PCTEL Inc (PCTI) 2007 Q1 法說會逐字稿

Good day, and welcome, everyone, to today's PC-Tel first quarter 2007 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the program over to the Chairman and Chief Executive officer of PC-Tel, Mr. Marty Singer, please go ahead, sir.

On behalf of PCTEL, welcome to our earnings release conference call for the first quarter. Thank you all for attending and for your interest in our company's progress.

My name is Marty Singer and I am PCTEL's Chairman and CEO. With me today are John Schoen our Chief Financial Officer and Jack Seller, Director of Marketing.

As we have done in the past, John Schoen will review our financial performance in some detail and will review our balance sheet and other issues. I will cover the general state of the business, discuss highlights of the past quarter, and then I will discuss some areas of focus for 2007. We will then open the call to your questions. The company will provide a transcript of our prepared comments on our WEB site fifteen minutes after the call.

With that as background, John will read the Safe Harbor statement and then provide a financial overview. John?

Hello everyone. Before I begin my financial review of the company I will read the Safe Harbor statement. Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, and expectations regarding the future growth of our wireless and licensing businesses, are forward-looking statements within the meaning of the Safe Harbor.

Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless products business, implement new technologies and obtain protection for the related IP, and the ability to integrate acquired businesses and products.

Additional discussion of these and other factors affecting the company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today and we disclaim any obligation to update information to reflect subsequent events. This concludes the Safe Harbor Statement. Now, I will continue with the financial review.

Our investors will note that the company presents non-GAAP financial information in its earnings releases. The company believes that presentation of results, excluding restructuring charges and non-cash based expense including stock and stock option based compensation, amortization and impairment of intangible assets and goodwill related to the company's acquisitions, provide meaningful supplemental information to both Management and investors.

The non-GAAP financial analysis reflects the Company's core operating results and facilitates comparisons across reporting periods. For more information on our non-GAAP financial results, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website at www.pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results.

Now to Revenue. First quarter 2007 total revenue was $19.0 million compared to $18.6 million in the first quarter of 2006. I will speak to the trends by segment.

Our Broadband Technology Group, which contains wireless antenna and wireless scanning products, reported revenue in the quarter of $16.3 million compared to $16.1 million in the same quarter of last year. Strong growth in scanner sales was offset by a decrease in antenna revenue resulting from the elimination of lower margin antenna products.

The Mobility Solutions Group revenue in the first quarter was $2.3 million, up 10% from the $2.1 million reported in the first quarter of last year. The principle products in this segment are the company's Data Roaming Client software as well as its IMS client software.

Data Client sales dominate MSG revenue as IMS technology is currently in its pre-commercial deployment trial stage throughout the world.

Licensing segment revenue was $0.3 million compared to $0.4 million in the first quarter last year. With the completion of the modem patent litigation last year, the company has remaining only several relatively small licensing agreements that will run to completion in 2007.

Now I would like to speak to revenue guidance for the second quarter of 2007. Second quarter revenue is expected to be between $20.25 and $20.75 million. Licensing is expected to be approximately $300,000 of that number.

Now let's turn to gross margin. Aggregate gross margin for the first quarter was 52% compared to 47 percent for the first quarter last year. I will speak to the margin performance by segment.

Broadband Technology Group's gross margin was 44 percent in the first quarter, a substantial improvement of five points as a percent of revenue from the same period last year. The improvement reflects growth in our higher margin scanner products, improvements achieved in our iVET antenna products that were outsourced to lower cost manufacturing sources in 2006, the elimination of lower margin antenna products from the portfolio, and increased efficiencies in our Bloomingdale facility. We expect gross margin in this segment to run in the 44% to 45% range going forward.

Mobility Solutions gross margin was 99% in the first quarter, unchanged from the same period last year. The only cost of sales in this segment is third party software licenses. We expect gross margin to remain in the 98 to 99% range going forward.

Licensing gross margin was 99% for the quarter. We expect margin in this segment to remain in the 98 to 99% range going forward.

With the product mix forecasted for the second quarter revenue guidance, we expect total PCTEL gross profit for the quarter to be between 50 and 52%. This is a slight decrease from the first quarter, based on our anticipation of sequential growth in antenna products.

