Q3 2022 PCTEL Inc Earnings Call
Welcome to the <unk> third quarter 2022 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 over to Kevin Mcgowan the company's CFO .
Thank you for joining us on today's conference call to discuss <unk> third quarter 2022 financial results with me today is David Neumann the company's CEO .
Please note that a webcast replay will be available on our website.
Before we begin let me remind you that this call may contain forward looking statements and projections are based upon current circumstances.
While these forward looking statements and projections reflect <unk> best current judgment they are.
Are subject to risks and uncertainties, particularly related to the COVID-19 pandemic.
Global supply chain and logistics challenges.
Political and economic circumstances, including a potential recession and.
And opportunities to expand our distribution channels that could cause actual results to differ materially from these forward looking statements and projections risk.
Risk factors that could cause <unk> actual results to differ materially 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 all for joining us.
In today's call, we will provide an overview of the third quarter performance and discuss our outlook for the upcoming fourth quarter.
We will also share our high level views of fiscal 2023 highlights the progress, we're making on our growth strategies and.
I will review significant accomplishments in both product lines.
Start with a few highlights for the quarter and then Kevin will walk us through the financials.
Overall, we're very pleased with our team's performance this past quarter as we delivered $26 million in revenue for Q3, which was a 16% increase year over year and a 4% increase sequentially.
The company has steadily grown revenue year over year over the past seven consecutive quarters, driven by strong execution innovative product releases and customer demand.
non-GAAP earnings per share was <unk> 14, compared to <unk> in the third quarter of 2021.
non-GAAP gross margin was 46, 2% due to strong scanning receiver sales.
I am proud of the entire <unk> team as we've delivered high service levels to meet our customers' needs while simultaneously navigating a challenging operating environment highlighted by significant inflationary pressures and supply chain disruptions throughout 2022.
While these supply chain and logistics challenges remain we saw an encouraging improvement in transit times and costs in the period.
Our long term material logistics planning conducted in close coordination with our customers enable us to achieve measurable improvement in our shipping costs, which contributed to higher antenna gross margins in Q3.
The company is on time delivery metrics remained strong and we continue to receive excellent supply ratings from our customers.
A recent innovations, including new multimode antennas and uplink measurement systems for public safety wireless networks.
With that I will now turn the call over to Kevin for a closer look at our third quarter performance and a discussion of the financials.
Kevin.
Thank you David.
Total revenues were $26 million at the mid point of our guidance range, and where approximately 16% higher in the third quarter of 2022 compared to the third quarter of 2021.
Primarily due to higher volumes in both of our product clients.
Revenues for antennas and industrial Iot devices were $18.7 million in the period, an increase of $2 million compared to the third quarter of 2021.
Driven by strong sales and our agriculture and utilities and markets.
Test and measurement revenues were seven 7 million for the third quarter of 2022 $1.8 million higher compared to the third quarter 2021, primarily due to stronger sales for five G products through OEM customers.
Note. This was the highest quarterly revenue for test and measurement products the pre pandemic period.
Third quarter of 2022 gross profit margin and a non-GAAP basis was 46.2%.
Love our expectations. However, it was 50 basis points lower than the year ago period.
A decrease in the gross profit margin was primarily due to lower gross margin performance within our test and measurement products.
non-GAAP gross profit margin for antennas and industrial output devices in the third quarter of 2022 improved by 3.1% sequentially and by 0.6% compared to the third quarter of 2021, primarily due to the favorable impact of lower freight costs, resulting from the teams proactive mitigating actions.
As previously mentioned.
And operating leverage.
The non-GAAP gross profit margin for test and measurement products was lowered by $6, 4% in the third quarter of 2022 compared to the third quarter of 2021 due to product mix and higher component costs.
Operating expenses on a non-GAAP basis, where nine $4 million in the third quarter of 2022, an increase of 5 million compared to the third quarter of 2021 and $3 million lower sequentially.
The year over year increase primarily resulted from higher incentive compensation expenses and costs related to the return of business travel.
