Q4 2021 PCTEL Inc Earnings Call
Welcome to the P C till fourth quarter 2021 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.
I'll turn the call over to Kevin Mcgowan the company's CFO .
Thank you for joining us on today's conference call to discuss <unk> fourth quarter 2021 financial results with me today is David Neumann the company's CEO .
Before we begin let me remind you that this call may contain forward looking statements and projections based upon current circumstances.
While these forward looking statements and projections reflect <unk> best current judgment, they are subject to risks and uncertainties, particularly related to the COVID-19 pandemic.
Mobile supply chain and logistics challenges.
Spansion of our distribution channels and the impact of our acquisition of Smart Tech wireless AP 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 .
The company assumes no obligation to update any forward looking statements or information, which speak as of their respective dates.
Additionally, our commentary will include reference to the following non-GAAP measures.
non-GAAP gross margin percentage non-GAAP operating expense.
non-GAAP earnings per share and adjusted EBITDA.
We believe these non-GAAP measures facilitate comparability of results over different periods.
A full reconciliation of these non-GAAP measures to GAAP 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 good afternoon, and thank you for joining us.
We're pleased to report revenue growth in 2021 and record setting incoming orders and backlog as we begin 2022.
Although disruptions in the supply chain creates significant challenges in 2021, we made progress throughout the year and had a strong finish.
This gives us optimism about our company's future and our ability to grow consistently and challenging environments.
In today's call I'll share a summary of the fourth quarter and annual financial results and then highlight key growth areas for both our product lines.
Global pandemic created disruptions in both supply and demand, particularly in Asia and Europe . Despite.
Despite these disruptions in 2020 , one we successfully acquired and integrated Smart Tech. We continued our investments in new R&D initiatives, resulting in eight patents being issued in the U S.
We launched market, leading products and most importantly, we met the delivery needs of our customers as you may have seen in our press release issued after the market close we achieved 13% growth in annual revenue from $77 5 million in 2020 to $87 8 million in 2021.
The product mix, which was more heavily weighted towards antenna sales in 2021, together with increased cost for freight logistics raw materials, mainly for components and increased sales commissions reduced our non-GAAP earnings per share from 31 in 2020 to 27 and 2021 we.
We remained profitable throughout the year with consistent quarterly increases for revenue EBITDA and non-GAAP earnings per share.
I'm pleased to share that fourth quarter revenue and earnings were the strongest of the year and exceeded our guidance. In fact, we set a record for incoming orders and backlog and we expect most of the backlog to be delivered in the first half of 2022.
Orders are strongly leading indicators as we enter the year and were driven largely by growth with existing antenna customers successful expansion of our distribution channels and the introduction of new products.
As shared in our press release in the fourth quarter, we achieved $26 million in revenue $3 1 million in adjusted EBITDA, and 12 cents and non-GAAP earnings per share all sequential improvements over the third quarter.
We achieved non-GAAP gross margins of 46, 6% for the quarter, a slight decrease from the third quarter and just below the average for the year before.
Before I discuss our two product lines and growth initiatives for 2022, I want to mention the successful completion in the first quarter of the transition from our company owned factory in Tianjin, China to contract manufacturers.
This manufacturing transition that start in 2019 and was completed in this quarter eliminated significant fixed cost. It has already generated cost savings that have helped us offset increases in commodity prices unfavorable currency exchange rates and shipping costs.
With the final closure of our factory in the first quarter, we expect net net cost savings in 2022.
It also reduces our operating risks and allows us to quickly expand our capacity given the ability of contract manufacturers to ramp up production when necessary as was the case when several of our customers place large orders this past year.
2022.
Growth initiatives of our two product lines include.
Evaluating and further developing our distribution channels and launching new products, including <unk> tools, industrial Iot radio products and antenna platforms.
From a regional perspective, the business in the U S remains strong our team in Asia is doing an excellent job winning new customers for existing antenna products in test and measurement tools and our presence in Europe is growing.
Smart Tech by all measures has been a successful acquisition and it has added antenna products for new applications, such as electric vehicle charging stations cargo tracking immaterial handling the.