Now let's turn to operating expenses. First quarter R&D and SG&A were $9.9 million, up $0.8 million from the same quarter last year. R&D expenses were up $1.0 million on incremental investment in headcount and expenses across all products.

Sales and marketing were virtually unchanged for the quarter. G&A was down $0.2 million, reflecting the completion of the patent litigation in Q1 2006, and the reduction of costs associated with the Dublin facility. The Conexant royalty was unchanged from last year.

With regards to the second quarter 2007 as compared to the first quarter, R&D is expected to increase by $0.1 to $0.2 million on additional investments. Sales and Marketing expenses are expected to be about the same to down $0.1 million.

Our annual trade show expenses incurred in the first quarter come out of the run rate and should be partially offset by higher outside rep firm commissions related to higher antenna volume. G&A is expected to decrease by about $0.1 to $0.2 million. The Conexant royalty is expected to remain approximately the same.

Let's turn to other income. Other income was $0.9 million in the first quarter compared to $0.6 million a year ago. Other income is comprised primarily of interest income on our cash. The increase year over year is attributable to the general rise in short term interest rates, as well as the increase in cash from last year, primarily due to the $7.0 million patent litigation settlement received in the third quarter 2006. The company expects other income in the second quarter to be approximately the same as it was in the first quarter.

Now let's turn to income taxes. The company recorded a tax provision credit of $0.2 million, representing an effective tax rate on GAAP earnings of 19 % for the year. Just as a reminder, the company records its tax provision throughout the year as a percent of the GAAP earnings. In quarters where GAAP results are a net loss, then a credit is recorded, and when GAAP results in net income, an expense is recorded.

Based on the guidance given for the components of pretax income earlier in the call, the company expects a tax provision in the second quarter of approximately $0 to $100,000.

Let's speak to earnings. Non-GAAP net income for the first quarter 2007 was $1.3 million, or $0.06 a diluted share, compared to non-GAAP net income of $0.5 million, or $0.03 per diluted share in the first quarter last year.

To summarize the differences previously discussed, gross margin is up due to greater software and scanner sales coupled with cost improvements in antennas; total OpEx cost was higher on investments in R&D, offset partially by G&A reductions; other income is higher from a rise year-over-year in interest rates and our cash balance; and taxes were lower from a change in the effective tax rate. The net effect of all of those factors is an increase in non-GAAP net income.

Now let's turn to the balance sheet. Cash and short-term investments ended the quarter at $67.7 million, down $3.1 million from the fourth quarter last year. The decrease was primarily attributed to the growth in accounts receivable related to the timing of software revenue recognition, versus invoicing cycles and an increase in European receivable mix, which tends to have longer payment cycles than other regions. The company anticipates that receivables will work their way back to historical levels over the second and third quarters. We have already seen a strong collection month in April.

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

Thanks, John. There are no additional insights that I can offer on the financial profile that John has reviewed with you. My comments will focus on our product development and marketing efforts over the past quarter and what you might anticipate as we move forward.

The last quarter was unusually active for us. We supported three major shows; 3GSM, CTIA, and IWCE, a show that focuses on antennae technology. I was happy to see many of our investors and the analysts who cover us at our booths. If you were among those who visited us, then you already know that we had several outstanding product announcements.

These announcements included our new, iVET WiMax antenna. As we mentioned during the fourth quarter earnings release, we have successfully applied our iVET, or our Integrated Variable Electrical Tilt technology to our expanded WiMax product line.

As you know, we invested in iVET because of the application to UMTS networks. Many of our prospective WiMax customers, however, have voiced a requirement to incorporate variable tilt into our WiMax portfolio. At CTIA we demonstrated this new product and it was received quite favorably by customers and network operators. We have high expectations for this product.

You also may already know about the introduction of our new EX scanner. The new, EX platform scans network channels at 50 times the rate as our previous scanner and offers a much broader dynamic range. In addition to the new EX platform, we launched an iDEN scanner. iDEN, as you know, is the underlying technology for the Sprint Nextel network.

We now offer a combined iDEN/EVDO scanner directed at the various engineering and transition issues that Sprint must handle. We will continue to push for complete market share dominance in this product area.

We made three significant announcements in our software product line. We unveiled our IMS-based Instant Messaging at 3GSM and introduced it again at CTIA. We also demonstrated two new software modules that are designed to simplify the activation of new high-speed wireless data customers. We envision a future in which operators will encourage short session subscriptions and tiered service quality to promote a broader subscriber base. Our new Client products enable those new market offers.

