Q2 2019 Earnings Call
Welcome to the PCTEL second quarter 2019 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'll now turn the call over to Kevin Cohen, the company's CFO .
Thank you for joining us on today's conference call to discuss PCTEL second quarter 2019 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.
While these forward looking statements reflect pctels best current judgment.
They are subject to risks and uncertainties that could cause actual results to differ materially from these forward looking projections.
Risk factors that could cause pctels actual results to materially differ from its projections.
Our discussed in the earnings press release, which was issued today.
And in our most recent annual report on Form 10-K .
Both of which are available on our website.
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.
A full reconciliation of these non-GAAP measures to our GAAP measures.
It is included in our quarterly earnings press release that was issued earlier today.
With that it's now my pleasure to turn the call over to David Newman.
Thank you Kevin.
We're pleased with another strong quarter driven by sequential revenue in antenna margin improvements.
Second quarter revenue gross profit margin adjusted EBITDA and non-GAAP earnings per share all improved both sequentially and compared to last year.
The improved results over the last three quarters are attributed to the R&D investments and actions we took in 2018.
A strong demand for Fiveg scanning receivers and increase industrial Iot T. antenna sales.
We issued a press release after the market closed announcing our results for the second quarter ended June Thirtyth 2019 for the second quarter 2019, our revenues are $23.5 million.
Increased sales of higher margin scanning receivers and improved gross margins for antennas contributed to improved non-GAAP earnings per share for the quarter.
We achieved 13 cents in non-GAAP earnings per share for the second quarter on gross margins of 45.5% of 3.5% over the first quarter and up 9.4% over last year.
Our focus on higher margin antenna solutions for intelligent transportation and industrial Iot tea.
Coupled with strong demand for Fiveg scanning receivers contributed significantly to increase margins for the quarter, we expect to maintain margins at this level through 2019.
Operators of launch more than 20, Fiveg networks in the Us Europe and Asia with dozens more planned for the remainder of 2019, we believe Fiveg network construction will continue over the next several years to address capacity and ultimately to support more technically demanding wireless applications.
Our R&D investment in Fiveg scanning receiver technology, which started almost two years ago as position PCTEL as a leader in testing Fiveg networks.
Scanning receiver revenues in the second quarter benefited from continued demand for our fiveg products more than 50% of our scanning receiver revenue was from Fiveg sales for new units and upgrades.
We hold a dominant position in the us and believe the pending merger between T mobile and sprint will accelerate their fiveg rollout and increase the demand for test and measurement tools. In addition, Fiveg network will also provide additional opportunities.
We expanded our fiveg scanning receiver portfolio in the second quarter by adding full fiveg support to our MX flex.
The MX flex is the fastest fiveg scanning receiver on the market. The only scanner that supports four by four mimo in one unit and the only scanner that measures Fourg and Fiveg networks concurrently.
In addition to purchasing new am Exflex scanning receivers customers have the option to purchase an upgrade for existing units to add fiveg measurements.
Upgrading units reduces the cost to support testing Fiveg and it provides a higher margin revenue stream for PCTEL.
Ill look safety has always been an important market for PCTEL.
The demand for public safety antennas remains robust and we continue to make progress in providing public safety testing solutions for first responders. The latest version of our in building testing solution includes expanded capabilities to test P 25, and LTE Firstnet networks to include signal quality measurements.
We are pleased that a major public safety radio system provider agreed to feature our public safety solutions in their product catalog, which is distributed to their nationwide dealer network.
We believe this is a growing market for performance critical antennas and scanning receivers and that we have the best solution to verify in building stations for first responders.
Intelligent transportation systems enabled by multiple wireless technologies require precision RF engineering to provide game and to limit interference in hostile RF environment.
Our customized antenna systems will be deployed at approximately 15000 traffic intersections in New York City, where urban canyons and reflecting signals can create a challenging RF environment.
This opportunity accounted for a significant portion of our incoming at 10 orders in the second quarter.
And tenant deliveries for this order will begin in the third quarter and continue into 2020, which gives us some visibility of antenna revenue going forward.
Our performance is important and in many cases custom mechanical engineering is just as important to meet formans fit requirements for demanding physical environments such as for aircraft.
