PCTEL Inc (PCTI) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the PC-Tel, Inc. Second Quarter 2008 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Jack Seller, the Director of Marketing who will read the Safe Harbor. Please go ahead, sir.

Thank you for joining us today, July 24, 2008 for the PC-Tel financial results conference call for the second quarter 2008.

On today's call will be Marty Singer, Chairman and CEO and John Schoen, Chief Financial Officer. 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, RF and licensing business 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. 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.

I would now like the turn the conference call over to Marty Singer for opening remarks.

Thank you, Jack.

On behalf of PC-Tel, welcome to our financial results conference call for the second quarter. Before I turn the call over to John for a detailed review of the quarter, let me briefly recap the results for the quarter on a non-GAAP basis.

Revenue in the quarter was $20.3 million; the gross margin was 48%. Operating income from continuing operations was $2.9 million, and net income from continuing operations was $3 million.

I'd also like to summarize some of the highlights from our second quarter. I am pleased to note that we completed our previously-announced buyback of three million shares, and during the quarter, purchased 1.8 million shares at an average price of $9.04.

We also paid out a $10 million one-time cash dividend, which represented a significant return to our shareholders. After all of these events, we have roughly $85 million in cash and investments on the balance sheet.

With that as background, I would now like to turn the call over to John Schoen, who will provide you with the financial details of the quarter.

Thank you, Marty, and good afternoon or evening to everyone.

Our investors will note that the Company presents non-GAAP financial information in its earnings releases. The Company believes that the presentation of operating profit and net income, excluding restructuring charges and non-cash based expenses, including stock and stock-option based compensation, amortization and impairment of intangible assets and goodwill related to the Company's acquisitions, and non-cash based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the Company's core results and facilitates comparisons across reporting periods.

For more information on our non-GAAP financial results and reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8K 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.

As a reminder, the Company closed the sale of its Mobility Solutions Software Group, or MSG to Smith Micro on January 4, 2008. The Company's financial statements have been revised to reflect MSG as a discontinued operation. My discussion of financial results will address continuing operations.

Let's turn to revenue. Second quarter 2008 revenue from continuing operations was $20.3 million compared to $16.5 million in the second quarter of 2007, an increase of 23%. Revenue for scanning receivers in the quarter was up significantly, both sequentially and year-over-year, on the strength of several large orders through our OEM customer channel.

Antenna revenue growth from the same period last year was modest, primarily related to the acquisition of Bluewave in the first quarter this year.

With regards to gross profit margin, gross margin from continuing operations for the second quarter was 48% versus 45% in the same period last year. The gross margin improvement reflects the favorable product mix of scanning receiver revenue previously mentioned.

For operating expenses, the second quarter non-GAAP R&D and SG&A from continuing operations were $7.2 million, down $400,000 from the same quarter last year. R&D expense was lower by $100,000. Last year's expense included expenses related to our antenna operation in Ireland, which we discontinued at the end of Q2 last year.

Sales and marketing were up $100,000 on higher revenue. G&A expense was $400,000 lower, resulting from our decision to divest our software business and concentrate solely on RF. As you may recall, one of the Company's initiatives is to increase profitability to double digits. Management felt our operating expenses is one of the components of this goal, which we expect to achieve through greater operating efficiencies within the business.

The connection royalty was lower than last year by $50,000, as the contractual quarterly cap is lower in 2008.

Now, let's turn to non-GAAP operating income. Non-GAAP operating income from continuing operations in the second quarter was $2.9 million, or 14% of revenue compared to $127,000, or 1% of revenue in the same period last year. The results reflect improved gross profit performance and lower operating costs.

With regards to other income, other income was $650,000 in the second quarter compared to $850,000 a year ago, and $800,000 in the first quarter 2008. The year-over-year decline is attributed to lower interest rates more than offsetting the rise in cash and investments. The sequential decrease is due to cash used in the second quarter to fund the special cash dividend, the stock buyback, and the first and second installment of our estimated tax payments due for the gain on the sale of MSG.

With regards to our tax rate, the non-GAAP income tax rate is 16%, and we expect it to remain at that level in 2008. non-GAAP net income from continuing operations for the second quarter 2008 was $3 million, or $0.15 per diluted share compared to non-GAAP net income of $800,000, or $0.04 per diluted share in the second quarter of 2007. To summarize the differences previously discussed, net income from continuing operations was higher from higher revenue, improved gross profit, and lower operating expenses, which were partially offset by lower interest.

Now let's turn to the balance sheet. Cash and investments ended the quarter at $85 million of which $70 million is classified as short-term and $15 million is classified as long term. This is a sequential decrease of $33 million from the first quarter this year. The largest contributing factors to the change were $17 million used for the stock buyback, $10 million paid out for the special dividend, and $10 million paid on the first and second installments of the estimated tax payments due for the gain on sale of MSG, offset by $4 million of net cash generated from all of the sources. There are two more estimated tax payments of $5 million each in September and December related to the gain on sale of MSG.