Let me briefly mention some significant customer activity. We secured a major, US-based carrier contract for our Roaming Client. We will wait for our customer to launch their service prior to a formal press release. We secured two qualification contracts for our new WiMax product line and we began to ship our Wideband Mobile Antenna solution into the public safety market. If you'll recall, I mentioned this at our last earnings release. This Wideband Mobile Antenna solution eliminates the need for multiple antennas on the back of the emergency or public safety vehicle.

We also made our first significant sale of the new EX scanner platform. In particular, we made our first sale to one of our major OEM customers. These new contracts and sales give us optimism about revenue opportunity for both this year and next.

Finally, we spent a great deal of time exploring potential acquisitions. Although we can report that we found companies of interest, we are not close to consummating any deals at this time. We will report back to you when this changes.

With that, we have set aside 30 minutes for your questions.

[OPERATOR INSTRUCTIONS] Douglas Whitman with Whitman Capital.

Thank you and congratulations on another strong quarter, guys. One of your superstar analysts churned out a report where he talked about you guys winning Sprint on the software side. Could you talk a little bit about that on the client side and why you were chosen and what was the primary driver behind that?

Yes. As you probably know, Doug, that kind of question puts me in an awkward--.

I like putting you in awkward positions--.

Position, because we make a commitment to our customers to allow them to determine when contract awards are announced. So I can't really comment on that analyst report, other than to say that I continue to express to our shareholders and to analysts that we are making progress in winning additional deals. And we just have to wait for our customers to be comfortable where they are with their launch process before we can comment publicly.

Okay. Can you talk a little bit also about what's going on in WiMax? There's been some large financing, obviously, going public in that area and a little bit about your opportunity and your view of the market timing and what your--are you spending more money on WiMax than you were six months ago and is it becoming a bigger opportunity for you guys as you get closer and closer to it?

Sure. WiMax is one of the three areas in which we have incremental development investments. We are investing a great deal more in WiMax. We have now, for about a year. As I believe I've discussed on previous conference calls with all of you, we really believe in this marketplace, because we believe it is a disruptive standard in technology in terms of price per subscriber or price per bit for wireless data.

In addition to the investments that we've made in transporting the iVET technology and integrating it into WiMax, we've come out with a complete line of WiMax products, not just point to point, but point to multipoint and all sorts of types of form factors. And without being specific on customers, I can tell you that we have three significant design wins. We have hosted all of the major infrastructure players at our facility. We believe that WiMax is going to be one of our strong growth areas.

I'm warned by our auditors and by John that if I get specific on the dollar amounts, then we'll be stuck reporting on this until the end of life of this product line. But I can tell you this. This is one of the four areas that we have in the cusp in the business now that is going to grow at greater than 35% year-over-year and possibly much greater than that.

Indeed, I think from last year to this year, we're talking about 200% to 300% and then we'll have continued strong growth in this area.

Let me just check here. John, am I okay in saying that? Okay.

But we're strong believers in this market, Doug. And it's going to be very competitive, but it's also an area where our assets and our distinctive competencies, being able to respond with custom designs for our customers, will serve us well.

And last question I wouldn't want to do a conference call without asking, given where the stock was, it was accretive to do a buyback?

Are we contemplating a buyback?

Did you do any buyback as well, during the quarter?

We will always look at the price of our stock during the open period, which begins three days after an earnings release and in the middle month of each quarter, and we'll see if there are opportunities. We still have, I think, John, about 350,000 to 400,000 left on our original authorization from the Board and if appropriate, we'll go back to the Board and ask for additional allocation.

Okay. In the March quarter then, there was no buyback?

There was no buyback.

But you'll remember, in the March quarter, because it's the year-end results, there's effectively only like three or four open days, because the earnings call is later.

Okay, thanks for pointing that out.

Matt Robison with Ferris Baker and Watts.

First of all, what was the product area that enabled you to have more business in Europe? You mentioned that in the context of your receivables.

The antennas. In antennas and actually MSG.

