Q2 2021 Wireless Telecom Group Inc Earnings Call
You have to turn the floor over to your host Mike Kendall Chief Financial Officer, Sir the floor is yours.
Thank you Kate good morning, everyone and thank you for joining us on today's conference call to discuss wireless Telecom group's second quarter 2021 financial results.
With me today is Tim Whelan the Companys CEO.
Before we begin I would like to remind everyone on the call that our remarks today could include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
In some cases such forward looking statements may be identified by terms such as believe expect seek may will intend project anticipate plan estimate or similar words as well as statements that 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 on the company's 2020 annual report on form 10-K.
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, the GAAP information, we will provide information relating to certain non-GAAP measures.
We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business.
Detailed reconciliations of GAAP measures. The non-GAAP measures are set forth on a reconciliation table in our press release issued earlier today and furnished with the form 8-K filed today with the SEC.
With that it's now my pleasure to turn the call over to Tim Whelan. Thank you, Mike and good morning, everyone.
We are exceptionally pleased with our second quarter results, which we believe continue to demonstrate the success of our long term strategic plan as well as improving market conditions.
Our second quarter financial performance improved across several key measurements and while Mike will go through some further detail shortly I would like to acknowledge some of highlights.
First consolidated revenue increased both sequentially as well as year over year.
Within this increase are some important qualitative points.
These include improving RF component revenues, increasing sequentially, which demonstrates an improving environment of carrier network spend.
In addition, our increasing second quarter revenues include a record quarter in test and measurement, reflecting strength across all three TNF brands.
The Q2 revenue increase also includes a year over year increase in RBS revenues, reflecting improving hardware revenues.
Netting it out the <unk>.
Increased revenues reflect broad based improvements across every product group in the business.
Second.
Gross margins remained strong and represent our fifth consecutive quarter of gross margins above 50%.
We believe this reflects the successful execution of our strategic goal aimed at driving margins above 50%.
Q2 reflects the increasing mix of revenue from higher test and measurement solutions. While the six months ended June 32021 reflects the mix of both higher test of measurement revenues as well as higher RBS software revenue.
And third our financial performance included sequential and year over year, EBIT improvements, reflecting our focus on operational leverage and higher profitability from increasing revenues.
Turning to some additional highlights across our three product groups that contributed to improving bookings and backlog.
In RF components, our revenues in Q2 increased to over $4 million as compared to the last two quarters of revenues, which each were in the low of $3 million range.
This reflects the return of carrier spend driving larger projects and an improved run rate of bookings from distribution and smaller sized orders.
The positive book to Bill ratio on RFC during the quarter was encouraging.
Equally important is the traction underway from an increasing number of projects. This includes orders in the second quarter for stadiums Entertainment parks and other large venue projects, which was our expectation in our last earnings call.
We believe improvements will continue in our bookings in the early part of the current third quarter are encouraging reflecting the potential for continued sequential increases in RFC revenue.
And our test and measurement product portfolio.
We realized top line growth supported by strength across a broad base of customers and applications.
We captured wins in purchase orders from the military.
Semiconductor companies government labs, large defense contractors and satellite providers.
The applications include semiconductor production test.
Avi calibration needs Mil Aero programs and satellite communications to name a few.
We also continued to see growth opportunities from our design in the initiatives and smart noise sources.
All of our team of <unk> brands participated in this broad based growth and Holzworth continues to perform exceptionally well.
Just as important in.
In June we expanded our product portfolio with announcements of new programmable noise generators are new holsworth multichannel RF synthesizer and there are new booton signal generator.
These new offerings reflect the continued returns of our R&D roadmap and the post closing synergies that are leveraging core holdsworth technologies to create new products.
Overall, we believe our investments in test <unk> measurement and expanded focus on new products and solutions designed into larger more complex devices is expanding our addressable markets and paying dividends with increased bookings and revenues.
Within our radio baseband and software business. We are excited about the top line opportunity in this product group and revenue results, which reflect the 135% growth for the six months ending June 30, as compared to the same period last year, including increases in both hardware.
And software revenue.
We also continue to see very good success, signing new software customers, which is reflected in both our bookings and revenues and we remain very excited by the momentum in our total bookings.
Our year to date June bookings and RBS include $6.4 million of new RBS orders, which include for $4 million on the first quarter and $2 million in the second quarter.
These total bookings include approximately $3.7 million of hardware orders and $2.7 million of software and services orders.
Our first half of RBS bookings also represent over a 500% improvement compared to the first half of 2020 and is nearly equivalent to last year's 2020 full year RBS bookings of $6.9 million.
As we announced in June we have signed for new software customers in the first half of the year representing over $2 million of these new rvs orders.