Of the roughly $85 million of cash and investments currently on hand, the Company has approximately $2 million in operating bank accounts, $58 million in AAA money market funds, which are in turn invested 100% in short-term U.S. Treasury Securities, U.S. Federal Government Agency Securities or bank repo agreements collateralized by the same, $20 million in the Columbia Strategic Cash portfolio fund and enhanced cash Money Market fund, and $5 million in tax-exempt Municipal Notes.

As we have discussed in previous calls, the Columbia Fund is an enhanced cash Money Market fund that was impacted by the recent turmoil in the credit markets. Columbia is in the process of liquidating the fund. The liquidation program returned $5 million of our investment in the second quarter 2008. To date, Columbia has liquidated approximately 53% of our original share position. However, we cannot predict the ultimate outcome of liquidation. Of the $20 million balance remaining in the Columbia fund, $10 million is classified as short term, and $10 million is classified as long term, as the weighted average life of the underlying securities are beyond 12 months.

Now I would like to discuss guidance for the third quarter and the year for continuing operations. We anticipate the quarter will see year-over-year revenue growth in both scanning and antenna products. Sequentially from the second quarter, we anticipate significant growth in antenna revenue from WiMAX and a sequential decline in scanning revenue. The sequential decline in scanning receiver orders will return us to very strong levels, but we do not anticipate the large urgent orders that we received in the second quarter. Modem licensing revenue is expected to remain immaterial.

As a result, total Q3 revenue is expected to be approximately $20.3 million, which is sequentially even with the second quarter, and an increase of 15% from the third quarter 2007. We have tightened our annual revenue guidance range to $79 million to $81 million. It was previously $78 million to $82 million.

Now let's turn to gross margin percent. We expect strong revenue contributions from some of our lower margin antenna products in the quarter. The change in the product mix will result in a sequential decline in gross profit percent. We project 43% to 45% gross profit for the third quarter. Guidance for third quarter non-GAAP R&D and SG&A from continuing operations is expected to be in a range of $7.2 million to $7.4 million. We continue to look at the cross side of the equation in driving higher earnings.

The connection royalty is expected to be $200,000, and other income is expected to be $400,000 for the quarter.

As mentioned before, the annual guidance for the non-GAAP effective income tax rate remains unchanged at 16%.

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

Thank you, John.

We performed well in the second quarter, with significant contributions from the scanning receiver product lines, and consistent performance from our antenna products. The results also underscore our efforts to better manage OpEx. Across the board, OpEx as a percent of revenue continued to decline. This is particularly true in G&A, which John has been able to contain or reduce costs associated with IT, Legal, HR, Finance, and Strategy Development. These cost reductions are a continuing benefit from our decision to focus the business on our RF products.

Although we do not offer revenue guidance by product line, we experienced an exceptional sequential improvement in scanning receiver sales. I hasten to add that some of this increase reflects a significant order from one of our major OEMs that needed to be shipped in its entirety in the second quarter. Our scanning receiver sales returned to strong but more sustainable levels in the third quarter. As John has already pointed out, the strong scanning receiver sales in the second quarter contributed heavily to our unusually strong bottom line performance.

Financials aside, we had a few significant product events in RFs that weren't mentioned. Many of you have read about the deployment of TD-SCDMA in China. We are pleased to report that our TD-SCDMA scanning receiver, along with our WiMAX scanning receiver are now commercially available for deployment in China. In fact, we already received our first WiMAX scanning receiver order for the China market. Both applications are based on an industry-leading SeaGull EX platform, which drives testing applications across cellular technologies. Our WiMAX scanning receiver is commercially available in other markets as well.

The EX platform was also deployed in UMTS applications in both the U.S. and Russia during the second quarter, and we had one significant CLARIFY order in South America. We continue to ship item technology-based scanning receivers outside of the United States. We shipping an inside item solution, for example, to Nextel Mexico during the quarter.

We have had an extremely exciting quarter in our antenna products group as well. As we have been communicating over the past several quarters, GPS has emerged as an important market and product area for PC-Tel. This past quarter, we released an industry-leading multi-band timing antenna. The importance of the tri-band GPS antenna is that it can drive network timing from any one of the three primary satellite services used in different regions. The ability of our new antenna to derive timing from GPS, GLONASS, and Galileo will enable greater flexibility, security for economic reasons. The critical advantage of our new design is that our major OEM customers can order a single product, one SKU, to meet all of their timing needs.