Other income was positive point $2 million in the third quarter of 2022 due to interest income on investments and foreign exchange gains.
I suggested EBITDA increased by 41% to $3.3 million in the third quarter of 2022 compared to $2.3 million in the year ago period <unk>.
Jested EBITDA as a percentage of revenue is 13% in the third quarter of 2022 <unk>.
Compared to 10% in the third quarter of 2021 and.
And non-GAAP diluted earnings per share was 14 in the third quarter of 2022 higher by six compared to the third quarter of 2021.
The increase in EBITDA can be attributed to improve margins for antennas and mix Favouring, the strong test and measurement revenue for the quarter.
Cash and investments are $28 million at the end of the third quarter of 2022.
Compared to the end of the second quarter or cash in investments decreased by approximately point $3 million.
Payment of our quarterly dividend of $1 million was approximately equal to our free cash flow.
Our use of working capital during the third quarter reflects an increase in inventories inventories are higher because we made some strategic decisions.
To increase our inventories to keep peace hotel in front of supply chain constraints and also because of temporary delays with certain antenna customer orders due to their supply chain constraints with chipsets.
Ah cash and investments on hand, and free cash flow supports our capital allocation strategy of paint quarterly cash dividends and having available funds for M&A activities.
Turning to our fourth quarter outlook, we expect to achieve revenues in the range of $25.5 million to $26.5 million.
The fourth quarter of 2022 revenue guidance at the midpoint of the range is approximately the same as the fourth quarter of 2021.
<unk> as the third quarter of 2022.
Based on our anticipated product mix, we expect our non-GAAP gross profit margin percentage to begin the range of 47%.
49%.
And we expect our non-GAAP earnings per share to be in the range of 14 to 16.
Teams are executing well and we're pleased with the company's performance to date.
We continued to see opportunities for our products in the market we serve although the risks of a global macroeconomic slowdown in 2023 is increasing caused by the persistent inflationary environment <unk>.
Supply chain constraints and the conflict in Europe .
Although our supply chain team has done a good job ensuring we can obtain parts to produce our products. There is still uncertainty for our antennas given the continuing supply chain challenges for chipsets.
Even with the global economic challenges, we are forecasting modest organic growth in 2023 potentially complemented by M&A activity.
With that I will now turn the call back to David.
Thank you Kevin.
Now I would like to provide an update on how we are progressing against our three growth strategies, which we mentioned earlier, including launching innovative wireless products, expanding and leveraging distribution channels and increasing market share by providing more components of the overall systems.
In terms of our first growth strategy of launching innovative products or product suite presently includes wireless Iot devices, and tennis and RF test and measurement equipment used across a variety of wireless technologies, including five G. Wi Fi six E P 25, Laura and others.
Our wireless Iot devices include rug is access points Iot radio modules for remote devices and integrated wireless sensors.
I'm pleased to report that we received FCC approval for Iot radio modules, which are currently several trials with customers who are planning to go to market with our solution of 2023 the.
The access point product is now being promoted through one of our largest online distributors and the radio module will be available to our distributors in the fourth quarter or.
Access points in radio modules are well suited for precision agriculture heavy machinery and other applications.
With respect to antennas, we see continued strength and rail agriculture utilities logistics, and vehicular markets, including incentives for electric vehicles and EV charging stations.
The global market for EV charging stations has the potential to grow significantly over the next three to five years.
Also in the vehicular space, we announced the availability of our new multi <unk> configurable antenna for public safety mass transit telematics infotainment systems and fleet management applications.
The multi <unk> 71 antenna maintains PC tells high arc performance standards, and a flexible discrete rugged low profile shark fin design.
And this is a tenant allows a simultaneous operation of customers existing radio networks, we expect deliveries of the new multifamily antenna to begin by the end of this year.
On our last call, we discuss our <unk> scanning receiver that is used by five G wireless operators and government agencies to test our performance.