We recently received an antenna order for specialized GPS antennas to be used for tracking and commercial aviation as well as for military aerial vehicles and helicopters.
With respect to the second quarter revenue antenna revenue for industrial fleets, and specifically rail and precision agriculture remains strong.
The industrial biotech market for antennas radio devices and systems is the largest long term opportunity for PCTEL.
Our products are used today in systems to provide wireless internet access for utility smart grids sensor networks and asset tracking.
We want a significant order in the second quarter to support a new sensor that monitors high power lines.
This is significant because PC detailed design enrollment manufacture the entire Iot sensor device not just the antenna.
We expect to launch additional industrial ATSI radio products in the second half of 2019.
These product releases will be another step toward our long term goal of becoming a leading original design manufacture or OTM of customized industrial Iot devices that include the radio antennas and supporting systems.
I'd like to spend a few moments to talk about China, we continue to support our customers in China and deliver products within the constraints of the executive order issued by the Us government.
I know, however that 75% of our second quarter revenue was generated in the United States up from 67% for the second quarter of 2018, and we expect this trend to continue.
Although our customer base is mainly in the U.S, China remains attractive for manufacturing Arent Center products. We are in the process of transitioning a substantial portion of our manufacturing activities in China to contract manufacturers in order to increase flexibility and reduce geopolitical exposure.
This transition is expected to be substantially complete in late 2020.
And result in an estimated 35% reduction in the company's entire workforce.
Looking forward I'm pleased with the increased rate in size of incoming orders driven by our high quality engineered products and improved sales and marketing efforts to win business.
Based on incoming orders in the second quarter and the global demand for Fiveg test and measurement tools. We believe the momentum will continue through 2019.
As a reminder, incoming orders for antenna products provide some visibility for future quarters for larger projects. The scanning receiver business revenue cycles normally much shorter so entering the third quarter with scanner backlog is significant.
This is our third quarter with improved sequential results and I'm confident that we have the people and processes in place to drive consistent growth to increase shareholder value.
With that I will now turn the call over to Kevin for a closer look at our second quarter, Kevin. Thank you David.
I will address the financial results for the second quarter ended June 2019, and ill provide third quarter 2019 guidance.
Revenues were $23.5 million in the second quarter of 9% compared to the second quarter 2018.
Similar to the first quarter 2019, higher test and measurement revenues offset lower antenna product revenues in the second quarter compared to last year.
Test and measurement revenues were $7.5 million in the second quarter, the second highest revenue quarter ever for this product line.
As David mentioned scanning receivers for Fiveg continuing to drive the top line as revenues for test and measurement products were 82% higher in the second quarter 2019.
Compared to the second quarter 2018.
And were 36% higher sequentially.
And tenant product revenues were $16 million in the second quarter 2019, 8% lower compared to the second quarter of 2018, but 6% higher sequentially.
Second quarter revenues were higher for antennas for public safety and fleet applications, but declined compared to last year due to lower revenues for small cell antennas.
And because we completed a large nonrecurring enterprise why a project in the second quarter 2018.
The second quarter 2019, gross profit margin improved by 9.4% to 45.5%.
Due to the favorable product line mix of test and measurement products and improved and tenant gross margin percentage.
The gross margin percentage for antenna products was 6% better in the second quarter 2019.
Compared to the prior year, primarily due to a more profitable mix within the product line and also because of the cost reduction actions taken in 2018.
Adjusted EBITDA, a non-GAAP earnings per share improved both sequentially and compared to last year, primarily because of higher revenues and gross margins.
Adjusted EBITDA margin as a percentage of revenue was 13% in the second quarter.
Compared to 2% for the second quarter 2018.
And 7% in the first quarter of 2019.
non-GAAP diluted diluted earnings per share improved to 13 cents in the second quarter compared to breakeven in the second quarter of 2018.
And four cents in the first quarter 2019.
Cash and investments increased by 1.7 million to $36.8 million at the end of the second quarter 2019.
As free cash flow was $2.9 million during the second quarter 2019.
Now, let's turn to third quarter 2019 guidance.
We expect third quarter revenues will be between 23 and $24 million.
With higher sequential antenna product revenues.