The smart tech team exceeded their financial goals for the year and have successfully navigated the supply chain and logistics issues to provide a high level of service to customers. There is a talented team and we're glad they're part of PC tale.
Together, we launched four new antenna platforms and secured key design wins and metering cargo tracking and rail.
Our large Oems in the utilities agriculture, industrial public safety and Wi Fi markets had strong growth in 2021, and we anticipate significant opportunities through OEM channels and our antenna products in 2022.
<unk> has one of the broadest antenna and device portfolios to serve our target markets, including those just mentioned plus smart transportation metering and rail.
Our extensive product portfolio is attractive for distributors and we added five strategic channel partners in 2021 to expand our market reach.
On the test and measurement front, we're very excited about the launch of our new G. Flex scanning receiver for both <unk> cellular and broader government applications such as signal intelligence.
This product is the most advanced scanning receiver on the market. The G. Flex is functionality and performance in a compact unit that is equivalent to operating four to six of our competitor scanning receiver simultaneously.
We announced the product at the end of the third quarter and within the fourth quarter, we delivered G flex to the leading operators around the world.
The deployment of <unk> networks continues with just over 25% of the global operators launching <unk> mobile services by the end of 2021.
Approximately 70% of the global operators arent investing stage for <unk> deployments, which may include spectrum auctions trials and planning for deployment.
Despite pandemic related slowdowns for for spectrum auctions, and Rollouts in Europe , and parts of Southeast Asia <unk> deployments continue to grow driving the demand for high performance scanning receivers like our G flex.
In addition to our strong antenna sales of public safety markets.
We have expanded our market for scanning receiver solutions to address critical communication networks, including public safety.
Our public safety scanning receiver solution based on the IV flex product ensures the quality of in building wireless communications for first responders.
We performed well in the public safety market by selling through distributors and across 140 certified engineering service companies in the U S, which can be found on our website and.
In the second half of 2021, we launched Seahawks Central which is our cloud based test management storage and analytics platform for public safety network applications.
The subscription based service allows stakeholders, including engineering service companies building owners and government jurisdictions to easily manage the collection process and access final reports through an online map based portal.
In addition to organic growth, we continue to evaluate acquisitions as an important component of our long term growth strategy for the company.
We believe there'll be opportunities to grow <unk> through adding complementary products and markets and new regions.
With that I will now turn the call over to Kevin for a closer look our fourth quarter and a discussion of the financials Kevin.
Thank you David.
I will review the financial results in more detail for the fourth quarter ended December 31, 2021, and I will provide first quarter 2022 guidance as David mentioned, we reported sequential financial improvement for revenues and earnings in the fourth quarter and the reported revenue and earnings for the quarter were above our guidance.
Total revenues of $26 million.
Approximately 23% higher than the fourth quarter 2021, compared to the fourth quarter 2020.
Revenues for antennas and industrial Iot devices were $19 1 million, an increase of $6 2 million compared to the fourth quarter 2020.
This increase for the fourth quarter of 2021 is due to both the revenue recognized from Smart Tech, which was acquired on April 32021, and.
And an increase in organic revenues related to antennas for fleet and public safety applications.
Test and measurement revenues were $7 2 million for the fourth quarter of 2021, our best revenue quarter for the year.
Test and measurement revenues were lower by $1 4 million compared to the fourth quarter of 2020 as last year's fourth quarter was a record record revenue quarter for the company as test and measurement product line.
The fourth quarter of 2021 gross profit margin on a non-GAAP basis was 46, 6%.
Which was three 8% lower than the fourth quarter 2020.
The decrease in the gross margin percentage in 2021 compared to the prior year was primarily due to a higher mix of antennas and industrial Iot devices.
The non-GAAP gross profit margin percentage for test and measurement products was higher by five 8% in the fourth quarter of 2021 compared to the fourth quarter of 2020 due to product and customer mix.
The non-GAAP gross profit margin percentage for antennas and Iot devices was lower by 2% in the fourth quarter 2021, compared to the fourth quarter of 2020 as higher cost for La <unk> logistics and less favorable product mix offset favorable operating leverage.