It was a strong quarter for WiMAX antennas as well. We won a significant order from AXTEL, a Mexico-based operator providing high-speed data services for our WiMAX CPE antennas. We also delivered high-volume production orders to both Bellaire and Motorola. We believe that this business will continue to grow. We continue to ship meaningful quantities of Canopy as well, a precursor to the WiMAX standard.

During the quarter, we completed the integration of the recently-acquired Bluewave antenna line into our Bloomingdale operation. And we are pleased with initial sales results for those products. We secured a new OEM customer for the Bluewave product line that should expand our existing sales levels in North America. We also experienced growth in some of our traditional antenna business associated with OEM manufacturer support for cable vision.

Finally, we experienced our strongest antenna quarter in EMEA in the last 2.5 years, driven largely by our investment of WiMAX applications.

With all of this positive product news and our increased revenue and earnings, we do not want to minimize some of the challenges that we face. Inflation is taking a toll on freight and commodity costs. Our cost of business is increasing, and we need to re-double our efforts to combat gross margin pressure, particularly in the antenna products group with the rising cost of raw material directly impacts the cost of goods sold. There is also work to be done on the top line in APG. Our business model requires that we continue to identify and sustain new opportunities.

Further, consolidation in our industry continues. Large customers often seek out large suppliers, and some of our competitors have consolidated in anticipation of this pressure.

Finally, we are watchful of spending from municipal, state, and federal budgets that drive the purchase of our land mobile radio antennas. To date, we have not witnessed significant downward pressure, but we must monitor all of these factors. You will note that we have carefully managed our own expense budget growth in anticipation of emerging pressure.

John already commented on the successful buyback of PC-Tel stock. At this point, we have no further authorization to buy back additional stock. We believe that carefully orchestrated, small accretive acquisitions will increase shareholder value. When we announced the divestiture of MSG, our stock was trading at $7.61. Many investors opposed this strategic move, not recognizing the potential advantages of achieving a singular focus on RF. Today, the stock price has benefited from the decision, and we paid out one-time special dividend to our shareholders. We believe that we can build up this momentum.

It is our goal to double revenue from 2007 to 2011 and to remain a double-digit operating profit Company. On a continuing operations basis, we now have three successive quarters that are consistent with that model, and we are working on a fourth. Our strategy to achieve this goal comprises four elements. We will continue to exploit the global growth in wireless broadband. We will establish leadership positions in each of the markets we pursue. We will continue to enhance our position in product areas, such as GPS, WiMAX, and mobile LMR antennas. And finally, we continue to target select acquisitions that expand our footprint in organic growth opportunities.

That concludes my prepared comments, and we will now open the call to take your questions. We have set aside 30 minutes for this portion of the conference call.

(OPERATOR INSTRUCTIONS).

Michael Coady, B. Riley.

Thanks, good afternoon, Marty and John, and congratulations on your terrific quarter.

Thanks, Michael.

Just a couple questions. Could you quantify the amount of scanning orders that you would call kind of, not one time in nature, but they were pulled into the quarter from the third quarter?

Well, there was one large $1 million order that could have easily moved into the third quarter, but we felt it was more important to meet the customer's ship date than try to orchestrate consistency on scanning receivers' revenue.

Got you, and if antenna growth was nominal in the quarter with the exception of Bluewave, why the acceleration going into Q3 and the back half of the year?

Well, there's a few things. One, we have spent approximately 18 months developing design wins in WiMAX. And that's a long process where you work with the OEM vendor and you get your antenna designed into the radome, to their base station, and to their CP and so on. And we will start to see some significant sales in both the third and the fourth quarter. We also anticipate that some GPS orders will materialize in the third and the fourth quarter, particularly for some of our government applications. We're pretty confident of those.

And WiMAX and GPS are good product lines for us, and we'll continue to see growth in Bluewave, although Bluewave was strong, it will be stronger still in the third and fourth quarter. And there's an interesting thing happening. The Bluewave product line is basically a Yagi product line that's used in various industrial and enterprise applications, as well as Land Mobile Radio. If you combined our existing Yagi product line, and the new product line, that's starting to look like 10%, 11% of our sales in the antenna group, and we think that there's pretty good growth there.

Certainly, that's basically the answer to your question.

Okay, thanks and good luck in the back half of the year. I'll leave it at that.

(OPERATOR INSTRUCTIONS).

Eric Kainer, ThinkPanmure.

Thank you very much. Congratulations on a very powerful quarter guys.

Thanks Eric.

You have a sequential uptick here in R&D of $400K. I assume that a bunch of that increment is probably attributable to the scanner business, as well as maybe some to the new antenna acquisition. How should we think about that? How quick are your cycles between R&D, completing of project, and showing that up in revenues down the line?