Gross margin percentage is projected to be in the range of 45% to 46%.
And the non-GAAP earnings per share is projected to be in the range of 12 to 13 cents.
Before we take questions I would like to turn the call over to David to make a few closing remarks.
Thank you Kevin.
We are pleased with our performance in the first half of 2019.
We're seeing the benefits of the actions that we took in 2018 to reduce cost realigned talent and maintain a healthy R&D investment.
Most importantly, I'm proud of our team for driving the necessary changes executing on a daily basis and the success. They have had in developing new products and winning business for both fiveg scanning and industrial Iot opportunities.
We look forward to meeting with investors at two conferences in August .
Kevin and I will be attending the Intel a site investment conference in Minneapolis on August 14th.
And the Midwest ideas Investor Conference in Chicago on August 28.
With that Kevin and I are available to answer questions operator.
Ladies and gentlemen, if you have questions at this time. Please press Star then the number one telephone keypad.
Again, ladies and gentlemen, if you have questions at this time. Please press Star then the number one on the telephone keypad.
Our first question comes from the line of Jason Smith.
From Lake Street Your line is open.
During my questions I'm, just curious if you could comment on the traction and momentum you're seeing in the enterprise Wi Fi market.
Enterprise why Fi hasn't been a strong revenue generator recently.
We have had.
We have several antenna designs that are in work now.
So were anticipating some more opportunities, but it hasn't been a huge generator to this point.
Okay, and then can you remind us sort of the cadence of the ramp.
In this case fiveg, but what you saw in four g. from the scanning receiver business should we expect that these continue continued elevated levels through the first half of 2020.
Yeah, that's a good question Jason so.
We've been through a number of these cycles already to GE, Threeg Fourg and Fiveg.
And typically a new technology ramp is eight to 10 years.
Well within that time, there's initial deployments and then it tends to level off so.
Historically using Fourg is an example, we've seen the scanning receiver revenue around the 25 million Mark.
And then once you're through that peak.
It goes back to what sometimes referred to as a maintenance mode.
2000, $18 million to $20 million range.
I think there is a couple of differences with Fiveg and to some extent, we're going to have to see how this plays out.
But one driver I think we have in Fiveg that we haven't had in the past is fiveg is link pretty closely with industrial Iot applications.
And as companies can find ways to link items linked things to increase efficiencies, they're going to there's going to be more of a drive.
And the need for capacity.
So early on I think if you if you read some of the reports across the industry. The fiveg rollouts been a bit more aggressive than than anyone anticipated.
So weve.
Enjoy the provided in test and measurement equipment for that it's been it's been very strong. It's also helped we were probably about six months ahead of the competition for Fiveg product. So we've been able to capture.
Significant portion of the market.
Now one of the questions that we get is this a is this a bump or is this a ramp.
And I don't think were at the peak of deployments just by looking at the number of markets that are deployed thus far.
So in the in the short term I think it's really a capacity.
Issue, where the operators want to deploy five g. to increase capacity and serve hot spots.
Well keep in mind with Fiveg, there's still additional features that aren't rolled out yet.
We have a low latency capabilities that aren't rolled out and then you also have the massive machine type communications, which are in later releases as well.
So I you know my personal opinion is that this is a ramp.
We feel that at least going into 2020 and through most of 2020.
Theres going to be a need for test and measurement equipment to test the capacity.
A portion and then once a fiveg starts to support more the industrial tea applications. It will be a good opportunity for test and measurement equipment, but then it's also going to be a good opportunity for for the antennas and.
Dust royalty devices that will start to roll out later this year.
Okay. That's helpful and finally I'd just given those comments should we expect gross margin to remain in this mid 40% range just given the mix.
We do obviously, what weve guided in Q3 and for the remainder of the year, we're seeing that same kind of consistent mix.
But we haven't really.
Providing any guidance beyond that.
Okay. Thanks, a lot guys.
Thanks, Jason.
Our next question comes from the line of David Gray from Henry investment.
Your line is open.
Hi, good afternoon.
Where are you moving your China trying to manufacturing to geographically.
So we we started this process in China, almost a year ago.
And it's not that we're moving the entire.
China manufacturing to one location.
In fact, we do intend to keep.