Operating expenses on a non-GAAP basis were $9 8 million in the fourth quarter of 2021, an increase of $1 6 million compared to the fourth quarter of 2020.
The increase results from inclusion of <unk> operating expenses.
In addition to higher employee costs, including incentive compensation programs.
Higher engineering development costs and higher <unk> costs.
Operating expenses for the fourth quarter 2020.
Were lower as a result of reduced employee incentive compensation and measures. The company took at the beginning of the pandemic to control costs, including temporary reductions in salaries travel and other discretionary spending.
Adjusted EBITDA was $3 1 million in the fourth quarter of 2021 compared to $3 2 million in the fourth quarter of 2020.
<unk> improved sequentially by $1 8 million.
EBITDA as a percentage of revenue was approximately 12% in the fourth quarter of 2021.
Compared to approximately 15% in the fourth quarter of 2020.
And non-GAAP diluted earnings per share was <unk> 12 in the fourth quarter of 2021.
Here by <unk> sequentially and the same as the fourth quarter 2020.
Cash and investments there were $30 8 million at December 31, 2021 or.
Our cash and investments declined by approximately $1 7 million.
Due to negative free cash flow of $1 million and.
<unk> 7 million of cash used in financing activities.
Free cash flow was negative in the fourth quarter due to an increase in working capital.
As accounts receivable increase in relation to higher revenues.
And inventories increased to ease supply chain constraints.
For the full year 2021 revenues increased by approximately 13% to $87 8 million as revenues for antennas and Iot devices increased by approximately 25% to $63 million.
And revenues for test and measurement products decreased by approximately 7% to $25 7 million.
The 2021 gross profit margin on a non-GAAP basis was 47% compared to 49, 5% in 2020.
Due to a higher mix of antennas and industrial Iot devices.
The adjusted EBITDA for the full year 2021 was $8 5 million compared to $9 1 million in 2020.
Our first quarter is historically, our lowest revenue quarter of the year, we anticipate that revenues will be lower sequentially in the first quarter of 2022, but will be higher compared to the first quarter of last year.
Our revenue guidance for the first quarter is in the range of 21 to $21 $5 million and.
And our non-GAAP earnings per share guidance is in the range of negative <unk> <unk> to breakeven.
We project, our non-GAAP gross profit margin percentage to be in the range of 43% to 44%.
With that I will now turn the call back to David.
Thank you all for joining us before we take questions I'd like to share a few closing thoughts.
We're a stronger position entering 2022, then we have been in several years. The investments we made in the past few years to increase our distribution channels develop a world class scanning receiver that G flex expand our presence and product line in Europe with the acquisition of Smart Tech invest in industrial Tech devices and innovate new.
Antenna platforms, all strengthen our position in the market and we will continue to contribute meaningful revenue in 2022 and beyond.
During the pandemic, we prioritize take care of our employees and I'm proud of my team and how we've worked together to support each other and maintain a high level of customer service.
Appreciate their dedication flexibility and a long hours to support our global business.
At this time last year, we believe the second half of 2021 would be back to some type of normal.
Though challenges persisted through the second half we focused on our customers remain profitable and built a healthy backlog.
We need to remain vigilant evaluate risks and be prepared to act quickly I have the confidence in this team and our ability to grow the business.
We appreciate our loyal customers and the opportunity to serve attractive and growing markets. We'll continue our mission to broadly distribute industrial Iot devices antenna solutions and test and measurement tools to ensure wireless connectivity and an increasingly wireless world.
With that Kevin and I are available to take questions operator.
At this time, we will be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pick up your handset if listen in on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Once again, if there are any questions or comments. Please press star one.
Your first question for today is coming from Tim Mcconnell. Please announce your affiliation then pose your question.
Hi, Yes, it's Tim O'connell chain of Lakes investment fund.
Guys can you hear me.
Yes, yes, okay.
Good.
So you mentioned growing backlog.
Can you shed any more color on that I assume that's on the antenna side of things but.
I don't know if you can quantify that at all you mentioned that a lot of those would be a lot of that will be delivered in the first half of the year and with the Q1 guidance.