Well, I would say there are three elements that contribute to the uptick in our R&D. One, as you mentioned, our RFS group. So, and that probably was the majority of the increase in the second quarter, and as we've said before, we really don't mind that increased investment in RFS because it helps protect our gross margin, it helps us to get ahead of the curve in terms of new product introductions, and so on.

But there are two other areas of growth that are worth mentioning. One, as you mentioned, Bluewave. We had some incremental growth. We took on a contractor to support us from Bluewave. There's been some additional work here, and we've also made a lot of progress in building our China design team. So we now have four people in China working very close geographically with our ODMs, our contract manufacturers, and we're looking to move some of our design engineering over there, particularly for some of the products that we're trying to get out in low-cost arenas.

So in terms of thinking about turnarounds and what you'll see quickly, the fastest payoff, I think, is going to be in incremental effort we'll put into Bluewave. I think you'll see us making some changes where we can incorporate broader spectrum coverage. I think you'll see rationalization of our product line with the Bluewave product line. And then I think we'll have some immediate benefit from the China design team.

Okay, another thing that I'd like to understand maybe a little bit better is for your international sales, I assume most of those particularly are denominated in dollars. First, is that true, and then if it is, what's the impact on customer orders or customer interest given that they'll seem to be getting a discount here with the weaker dollar?

Yes, it is true, and I think it's been helpful on the scanning receiver side. We don't have enough antenna sales in Europe for that to have a major impact, but as you know, we sell quite a few of our scanning receivers through three European OEMs for whom the denomination in dollars would be a significant discount.

Okay, and last, well I guess maybe next-to-the-last question for me is about the Land Mobile Radio sales. Do you presently sell any LMR gear overseas outside the U.S., or is that all domestic? And if, what kind of opportunities might there be overseas and how would you access those markets?

Yes, we sell a small amount of Land Mobile Radio overseas. A lot of that had to do with our acquisition of Sigma, who has a Land Mobile Radio product line associated with that, and we did set up a distributor.

We do have some opportunities. For example, when you think about Land Mobile Radio, you might want to think about our [PanGen] factory that turns out antennas to meet the needs of a very important OEM to us, which is Motorola, in that market.

So going to your last question, how do you access the market, there are two major ways for us to access the market with antennas. We very rarely -- I think very rarely is not the right word -- we never sell directly to a Land Mobile Radio carrier. We sell to distributors, value-added resellers, and through OEMs. So you may remember some time ago, we announced a relationship with Richardson Electronics, a global distributor. Richardson and other distributors that we've signed up around the world would be one way that we would go to market with Land Mobile Radio antennas.

But our favorite way, our sales channel of choice would be to have relationships with key OEMs in that market, and to sell our antennas through them as part of the system that they sell. The advantage of that is that you don't really need a sales person in the region that your product ends up in. You really need a sales person associated or co-located with the OEM.

Okay, well given how important the LMR business is to the top line, yet how comparatively small it is for the opportunity that you've got internationally, are you, when can we expect that to maybe be a little bit more significant part of the mix? Is that really kind of a part of the '09 plan, or how should we think about that?

Well, I'm not sure exactly how to answer that. You already are seeing Land Mobile Radio antennas sold out of China into Motorola, as I mentioned earlier. But I guess one answer to your question, Eric, is this. It's going to be very difficult for us to make sales to a distributor in some markets, for example, like India where the pricing is extremely competitive unless we had a footprint in India through an acquisition or a joint venture.

So one answer to your question would be our success in some markets is going to depend on our ability to build alliances and develop businesses through non-organic activities. But I think that you'll see results from some of our business development efforts in Land Mobile Radio later this year, and '09 primarily working through the OEMs.

Okay, and then my last question, which I think is a pretty straightforward one at least, is what was the diluted share count at the end of the quarter?

What you'll do is the diluted share count obviously has a weighted average component in it for this quarter because we were buying the shares. I would use 18.5 for Q3 and Q4 and go it forward.

Great, thank you very much John.

And we have no further questions in the queue. I'll turn the conference back over to Mr. Singer for additional or closing remarks.

Thank you. Well, I want to thank all of you for joining us today on the call and on the webcast. In the coming quarter, we will be presenting at the B. Riley Cash Rich Technology Conference in San Francisco on August 12. I want to thank Michael Coady for that opportunity, and at the Jefferies Technology Conference in New York on September 10. We hope to see many of you at those investor events, and will be speaking with other interested investors in the coming quarter ahead of our quiet period.

Thank you and good evening.

A replay of today's conference will be made available beginning at 8:15 p.m. Central Time, running through July 31, 2008 at 8:15 p.m. You may access the replay by dialing 719/457-0820, or 888/203-1112 and entering the pass code 3004106. This does conclude today's conference. Thank you for your participation. You may disconnect at this time.