this year.
So definitely some.
Some some impacts.
And I think.
We're still working out of this situation hopefully it'll it'll clear up by the second half of the year, but it's I think it's also important to note too is in both cases. It didn't result in lost market share. So it's definitely a delay.
But it's not we're not we're not losing market share.
Sure actually one more for me and then I'll turn the Mike back over but.
I think last year earlier in the year and middle of part of the year, maybe you had put some longer term.
Targets out there and I'm wondering.
Have you.
Rethought those targets and how do you feel relative to kind of the more medium term relative to where.
You might have thought the companys growth prospects were prior.
Well I think early in the year, we were we didn't make any changes in the mid year, we did make a change.
And with the anticipation that Covid would go through 2020 and into 2021.
At this point of I don't think were making any further changes either way so as the <unk>.
Biggest challenge now is that there is still.
Unknowns I think all of us want to be optimistic and think that we're going to get through this relatively quickly with the vaccine and.
And a lot of the infection rates are going down.
But we just wanted to be careful so we're we're not going to change any of any of our estimates at least.
Through the through Q1, and probably into Q2 until we see some of it.
The real improvement in the economy.
Understood. Thank you very much.
Okay.
Thank you, ladies and gentlemen, once again, if you do have any questions. Please press star one on your phone at this time for the next question is coming from John Bair, John Your line of lives. Please announce your affiliation and pose your question.
Thank you John Bair ascend wealth advisors.
Good afternoon gentlemen.
Hello, John.
I was wondering if you could.
Share any insights on the trends that youre seeing in the rail.
<unk>.
Markets that you address.
Might that ever elusive the infrastructure Bill.
Centrally benefit you.
If they are of a push one of those things through.
Regarding sensor and monitoring of that kind of thing.
Yes, so the rail industry is of great market for PC tell we've been involved in rail for for many years.
A lot of track side of the antennas are positive train control systems.
Like all other industries the rail industry.
Updating systems integrating more Iot applications with sensors communication systems.
And historically for PC Tel.
Going back maybe three years and prior the.
The rail business was really just an antenna play.
Over the last couple of years once we integrated our sales teams and our sales team with rail.
Learn more about the capabilities that we have with our scanning receivers. When you were starting to see some some opportunities there too.
For especially as the Iot systems in the wireless and cellular Iot systems are deployed are in testing.
The rail like like everyone else, we will need to test those networks to make sure. There is good communication. So we've begun to see some some real opportunities on the scanner side too.
Are you seeing more interest in the eye.
Guess, what I'm trying to get at is if you are seeing on the overall uptick in interest in actually purchasing the implementation in the not just kind of plodding along.
And.
I think there's interest for things are opening up for Io and starting to look a little bit more of it saying, okay. Yes, we're going to open the per screens on this kind of thing.
The plenty of trials lots of interest in designing products and as I mentioned interest in in the scanning receivers as well.
The I would say the purchases in that space are.
I would say consistent we haven't seen a huge uptake.
But there are real problems to be solved where Iot systems antennas scanners play a role, but it's really going to be driven by their overall budgets.
Okay and then.
Yeah.
There's been a pretty pretty good move in and agricultural prices and so I'm wondering.
How if youre seeing any impact.
Again higher interest Inc.
<unk> et cetera from the from the AG market and the Oems that you work with the net in that regard.
AG is still strong business for us.
On the antenna side precision agriculture has always been a good market for PC tail. We typically don't go into dollar values of percentages of.
Individual market or customer basis, but I would say the <unk>.
Agricultural markets for PC tailor, our consistent if not a bit stronger.
Okay very good thank you very much.
Thank you.
Okay.
The next question is coming from James Gillespie, James Your line is live.
Just the comment on Thompsons.
The quote try on the system on my yes.
I'm here at Morgan Stanley of chose your dividend as zero.
You might call Mr. Thompson.
<unk>.
Okay update here.
All I wanted to say thank you.
Thank you and that is not true it's not true.
Sure.
Right right five five cents I believe.
So yes. Thank you.
Thank you.
Thank you ladies and gentlemen is there any other questions. Please press star one on your phone at this time.
And there were no other questions in queue I would now like to hand, the call back to David Newman for closing remarks.
So thank you all for joining us. This afternoon, we recognize our employees earlier like the also thank our customers suppliers and distribution partners.
I would like to hope and think are the challenges of 2020 are behind us and will continue to improve through the 2021 day.
We have some opportunities ahead of us and we're looking forward to it so thank you.
Thank you for joining us today for PC tells the fourth quarter 2020 earnings call. You may now disconnect your lines.