Our RV of software is being used in a variety of five <unk> technology development projects.
Programs include five millimeter wave for Peters for.
<unk> <unk> base stations and small cells U S Department of defense five G research projects and private network deployment.
In each case, we customize the software to the unique requirements of our clients of projects <unk>.
Simplifying their development process cutting time to market and reducing risk for our customers.
It is also important to note that the total potential lifetime contract value of these for new customers is over $6 million.
Subject to continued successful delivery of contract milestones for which only the first $2 million has been recorded as of booking.
And last certain of our contracts reflect potential royalty revenue from our customers if certain production volume deployments are reached.
Our booking numbers do not reflect such royalty amounts as they are contingent upon our customers' production deployments.
Our best estimate of timing of potential royalty revenue is in 2023.
To summarize the second quarter 2021.
Reflect the significant continued momentum in the business with improvements to our financial performance and growth in our bookings and backlog, which helps underpin our confidence in the future.
Collectively inclusive of all of our product groups, we achieved record bookings of $14.5 million in the quarter.
Reflecting healthy growth across all of our product groups and of one to one positive book to Bill ratio.
This in turn has resulted in a record quarter end backlog at $12.5 million and as our clearest data point for expected continued improvements to our financial results ahead.
With that I'm going to turn the call over to Mike to walk us through the financials.
Tim Good morning, again, everyone I'm going to walk through the results for the second quarter of 2021, and then comment on our balance sheet as of June 30 of 2021 all.
All P&L comparisons are on a year over year basis, unless otherwise noted and balance sheet comments. Our June 30 of 2021 compared to yearend December 31.2020.
Before I get into the details of the financials as Tim mentioned in his opening remarks, we're very pleased with our consolidated results for the second quarter, which include revenue growth of eight 2% year over year consolidated bookings of $14.5 million greater than 50% consolidated gross margins positive GAAP operating income of 165.
And cash flow from operations for the six month period ended June 30 of the 394000.
Now turning to the details for Q2 consolidated revenues for the second quarter 2021 increased 915000 or eight 2% from the prior year period.
Out of product group level, RBS revenue increased $1.5 million of 193% on higher sales of digital signal processing hardware cards, TM revenue increase of $1 million or 23, 5% primarily related to our legacy product brands, specifically, our peak power measurement products as customer spending started the rebound during the evolving.
COVID-19 pandemic.
These increases were partially offset by a decrease in RF component revenues of $1.6 million as we continue the feel the overhang of the continuing COVID-19 pandemic in this product group of.
Although below prior year results Q2, 2021 revenue for RF components was above our expectations sequentially, increasing 35% from Q1.2021.
Consolidated gross profit increased 466000 on higher revenues consolidated gross profit margin was flat with the prior year at 51% Q2, 2021 represents our fifth consecutive quarter of greater than 50% consolidated gross profit margin.
Lower gross profit margin on RF components on RBS was offset by higher margins at our TM product group due to product mix and higher absorption of fixed manufacturing costs.
Turning to operating expenses consolidated R&D expenses decreased 211000 or.
Of our 12, 6% from the prior year because of lower third party material and consulting expenses. The majority of which was in connection with our third party <unk> collaboration agreement we expect the.
The continued third party investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap roadmap dependencies, which in turn may create increases and decreases the research and development expenses as a percentage of revenue.
Consolidated sales and marketing expenses were flat as increased commissions and marketing expenses were offset by lower sales salaries and benefits due to lower head count.
Consolidated general and administrative expenses increased 415000, or 17, 4% from the prior year due primarily to higher head count related costs, an increase in bad debt expense and unfavorable foreign exchange impact.
In June we received notification from the SBA that our PPP loan and all accrued interest thereon had been fully forgiven.
Accordingly, we recognized the gain on extinguishment of the PPP loans in Q2, and the amount of $2 million.
This is shown as a separate line item on our income statement in Q2.
Other income and expense decreased 73000 from the prior year due primarily to lower gains on sales of assets in the higher foreign exchange losses.
Interest expense increased 39000 from the prior year due to higher interest on our term loans.
Net income was $1.5 million for the quarter due primarily to higher operating income and the gain on the extinguishment of the PPP loans non.
Non-GAAP adjusted EBITDA was 864000 or approximately $70000 higher than the prior year period, due primarily to higher operating income.
Turning to the balance sheet consolidated cash as of June 32021 was $4.2 million of approximately $700000 lower than December 31, 2020, due to paydowns of our term debt of 470000.
Of the payment of 305002, the Holzworth founders for the final hold back payment in the first earn out payment, respectively and capital expenditures expenditures of 313000.