Core group.
Manufacturing still at the PCTEL facility for the higher margin low lower runner antennas.
For the high runner products.
We're we've selected a few we're evaluating others, but most likely will go to.
The group of contract manufacturers with the rights best multi depending on the antenna.
As an example.
You're producing embedded antennas.
The amount of capital that you need to invest and that type of a factories is much different from doing.
Public safety antennas.
So it's not that we're moving all the manufacturing out of our factory to one cm.
It will be a mix of both.
PCTEL factory plus several cmps.
No. The seems that we're evaluating are in China and also out of China.
Right these out of China.
Asia North America.
I think it's early to really make comments on that but just along those lines keep in mind that most of the supply chain for technologies coming out of Asia. So it does make sense.
To keep manufacturing close to the supply chain.
Okay and can you give some commentary around why.
General and administrative expenses.
Sequentially because of the because the revenues and EBITDA that we've.
Enjoyed from the.
Test and measurement business, we've increased some of our variable compensation during the year.
So it was mostly related to compensation.
Correct.
Okay. Thanks very much.
You are welcome.
Our next question comes from the line of Mark.
Isn't Berger.
From.
Right.
Yes. Thank you. Thank you good afternoon.
I'm wondering if you could comment a little bit more on the the win for your Io T related to monitoring power lines and maybe how your redefine business development team played a factor in that win and then.
Clarification on the cadence of those revenues.
Yes, so for the industrial out T. When this is related to smart grid utilities.
And I think whats important to know too that this is the second system. We did for the same same customer.
So the first system that we worked on was specifically.
Just for the antenna.
Because of the success of the relationship.
I would say a mix of business development efforts, but also a lot of work from our product line management team and engineering to develop the prototypes. We were asked to bid on this next type of sensor and this one included antenna and other devices, including infrared support and Lcds to monitor the the units.
We I think we were we had we came in with a very good position because one we had the RF expertise and were able to.
Develop the antenna elements, but just as important for this specific opportunity it was a unique.
Configuration, which will get you really can't go into a lot of detail, but there were additional challenges on the mechanical engineering side.
Which are our team did a great job of solving those issues and as a result, we won the order.
Gives us a little bit more visibility is not going to be delivered all in one quarter.
And most importantly, it keeps us.
Gives us good a good win in the industrial biotech space.
And.
I'm sorry.
Mark what was the second part of your question.
Just the the cadence of those revenues we should expect.
So thats why it is definitely important and we're putting a lot of our focus.
The antenna business, we've had some good opportunities we have the one in New York.
We've developed.
Other solutions that are in the markets I think where this really becomes interesting is when we start to release, our new radio products, which will be in the second half of this year. Because then we can address opportunities where we're not only supplying the antenna are there and the mechanical tools.
But we also can provide a radio solution and whether that be a transmission a device to monitor aiotv.
Sensors or the actual RF components that go into.
The the devices that have the sensors.
So long term this is definitely a focus like to see that revenue component grow as a a portion of overall revenue.
And it's definitely dust fraud is definitely the largest market segment in terms of opportunities and we'll continue to focus on those.
That's great just a follow up on that specific one.
You mentioned that you will be manufacturing the entire product line.
Since you are going to be realigning some of your manufacturing facilities do you anticipate.
That causing any delays with with this product.
Release at all or you are comfortable.
That.
With everything there.
No we don't anticipate any delays.
If you.
Look at the transition for some of the manufacturing and this isn't something that you do overnight.
It's there's a lot of planning that goes into this and this is why we think this is going to go through 2020.
And we'll go we'll make the decisions to transition products once the CMS chosen wants to see him is ready.
And a lot of cases, we need approval from in almost all cases, we need approval from the end customer to make those changes.
So it's a very controlled and methodical approach to due to the transition so we're not anticipating any.
Product issues of delivery issues for that product or for any of the other products as well.
Since we already do.
Have relationships with some of our contract manufacturers that we're going to increase business and transfer business too that will also help with the transition.
Understood.
Additionally are you seeing any changes in some of the competitive dynamics when you're going after the tier one Oems.
For the test and measurement business what business are you talking about maybe some of the Wi Fi access point.
