PCTEL Inc (PCTI) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to PC Tel Incorporated first quarter earnings conference call. During the presentation all participants will be in an listen only mode. Afterwards we will conduct a question and answer session. At that time if you have any question please press the 1 followed by 4 in your telephone. As a reminder, today's conference is being recorded Tuesday, April 30th of 2002. I would now like to turn the conference call over to Martin Singer, Chairman and CEO. Please go ahead sir.

I am Martin Singer, Chairman and CEO of PC Tel. On behalf of PC Tel we thank you for joining us on this first quarter 2002 conference call. In this call we will address the financial results for the quarter, the outlook for PC Tel, including the eve

events support of cautiously optimistic view of the second quarter of 2002. Joining here today is John Schoen, COO and CFO of PC Tel. John will take through financial performance for the first quarter as well as limited financial guidance for the second quarter of 2002.I would then discuss the state of the business. John...

Uh! Hello everyone. Before I begin my financial review of the company, I will read this Safe Harbor statement. During this call Martin Singer and I will discuss PC Tel's business and do extend some of our statements might contain forward looking statements within the meaning of the Federal Securities laws. These forward-looking statements are subject to some significant risks and uncertainties in particular the statement concerning future financial performance, our ability to expand product offerings and product line and our ability to continue, to enhance and protect the IP portfolio actual results may differ materially from those projected as result of risk. Some of these risks include the economic recovery and associated PC demand, our ability to forecast cautioned demand in this environment, the technical nature of semiconductor and PC industries, the ability to develop and implement new technologies and to obtain protection, and intellectual property. Operating and financial result can also be affected by market conditions resulting in revenues deviating from projections, increased operating expenses, to reserve , lower gross margins and higher working capital ratios.

Our litigation expenses are dependent on number of factors, now all of which are within the company's control. These as well as other risks and uncertainties including but not limited those details from time to time SEC filings get affect results. These forward-looking statements are made only as of today and we disclaim any obligation to update or revive the information contained in any forward-looking statements. This concludes the Safe Harbor Statement and now we will continue with the financial review.

I would like to start with revenues. PC Tel's revenue is the combination of product and licensing revenue. The product revenue is related to the sale of modems. The licensing revenue is related to royalties associated with Capping portfolio and software license revenue related to use of modem software under license.

First quarter total revenue was 10.3 million dollars comprised of 7.8 million dollars of core product and licensing revenue, one time payment of 2 million dollars received from Ace technology pursuant to a licensing agreement entered into during the quarter and recovery of half a million dollar in previously reserved at cash receivables. The company soft product and licensing revenue decline sequentially each quarter last year to allow a 4.7 million dollars in each of the third and the fourth quarters last year.

Customer inventories have returned to manageable levels from most of our customers as reflected in the sequentially quarterly increase. The short term economical outlook, we just to believe second quarter core product and licensing revenue will be flat with 7.8 million dollars acheieved in the first quarter. First quarter product licensing revenue includes two notable affects, of the first with apical volume to deal with our largest customer in the quarter. The second with the one time up front royalty payment from ESS.

Now I would like to turn our attention to gross margin. First quarter gross margin was 5.1 million dollars for 49 percent of total revenue. The quarter contained a significant one-time licensing payment and account receivable reserves or recovery as we previously talked about. When stated without those items gross margin would have been 33 percent on the core product and licensing revenue, which is in line with same period last year in the guidance range given the last quarter's earnings call.

As you may recall fourth quarter's last years margin was 5.3 million or 70 percent of total revenue. The quarter contained significant one-time favorable account receivables and inventory reserves recoveries as discussed in last quarter's conference call. Additionally, at the end of the year, we turned our distribution agreement with our Asic supplier and began bundling the Asic in our product offering starting in 2002. When stated without the one-time favorable accounts receivable and inventory recoveries, as well as the distributor agreement, gross margin

in the fourth quarter of last year would have been 35 percent.

Now let's turn to operating expenses. Now I would like to speak to our cost structure. Operating expenses, which are defined as R&D, sales and marketing, general administrative, and amortization of deferred compensation expense were 5.7 million dollars in the first quarter. This is a 3.7 million dollar decrease from the last quarter of last year and a 4.2 million dollar decrease from the fourth quarter of last year. 3.4 million of the sequential quarter decrease was related to lower mitigation cost and 800,000 dollars was associated with the full quarter effect of expense cost reduction actions taken in the fourth quarter of last year.