Cash flow generated from operations for the six months ended June 30 was 394000.
Availability under our asset based revolver was $7.6 million and gross debt was $7.8 million as of June 30 of 2021.
And as previously noted our PPP loans was fully forgiven as of June 32021.
I'll now turn the call back over to Tim for some closing remarks.
Thank you Mike the.
First six months of 2021 have resulted in improvements across the business, including increased revenues strong bookings and an increasing backlog.
We won new customers for our software solutions launched new products and continue to focus on strong Holzworth performance we.
We saw improvements in RF components solutions and expect an overall continued improved outlook for in building our solutions.
On our balance sheet. We are also very pleased with the successful conclusion of the forgiveness of our PPP loan as Mike has described.
You will also note that we launched an ATM transaction, allowing us to be opportunistic and purposeful with equity capital raises.
Since our launch our net proceeds for share sold was 732000.
We intend to be disciplined and carefully evaluate pricing and volume as we execute on the ATM we.
We do not intend to be in the market every day.
As we noted in our prospectus. It is our intention to use any proceeds raised the pay down higher interest debt on our on our balance sheet. The.
This is expected to lower our interest expense, which we believe will have a positive impact on net income.
Additional capital will also provide the company with greater liquidity and flexibility for the satisfaction of our earn out obligations.
Finally, additional capital will also allow us to consider investments in the business accelerate our R&D roadmap and fund opportunities within some of our higher growth markets.
With respect to the next two quarters, we feel good about the business environment and we expect continued improving conditions in the second half of.
Our watch list for key risks include supply chain uncertainty any increasing risk for talent being seen across multiple industries and disciplines among other items.
As a reminder, our software business includes larger more lumpy contracts, which are complex in nature and require more rigorous acceptance testing and revenue recognition.
We expect important software milestone deliveries to multiple customers in late September early October, which currently makes forecasting the next few quarters difficult.
But with an improved overall business environment and with our backlog increases we anticipate continued revenue and profit growth in the second half.
Thank you and Kate if you could please open the lines for questions.
Certainly ladies and gentlemen on the floor is now open for questions. If you have any questions or comments. Please press star one on your phone now we do ask that if you are listening via speakerphone. Please pick up your handset for optimal sound quality.
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Our first question today is coming from Josh Nichols at B Riley. Your line is live you May proceed.
Yes, Thanks for taking my question and great to see that all three of the business units.
I mean all of them.
Wanted to ask a little bit.
The big quarter over quarter improvement, specifically in the RF components business.
Much of that related to ramp that youre seeing in the <unk> spend and now with the company north of $4 million of revenue for the quarter like well. That's the happened do you think the kind of get back to the previous highest pre COVID-19.
On the it could be doing $5 million or so per quarter of revenue.
On that segment.
Good morning, Josh Thanks for thank you for joining us.
Yes, I think I think we noted a little bit in the remarks that the it's really the return of the projects.
That's what we had seen come out of the system of the larger size of projects.
During the second half of last year, and we did see a return of that both on the revenue and importantly in the bookings so that really needs to sustain.
The carriers right now are focused primarily on a macro based deployment of the <unk> spectrum.
That's been published through other equity research analysts reports and also discussed by the carriers, but they still intend to complete the projects and the small cell is necessary for ultimately the deployment of that spectrum. So I think the continued projects is really what's going to continue to drive that.
The appointment of that ultra wide band spectrum.
In the mid band spectrum, which keys into our ultra wide band product portfolio.
Great. Thanks, and then.
You could provide a little bit more color I mean.
Again the.
The RBS business seems very good growth year over year I know you have.
Some deliverables.
<unk> come in between <unk>, and <unk> that May think it's a little bit difficult to forecast, but I guess.
Opportunities.
Think about the second half relative to the first half for some potential improvements in the RBS business.
And how quickly that may scale as you start to see some of the software opportunities kind of materialize and.
And ramp ultimately.
Sure. So we've got some good contracts in the backlog on the delivery of milestones under those contracts will then sales lead to additional bookings and revenue opportunity and I referred to that in total in terms of the $2 million of of <unk>.
Software sales, which represent close to $6 million of total potential contract value. So we feel good that that's the nearest term opportunity just to continue delivering on the milestone deliveries because the contract is already in place for the subsequent purchase orders to be placed that sort of key point number one.
I think in the second half we feel very good about the the revenue opportunity within Rvs as I said, it's difficult with with late September delivery in early October delivery, and then coupled with that customer testing before acceptance and then the Rev. Rec, it's hard to judge where that revenue will fall in.