You know being less in Q4, maybe that would just help understand you know two.
<unk> 2022 as a whole.
Sure Yes.
So the scanner business is much more transactional within the quarter, just because of lead time to deliver so much shorter.
Correct.
Almost all the backlog is from from the incentive business.
And some of the.
I would say global challenges actually helped us secure additional backlog.
Because many of our customers have a supply chain challenges as well so wanted to ensure that they had the antenna products that they would need coming into 2022, which helped.
Help backlog.
Going in.
Also had a.
Price increase system of our customers wanting to get ahead of price increase.
Place additional orders.
So most of the orders that will be delivered in the first half of 'twenty two are from the antenna business.
With respect to Q1 Q1 is typically a light.
It's normally our lightest quarter of the year.
Part of that is due to the scanner business.
Most of the scanners are driven by deployments, which are done by the wireless operators globally.
In Q1 is when budgets are discussed and approved and we typically don't start to receive significant orders for scanners until almost the middle.
Q1, and then it's heavily loaded towards the back end of Q1 for scanners.
The antenna business.
Is it is typically a bit lighter in Q1 as well so yes.
Our guidance for Q1 is less in Q4.
And just about every year Q4 is our strongest.
Q1 is probably one of the later quarters.
Any color maybe you don't want to give an exact number quantified the backlog, but any any color in terms of maybe the growth of the backlog you know percentage wise or how it compares to other quarters.
So that yeah. That's my question on that I don't think we want to share the actual number Kevin I don't know if you can give any.
Any.
Estimates or anything you might want to share.
Just in general it's.
Yeah on the antenna side its in the magnitude of probably twice what normally would be done at the end of the year at.
Okay.
And then kind of.
In terms of market share are you seeing any market share gains in either side of the business. I know you came with a G flex on.
On the scanner side.
Take.
Taking any market share there and if so maybe what parts of the world.
And on the antenna side, any kind of design wins or whatnot.
In terms of just competing better against.
Some of these other companies.
Companies in your space.
Sure, Yes, so the <unk> is definitely going to be an important product for the market. We've always been I would say very strong in the U S.
Well for operators within the U S standardized on our scanning receivers and the other interested in upgrading to the to the G. Flex because it is the only <unk> scanner on the market that will collect information across the whole 100 megahertz of bandwidth.
For measurements.
It also will do all the technologies in one unit so it's very attractive for benchmarking applications.
Necessarily think we took any additional market share in the U S. Because we're already a very strong.
I think what's interesting with the G flex the tier one operators some of the leading tier one operators that really value.
Performance and quality of their network.
Bought the <unk> flex sooner as soon as it was ready and can announce at the end of Q3 and Q4 in.
In Asia, I think we're maintaining maybe slightly increasing our market share.
So we are always relatively strong in.
North.
East Asia, So South Korea, Japan.
Even China.
Some strength.
I think longer term China will.
Reverts to Chinese vendors, so I don't think we'll be there for.
For a long period of time, but.
China is still a value technology and the value of <unk> products.
And then Europe Europe .
<unk> is starting to really pick up so some of the spectrum auctions are are occurring some of the regions of the U K for example.
Progressive starting to aggressively build out the <unk> network.
They're very interested operators, who are very interested in our G flex and our team there is doing a good job. So I think we will capture some more market share in Europe , where our main competitor has been relatively strong so I think thats.
That's a big plus.
On the antenna fronts.
The acquisition, we talked during the call about smart Tech.
<unk> has some products in areas where.
<unk> has the capability, but theyre just not markets that we were we concentrated on.
A couple of those markets EV charging stations.
<unk> is the leader in the Nordic countries.
The.
Walloping antennas and deploying those systems there.
<unk> a leader in Europe for smart metering applications, while they're leader in Europe .
For tracking environmental cargo.
So those are product lines that we think.
We know that have applications in the U S, especially with the EV charging stations.
So not only are we excited with their performance this year.
The team has.
Some products are going to really do well for for <unk> globally.
Talented team.
And with a larger presence in Europe .