With regard to other income, interest income generated in some investments was 1.1 million in the first quarter compared

with 1.8 million a year ago and 1.3 million in the fourth quarter of last year. The amount recorded is expected to decline over time, should interest rate today is at current level or decline further.

To sum up earnings, net profit for the quarter was 462,000 dollars. This compares to a loss of 2.9 million a year ago and

a loss of 6.1 million in the fourth quarter last year. The increase in earnings includes the 2 million of one-time revenue from the ESS settlement and the accounts receivable recovery of 0.5 million.

With regards to the balance sheet, the company's balance sheet remains strong. Cash and short-term investments ended the first quarter at 111.8 million dollars compared to 121.4 million dollars a year ago and 125.6 million at December 31st of last year. The sequential quarterly decrease was attributable to the patent law settlement with Dr. Brad for 14.3 million, of which was 4.5 million related to the prepayment of future royalties.

That concludes the financial review. I would like to turn the call over to Marty for the summary accounts.

Thanks Jim.

While we are pleased to report the modest profits for the first quarter, this progress over the prior two quarters reflects three elements, a higher product revenue run rate, some success in controlling our costs, and the successful resolution of ESS litigation and up front royalty payment associated with that settlement.

As we have stated we have had four goals for the second 90 days of the new management team. They would grow product revenues, eliminate various of unnecessary cards during our capital litigation matters to a successful conclusion and recruit leadership for a while and to that end we have done the follow on. We have improved product and licensing revenue from 4.7 million dollars to 7.8 million dollars per quarter. We ramped up shipments our Modem Daughter Card.

We settled our losses for ESS technology and . We cut annual apex run rate from 36 million dollars in the second half of last year to 23 million dollars run rate in the first quarter this year. We will compensate without compromising our development or our customers code.

We have improved in the revenue per employee, it has gone up from 157,000 dollars per employee to 390,000 dollars per employee. We have continued to surpass of under mandated quality goals. Clearly we still have more room for us with respect to growing product revenues we need to restore business with key PC vendors and strengthen our up return total growth markets such as China.

We also have due to cost containment. Modems are clearly a commodity market then I saw cost need to be consistent with the low margin business. With respect to our patents we are working hard to achieve the full commercial value of our intellectual property without engaging cost free litigation.

We have successfully reserved two litigation matters of the company has been engaged over last several years and we would like to name out of litigation as we move forward. The progress we have made has permitted us to turn our attention to building our future. To that end we have successfully recruited a strong leader to direct our team's new product efforts comes to us with the strong background in software development and wireless experience. We are pleased to have him on board. Thank you for joining us on this conference call that concludes our review of PCTEL and our prepared comments. We are now ready to answer your questions. if you could please fill the questions for us.

Ladies and gentlemen if you like to register a question please press the one followed by the four in your telephone. request your question have been answered and you would like to withdraw your registration please press the one followed by three. If you are using a speakerphone please lift your handset before entering your request Wes Cummings from B. Riley & Co. please go to the question.

Well, in terms of, you previously had a very small percentage of your sales going.

Well, I don't look at this as taking out. I think we have to increase the revenues side. You know so, we are looking to increase revenues. We are looking to maximize our license in revenue that we get from Silicon Labs and we are looking to see if there are other opportunities to reduce cost. I think that it would be reasonable to expect that we could take as much as another 2 and a half million dollars of cost out the business by the end of the year.

Okay. And so you take some out of the business, and then do you guys, I guess what I am looking for is you think maybe. When do you think you can actually have this business profitable from operational standpoint? It is leading the interest income coming out, after that the actual businesses were.

Hai Martin. Hai John. First of all you guys did a great job managing the operating expenses during the quarter. I guess I am just wondering what the sustainability of these reductions are and can you work for anymore reductions going forward? And I guess what the likelihood is any more litigation expense many pop up through the remainder of the year?

Let me answer that. Again litigation is always difficult to predict but I think there are ways that we can carry ourselves into this difficult discussions about of our patterns with our competitors and I think we can carry our selves in such a way to maximize the possibilities that we will be able to settle those as bilateral agreements without the help of third parties and we intend to do that. As you know what been here sort of been settled the issue of Motorola with DSS with Dr. Thomson and you know I intent to move on that path. With respect to cost containment we absolutely can sustain the lower cost that we have achieved than that quite frankly I am looking forward to continued reductions. We have an initiative to move more of our development to Asia. As you know we have a Taiwan base now and you will be seeing more of our development activity on in either China or in Taiwan and those development costs for the development costs if one can achieve in China for example are substantially lower than the cost we realized here and we plan to take advantage of that. As I say it is really critical for the company to bring development costs in line with what is expected in a commodity product. I also think that we will go and continue to work at the performance of our different businesses and we will make some changes in areas we feel our resources are being used as productively as they should be. Now I will mention that those comments with regards to cost containment and further cost reduction are valid for those areas but let me remind you it is our interest to invest in wireless areas and you can expect some increase in expenses associated as we firm up our plan head and in other arenas.