Q3 of Q4, but we feel confident that it's going to be in the second half of the year the.
The one item we are keeping our eye out on our the semiconductor chips that are used in some of our RF cards and RBS.
And we did see some delays push out of Q3 into Q for.
That push was reflected in my commentary, we still expect an improving overall environment in the second half, but whats on our watch list about whether that hardware it will push out of Q4 into Q1.
But we feel good about the software on our backlog and our ability of deliberate we feel good about new software contracts that we can place under purchase order and we feel good about where we stand on the hardware cards. When we've already taken some precaution on how we think about those deliveries.
Thanks, and you kind of.
The hit on what I was going to ask about some of the potential supply chain headwinds, but.
It seems like that's mostly focused in the RBS business outside of that just kind of looking at the margin profile. So.
You've achieved 50% plus gross margins now for.
I think five sequential quarters.
What's the opportunity to kind of continue to scale that up a little bit as we think about the coming quarters as far as the the.
The product mix on the hardware side, but also software.
Hey, Josh.
I would expect it to be consistent over the next few quarters as compared to the previous quarters. Because we are going to have a bit of a mix of hardware and software. We may have some depending on deliveries we have some some quarters, where we might have more software than hardware, which I will scale up of.
Little bit, but overall I expect it to be pretty consistent with the prior few quarters.
Thanks, guys I'll hop back in the queue.
Great. Thank you Josh.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.
Our next question today is coming from Michael Potter at Monarch. Your line is live you May proceed.
Hey, guys congratulations on the on another good quarter.
Michael Thank you.
Good morning, just just a couple of follow ups on on the last release, you put out the relationship with the pivotal.
And the exciting company, we look them up on the application.
Is there product currently in commercial use or is this is this currently in beta.
I can't speak clearly exactly as to what stage of their product releases at Michael So I can't tell you, whether its beta or in trials or anything else. What I do know is that most of our customers are on it.
Early technology development, and bringing those solutions to market.
So that crosses beyond just pivotal of that crosses.
And to just development that has not yet been brought to any trials that includes in one instance, I know trials that are currently being on.
Conducted.
I would say that that none of our customers are yet at the point of volume production and deployment.
And I made that remark specifically with respect to certain royalty agreements we have on our contracts. So I think the advanced I think they are they are out of the lab, but I can't say that they are in the field trials and testing and betas.
Okay. So this is one of the agreements it sounds like the one of the relationships that would lead to.
The royalty payments if they do commercialize.
Correct.
Got it got it.
Okay.
Another question just on the Opex side, we had good topline growth we were maintaining a good margin, but we had a 17, 5% increase in G&A.
Talk to that of a bit.
Yeah, Hey, Michael So a couple of key things. There. One is we had some head count related expenses certain things that we cut during <unk>.
<unk> 2020 in the midst of the pandemic that we've re instituted in 2021.
We had some increase.
And head count.
We did have a bad debt expense of.
A particularly large bad debt expense this quarter, which is unusual for us.
And then we also had some impact of just the FX FX impact with the pound.
Increasing year over year.
Those are the key components.
Okay.
So we should but going forward it sounds like.
We're going to be running.
At around this level.
On a per on a.
Orderly basis of this $2.8 million dollar.
Mark.
There's going to be.
We're running well.
Well the bad debt.
<unk> expense was a one time one time charge.
Head count related benefits, yes, I would say, they're going to they're going to stay theyre going to stay in place for the for the for foreseeable future.
And the FX as below the line so how much was the bad debt expense.
The FX the FX below the line as gains and losses on our balance sheet items.
The impact of of the FX is just the.
As we we have pounds as the converts into the U S. Dollar for the income statement, that's sort of at a higher rate so that on.
On the line items on the P&L and the head Count Michael also keep in mind that includes our investment in our new CRO right.
<unk> of course was zero in the first half of last year and now reflects a full year of the investment of <unk>. So we feel very good about that one correct.
Alright.
Hey, guys. Thanks, I'll get back in queue. Thank you Michael.
Thank you. Our next question today is coming from Orin Hirschman AIG H partners. Your line is live you May proceed.
Hi, Good morning, how are you good morning on.
No.
We've had a lot of progress for the last few quarters.
I guess you know every time, we take a step forward, we take a couple of steps back and I think the profitability issue or the timing issue on the revenue I realized part of it is.
Really totally out of your control of in terms of the Lumpiness perhaps.
Thought for etc.
Is there some point, where there isn't enough business for them.
Yes.
One of the things happening in all of the things shipped out of it.
There can be more consistency within the overall business.
We're getting close to that yes, I wouldn't characterize the the software so step back.
Characterize it as the.
The opportunity.