The G. Flicks scanning receiver was designed specifically to meet the three G. P. P specification and demands of Multicarrier five G network testing for wireless operators globally.
We believe there will be growth for this platform to support increasing adoption of five G in private and government applications in 2023 and beyond.
Additionally on August 1st we launched our seahawk monitor for automated critical communication testing for public safety networks.
The system provides automated spectrum monitoring to quickly identify interference in other issues that impact the reliability and building wireless coverage.
The ethylene path, which is a link from the handset to the tower is more vulnerable to interference the.
The seahawk monitor collect uplink signal strength to complement downlink data in order to test the entire communication path.
This data helps building owners identify RF transmission problems and enhances the reliability of in building critical communication networks trials.
Trials continue and we expect initial orders starting in the fourth quarter.
Additionally, last week, we were pleased to announce an updated release over automated cloud based platform Seahawk central.
Which streamlines the testing of public safety networks.
This product will become increasingly essential is more states about mandatory indoor communication coverage standards to support first responders.
Moving to our second growth strategy, we continue to make solid progress and expanding and leveraging our global sales channels.
We have also remained diligent in making strategic investments to grow European business <unk>.
Along those lines, we hired a senior manager for distribution in Europe , and our Onboarding, our first larger paean stocking distributor.
Additionally, we recently completed a two day customer event in Stockholm to share a European strategy learn more about how our products or use that.
That was well received and our customers value added resellers and distributors appreciated learning more about our product lines.
We identified and are negotiating contracts with three other international distributors to complement those in the U S and Europe .
Areas of strength and and markets includes multiple design wins with international electric vehicle manufacturers that will generate revenue later in 2023.
We believe growing EV markets provide an opportunity for both supplying incentives for the vehicles and for the charging stations.
We also saw strong sales of agriculture utilities, and new embedded antenna opportunities.
We expect that our channel partners will drive long term growth in these markets through their wider customer reach.
Our third growth strategy is to increase market share with existing customers by providing integrated solutions.
The industrial Iot market expands there will be greater need for turnkey integrated solutions and embedded incentives, we continued to integrate Iot sensors and other activity <unk> within our antenna portfolios to address specific markets.
We also see opportunities to provide more integrated embedded antennas for industrial and utility applications like smart metering.
We are supporting multiple trials and interest from strategic value added resellers for embedded incentives integrated radios sensors and electronics to provide turnkey solutions to increase our customers productivity and simplify deployments.
These three growth strategies of launching innovative wireless products, expanding and leveraging distribution channels and increasing market share by providing more components of the solutions have proven to be our foundation for driving growth within the company.
We remain focused on executing these growth strategies to increase value for all stakeholders.
Before we take questions I would like to share a few closing thoughts.
While 2023 may pose new risks, resulting from the potential the global recession.
I have confidence that our team will address these risks as they have addressed challenges presented by the pandemic geopolitical instability and supply chain issues with hard work and dedication.
We are confident that our core strategies are developing innovative and high quality products, expanding our distribution channels and increasing market share by providing more components over the overall systems are the right strategies, even in a challenging economic environment.
With that Kevin and I are available to take questions.
Operator.
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 that while posing your question you. Please pick up your handset is listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Yeah first question for today is coming from Jason Smith, Please announce your affiliation and put your question.
Hey, I'm with a Lake Street. Thanks for taking my question skies and congrats on your currently strong execution in the corridor.
I want to start with some of your comments in the prepared remarks regarding some delays in orders from some antenna customers.
Any additional color you can provide is this kind of one or two are you seeing sort of a softening across the customer base, just given the macro and I guess Relatedly would we infer then that.
The antenna business might be down sequentially in Q4.
[noise], Yeah, I can talk to his supply chain challenges, Jason and Kevin can can talk about the Q4.
So.
For our products I think our supply chain team has done an excellent job, making sure that we can build the antenna T devices.
Of course with our antennas were were component of a larger system.
So we are.
It's conditional on.
Customers, having the rest of their systems and I think Kevin mentioned this in the remarks with with chipsets.