Ok. And also as far as far as the enforcement of you guys had in pattern portfolio. Can you give us an update on the when we might expect to see settlements with some of the larger competitors in your industry?

Well I would have want to give a specific date because of you know the nature of these agreements are bilateral and so I have to get the cooperation from other parties. But I will say this we have initiated some of the important meetings with more significant competitors in the arena and we are at a stage where we are in a amicable fashion ready to explore the charts which will lead to discussions and we believe the settlements you know that will be in the form of a license agreement. I am always told that I will be able to achieve resolution of at least one of these matters by look fourth quarter and perhaps two of those matters.

Ok great. And last question. The shipments to Dell came on pretty strong during the quarter, how are those working going out in the next quarter, can you expect that sequential increase there?

Well everybody has told us that Dell has been one of the beneficiaries of the Compaq HP activity and we think that there shipments will remain strong and our shipments to them will remains strong. Our job here is to maintain high-quality shipments to them. I do want to mention one other thing now is that we are now shipping the modem data which is really into other vendors in particular as a product have been referred to as desk note which is so a hybrid of laptop and a desktop it is a very desktop machine and we are now shipping that product into them and we have strong expectations for that

Ok great thanks guys.

Thank you. And thanks for your support.

Tom from Needham and Company please go to the question.

Hey John and Martin can you hear me?

We sure can hear you and glad to have you on board again

Just quickly since my colleagues are not here I had a series of questions that came to mind first of all in the subject of Dell. How what percentage of Dell in the quarter?

Well I want to be clear for that I don't want to comment on any one specific vendor so I prefer not to answer that.

Ok but they were the only 10 percent customer?

No I would say they were larger than that but you know

But there are other 10 percent customers as well Dell is about 10 percent?

We had five customers that accounted for 10 percent or more of our business

Ok. Alright.

And then I would like to make a point that the very positive change for the company you remember a point in our history were we had 65 percent of our business or more that was what a single customer and I am really pleased that at this point our DPS sales has really been able to distribute our business over a broader base.

Ok. How many employees do you have, what is the total employee count?

We have about 100 right now which is lower than what we ended the we ended the first quarter with 107 and we had about a 100 now and I have expectations of reducing that further.

And those reductions are to come from non research and development areas?

Well you know predominantly they have. However, there will be some areas in the company that be looking at very carefully that might have impact in research and development

Ok. How between the 100 employees geographically how many of are at your corporate headquarters and how many are in Taiwan and how many are at some other location including the northern area.

I think you could use the following numbers; 54 for 7 for Illinois, 15 for Connecticut, 18 for Taiwan, and the rest are distributed in the regional sales offices.

Alright. That is helpful. Also another thing which you did not mention in your prepared remarks were the set-top box customer list that had been emphasized in the past sort of nine months ago and longer than that in the past could you give us an update on where your set-top box customers and there were a number of European customers that have been announced. Did those volumes ever take off or is that kind of something we should not be looking about much going forward?

As I indicated in the last quarter's call you know that area has been disappointing to us we still have business have had business with in Europe and we have been waiting for long time for other business to materialize such as with but right now we think that for example silicon labs as a user of our software is beginning to be successful in that business and that we are working for ample time here to is participation in that business via our royalty stream from their success. So, in our business relationship for example with Silicon Labs we have license and software to them, that was announced some time ago, and they have a DSP based modem business and we benefit when they are successful at all speeds by the way.

Okay. From the past the trend that stated some time ago with soft modems first because of the availability greater CPU horsepower first in desktops and going to laptops. Could you give an update on where that evolution stands at this point of time?

I am not sure that I fully understand the question, evolution

The percentage of the going into laptops, we see MDC which is optimized for laptop application is becoming on increasing percentage of our modem business and we think that by the end of the year, with all customers will be using the MDC and that could represent 40 to 50 percent of our business.

And now where are you at this point?

Well, I would say that it is seen in the neighborhood of may be a total of 15 to 25.

Okay. Alright, also in terms of other mobile devices, there are series of classes have a new that have record all over the last year June particularly, in the pocket PC 2002 based devices and going into a modem devices.