Keep in mind, what I noted was that we have multiple deliveries to multiple customers in the second half that's a very good thing.
On the exact timing is what's more difficult so I wouldn't necessarily characterize that as a step back we're very encouraged with the software deals. We've signed we're very encouraged with the ability to bring them for revenue in the second half of the year and we're very encouraged with the ability to book some additional contracts. So.
So we feel very positive about that.
And but the RF.
The longer sort of a prognosis there.
You have some very strong growing piece of it.
What do you how does that how does that sort of interest.
And then for the overall picture.
So our of components again, I think right now we've pointed to in the past the fab.
That the the spectrum auctions, which were completed in the first quarter of the current year.
That was of point of resistance in the second half of last year, because carriers without understanding what spectrum, they own kind of harder time executing on the densification design, so with that being behind us number one and with the Covid.
Scenario looking to improve I think there's both pent up demand for projects to be completed number one and number two.
In investment and increased investment as we think about carrier deployment of the spectrum. They have just acquired and so the analysts following the carriers expect a 10% to 20% I believe is what we've quoted over each of the next three years. So we feel good about the tail winds on RF components, we feel that we have.
Of address of the product set to launch our ultra wide band product set of dresses that spectrum very specifically, we feel very good about our design and initiatives for the new radio is being deployed and we feel very good about the diversification of our product set and the smart coupler solution, which the Saar.
Line to be of public safety monitoring solution. So it's an active solution and we feel that the fire codes are tightening and requiring certain jurisdictions to actively monitor in building wireless systems and that that is a favorable trend that we will grow more slowly over time, but we.
Do think it's the growth trend. So those are the things that I would point to in terms of feeling optimistic about the RF component business.
Okay and the final quick question one of you.
You mentioned quantum computing at the later releases and I think of as mentioned, Pennsylvania on the.
In the prepared remarks.
Can you just kind of set the record strength, where are you in the overall picture of the quantum computer.
The test of the concept.
Peter was there some active ongoing assay.
It is it is part of the overall solution it's called for.
Phase noise coherency in our solution Spa.
Specifically, the multichannel wireless synthesis device.
Applies itself to that phase noise, coherency, which is the ability to get those adams in a stable state necessary for the.
Those those computations and for that those designs to be completed these are massive I've seen pictures. These are massive.
Sure.
Lab architectures, we are one component of that but we feel good we feel good that we have multiple customers and all of the brand names that talk about getting into quantum.
Computing, including IBM, Google and Amazon. So it is not necessarily I think going to be.
A key material driver of growth, but it's a it's a good case study of where our solutions are specialized solutions fit into.
Hi, technology specialized needs and how we've accomplished and satisfies those customers' demands.
Okay.
The final comment.
Yeah.
Obviously, we're at 5% of plus shareholder here and one of the key thing of it that the ramp.
You're able to see the earnings leverage on the effect.
Yes on the ATM in place that actually pulled on the even at these level.
Think of it.
And I'm feeling confident of your cash flow what should we take away from that now again ahead of the excess cash flow.
The definitely reduced the pay down debt.
Sure. So so again I think the our intent is to be both opportunistic and purposeful.
As we think about our balance sheet, we think about it as a good opportunity.
At responsible levels of price and volume.
Potentially be in a position to raise cash, especially when we see the volume spikes as we've seen over specifically late June early July.
Debt, if we raise cash for that vehicle, we can pay down high high interest debt, which would translate into.
Interest savings and therefore translate into higher net income.
So as you can tell from from the number I've called out we've raised $730000 of approximately a little bit more than that so we haven't been in the market. Every day, we don't tend to be in the market every day, but if we see that that volume spike and at certain prices.
We will raise some cash to pay off some high interest debt and we've mentioned that in the prospectus as well.
You realize that that creates of overhang for the.
Think of like off the excited about the birth of a feel like Oh, that's kind of go on and buy stock in there.
Yeah.
Why should we do that.
Moving the company here lately.
The fact.
And the indicative of the fact that the.
All of that they're going to have enough cash flow to pay down debt high interest debt right.
So yes, we feel.
We feel good about the business, we think it's the appropriate.
The action to take to strengthen the balance sheet the.
Three expires in the late September timeframe I believe at September 'twenty, one so.
So we will keep our eye on the market and we'll do the responsible thing.
Okay.
Okay. Thank you very much pleased with the same room don't renew.
Anyway.
Thanks.
Thank you.
Once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.
We have no further questions in queue. At this time do you have any closing comments you'd like to finish with great. Thank you Kate. Thank you everyone for joining us today.
Have a great summer and we look forward to speaking with you again soon.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.