So so we are seeing in some cases, some slowdown where we have product that we could ship, but the <unk> the customer simply isn't ready for the antennas or the devices.
Because they have other a supply chain challenges on their own.
Going forward without speaking specifically to queue for but I do think customers in general are carrying a little bit more inventory and perhaps a like a more caring more inventory too. We think it's a good use of cash to make sure. We have products that we can ship the customers.
But as I.
I think it's going to take some time to work through this inventory with customers and that will impact.
Impact some of our antenna sales.
We've talked about record backlog as in previous quarters.
Not necessarily a record backlog, we so healthy backlog, but we're starting to work through that and and I think the industry as a whole will have to work through some of these <unk>.
Inventory issues as conditions improve.
And Jason I guess, specifically with Q for not going into too much detail, but yeah, we will likely see a.
Mix with lower antennas Q4, compared to prior year and sequentially, but being made for offsetting with Tessa measurement.
Okay. No. That's really helpful. And then just following up on that and I mean, really nice step up and gross margin, which obviously is being driven by mix looking forward. How should we think about gross margin in general.
I mean is this a situation where within the antenna business acknowledging the dynamics in the supply chain of right now, but how should we build on gross margin in 2023 trying to take into account all the varying crosswinds.
Yeah, I think with antennas you know we saw we did see a nice improvement in Q3, and we feel we can sustain that maybe even do a little bit better based on.
With the frame using a freight costs is one of the biggest drivers.
And also with potentially some some uplift on price and also with cost with exchange rates in China work into our benefit currently.
So we feel pretty good about antenna margins test and measurement, that's always a mix issue.
We will see potentially some pressure from some of the costs that we've had to incur on <unk>.
Buying some of the components with the supply chain situation, we viewed as temporary but there could be some some slight.
Degradation compared to some stronger origins, we saw last year and earlier this year.
Okay got it and then just the last one for me and I'll jump back into Q.
Seahawk product line for the public safety market, how has customer response been so far.
So.
Public safety is really being driven I would say on a state by state basis and for those states that have implemented the codes that demand the testing we've seen very good business.
We're not it's not a national at this point.
But I I would guess that we're probably about 25% other states have some public safety initiative and what we're learning is for those states. We initially do the tools for the down link testing and building.
And of course, once you have the products and you're working with a customer as you come across other challenges that they have.
One challenge the test of building a city hundreds or maybe thousands buildings that they need to test how do you manage all that data and that really what drove seahawk central so the sun the centralized.
Online system, where engineers can upload test.
The.
Municipalities or the government entities can download the test and verify that that the buildings passed before the issue the occupancy permits and then along the same lines and working with our customers.
Okay. This is great. We we understand the downlink, but in many situations we have challenges on the uplink. So a first responder goes in the building they can hear people talking to them, but when they respond or if there is an emergency they need to get out the building no one can hear them outside of the building so.
So there was a need to do uplink testing our scanning receivers of software defined radio. So we were able to use a lot of the same technology for the uplink testing is we're using for downlink.
Built the computer interface and now we have a product that potentially could be installed.
One for one for every base station for for 25 networks. So.
And the markets that more and there's a lot of interest I think we have eight or nine trials going out already and we just launched the product in Q3, and we do expect to see revenue this quarter.
And then as as the rest of the country catches up on the codes I think we'll be in a good position to.
To sell product there there as well.
Okay. That's helpful color. Thanks, a lot guys.
Thanks, Jason.
Once again, if there are any questions or comments. Please one on your phone at this time.
They appear to be no further questions in queue I would like to turn the floor back over to David for any closing remarks. Thank you Holly.
Thank you all for joining us. This afternoon. Our team has done an excellent job of supporting our customers and I. Appreciate their efforts. So I want to thank the mall will continue to support our customers will continue to provide the products that they require.
And I'd like to wish everyone a great afternoon. So thank you again.
Thank you for joining us today for P. C tells third quarter of 2022 earnings call you may disconnect your lines.