Those numbers go. We have looked at it carefully and there are opportunities for us and that would be the DSP based modem. It would fit into a you know, a Compaq flash type of technology and right now the numbers all though you are right you see them in the aftermarket, you see them in retail. Those numbers are quite small.

So, . You wouldn't have the actual makers looking to integrate these things those in times.

We have talked to a few of them and you know if the opportunities are getting interesting we are certainly willing to sell DSP-based modems into that market but right now those numbers are very small.

Right. Final question, competitive landscape and any market share losses, would you still say that it has been you connection or are there any meaningful accounts, that you lost in important in the past quarter.

I would say that the meaningful competitors remain at three that you mentioned. I think that there has been some progress made by Smartlink in Europe, or where their activity with any CCI and for Fujitsu Seimens. I think our greatest challenge in terms of specific customers is to get established with Compaq in Europe. We see them becoming much more influential and

Overall Compaq opportunities and I think as you know at the end of last year, we were struggling with the Compaq accounts. We think that it connects and has most of that business at this time.

All right. Thank you, Martin.

You are welcome

Richard from Kennedy capital please goes to the question.

Hey, Martin. I am Rich from Kennedy, US.

Hai Rich.

Once again, I want to to get on the losses side, and focusing on the non-accounts, the question I have for you is more strategic, I am sure this quarter within gains would you have lost on a operation basis, about 3 million dollars. Is that about right?

No. We would have lost about 2 million.

About 2 million, so how much more can you guys take out to get that 2 million dollar lost out?

I think our target would be the fourth quarter this year.

And will that be at a 15 million dollar run rate and revenues. Is that what you are looking at to be able to get this business break even?

Maybe a little bit lower depending on what mix is, in product and licensing revenue. I think that if you look at this quarter, we are profitable because of ESS and although that is a one time event, you need to recognize that there are other potential one-time events that could occur this year and also we are confident of being able to increase the royalty stream coming into the business. It really depends on what the product mix is. Also it depends on what the mix is, what is the MDC sales versus the other types of chip sales but for modeling purposes I would say the run rate depending on mix of licensing and type of product revenue ranges from 12 to 15 million dollars.

Okay, 12 to 15. Strategically, will then make more sense to have this company as part of a larger company that they can absorb over head and the, the cost or risk, cost that is associated with that versus investing in and trying to build a whole new product. Can it be in a research and development, how you cash, for the next two years, it seems like you guys would have like a big fore sales, and now, you are saying, you know 'hey, somebody else can incorporate all these expenses plus we have 111 million in cash plus we have spent. It seems like, it is supposed to be going after the and the research resulted. You guys would be focusing on actually getting a rational banking on many of your housing selling the firm, because on a operational basis it seems like it is going to be a we get this stock kind of going, on the operational side and 15 million run rate at 60 million, and that is for to date, may be 99 and 2000 with better ASPs. Am I messing something, or what should it be, I know you obviously can comment on some of that, but you can talk about he strategic direction of , I mean would you hire an investment banker and start looking at these alternatives?

First of all, if I have to that, I wouldn't discuss it on this phone call. The second this is we look at the over a bit differently. We view our assets as not just money to invest in, new technologies but also out customers and we feel that there are some technologies that are easily attainable for us, that can be distributed thought that assets, our distribution channel. So, we are going to continue to explore ways to expand our product portfolio and need to meet out current customer base. Now if opportunities were to arise there would be something that we might explore but those types conversations and those decisions would be some of more private in this form.

Okay. Just I mean I understand. But it just, I guess my main concern is the shareholders. If we do things by focusing on other areas like the and the different areas that actually we spent some of the cash, we reduce something that distracts or hurts us from actually been able to be bought by a larger company that makes us attractive right now, that we can

All make a lot more money on selling the company versus for two years till we start earning some money on the A.2.11 and that is what. And I guess that is just my comment to you. But anyway I think you do a nice job and I appreciate it.

Thanks and we appreciate your prospective and as I said it is certainly something that is difficult to comment on phone such as these, but I don't want you or anyone else to leave this conversation believing that we are interested in technology first and shareholder value second. Our concern is, structuring the business and doing what is necessary to maximize the value that we offer to shareholders.

Okay. Thanks. Martin.

Thanks.

Ladies and gentlemen if there are any additional questions at this time please press the one followed by the four on your telephone. Gentlemen, I understand that there are no further questions. Please continue with you presentation and the closing remarks.

We have no further remarks other than to thank all our participants for joining us on this call, and we will continue to keep you informed as the . Thank you again.

Ladies and gentlemen, this concludes our conference call for the day. You may all disconnect and thank you for participating.