We believe we can cross sell some of the incentives that we've been selling in the U S into well into broader Europe .
Okay, and then kind of my final questions are around this G flex.
Historically, you've been selling the wireless carriers.
But this G flex.
Appears to open up a whole new market government military maybe you can kind of comment on.
The size of that market.
And when you think you'll get some real traction there.
What kind of those numbers could look like.
Yeah even.
Before I talk about government and G flex we.
Past year or so.
Starting to break into the public safety market outside of the cellular market for testing.
Systems for first responders spring building and that was actually using the IV flex. So we have some experience.
Dressing markets that are beyond cellular but to your point, Tim the G. Flex does open new opportunities.
And I would say over the last 10 plus years.
<unk> sold some our scanners into government and military space.
And for the most part we would get feedback that there were a couple of features that would really make a product.
More valuable.
And with these scanning receivers it's typically.
Three year development cycle.
From start to finish to the new scanner.
That form so with the G flex from the beginning.
<unk> added these two or three features that we were getting feedback from the government.
And they're in the G flex.
So the next step is to promote these feature sets promote capabilities.
Leverage some of the relationships that we have with our Oems that also have ties into the government space.
This year the goal is to do some trials get the equipment out there get some real field tests, which we have some we have been invited to attend.
Sessions.
And evaluate different test tools and Keystone will be included.
But in terms of real revenue generation.
I think we will have an opportunity to maybe close a couple evaluation units or a couple of smaller deals by the end of the year, but the real revenue.
We will start in 2023.
Once we're approved we're into the budget we're into the T rfps would be some design wins.
And I think it could be a significant contributor in 2023. If you just look at the size of the Tam I think you were asking about market.
I believe the government space could be comparable size, maybe even a bit larger than further market. So it gives us.
Basically the opportunity to especially with public safety and gave us an opportunity to double the size of the market that we're serving now.
Wow.
That's pretty.
Presses too because the scanner business has been kind of cyclical.
Not necessarily a growth business for you guys historically.
But.
Is the.
That market for the G flex doubles does that mean that.
What does the competition look like I mean, you kind of have large market share in the wireless carrier for scanners as the military market. You think you could get the same type of market share.
It's going to be.
Not the incumbent so it's going to be a battle to get that market share, but I think.
Given that we put the three years to develop this technology.
There isn't another scanner on the market today matches with the G flex can do so.
So in the government military space there are more competitors and they are different niche areas. We will have to take market share from some of those competitors, but the size of the market as I said I think it's probably about the same size and scale of the market. So there's a real opportunity.
Okay.
Alright, well thanks, thanks for the answers guys I'll jump back in queue.
Okay makes sense.
Your next question is coming from Jason Smith. Please announce your affiliation then pose your question.
Yes, Jason No with Lake Street capital markets, Hey, guys. Just wanted to follow up on your comments on smart package stuff kind of approaching a year since you announced the acquisition just curious what end markets you are feeling a bit more bullish on now that you've <unk>.
Had that integrated within the broader PCT pre detail umbrella.
Yes, so thanks, Jason Yeah. Thanks, Thanks for the question.
Im actually at our Smart Tech offices in Sweden. So we are holding some integration and strategic planning meetings.
We closed the deal.
We're approaching approaching a year. So once we we closed on a smart tech for the first six months to eight months, we basically let smart tech run on its own with very little interference.
Yes.
Good part of that was we just couldn't travel with Covid.
You can see them in person until until December .
No.
Performance in 'twenty, one it was really driven by by the team I mentioned in the comments during the earnings call.
It's the area of electric vehicle charging stations as a market, but we're not in and we will be able to leverage some of their wins, although we're in all the Nordic countries.
They're in material handling.
Forklift systems.
Traditionally or historically havent been answers, there's real opportunities there.
Even though PC told us quite a bit with vehicles, Gnl's us and multimode antennas for broad.
Our base of vehicles from AG two buttons.
Smart Tech is very strong and off road.
Logging systems and off road systems for their internal so that's another market for us.
Some some very attacks won't see Iot applications.
They're very strong in the high end.
<unk> applications a deadly.
As a customer.