I think we mentioned to you before, Matt, that last year we secured Vodafone and PDC in Denmark and we're starting to see some growth in those businesses. Although we weren't happy with the growth in the iVET UMTS business, you'll recall that we actually acquired other businesses when we acquired Sigma in the PMR area, the Public Mobile Radio area. And that business is doing reasonably well.

Okay. And John, you mentioned collections, I thought I heard you say $1.6 million. Was that just of the portion that was the software portion that didn't get collected? It can't be all of your collections?

No. That was the portion that showed up in April that I was expecting to get in March--I was pushing hard for it. So I'm already ahead of run rate in the month of April.

Marty, I didn't catch any mention of your full-year view at this point. How are you feeling about that?

We're not adjusting our revenue targets at this time.

How do we--that makes for pretty strong comparisons in the second half. What do you expect to be the primary drivers?

Well, I expect sequential improvement in software, strong sequential improvement in software. And we are now really getting feedback from our customers in antennas that we're out of the penalty box from some of our delivery problems that we encountered in our core business when we integrated two new businesses.

As you'll recall, Matt, that we first bought Maxrad, then we acquired four product lines from Andrew and then we acquired Sigma in pretty short order. And during that period, we had--I think I used the word self-inflicted. Some of our problems were related to the overall market, but some of them in antennas were self-inflicted.

Jeff Miller has done a great job, along with his team, down in Bloomingdale and I think our distributors and our direct customers are appreciating the improvement in some of our basic performance measures. We've had a number of good meetings. We're seeing a little bit of an up-tick in that business. So, I think we're going to see growth there.

And then finally, you know, we have a very low bar to get over in iVET UMTS in some of the areas in Europe. We have some pretty low sales numbers in terms of what our expectations were last year. And we think that that's going to improve as our customers rollout their implementation of those networks.

Okay. I think you mentioned everything but the really high-growth statements that you--.

The scanners, the reason I didn't mention them is they're already doing pretty well. We do believe that they're going to continue to grow. But, the fact is, they're already doing very very well. They'll improve in the second half.

We will see, in both GPS antennas and in WiMax, strong growth in the second half of the year.

Okay. In the MSG, how should we think about the breakdown between NRA new licenses and subscriber adds?

I would say you can use 65% for subscribers, new adds, and the rest of it is in the bucket of NRE and IMS trials.

[OPERATOR INSTRUCTIONS] Anton Wahlman with ThinkEquity.

Just a question on the connectivity software. You've [brought in here] some pretty big carriers; T-Mobile, Cingular, Vodafone and others, but it seems to me like there are so many carriers around the world that seemingly haven't picked any independent software vendor at all and a very large portion of them have launched some sort of 3G oriented network, most of the kind of UMTS around the world are in the [process] [inaudible] or some have even gone to HSTAN. To what extent are you going to go after some large number of these, like 100 carriers around the world or 300 carriers around the world or more? And what do you think are the [odd to close for it], you know, getting those customers and why aren't they--are they trying to seek out a third party vendor for this yet or is something holding them back?

The obvious barrier is focus for a small company and so we've tended to focus on the top-tier customers. But having said that, we have picked up one smaller operator in Europe, TDC. And I will also say that in many cases, these carriers are going after the enterprise business. And the way we've chosen to go after that is through the auspices of companies like FiberLink, where we provide our software to them, either in final form in an FCK and then it's our goal to participate in that growth in the enterprise side for large and small operators through private carriers such as FiberLink.

With respect to going after the 300 or so small carriers that might have opportunity, we really haven't focused on that. And indeed, what we're trying to do at this point and time is deepen our relationship with some of the existing customers. And I know that you were at our booth in CTIA and you probably know that we are delivering now some provisioning capabilities, you know, the ability to rapidly signup and activate a customer and more than that, to elaborate upon that and allow the carriers to deliver shared or graded service. We think that there's a lot of opportunity in this provisioning space that we're beginning to develop with the larger customers.

I will say that there are some opportunities that we see in perhaps applying our client to the cable industry and those operators that see themselves having a triple play opportunity.

So to summarize, we will go after some of the small operators, but we're going to focus on utilizing the worldwide sales capability of private carriers such as FiberLink.

The second thing is that we will derive more revenue by deepening our relationship with our already existing customer base, particularly in the area of provisioning. And the third is that we will try to mine some new opportunities with some cable operators that are going after triple play. And we believe that there's not only client business there, but also provisioning business.