Oh, there's always I mean, there's a set of competitors that doesn't they don't change a lot and sometimes you know bid the bid.
One.
Company will win the next company When's. The next when it comes back and forth. So like I don't know if the landscape is changed.
Yes, I think is the same same group and it's it's really up to us to to win the deals.
Okay.
And based on your significant win in New York to connect all the traffic signals has that helped spur maybe some additional demand from other cities.
That's the hope so yes.
We're working with the couple vendors that want to replicate the system and other cities in the us.
The antenna is not easy to copy we don't want to get the overconfident, but we put a lot of work in into this antenna system and the two vendors that are trying to replicate this a both decided use PCTEL antennas. So we're we're fully supporting that.
Very good.
Some of your competitors have talked about their some of their larger customers, maybe pushing out the timing of some of their product projects.
Maybe based on either internal or macro factors are you seeing anything across some of your larger customers.
Not that I see that not that I'm aware of no.
Okay, Great. That's it from me thank you very much.
Thanks Mark.
Again, ladies and gentlemen, if you have questions at this time. Please press Star then the number one on us off.
The next question comes from the line of team O'connell chain of Lakes investments. Your line is open.
Hi, David Hi, Kevin.
Hi, congratulations graduations on the good quarter.
First comment or question is around the small cell antennas and.
What your business looks like there and maybe positioning.
Yeah. So small so I think everyone knows our largest customers in China definitely have some.
Challenges with the geopolitical situation.
We're still supporting that customer per the terms of the executive order. So on an important customer were doing everything that we can.
One of the challenges that we have there that specifics small cell opportunity is even though we can provide the antennas.
The antenna zone is only one component of a larger system. So there has been a bit of a slowdown.
Because our customer can't necessarily get all the components that they need.
So that's definitely a factor.
Now, we also supply small cells to some of the other.
A large Oems.
That business the small cell business typically goes through a cycle with new designs. So we continue to to bid on those designs and when some of those designs and this is one area, where we really asked our new business development team that we put together last year to focus on some of the other large Oems for small cells. So we know that's going to take some time to really to get in and get qualified and have an opportunity to bid on that business.
But the small cell market is not going away, especially for the Fourg networks.
Some on the Fiveg side, some of that especially with millimeter wave is it a little bit different approach than than a small cell antenna small cells are are important we continue to work in that area, but given that one of our largest customers. There is a base in China.
It's been it's been.
Challenge recently.
Okay.
That's helpful.
And then just on terms of the balance sheet any comments there in terms of creating some shareholder value I know you referenced on the last call.
In response to a question that Youve.
You're looking at that.
Yes, so we continue to look at it and I think we've talked about this before our board looks at capital allocation to every board meeting and we just we just had a board meeting yesterday. So we went through the process again.
Looking at ways to best use our cash.
And we've talked about this and other calls and other investor conferences.
We we believe that there are opportunities to do so.
Acquisitions, I would would help us grow the business.
Specially in industrial tea space, and then also and distribution in Europe .
There is no reason antennas that we manufacture here most of our businesses in the us.
A lot of those antennas can be sold in Europe as you have the right distribution channels.
So we're looking at opportunities to to expand in Europe through through an acquisition looking at ways to expand our antenna portfolio through acquisitions industrial aiotv through it we have an active campaign, we looked at it really good companies all the time.
It's definitely on the radar.
We talk about stock buybacks and dividends the board meeting as well.
It's really up to the board to make those calls, but there are active discussions and weve made the commitment that we would share publicly what our capital allocation plan as this year.
So we had additional discussions yesterday.
And we will.
Share that before the end of the year.
Okay, Alright, thanks, Thats all for me.
Thank you Tim.
There are no questions at this time.
Let's turn the call back to David.
Thank you.
We're pleased with the results to date in 2019, and we look forward to finishing the second half just as strong.
It's really a pleasure to see that the team win with best in class antennas scanning receiver products.
I'd like to thank the entire PCTEL team for their dedication and hard work.
I've said before that we are in the right markets. We're developing the right products. It comes down to execution and I'm pleased to see that the hard work is paying off for for all stakeholders.
So with that I'd like to thank everyone and have a great afternoon.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day.
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