It's very complementary.
What <unk> has today.
Now that we're I would say in the second stage of integration, we're really looking to see how we can leverage their base in Europe , a week, so more PC, telling tenants very strong and that you have.
So tenants.
Leverage the team here to get into the public safety space some of the European markets for <unk> scanning receivers.
Then on the flip side with the infrastructure being built out in the U S.
Along with electric vehicles.
To leverage the not only the products, but the reference accounts.
<unk> has developed in Europe .
To get into the EV charging stations in a bigger way in the U S.
Okay that makes a lot of sense and then obviously you mentioned some nice opportunities for growth with the cross selling opportunities, but just curious if the sales infrastructure and sales team you think its fully built out to address the numerous end markets Youre now going after.
I think in the U S. We're in very good shape.
We continue to make investments in.
In Europe , So I think there are opportunities for.
For PC tell to add some talent on the sales front and we actually have openings.
Executive sales positions in Europe . So the products are there we have our existing sales team we have the.
Our sales team from Smart Tech, but I think one of the benefits that <unk> brings to smart tech.
As our scale.
<unk>.
The level of cash that we have no debt.
So we're in a very good position to make some investments and help will help the team here will grow faster.
Okay. That's helpful. And then just the last one for me and I'll jump back into queue, just sticking with the antenna business. Just curious your thoughts on what Youre seeing from an inventory standpoint at distributors.
Inventory standpoint at distributors.
We actually have I haven't looked at it recently, but we have visibility.
Inventory of action through our web site.
So customers can come to the <unk> website pick an antenna and it will bring up all the distributors that have that carry that antenna and also the inventory levels that they have.
Some of our distributors and partners.
Prefer to carry more inventory.
It's just their strategy they want to make sure that that product when customers Tom.
Other distributors are more selective and what inventory they carry but in a general sense.
<unk> see.
Our distributors carrying excess inventory.
I think it's been pretty steady and it's been encouraging even with the addition of.
The distributors that we've added this past past year.
That their distributors.
We're very selective in what we pick is for it because they had a strategic market or the strategic reach that we haven't had and we're also very careful that we're not.
Creating too much competition between the distributors.
I'm pretty comfortable with.
With the inventory that they're carrying but it does vary distributor by distributor.
Oh, Okay got it.
For me it really appreciate the color guys. Thank you.
Thank you Jason.
Okay.
Your next question is coming from Michael Wasserman. Please announce your affiliation then pose your question.
Yes, hi, with Moors, <unk> Cabot Hi, David.
I like what.
With technology developments over the past couple of years.
Have.
<unk> thrown you a curve ball if any have been most unexpected.
If any if any of those exist in your markets obviously.
Wow, that's a great question.
Technologies that are throwing us a curve ball.
Well, given the antenna space and even the scanning receiver space technology is changing.
Happily.
It's been I would say it challenge to keep up with not necessarily technologies, but some of the components that we used in the systems to support those technologies.
So we regularly have to go through Redesigns and this is just part part of the product cycle Redesigns.
Ponant goes end of life.
And if there has been a curve ball and it's related to Covid.
With the supply chain issues on components.
We really had to be creative.
The team has done a really good job of sourcing components. Some of these components.
Not only are the lead time may have increased from four to six weeks in some cases 50, plus weeks, but the cost of those components. It has gone up quite a bit too.
So if there was a curve ball.
I don't necessarily think it's a technology because were.
We tried to stay on top of that I think the curve ball is really.
Supporting this technologies with some of the supply chain challenges.
Willing have really having to step up to make sure that we can we can get to a component that we need to to build product.
Okay. Thank you.
Thanks, Mike.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
There are no further questions in queue I would like to turn the floor back over to David for any closing comments.
Thank you all for joining us this afternoon.
In addition to recognize it recognizing our employees I'd also like to thank our customers suppliers and distribution partners are excited to leverage the accomplishments that we had in 'twenty one to drive growth in 2022, and we look forward to updating you on the next call have a great afternoon and thank you.
Thank you for joining us today for PC tells fourth quarter 2021 earnings call. You may now disconnect your lines.