Okay. Back to another comment you made to a previous question with respect to no change in your full-year 2007 outlook. Would you care to remind those of us here, like me, who's very old and have destroyed our memory cells, what that '07 full-year guidance was?

94 to 100.

94 million to 100, okay.

Ken Muth with Robert Baird.

Just following up on the guidance a little bit here. Q2, you just obviously talked about your full-year guidance, the 94 to 100. Why is Q2 down a little bit or kind of flattish sequentially here? And that obviously implies a pretty aggressive ramp in the second half of the year. What do you see coming in deals either announced or close to announcing or close to winning? How do you have confidence the second half is going to be able to ramp on that trajectory?

Well, I think second quarter is not down or flat sequentially. We're talking about going from 19 to in the range of 20.5. But Matt asked the question to have me go over areas that I think will grow and I'll tell you the areas that I have confidence in. I thought we had a pretty sluggish quarter on software and I think that we're going to outperform that benchmark in the next three quarters and in some cases, substantially.

I think we have three very strong areas of growth in antennas; GPS, WiMax and in general, our European antennas. I also think we're going to see some up-tick in our public mobile radio or land mobile radio antennas, the public safety. We believe that this wide band mobile antenna will be strong and we're going to see continued strength in our scanning business.

So, as I said, I think that there are three or four areas that we're going to see 35% growth year-over-year, in some cases, more than that, that will help carry us.

Okay. And with the up-tick in the revenue like you were talking about, all the kind of things positive there, why wouldn't the gross margin, just because of mix alone and some of the improvements you're doing, why wouldn't that gross margin go up a little bit more?

Because antennas have the further content of the recovery. If you look back to when we used to do separate segment reporting--it's still public information, you know, those margins tend to be in the 30s. And at the end of the day, that's the biggest dollar value of the second half trajectory.

Yes. As a matter of fact, if you look at some of the businesses that are doing well in Europe, some of those businesses are lower gross margins than we have out of Bloomingdale. And we expect to do better there.

And as excited as we are about WiMax, Ken, there's no question that along with the standardization and the flatness of architecture, there's going to be tremendous pressure on pricing for WiMax.

Is that still a good market to be in then?

Oh, I think so. I mean, it's a great market, it's high growth and comparing it to other antenna markets, it's still going to be strong, but there will be pressure on gross margins.

Okay. And then on the scanner side, is there any opportunity to take that business internationally, even in the likes of China, which has kind of their own homegrown version going on or anywhere else you see outside the US, big opportunities for that scanning business?

Absolutely. You may not know this, but I would say roughly 40% to 50% of our scanning business is outside the United States. Our two major customers are [Tams], a division of [Aerospin] and [Nimo], which was recently purchased by Aknight. And it is sometimes difficult for us to tell you exactly where our products are sold, but Tams and Nimo and [Schwartzqual] and [Ascom], all of whom are our customers, take those scanners worldwide.

And so we have products sold into India, we have products sold into China, we have products sold into Russia. We've recently sold products into Africa, Israel, the Middle East and certainly Europe. So that is an area of growth for us.

Okay. And then John, quickly, last thing I have. Could you just help us walk through the quarters on the tax rate for '07?

Yes. What effectively we have is a tax rate that is 19% on GAAP and if you go through the numbers, that rate would be even smaller on non-GAAP earnings. So as an example, if you take your model and--bear with me for just a second, because I haven't modeled it on non-GAAP yet. Hold on a second.

So it's closer to a 8 to 10% rate on non-GAAP earnings.

And how would that just kind of evolve Q2 through Q4 of '07?

Well, what it would do, as an example, is it would put somewhere between 0 and 100,000 positive in the second quarter and then what it would do is it would put us in the range of a couple of hundred thousand in the third quarter and a couple of hundred thousand in the fourth quarter.

Follow-up from Matt Robison.

Sorry. My question got answered, thanks.

Mr. Singer, it appears that we have no further questions.

Okay. Again, I want to thank all of you for participating and for your questions and I look forward to updating you at our next earnings release conference call in the following quarter and updating you on our business activities. Thanks a lot.

Thank you, everyone. That does conclude today's conference. A replay of today's conference will be made available, beginning at 8:15 p.m. Central Savings Time, running through May 8th, 2007 at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the pass code of 4753598.